Euro Exit by Southern Nations Could Cost 17 Trillion Euros
With Google stealing a lot of attention, let’s not forget about the European mess. Latest out of the German think tank, via Spiegel.
A Greek euro exit on its own would have a relatively minor impact on the world economy, but if it causes a chain reaction leading to the departure of other southern European nations from the single currency, the economic impact on the world would be devastating, a German study warned on Wednesday.
European Debt Crisis Explained
The European debt crisis explained: The debt levels around the globe are unprecedented in peacetime. The odds of restructurings and/or defaults are higher than most believe. When does debt become unsustainable? Good reminder video from last year.
Video below.
The house has burnt down
Must read piece by Hugo Salinas on the European mess.
The house has burnt down. Nothing is left of it but a pile of wet ashes. Pop and Mom and their numerous progeny gaze at the ruins, speechless.
Pop turns to the family and says: “Mom and I will have a summit meeting tomorrow, to find a solution to this problem. Tomorrow we’ll have the definitive solution to this crisis; in the meantime we’ll sleep in a tent that our German neighbors will rent us.”
The European house has burnt down financially. In 1999 the Euro was installed as the single currency for a central group of European nations. The interest rates of the various nations were to be set by “diktat” of the European Central Bank. No nation was to be allowed to have a Fiscal Deficit of more that 3% of GNP.
Thus was set up the orgy of government and private sector borrowing and spending on the part of the hot-blooded nations of Europe, that is to say those that form the “Club Med” of Europe: Greece, Italy, Spain, Portugal, with the participation of Ireland and even France. Never were seen nor dreamt of in dreams such low interest rates and such easy credit in those nations.
The spending was gigantic. Never was Europe so happy. The governments showered benefits upon the governed. Life was pleasant, free of worries. The good life was assured: modern housing, autos (his and hers), free education for the kids, medical and hospital insurance, generous pensions for early retirement, a monthly check in case of unemployment; in Italy, three months’ vacations. The standard of living in Europe was the wonder of the world.
(Full article here)
PIIGS to be expanded-PIIGSS next?
Is the word PIIGS to be extended with another “S”? Slovenia, the little nation and a part of former of former Yugoslavia, is showing similar signs to several of the other PIIGS countries. PIIGSS here we come. Facts by Edward Hugh.
Slovenia is in the news. According to press reports (and here) solving the problems which have accumulated in the country’s banking system may well mean the country is next in line for some sort of EU bailout assistance. Speculation was fueled last week when ECB Governing Council member and Bank of Slovenia Governor Marco Kranjec said that the country may well eventually need assistance, even if for the moment it will not be necessary. Sounds a lot like the other denials we have heard just before the “happy event”.
“We do not exclude anything … but for now this is an entirely hypothetical question,” he told his conference audience,”Conditions (in the Slovenian banking sector) are going in the bad direction, but for now I do not see a reason that Slovenia would need to ask for (international) help.” He also made the point that “Yields on our (Slovenian) debt are very high but poor availability of (financial) resources is even more worrying,”
Soros- A Tragic, Historical Mistake by the Germans
Soros has been rather “active” in the media lately. The master of speculation and reflexivity theory shares his thoughts on the European mess. Must read interview via Spiegel online.
Why an ESM programme could be a kiss of death
A couple of points on recovery values, via Voxeu.
‘Recovery value’ is a crude means used by some investors when evaluating sovereign default risk.
The Eurozone’s May 2010 strategy is a disaster
Restoring stability, while avoiding the contagion effects is a failed policy. This should be clear to majority of people by now. The bigger question is, what do the politicians need to do going forward? From Voxeu.
The EZ rescue strategy adopted in May 2010 failed to restore debt sustainability, avoid contagion, or reduce moral hazard. This column argues that a volte face is needed. The debt of Greece, Portugal and Italy – and perhaps Ireland, Spain and France as well – must be restructured to restore growth and end the crisis. All EZ nations should pay since their leaders’ decision to violate the Maastricht Treaty’s no-bail out clause is what brought us here.
Chancellor Angela Merkel has sent word that Germany cannot save the euro. She is right.
From the very start of the Eurozone crisis, it was clear that a domino game was under way and that a highly indebted German government should not be seen as the residual saviour. But keeping the euro will be costly and Germany will have to share the burden.
The solution will have to combine debt structuring and ECB lending in last resort to banks and governments. Angela Merkel needs now to lift the German veto.
Die Europaeische Bankenkrise (European Crisis Explained in German)
Still the best dummies video around explaining the European mess, is now presented in a German version. Maybe, zee Germans will understand now, what this whole situation is about.
Video below, courtesy Omid Malekan.
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.
Schadenfreude Is a German Word
Guest post by Peter Tchir of TF Market Advisors.
The market is relatively stable overnight and this morning. Yesterday traded in fits and starts with brief moments of concern that Friday’s sell-off would continue and brief moments of hope that Europe was going to do something to fix the situation in Europe. Trading was on light volume and liquidity seemed low as gaps of 5 pts on the S&P 500 seemed the norm.
With the U.K. shut for a second day due to the Queen’s diamond jubilee, there isn’t much of a read on credit markets in Europe. Spanish and Italian 10 year bond yields are better for the fifth day in a row in the case of Spain. 5 year yields are more mixed and CDS, without London, is effectively shut. Here in the U.S. with futures hovering around fair value the credit indices are stable with IG18 1 wider and nearing the 130 level, but HY18 finally outperforming and actually up an 1/8. HY managed to squeak out a small win yesterday in ETF land with HYG and JNK both up, and the EMBI index had some real strength. This is in spite of continued outflows from the funds, though with the ETF’s now trading at less than a 1% discount we may see any arb driven activity slow.
Is the German Pot Calling the PIIGS Kettle Black?
We seem to get the daily barrage of messages and soundbites out of Germany demanding that countries stick to existing plans and that “austerity” is the only way forward. Germany continues to love to point the finger at the other countries and accuse them of borrowing too much and that these countries need to suck it up and pay what they owe. For now we will ignore the fact that Germany itself was one of the first countries to break the Maastricht Treaty. What Germany seems to be forgetting is that they jeopardized their own credit quality. With bunds at record lows, this may not be obvious, but for the past 2 years, Germany has been throwing around guarantees and commitments like they meant nothing.
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