The Accidental Empire
Recent news flow has been all about Spain, but let’s not forget the rest of Europe. Germany, the leader, must decide how to play this game. By the legendary investor, George Soros.
But we are at an inflection point. The Greek crisis is liable to come to a climax in the fall, even if the election produces a government that is willing to abide by Greece’s current agreement with its creditors. By that time, the German economy will also be weakening, so that Chancellor Angela Merkel will find it even more difficult than today to persuade the German public to accept additional European responsibilities.
Barring an accident like the Lehman Brothers bankruptcy, Germany is likely to do enough to hold the euro together, but the EU will become something very different from the open society that once fired people’s imagination. The division between debtor and creditor countries will become permanent, with Germany dominating and the periphery becoming a depressed hinterland.
This will inevitably arouse suspicion about Germany’s role in Europe – but any comparison with Germany’s past is quite inappropriate. The current situation is due not to a deliberate plan, but to the lack of one. It is a tragedy of policy errors. Germany is a well-functioning democracy with an overwhelming majority for an open society. When the German people become aware of the consequences – one hopes not too late – they will want to correct the defects in the euro’s design.
It is clear what is needed: a European fiscal authority that is able and willing to reduce the debt burden of the periphery, as well as a banking union. Debt relief could take various forms other than Eurobonds, and would be conditional on debtors abiding by the fiscal compact. Withdrawing all or part of the relief in case of nonperformance would be a powerful protection against moral hazard. It is up to Germany to live up to the leadership responsibilities thrust upon it by its own success. (Full reading here.)
Another must read things that make you go hmmmm
“What is being requested is financial assistance. It has nothing to do with a rescue”
– Luis de Guindos, Spanish Finance Minister
Classical conditioning (also Pavlovian conditioning or respondent con- ditioning) is a form of learning in which one stimulus, the conditioned stimulus or CS, comes to signal the occurrence of a second stimulus, the unconditioned stimulus or US. The US is usually a biologically significant stimulus such as food or pain that elicits a response from the start; this is called the un- conditioned response or UR. The CS usually produces no particular response at first, but after conditioning it elicits the conditioned response or CR. Classical conditioning differs from operant or instrumental conditioning, in which behavior emitted by the organism is strengthened or weakened by its conse- quences (e.g. reward or punishment).
Conditioning is usually done by pairing the two stimuli, as in Pavlov’s classic experi- ments. Pavlov presented dogs with a ringing bell (CS) followed by food (US). The food (US) elicited salivation (UR), and after repeated bell-food pairings the bell also caused the dogs to salivate (CR).
In short, by associating the sound of a ringing bell with the appearance of food, Pavlov condi- tioned dogs to salivate merely at the sound of the bell.
Spain: Nothing and Everything. Details Examined.
Peter Tchir of TF Market Advisors on the Spanish bail out.
Change of Attitude or One More Last Minute Plea Bargain?
On a standalone basis, the deal announced yesterday does relatively little for Europe. It once again looks like a last ditch attempt to cobble together something to appease the markets. It relies on ESM which hasn’t yet been set up. It lends to the FROB rather than to Spain or capitalizing banks directly, creating some potential confusion. The plan, under the most positive interpretations, is reasonably meaningful to Spain, and under the worst execution, may do virtually nothing even in Spain.
The key is whether there has been a shift in attitude in Europe. Is this different than prior plans and is this only the first of many steps? The ECB was extremely dovish in words if not action last week. This plan does seem to bend over backwards to fit within the existing treaties and yet offer the most flexibility possible. If this is all we get, the rally, if there is one, will be short lived. If this is just the beginning of a series of actions such as
- Renegotiating Greek Austerity Package
- Working with Ireland, Portugal, and Greece to restructure existing programs
- Project and/or Redemption Bonds
- New LTRO, Renewed SMP, or Rate Cuts
- Global Policy Intervention with the PBOC and Fed leading the way
then we may yet be at the early stages of a liquidity and money printing and “growth” rally. It too will likely fail, but that will take time.
Denial stops in Spain as banks finally ask for monedas
No, no, no, but eventually after years of denial it was a YES. Spain is slowly realizing the banks need more capital. The problem is though, Spain will most probably be coming back for much more. With the “fantasy” valuations of unsold properties, the balance sheets will be needing more boosting later. Let’s see what happens to Spain’s, 92 billion Euros, part of the mighty EFSF. From El Pais.
Economy Minister Luis de Guindos announced Saturday evening that the government intends to ask for a European bailout to recapitalize Spain’s banking sector. The package will total 100 billion euros.
He added that the amount of the rescue package would be “sufficient” to meet the needs of the banking sector as identified by the audits being carried out by two independent appraisers and the estimates of the IMF, plus “a significant margin.”
As the financial assistance as defined by De Guindos will be to attend to the needs of the banking sector, the conditions that will be imposed for its disbursement will be linked exclusively to the specific loan to the financial sector.
The loan will be received under “very favourable conditions.”
S.O.S-Spain
Al Jazeera on the Spanish messy situation.
Eurozone finance ministers will hold a conference call on Spain’s expected request for aid to shore up its distressed banking sector, European government sources said.
