Posts Tagged ‘Spain’
Please Europe, either put up or break up
by Ambrose Evans-Pritchard
Posted August 5th, 2011
THE DEBT CRISIS IS MOVING AT LIGHTNING SPEED. We must wait to see whether the ECB is really willing to sit back and let the whole edifice collapse. Are the Bundesbankers really so stubborn that they would rather bring down the European financial system, tank the world economy, and cause a deep global depression, rather than enter the bond market on a sufficient scale to back-stop Italy and Spain?
Tough call. 50:50, I’d say. The hardliners are seriously ideological people, and there seem to be some in the upper echelons of German policy-making (though obviously not the floundering bean-counter Schauble, or the battered Chancellor), who suspect that it might be better to lance the boil by forcing an immediate break-up of EMU.
I note that Belgium’s central bank governor Coene hinted that the ECB is withholding bond purchases to force Italy and Spain to push through – you guessed it – yet more growth-destroying austerity. Dangerous game. These 1930s deflationists really are a menace to society. In a nutshell, unless the ECB is willing to step in – I mean really step in, not piss in the wind – until such a time as the revamped EFSF bail-out is ratified by all parliaments and is ready to take the baton (say November), and unless the EFSF itself is quadrupled in size and given a €2 trillion mandate without all the German-imposed ifs and buts, then the game is up.
If the EU authorities refuse to do this, it is best for everybody that it is recognized immediately and that arrangements are made for the orderly break-up of monetary union… not next year, or next month, but next week. There are two basic choices:
1) a spiralling crisis in the South, leading to a string of countries being blown out of EMU, causing a catastrophic financial collapse akin to 1931. As Citi’s William Buiter told me yesterday, the issue is not how long Italy and Spain can ride out the storm in bond markets. There would be a banking and insurance crisis long before sovereign defaults came into play, simply because the fall in bond prices on the secondary market is causing carnage to bank books (among other transmission mechanisms).
Or 2) Germany and its satellite economies withdraw immediately from EMU (let us say the Netherlands, Austria, Finland, Flanders and Luxembourg). This allows the South to enjoy a much-needed devaluation to restore competitiveness without going through a disastrous Fisherite debt deflation. Their contracts would remain in euros, so they would not need to default.
Temporary capital controls and some form of financial repression would obviously been needed for a few weeks. The German bloc would have to stand ready to recapitalize its banking system with €100bn perhaps (peanuts in the bigger picture) to offset the shock effect on sudden exchange losses on Club Med debt.
This would require French leadership. (I have almost given up on Germany.) Carried out with Napoleonic speed and determination, I think this could conceivably prove the game-changer that halted the downward global spiral. Markets would very quickly see that the greatest impediments to recovery had been removed. We could rejoice, and breathe a little easier again. My guess is that stock markets would surge in Milan, Madrid and Paris, as occurred in London and Milan after the ERM crisis in 1992.
Yes, I know, EMU is not the ERM, blah, blah, sanctity of the Project, blah, blah, blah. But just how different is it really? Will this happen? I don’t see much evidence that anybody is thinking along these lines. (The Buba men seem to want to expel Greece, Portugal, etc, which is not at all what I mean.) Just my instant thoughts on a story that is moving with lightning speed.
More later, after some Rioja, and a Vecchia Romagna to finish.
Portugal loses patience with Europe
by Ambrose Evans-Pritchard
Posted July 18th, 2011
AT LAST, SOME RAW EMOTIONAL GAULLISTE PATRIOTISM FROM THE VICTIMS of Europe’s Maquina Infernal? Portugal’s new premier Pedro Passos Coelho — a free marketeer — began to growl over the weekend. “We want to take part in an ambitious European project and make our contribution so Europe can confront its problems in the most ambitious way, but as prime minister I will not stand by and wait for Europe to govern Portugal,” he told the party faithful.
For Portuguese readers: “Nós queremos participar num projecto europeu ambicioso e queremos dar o nosso contributo para que a Europa saiba encontrar respostas mais ambiciosas para os problemas, mas como primeiro-ministro nunca ficarei à espera do que a Europa tenha que fazer para governar Portugal”
Please correct me if my loose translation is wrong.
