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Posts Tagged ‘euro crisis

Europe at the Abyss

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by Robert Samuelson
Posted originally May 30, 2011

IT HAS COME TO THIS. A year after rescuing Greece from default, Europe is staring into the abyss. The bailout has proved insufficient. Greece needs more money, and it can’t borrow from private markets where it faces interest rates as high as 25 percent. But Europe’s governments are reluctant to advance more funds unless other lenders – banks, bondholders – absorb some losses by writing down their debts.

This, however, would constitute a default, risking a broader banking crisis that might torpedo Europe’s fragile recovery in France, Germany and elsewhere. There is no easy escape.

WHAT’S CALLED A “DEBT CRISIS” IS INCREASINGLY A POLITICAL AND SOCIAL CRISIS. Looming over the financial complexities is the broader question of the ability – or willingness – of weak debtor nations to endure growing hardship to service their massive government debts. Already, unemployment is 14.1 percent in Greece, 14.7 percent in Ireland, 11.1 percent in Portugal and 20.7 percent in Spain. What are the limits of austerity? Steep spending cuts and tax increases do curb budget deficits; but they also create deep recessions, lowering tax revenues and offsetting some of the deficit improvement.

Just how long this grinding process can continue is unclear. In Spain, the incumbent socialist party lost big in recent elections. Popular unrest persists in Greece amid signs of a “resurgence of an anarchist movement” there and elsewhere.

Some causes of Europe’s plight are well-known: the harsh recession following the 2008-2009 financial crisis; aging populations coupled with costly welfare states. But there’s also another less recognized culprit: the euro, the single currency now used by 17 countries.

Launched in 1999, it aimed to foster economic and political unity. Economic growth would improve. Costly currency conversions would cease; money would flow smoothly across borders to the best profit opportunities. Using euros – and not marks or lira – Germans, Italians and others would increasingly consider themselves “Europeans.” For a while, it seemed to succeed. In the euro’s first decade, jobs in countries using the common currency increased by 16 million.

It was a mirage. The euro helped create the crisis and has made its resolution harder, as a new report from the International Monetary Fund shows. For starters, the euro fostered a credit bubble that led to booms in housing, borrowing and consumer spending. When each country had its own currency, the country’s central bank (its Federal Reserve) regulated local interest rates and credit conditions. With the euro, the European Central Bank (ECB) assumed that job. But one policy didn’t fit all: Interest rates suited to Germany and France were too low for “periphery” countries (Greece, Ireland, Portugal and Spain).

“Financial markets” – private investors – compounded the problem by assuming that the euro’s creation reduced risk. Weak countries would be protected by the strong. Money poured into the periphery countries. There was a huge compression of interest rates. In 1997, rates on 10-year Greek government bonds averaged 9.8 percent compared to 5.7 percent for similar German bonds. By 2003, Greek bonds fetched 4.3 percent, just above the 4.1 percent of German bonds.

“The markets failed. All this would not have occurred if banks in Germany and France had not lent so much,” says economist Desmond Lachman of the American Enterprise Institute. “It was like the U.S. housing market.” Both American and European banks went overboard in relaxing credit standards.

Now that the credit bubble has burst, the euro impedes recovery. One way countries revive from financial crises is by depreciating their currencies. This makes exports and local tourism cheaper, creating some job gains that cushion the ill effects of austerity elsewhere. But latched to the euro, Greece and other vulnerable debtors forfeit this safety valve.

Greece’s debt is now approaching an unsustainable 160 percent of its annual economy (gross domestic product). If it defaulted, investors might dump bonds of other weak debtors for fear that they too would default. That could send interest rates soaring and saddle European banks with huge losses. At the end of 2010, Europe’s banks had about $1.3 trillion of loans and investments – both governmental and private – in Greece, Ireland, Spain and Portugal, reports the Institute of International Finance, an industry research group. A banking crisis would imperil economic recovery.

So Europe is playing for time. It’s struggling to delay any Greek default long enough for other vulnerable countries to demonstrate they can handle their debts. The very process makes the euro – contrary to original intent – a source of contention, as nations shift blame and costs to others. Given Europe’s huge debts, even the holding action may fail. It may merely postpone a broader crisis. “They may dodge this bullet,” says Lachman, “but not the next.”