The eurozone greenlighted the “holding of a teleconference of the Eurogroup on Saturday at 4:00pm (1400 GMT) to agree a declaration on Spain’s intention to request aid and the Eurogroup’s commitment to granting it,” a European government source said.
The move came as the International Monetary Fund released a report on Friday which estimated that Spanish banks need at least a 40bn euro (about $50bn) capital injection following a stress test it performed on the country’s financial sector.
“Reports we are getting from various sources suggest that there will be this conference call from Brussels between the 17 finance ministers of the eurozone, the so-called eurogroup. The Spanish finace minister will be among them,” said Al Jazeera’s Jonah Hull, reporting from Madrid on Saturday
“What we believe they will be discussing is the sort of size and shape of the terms attached to a possible bailout for Spain, to inject fresh capital into its banks.
“All that Madrid has to do is ask for that bailout, under the rules of course they have to ask for a bailout to be put into action. (Full article here).
Video below.
Calm Markets `Before They Go Haywire’
G Papp, partly responsible for the Greek Drama urges world leaders to decide urgently on Spain and the rest of Europe in order to calm world markets.
Video below.
Fed’s Balance Sheet
Guest post by Doug Short.
Pop Quiz! Without recourse to your text, your notes or a Google search, what line item is the largest asset on Uncle Sam’s balance sheet?
| A) U.S. Official Reserve Assets B) Total Mortgages C) Taxes Receivable D) Student Loans |
The correct answer, as of the latest Flow of Funds report for Q1 2012, is … Student Loans.
The rapid growth in student debt has been a frequent topic in the financial press. One stunning chart that caught my attention illustrated the rapid growth in federal loans to students since the onset of the great recession. Here is a chart based on data from the Flow of Funds Table L.105, which shows the Federal Government’s assets and liabilities.
Can Spain and Italy export their way out of trouble?
What about Spain and Italy? By Voxeu.
Anxiety about Spain and Italy’s bond spreads has returned with a vengeance. In this dangerous race to the bottom, Italy was in lead position back in November but Spain has now overtaken and is once again at the epicentre of the crisis. Spain’s macroeconomic imbalances are much larger than Italy’s, but, to grow again, both countries confront an enormous challenge in reorienting their economies towards export- and import-competing sectors.
There is no lack of ideas about what a growth policy for Spain, Italy, and other troubled countries in the European periphery would look like (see for instanceAlcidi and Gros 2012 on Spain). But most of these ideas misdiagnose the cause of the crisis as one of shortage of credit or of excessive austerity. The Eurozone crisis is at its root not a fiscal or banking crisis, but a crisis of competitiveness hatched over about 15 years, and reflected in large differences in labour cost, export performance, and balance of payments between the periphery and the core, notably Germany (Dadush et al. 2010). Accordingly, fiscal and banking remedies, while badly needed, will not – by themselves – durably resolve the crisis.
Greece’s history – The Biggest Burden?
The Trader has witten about the Spanish mentality mainly. Here is some great insight on how things are “run” in Greece. Did the Greek mentality cause the implosion of the Med countries? From Spiegel.
Thirty-seven years ago, Nikos Dimou, who is now 76, wrote a book of aphorisms titled “The Misery of Being Greek,” which was published in 1975. In the book, he wrote that a Greek does “everything he can to widen the divide between desire and reality.”
For this interview, he invited SPIEGEL to his apartment in Athens’ leafy embassy district. The air smelled of jasmine, a sprinkler watered the lawn outside and Dimou’s three-legged cat, Azurro, was asleep on the sofa. Dimou, who studied in Munich, served the reporters coffee and cake, despite his recent frustration with SPIEGEL. Like many people in Greece, he was hurt by the magazine’s recent cover about the Greek crisis, which bore the headline “Acropolis Adieu!”
Spain is crying
The rating agencies are slowly realizing the health of the Spanish economy. The Trader has been arguing for more than a year, Spain is in trouble, and these cuts should have come much earlier. The deeply rooted problems will now go into the second phase. If the Spaniards start feeling “abandoned” by Merkel & Co, and no credible solution are presented shortly, the Iberian Peninsula will be on fire. “People will stop complaining and start protesting for real”. Look for a hot and dry Spanish summer. Must read by BBC.
One in four adults is unemployed. Half of all young people are jobless. Consumer spending is in freefall and the country has just learned that to save a single, relatively minor bank, will add a third to its already sky-high national debt. Meanwhile its top 30 listed companies have lost 40% of their market value in a year.
Spain is in trouble, on the face of it, because its small banks – known as cajas – fuelled an insane property boom that went bust. They didn’t do complex structured finance deals like Lehman Brothers; indeed they were the opposite of “Anglo-Saxon” capitalism – being small and locally owned.
But behind the pure economic story is a more complex political-economic crisis that could, even now, send Spain the same way as Greece, shattering the eurozone in the process and placing the whole European project in grave doubt.
You can see how badly the crisis has hit people at the “Utopia” apartment block in Seville. It’s a modern, newly-built, five-storey complex next to a busy road. The flats are small: perfect for young professionals with their taste for minimalist furniture. But the company that built the flats went bust and now the whole place has been squatted by families turfed out of their own homes due to repossession.
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