So, it has begun: last week Greece’s premier George Papandreou launched two angry broadsides against EU magnates. How could he do otherwise after Eurogroup chair Jean-Claude Juncker told a German newspaper that Greece’s sovereignty would be “massively limited”?
“Massively limited?” Mr Juncker should be clamped in irons if he dares set foot on Greek soil. Now the leader of what is arguably Europe’s oldest nation state (foundation 868, under Vimara Peres) has shown the first hints of frustration.
Just to remind you: unemployment in Portugal is 12.4pc (youth: 28.1) and about to rise much further as the fiscal punch hits. The figures for Spain are 20.9pc (44.4), Greece 15pc (38.5), Ireland 14pc (26.5), Latvia 16.2pc (32.9). Yet the these countries are all facing further headwinds of fiscal and monetary tightening.
For a serving prime minister to make such remarks at this delicate juncture might be taken by some as a cloaked threat to walk away from the EU project, if the country continues to be treated in a humiliating and damaging fashion. Mr Passos Coelho is fencing with a double-edged blade. Even to hint at misgivings over EMU is to set matters in motion. The markets were very quick to pick up on political body language during the ERM crisis in 1992. The Portuguese leader also said there was a “colossal” €2bn hole in the public accounts left by… well, somebody. He refrained from blaming the outgoing Socialists. They are needed to help pass laws in the Assembleia. Any other skeletons to be uncovered?
I have great sympathy for Mr Passos Coelho and for the Portuguese people. The German-led creditor states have treated the EMU crisis as if it were a morality tale, castigating Club Med and Ireland for alleged fecklessness. All that is required — goes the argument — is further austerity, a dose of 1930s wage and debt-deflation, and virtue will be its own reward. The Left-wing Bloco calls it “social terrorism”.
Adding injury to insult, Germany has insisted that Portugal, Greece, and Ireland pay a penal rate of interest some 200 to 300 basis point over the cost of funding paid by the EU’s bail-out machinery, though this may soon be cut somewhat. As former US Treasury Secretary Larry Summers said this morning in the pink sheet, such penal rates play havoc with debt dynamics and are driving a string of countries into insolvency and depression.
This Germanic view of events is self-serving and intellectually dishonest. Southern Europe is in trouble because Europe’s monetary union is and always was dysfunctional. The Maastricht process caused interest rates to plunge in the Club Med bloc, setting off credit booms. Portugal’s rates fell from 16pc to 3pc in short order.
The ECB poured further petrol on the fire by tilting monetary policy to German needs in the middle of the last decade, when Germany was in trouble. The ECB breached is own eurozone M3 and inflation targets for year after year. In the specific case of Portugal, the boom occurred earlier, in the late 1990s. No doubt a great many foolish errors were made in those halycon days. (I wrote about them at the time or shortly after, and was roundly reproached for my insolence).
Yet over the last eight years Portugal has been relatively frugal. It did not have an Irish banking bubble, or a Spanish property bubble. It did let social transfer costs creep up to 22pc of GDP — when they should have been falling — but it also passed a string of fiscal austerity packages. Yet at the end of the day it was punished anyway. It has failed to reap any worthwhile benefits. There has been no economic convergence or EMU catch-up effect. Productivity has remained stuck at 64pc of the core-EU average. Portugal switched from surplus on its external accounts in the early 1990s to a deficit of 109pc of GDP today.
Public and private debt has ballooned to 330pc of GDP, one of the highest in the world. Portugal will still have a current account deficit of almost 8pc this year and the budget deficit was still running at a 8.7pc rate in the first quarter. Such a profile two or three years into draconian cuts and demand compression is almost tragic. And now they must implement yet further austerity, without debt relief or offsetting monetary stimulus or devaluation. This policy is a near certain formula for economic asphyxiation..
In Portugal — as well as Greece, Ireland, and perhaps Spain in due course — we are moving closer to the point where national leaders must decide whether to satisfy EU demands, or placate their own citizens, for is it no longer possible to serve these two masters at the same time?