Copyright 2011, Washington Post Writers Group

QE2 and the Great Mis-Diagnosis

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by Jim Willie CB
Originally published: November 24, 2010


Use the above link to subscribe to the paid research reports, which include coverage of critically important factors at work during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.

THE BACKDROP HAS TURNED DIRE ON SEVERAL FRONTS SIMULTANEOUSLY. The great millstone around the USEconomy’s neck continues to drag it down. CoreLogic reported 2.1 million units have created a swamp in Shadow inventory of the housing market. That equates to 23 months inventory, whereas normal is 7 months. They tallied the growing tumor of bank owned properties as a result of home foreclosures, also called the REOs (real estate owned). Look for no housing market recovery for at least another two years.

Starting in summer 2007, the Jackass forecast each year has been for another two years of housing market declines, all correct. Ireland might be squarely in the news, but the big enchalada is Spain. The Irish banks have presented a grand headache for the European banks, with a $150 billion exposure. Ironically, Ireland has done more to reduce its budget spending effectively than any EU member nation, yet is left to twist in the soft rain. They cut their government budget by 20%. The USGovt budget grows every year without remedy or remorse. Few seem to remember that Irish fund managers lost the German civil service pension funds a couple years ago, a source of hidden tension and great resentment. Spain will rock Europe and the Euro currency in the springtime. The gold price consolidation will center on the Spain debt crisis hitting fever pitch, with the Euro hit. Then again, perhaps a mammoth new wave of European gold demand will neutralize any USDollar stability. On Tuesday this week, the Euro fell by 200 basis points, but the gold price was stable like a rock. That is notable strength. But the bigger story of strength is with silver. The round robin of destruction to major currencies that makes the Competing Currency War, the race to the bottom in rotated currency debasement, it will lift gold & silver in a round robin of strong demand.

The US bankers often go home to mommy and order a giant slosh of monetary inflation whenever in deep intractable trouble, like after the previous mistake in QE1 when ordering a giant slosh of monetary inflation. The USFed, led by the academic professor with no business experience, has ordered a fresh supply of gasoline from a lit fire hose, but he does so on a collapsing building. Bernanke has very erroneously diagnosed lack of liquidity within the system to be the underlying problem. He has prescribed a huge swath of ‘free money’ to be sent into the bond market as a solution. He has prescribed that cheap money continue to be delivered to the USEconomy. Bernanke has failed to notice the insolvency in banks, and has failed to notice that 0% has yet to prompt any revival in lending among banks. Bernanke is fighting INSOLVENCY with LIQUIDITY for a second time after learning nothing the first time.

The USTreasury 10-year yield has risen from a grand bond market dare, not at all from evidence of growth. Bond players dare the USFed to create another $1 trillion in new money. In no way does another lift in retail spending constitute a recovery. Household insolvency rises every month from worsening home loan balances. The USFed wants households to spend more on borrowed funds, yet they have depleted home equity and vanished income security.

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“The Euro game is up… Just who the hell do you think you are? You are very dangerous people”

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by Tyler Durden
Posted Zero Hedge on Nov 25, 2010

FAMOUS EUROSCEPTIC NIGEL FARAGE, IN JUST UNDER FOUR BRIEF MINUTES, tells more truth about the entire European experiment than all European bankers, commissioners, and politicians have done in the past decade. As we have already said pretty much all of this before, we present it without commentary:

“Good morning Mr. van Rompuy, you’ve been in office for one year, and in that time the whole edifice is beginning to crumble, there’s chaos, the money’s running out, I should thank you – you should perhaps be the pinup boy of the euroskeptic movement. But just look around this chamber this morning, look at these faces, look at the fear, look at the anger. Poor Barroso here looks like he’s seen a ghost. They’re beginning to understand that the game is up. And yet in their desperation to preserve their dream, they want to remove any remaining traces of democracy from the system. And it’s pretty clear that none of you have learned anything.

When you yourself Mr. van Rompuy say that the euro has brought us stability, I supposed I could applaud you for having a sense of humor, but isn’t this really just the bunker [or banker] mentality? Your fanaticism is out in the open. You talk about the fact that it was a lie to believe that the nation state could exist in the 21st century globalized world. Well, that may be true in the case of Belgium who haven’t had a government for six months, but for the rest of us, right across every member state in this union, increasingly people are saying, “We don’t want that flag, we don’t want the anthem, we don’t want this political class, we want the whole thing consigned to the dustbin of history.”

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Economic Implosion sets the Blame Game in motion

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By Giordano Bruno
Posted at Neithercorp Press, Nov 19, 2010

WHEN A CHILD BOUNDS ABOUT THE HOUSE AND BREAKS HIS MOTHER’S FAVORITE flower vase or creepy ‘Precious Moments’ figurine, he usually blames the dog before he blames himself. We tend to learn the value of scapegoats at a very early age. Many people eventually outgrow this terrible habit and begin to take responsibility for their actions, while others never do.

The ability to divert justice is frowned upon by those of us who value conscience, but in some circles, such “talent” is prized above all else. There are some in this world who derive great joy from creating destruction and allowing innocent men or guiltless groups to take the fall.

The Italian philosopher/elitist extraordinaire, Niccolo Machiavelli, often discussed the “virtue” of the scapegoat. In his treatise ‘The Prince’ (essentially a guidebook for the tyrants of the 16th century) he outlined how to manipulate the rage of the masses towards the ends of the state (or royalty, or dictatorship, or autocracy, etc.) Though a soulless cretin of the highest order, Machiavelli was ahead of his time in one sense; he recognized before many others that a storm was brewing against the traditional rule of iron fisted monarchy. The world was changing, and the threat of violence and death was not going to be enough to keep the elites in power. The common people were beginning to awaken, to educate themselves, to demand their inherent right to freedom, not just in small controllable pockets, but all over the globe. The ruling class had to adapt its methods to this awakening by turning away from brute force and towards more psychologically rooted tactics. The use of a proxy became a valuable method for the elites in creating the illusion of judgment on government criminality, while at the same time allowing the same men behind the criminality to maintain their “savior” status in the public eye.

Machiavelli suggested throwing middle-management thugs to the angry hoards, while the true heads of state, the men who gave those thugs their orders, remained untouched. There are, however, many variations to this scheme. When you are a group that heads the central banking apparatus of a nation or many nations, when you control the core mechanisms (its currency and interest rates) by which a country financially rises and falls, and you cause that country to fall, you had better have a host of backup patsies to take the pitchforks and bullets coming your way.

Let’s look at some of the probable redirections and excuses that we will be hearing from government and the mainstream media in the next couple of years as the world’s fiscal stability takes a long swan dive into the shallow end of the pool.

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The horrible truth starts to dawn on Europe’s leaders

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by Ambrose Evans-Pritchard
London Telegraph: Last updated November 16th, 2010

Survival crisis? A newspaper seller in Dublin on Monday

The entire European Project is now at risk of disintegration, with strategic and economic consequences that are very hard to predict.

IN A SPEECH THIS MORNING, EU PRESIDENT HERMAN VAN ROMPUY (poet, and writer of Japanese and Latin verse) warned that if Europe’s leaders mishandle the current crisis and allow the eurozone to break up, they will destroy the European Union itself.

“We’re in a survival crisis. We all have to work together in order to survive with the euro zone, because if we don’t survive with the euro zone we will not survive with the European Union,” he said.

Well, well. This theme is all too familiar to readers of The Daily Telegraph, but it comes as something of a shock to hear such a confession after all these years from Europe’s president.

He is admitting that the gamble of launching a premature and dysfunctional currency without a central treasury, or debt union, or economic government, to back it up – and before the economies, legal systems, wage bargaining practices, productivity growth, and interest rate sensitivity, of North and South Europe had come anywhere near sustainable convergence – may now backfire horribly.

Jacques Delors and fellow fathers of EMU were told by Commission economists in the early 1990s that this reckless adventure could not work as constructed, and would lead to a traumatic crisis. They shrugged off the warnings.

They were told too that currency unions do not eliminate risk: they merely switch it from currency risk to default risk. For that reason it was all the more important to have a workable mechanism for sovereign defaults and bondholder haircuts in place from the beginning, with clear rules to establish the proper pricing of that risk.