Can there really be any doubt as to the outcome of this tug-of-war
Sovereign debt blows big holes in big banks
by John Browne
– Euro Pacific Capital
Posted July 14th, 2011
THE PAST FEW DAYS HAVE BEEN VERY BAD FOR THE WORLD’S LARGEST BANKS. American behemoths Citigroup and Bank of America are down about 7% each. Across the Atlantic, things are far worse. BNP Paribas, Barclays, and Banco Santander are all down 13% or more… and Société Générale is down an astounding 16%! Some pundits warn of an overreaction and suggest this is a buying opportunity for the beat-up financials. I disagree. Rather, I think the financials should now be considered toxic assets. Caution is justified.
It was only a week ago that markets were preoccupied by a downgrade of Portuguese sovereign debt and renewed concerns that Greece will need about $100 billion by year’s end to remain solvent. Now, as eyes are quickly shifting towards the first tremors of financial crisis in Italy, concerns over Greece and Portugal seem rather quaint. With an economy roughly 7 times larger than that of Greece, Italy is simply too big to bail out. Its collapse, like the sinking of a great ship, could create a vortex that drowns Europe’s major banks in red ink.
In addition to exposure to sovereign debt from insolvent nations like Greece, Italy, Spain, and Portugal, major US and EU banks are also massively exposed to toxic mortgage debts, the value of which continues to be eroded by crumbling real estate markets across the West. Meanwhile, at the least opportune moment, the banks are being besieged by ill-targeted regulations devised by vindictive politicians. Finally, banks’ balance sheets are skewed by ultra-low interest rates and new rules that shield them from pricing their assets to market. Beneath a thin veneer of smoke and mirrors, serious risks remain.
Intractable budget negotiations in Washington and Rome have significantly increased the likelihood of default by the West’s two major economic blocs. It could be reasonably inferred that we are entering a new phase of sovereign decline: the US is within weeks of temporary default; Italy is teetering; and the consensus on Greece is shifting toward the ‘German fix’ of bondholder haircuts. What’s worse, there are no long-term solutions readily apparent. The EU is so rigid that it’s only option is to break into pieces, while the US is so pliant that its main political parties are allowed to waste precious time scoring political points at the expense of the greater good.
Since the EU does not have a formal mechanism for handling default, large European banks have been ‘persuaded’ for many months by the ECB and national governments to invest in the debt of financially challenged nations within the EU, most importantly that of Portugal, Ireland, Italy, Greece and Spain (PIIGS). This approach was considered more politically viable than direct investment by the ECB. Now, these European banks are left holding the bag. Since there is still no viable mechanism to deal with this debt at the sovereign level, it’s no surprise that EU banks are being hit hardest in this correction. The question remains: what were they promised in exchange for ‘walking the plank’ into the debt abyss?
American banks have a lesser exposure to sovereign debt of the European PIIGS, but many of these institutions have made massive profits by selling insurance derivatives known as credit default swaps to their European counterparts. This is the same strategy that brought down insurance behemoth AIG in the wake of the 2008 Credit Crunch. Therefore, major American banks are far more heavily exposed to PIIGS debt than first appears. It’s as if they have learned nothing. Even conservative, and supposedly bulletproof, money market funds have exposure to EU bank debt.
I do not expect all of these banks’ shares to go to zero. Powerful governments are likely to resort to almost any means to salvage their grotesque central-banking/fiat-money system. Likely, that will include eventually forcing their citizens to rescue their banks again — but this time from even larger losses. However, in the meantime, the financials’ earnings and share prices could suffer dramatically.
Moreover, Italy’s situation brings some larger questions to the forefront: what happens when the next round of bank bailouts bring major sovereigns to their knees? Where will you want to have your assets positioned if the EU comes apart at the seams, or the US stops paying its soldiers and seniors? What’s your plan if the central banks flood the market with even more cheap money?
Readers are strongly encouraged not to waste time gambling on shaky financials, but rather to build themselves an ark of hard assets and start rowing away from the sinking great ships of state. You don’t want to be caught in the vortex when they go down.
Green Shoots, Exit Strategy, No QE3
by Jim Willie, CB
Posted originally May 25, 2011
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.
IT IS NOT CLEAR WHETHER THE AMERICAN FINANCIAL COMMUNITY HAS THE ABILITY to observe and conclude that the US Federal Reserve is adrift and relies upon deception as policy in revealing its directions. Its position is to hold steady, inflate to oblivion, support financial markets in heavy volume secretly, and lie about leaving its trapped policy corner. The USFed is a propaganda machine that deals with ruses as a substitute for transparent policy discussion in the public forum. Two years ago the ruse disseminated widely was the Green Shoots of an economic recovery that had no basis at all. The scorched earth showed more evidence of ruin than fresh business creation, at a time when the grotesque insolvency was spreading like a disease throughout the entire US financial system.
On one hand the USFed was busy operating numerous credit and liquidity facilities in order to prevent systemic seizure, busily redeeming the Wall Street toxic bonds at the highest possible prices. On the other hand they were talking about Green Shoots, as insolvency spread across the big banks to the household equity. They lost their credibility in the process. They have lost it completely after two full years of 0% rates, the ultimate in central bank shame. The Jackass dismissed the Green Shoots ploy quickly, regularly, and correctly, as whatever little shoots showing were probably mistaken for some toxic green runoff from a nearby financial office of a corporation.
One year ago the ruse disseminated widely was the Exit Strategy from the 0% monetary corner that had no basis at all. The USFed was well aware that 0% as an official rate was untenable, dangerous, and would produce different maladies. They promoted a phony story of a Jobless Recovery, an utter contradiction and bad joke played upon the American workers. To make the cost of money free encourages speculation in the most general systemic sense. The primary gold market fuel is the price of money being far below the current price inflation rate. Anyone who believes the CPI is actually 2% to 3% is braindead. Even USGovt statistics list the numerous categories with strong price increases, yet the overall CPI is lower than all components. Power to adjustments.
My description has been that the USFed is stuck in the 0% policy corner. The corner has been described since the start of 2009 when it was instituted. If the USFed raises rates, they torpedo the housing market left as derelict adrift at sea, listing badly, taking on more water, weighed down by the inventory burden. Given that the USEconomy was so dependent upon housing for three or four years, and that dependence has turned to deep vulnerability, they cannot hike interest rates and exit the policy corner without sending home prices into a fast acceleration downward. They will bottom out 20% to 30% below construction costs.
Worse, a rate hike would trigger a credit derivative series of explosions from the Interest Rate Swaps. These queer devices hold down long-term rates far below the prevailing price inflation level. That is why the USFed Chairman Bernanke insists on an undying focus of the inflation expectations, the USTreasury Bond yields and TIPS yields (both of which they purchase in monetization operations). They control them using IRSwaps. If the USFed holds steady, as they must, they generate significant rising costs for everything from food to energy to metals to cotton. Even scraps (paper, metal, plastics) are rising in price. Even the toys sector must contend with fast rising prices in time for the Christmas season. See the Li & Fund effect, also called Foxconn in China. They also make i-Pods.
The current path lifts the cost structure to such a level that both businesses and households are experiencing a pinch. The fast collapse of the Philly Fed index is testament to the pinch. Shelves at major retail chains are experiencing a slow decline in volume. It is called the profit squeeze. Business profit margins are shrinking, even as household discretionary spending funds are shrinking. The Jackass dismissed the Exit Strategy ploy quickly, regularly, and correctly, as the monetary policy corner was described consistently and clearly. It was a bluff, but a very bad one. The savvy analysts did not fall for it, since the consequences of ending the 0% rate would be like turning the lights off for the entire USEconomy.
THE BIG RUSE & THE BIG BIND
The USFed is caught in a gigantic bind, cannot raise rates, and must endure the global price inflation problem that festers on the cost side of the equation. They busily deny their role in producing price inflation from debt monetization coupled with 0% rates. They lost more credibility in the process. They are the object of global anger and ridicule. They must hope that the eventual rate hike will keep the speculative juices from overflowing. Gold & Silver do not rest, as they brush aside such a plain ruse of a threatened rate hike. The sovereign bond situation in the entire Western World (with Japan adopted into the fold) is horrendous and worsening. The government deficits are out of control. Few analysts prefer to point out how the foundation for the global monetary system is supported by the gaggle of crippled sovereign bonds. To be sure, the Southern Europe debt is in a ruined state. But the debt of the United States is no better and the same for England, when viewed as annual debt ratio to total budget, when viewed as cumulative debt ratio to GDP (economic size). The graph below shows those two dimensions, and how the United States and United Kingdom are positioned among Spain, Ireland, and Greece, apart from the mass of nations. In the full year since this graph was produced, the US debt situation has grown worse. The reckless socialists seem prudent.