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More than a euro crisis

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by Dan Roberts
Originally posted guardian.co.uk, Friday 14 May 2010

WITH TALK OF THE BREAK-UP OF THE SINGLE CURRENCY, GLOBAL FINANCIAL STRIFE MAY BE JUST BEGINNING. France threatens to leave the euro. German savers hoard gold. The Bundesbank works on a plan B to restore the Deutsche Mark. It’s fair to say even a $1 trillion bailout hasn’t been enough to stop the rumour mill dogging the European single currency this week.

How much truth there is to these rumours we’ll probably never know. The Elysée was predictably playing down reports of Nicolas Sarkozy’s threat yesterday. A spike in gold prices to more than €1,000 an ounce can only be partly due to Germans buying gold coins, and if the Bundesbank does have a plan B, it won’t be telling the blogosphere first.

But, for once, the conspiracy theorists may not be entirely off beam. The trouble with Europe’s debt crisis is the same as the debt crisis everywhere: it just won’t go away. And until it does, the future of the euro remains as uncertain as the rest of the global financial system.

The Europe Union has responded to member states like Greece that can’t afford to pay their debts in the same way world leaders responded to a crisis among bankrupt banks – by lending them more money. It doesn’t take a financial genius to work out that this can only ever buy time.

All the while, political protests rise. Last week riots in Athens killed three people. This week police blamed left-wing militants for planting two bombs. Across Europe, voters are either asking why they should be asked to pay for the rescue package, worrying whether they might be next to need one – or both.

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Germans Desperate Over EU, Greece

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From The Daily Bell
Posted originally Tuesday, April 20, 2010

GERMANY WARNS OF “LEHMAN” CRISIS IF GREECE DEFAULTS. German finance minister Wolfgang Schauble has pleaded with his country’s citizens to back a joint EU-IMF bail out for Greece worth up to €45bn (£40bn), warning that failure to act risks a financial meltdown. We cannot allow the bankruptcy of a euro member state like Greece to turn into a second Lehman Brothers,” he told Der Spiegel. “Greece’s debts are all in euros, but it isn’t clear who holds how much of those debts. The consequences of a national bankruptcy would be incalculable. Greece is just as systemically important as a major bank,” he said. Mr Schauble said Berlin had scant room for manoeuvre over the bail-out given a likely court challenge by German professors but promised to “abide by the constitution”. German backing failed to stop spreads on 10-year Greek bonds surging to 454 basis points over German Bunds, the highest since the launch of the euro. “Investors are not going to believe in a rescue deal until every ‘i’ it dotted and every ‘t’ is crossed, ” said Marc Ostwald from Monument Securities. “But there is also a deeper fear that Greece could bring down the whole pack of cards.” – UK Telegraph

Free-Market Analysis: The dominant social theme as regards the European Union seems simple enough: “Things are getting better” or, perhaps, “the market is calm and optimistic about Greece.” But why is the elite orchestrating these sorts of sentiments – followed by wild gyrations in European bond markets, especially of Greek debt – when they likely won’t do any good?

We figure they’re running off an old playbook. In the 20th century, when a promotion was launched, the mainstream media reported on it like an echo chamber, each major newspaper and television station reporting the same thing in different ways, until eventually it sunk in. People began to believe it. Then all that was necessary to do was to manipulate the market itself (any given market) and voila – an outcome that was both predictable and desirable from the elite’s point of view.

But the power elite doesn’t have that sort of power in the 21st century, thanks to the widespread debunking by the Internet. It’s not just the sour economy, for there have been sour economies before. It’s the information that is being spread by electronic communications. It’s a kind of meme itself – or anti-meme. People are waking up, as if from a bad dream.

Many elite promotions are unraveling or at least becoming less convincing. Peak oil, global warming, even regulatory democracy itself – all are being questioned and all are being found wanting. In the US, libertarian congressman Ron Paul (R-Tex) is running neck-and-neck with the US president, Barack Obama in terms of approval ratings. And according to Pew Research, only 22 percent of Americans trust the government “always or most of the time.”

We would argue that the EU is heading toward the same fate. Every week, every day, we hear from some top EU bureaucrat or banker that the Greece crisis is at an end and that Europe has been stabilized. These pronouncements are dutifully related by the mainstream media with the seriousness reserved for major statements. There are big headlines and sonorous sounding declaratory quotes. And the next day the bond market gyrates and the proclamations reverse themselves. Greece is once more troubled; the EU is once more on the brink; Germany is headed out the door; the PIGS are generally stumbling toward ruination.

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