The extended PIIGS pen of nations, fully ruined and recognized widely as ruined, do not have the tools to prevent rising bond yields. They uniformly rise versus the German Bund benchmark. Their differentiation actually permits the Euro currency to trade more freely, even to rise. The Chinese were responsible for much of the Euro rise from 130 to 150, as they dumped USTBonds in favor of discounted PIGS debt, later to be converted into shopping malls, commercial buildings, and factories. Somehow, that factor did not appear on the US news networks. The USGovt has tools, wondrous electronic tools, which enable them at zero cost to fight off the barbarians at the gate. It is the Printing Pre$$. Unfortunately, its backfire is a powerful rising cost structure that has shown visibly in the high food & gasoline costs. So hardly at zero cost!! A year ago, the USFed folded like a cheap lawn chair. Instead of exiting their 0% corner, and implementing the advertised Exit Strategy, they went one step deeper down the rathole. That was exactly the Jackass forecast, QE to follow 0% stuck. They combined the ZIRP with the QE. They added the debt monetization scourge of Quantitative Easing to the already reckless no cost money of the Zero Interest Rate Policy.
PURE QE3 DECEPTION
The current ruse disseminated widely is the End of QE2 and no continuation of Quantitative Easing (aka debt monetization). The ruse has no basis at all in reality. The USFed would have to find buyers for the USTreasury Bonds. They have been buying 75% to 80% of USTBonds since the end of 2010. They have been supporting the US housing market by purchasing mortgage bonds. In other words, they have been preventing the more complete implosion of the mortgage market. It is one thing for the USTBond to go No Bid. The USFed has the direct responsibility to cover that up quickly and proclaim every USTreasury auction a rip-roaring success with great 2.3 bid to cover ratio. But it is another matter altogether to permit the mortgage rates to fly upward from lack of bids. If mortgage rates move to 7% or the adjustable ARM mortgages reset 3% to 4% higher suddenly, then housing prices will descend by another 10% to 15% quickly, as in with lightning speed.
The Breakdown Draws Near
by Chris Martenson
Posted originally April 19, 2011
THINGS ARE CERTAINLY SPEEDING UP, AND IT IS MY CONCLUSION that we are not more than a year away from the next major financial and economic disruption. Alas, predictions are tricky, especially about the future (credit: Yogi Berra), but here’s why I am convinced that the next big break is drawing near.
In order for the financial system to operate, it needs continual debt expansion and servicing. Both are important. If either is missing, then catastrophe can strike at any time. And by ‘catastrophe’ I mean big institutions and countries transiting from a state of insolvency into outright bankruptcy.
In a recent article, I noted that the IMF had added up the financing needs of the advanced economies and come to the startling conclusion that the combination of maturing and new debt issuances came to more than a quarter of their combined economies over the next year. A quarter!
I also noted that this was just the sovereign debt, and that state, personal, and corporate debt were additive to the overall amount of financing needed this next year. Adding another dab of color to the picture, the IMF has now added bank refinancing to the tableau, and it’s an unhealthy shade of red:
Banks face $3.6 trillion “wall” of maturing debt: IMF
(Reuters) – The world’s banks face a $3.6 trillion “wall of maturing debt” in the next two years and must compete with debt-laden governments to secure financing, the IMF warned on Wednesday. Many European banks need bigger capital cushions to restore market confidence and assure they can borrow, and some weak players will need to be closed, the International Monetary Fund said in its Global Financial Stability Report.
The debt rollover requirements are most acute for Irish and German banks, with as much as half of their outstanding debt coming due over the next two years, the fund said.
“These bank funding needs coincide with higher sovereign refinancing requirements, heightening competition for scarce funding resources,” the IMF said. When both big banks and sovereign entities are simultaneously facing twin walls of maturing debt, it is reasonable to ask exactly who will be doing all the buying of that debt? Especially at the ridiculously low, and negative I might add, interest rates that the central banks have engineered in their quest to bail out the big banks.
Greek T-Bill Sale Fails to Allay Fear
Greece’s Public Debt Management Agency paid a high price to sell €1.625 billion of 13-week Treasury bills at an auction Tuesday, amid persistent speculation that the country will have to restructure its debt.
The 4.1% yield paid by Greece, which means it now pays more for 13-week money than the 3.8% Germany currently pays on its 30-year bond, is likely to increase concern over the sustainability of Greece’s debt-servicing costs. Greek debt came under heavy selling pressure Monday after it emerged that the country had proposed extending repayments on its debt, pushing yields to euro-era highs.
Greek two-year bonds now yield more than 19.3%, up from 15.44% at the end of March.
With Greek 2-year bonds now yielding over 19%, the situation is out of control and clearly a catastrophe. When sovereign debt carries a rate of interest higher than nominal GDP growth, all that can ever happen is for the debts to pile up faster and faster, clearly the very last thing that one would like to see if avoiding an outright default is the desired outcome. How does more debt at higher rates help Greece?
It doesn’t, and default (termed “restructuring” by the spinsters in charge of everything…it sounds so much nicer) is clearly in the cards. The main question to be resolved is who is going to eat the losses — the banks and other major holders of the failed debt, or the public? I think we all know the most likely answer to that one.
“Contagion” is the fear here. With Ireland and Portugal already well down the path towards their own defaults, it is Spain that represents a much larger risk because of the scale of the debt involved. Spain is now officially on the bailout watch list, because it has denied needing a bailout, which means it does.
Spain is now at the ‘grasping at straws’ phase as it pins its hopes on China riding to the rescue:
European officials are hoping that the bailout for Portugal will be the last one, and debt markets have broadly shown both Spain and Italy appear to be succeeding in keeping investors’ faith.
Madrid is hoping for support from China for its efforts to recapitalize a struggling banking sector and there were also brighter signs in data showing its banks borrowed less in March from the European Central Bank than at any point in the past three years.
If Spain is hoping for a rescue by China, it had better get their cash, and soon. As noted here five weeks ago in “Warning Signs From China,” a slump in sales of homes in Beijing in February was certain to be followed by a crash in prices. I just didn’t expect things to be this severe only one month later:
Beijing March New House Prices Plunge 26.7% M/M
BEIJING (MNI) – Prices of new homes in China’s capital plunged 26.7% month-on-month in March, the Beijing News reported Tuesday, citing data from the city’s Housing and Urban-Rural Development Commission. Average prices of newly-built houses in March fell 10.9% over the same month last year to CNY19,679 per square meter, marking the first year-on-year decline since September 2009.
Home purchases fell 50.9% y/y and 41.5% m/m, the newspaper said, citing an unidentified official from the Housing Commission as saying the falls point to the government’s crackdown on speculation in the real estate market.
March Home Transactions in 30 Major Cities Fall 40.5% Y-o-Y
Housing transactions in major Chinese cities monitored by the China Index Research Institute (CIRI) dropped 40.5% year-on-year on average in March, a month when home buying typically enters a seasonal boom period.
Transactions rose month-on-month in 70% of the cities monitored, including five cities where transactions were up by more than 100% on a month earlier, secutimes.com reported on Wednesday, citing statistics from the CIRI. [CM note: month-on-month not useful for transactions as volumes have pronounced seasonality]
Beijing posted a decrease of 48% from a year earlier; cities including Haikou, Chengdu, Tianjin and Hangzhou saw drops in their transaction volumes month-on-month, according to the statistics. Meanwhile, land sales fell 21% quarter-on-quarter to 4,372 plots in 120 cities in the first quarter of 2011; 1,473 plots were for residential projects, the statistics showed.
The average price of floor area per square meter in the 120 cities dropped to RMB 1,225, down 15% m-o-m, according to the statistics.
Real estate is easy to track because it always follows the same progression. Sales volumes slow down, and people attribute it to the ‘market taking a breather.’ Then sales slump, but people say “prices are still firm,” trying to console themselves with what good news they can find in the situation. Then sales really drop off, and prices begin to move down. That’s where China currently is. What happens next is also easy to ‘predict’ (not really a prediction because it always happens), and that is mortgage defaults and banking losses, which compound the misery cycle by drying up lending and dumping cheap(er) properties back on the market.