Europe’s Mediterranean rim trembled on Wednesday as violent clashes broke out following the largest coordinated multinational strike in Europe ever. In the hope to stave off decades of austerity, precarity and unemployment, European labor unions united for the first time since the start of the European debt crisis to organize strikes and protests in a total of 23 EU member states, with millions of workers walking off their jobs and marching on parliament buildings across the continent. Bloody street battles ensued across Spain, Portugal and Italy.
In Italy, over 300,000 protested in over 100 cities as workers observed a 4-hour stoppage in solidarity with Greek, Spanish and Portuguese workers. In Milan and Rome, scenes of street “guerriglia” were witnessed as thousands of students clashed with riot police, bringing traffic to a standstill and leading to dozens of injuries. In Sardinia, industry minister Corrado Passera and Fabrizio Barca, minister of territorial cohesion, had to be evacuated by helicopter after angry protesters besieged a meeting and started burning cars all around them.
Guest post by Sober Look.
In late August JPMorgan argued that the ECB’s OMT (Outright Monetary Transactions) program should start with Portugal (see discussion). The prediction was wrong – the ECB disqualified Portugal from participating. But why? After all Portugal has complied with multiple troika reviews and the monetary transmission mechanism in Portugal has clearly been broken. The chart below shows that Portugal’s private sector has not benefited from the ECB’s liquidity injections (LTRO) and the lower overnight rate (prime example of broken monetary transmission).
What’s particularly strange is that the whole justification for the ECB launching this sovereign bond buying program to begin with had to do with problems of monetary transmission (see discussion) in the Eurozone.
The individual mind usually focuses on a few subjects only. Over the past weeks investors have focused on JPM, Grexit and Facebook, but let’s not forget about Japan’s downgrade. Yes, domestic investors are the main buyers of Japanese debt, and they have been “loyal”. The question is though, how much more debt can/want they take down. By Edward Hugh.
The recent decision by Fitch Ratings to downgrade the Japanese sovereign by one notch, from from AA minus to A plus, has all the outward appearance of being a predictable non event.
Yet something somewhere fails to convince me that this nonchalance is really justified . Something tells me that this process of rising debt and falling credit ratings cannot go on and on forever, and that at some point we will reach what Variant Perception’s Claus Vistesen calls “the end of the road”. In which case, we could start to ask ourselves, what then gets to happen next? Certainly there is nothing in conventional economic theory which can help us anticipate the answer, since this kind of end of the road point has not been forseen, anywhere, unless I am mistaken.
Some insight and implications regarding the Target2. From PIMCO;
- The large TARGET 2 positions developing among national central banks in the eurozone reflect capital flight from the periphery to the core and de facto introduce transfer and burden sharing elements of a common fiscal policy.
- Monetary policy ends up substituting for fiscal policy without going through the same democratic channels that governments’ expenditure and taxation decisions entail. Taxpayers in the eurozone are contingently liable for eventual losses incurred by the Eurosystem’s monetary policy operations.
- Three discernible consequences will likely come out of this cheap money and capital flight mix: inflation in Germany will increase, the internal devaluation process underway in southern Europe will proceed slowly and it will strain the political foundation of the euro.
(Full article here).
While the LTRO is saving the banks, people of Southern Europe are pulling money out of the local system and moving it to Northern safety. From Spiegel;
More and more people in southern euro-zone countries are moving their money north amid fears of losing their savings in the crisis. The capital flight makes things difficult for banks back home, but experts say there are no legal measures to stop it. Any steps would probably come too late, they say, and might even endanger the European project.
The TARGET2 numbers also show that a growing share of the money flow in crisis-stricken euro-zone member states is “involuntary.” The totals represent money borrowed by individual central banks from the ECB — and not foreign investment. Commerzbank analyst Lutz Karpowitz has calculated what capital flow balances would look like without the TARGET2 system. The result, as seen in the graphic below, is not terribly encouraging.
So, 2012 has just started. We are back to reality, and soon many Europeans will realize how bad things actually are. We have focused on Italy lately, but let’s not forget about the other countries of PIIGS.
Meanwhile, Portugal is feeling the pain. With the Portugese economy in free fall, tensions are building within the unemployed. Latest on the brain drain out of Portugal, the prime minister is urging people to emigrate in order to find a job. From Al Jazera;
The decision to leave one’s country “is not easy, it’s painful and difficult, and people don’t emigrate just because some political leader says they should,” said Peixoto, who described Passos Coelho’s remarks as “odd for a prime minister to make”.
Ana Maria Gomes, a member of the European Parliament, said that when she heard what he said, “I felt furious, because that is the last thing a prime minister should say.”
“Worse than feeling impotent is giving up, because no matter how complicated things are, we can and must pull out of this, because we have qualified young people, the result of the investment in education made over the last few decades,” said Gomes, one of the most prominent leaders of the so-called left wing of the Socialist Party.
Must read guest post by Saxo Bank’s Sten Jakobsen. Don’t forget reviewing the Stress Chart Indicator.
‘If the debtor is in a difficulty, grant him time till it is easy for him to repay. But if ye remit it by way of charity, that is best for you if ye only knew’. – Qur’an: 2.280’
There is not much to cheer about for 2011 and looking into 2012.
It is remarkable that the US was able to sustain a positive – barely – year again – now two years of near zero performance. Impressive? Hardly – The FED and US government has been throwing everything at this market – low interest, Operation Twist, QE 1 through 5, easier regulation for banks (In house models vs. harsh gross regulation).
A different story is Europe minus 20 pc is not a good year, and as we close the year economic activity is collapsing in Asia, moving towards major deflation in Europe, and slowing/maintaining low growth in the US. This creates environment/outlook for:
1. Major risk of ECB moving towards QE in Q1 of 2012. Europe will “fall of the cliff” in economic growth terms in Q1 – forcing German yield towards zero – but….. the initiation of QE could medium-term mean higher rates. I remain of the idea that early 2012 will be long-term low in interest rates in Europe, but also globally. The low interest rate environment have created negative impacts on spending, investment and savings which only can be solved through more market less government intervention.
2. We coined Q4-2011 the “Maximum Intervention” in our Outlook Report and it clear became an almost idiotic list of initiatives which all of them really only created more of the “extend-and-pretend” concept. This is overview of “measures” involving ECB in Q4. Joke! Q1-2012 could be the critical test of this fractional economy
Europe is in difficulties, that is for sure. With many of the Med countries imploding, and contagion spreading to core Europe, man needs to look abroad for opportunities. The politicians are trying to save the Euro project, which will eventually fall, while the Economies are falling further into the abyss. For the financial reader, it is all figures, but in real life, people are not getting jobs, and struggle to make ends meet. This is creating a dangerous situation, where Europe might feel the “brain drain” symptoms in the long run, just like Yugoslavia and other countries experienced after the crisis those countries went through. Europe is old, tired and a political chaos getting increasingly de united by the day. What we didn’t expect though, was the young well educated would go to countries like Angola. What’s next, Europeans working in factories for the Chinese? Welcome to New Europe, by El Pais;
Once again, Dagong is pulling the trigger before the rest of the agencies join. Now Fitch joins. From Reuters;
Fitch Ratings has downgraded Portugal’s Long term foreign and local currency Issuer Default Ratings (IDR) to ‘BB+’ from ‘BBB-’ and Short-term IDR to ‘B’ from ‘F3′. The Rating Watch Negative (RWN) on the long-and short-term ratings has been removed. The Outlook is Negative. The agency has also affirmed its Country Ceiling at ‘AAA’. Fitch has also downgraded Portugal’s senior unsecured debt to ‘BB+’ and commercial paper to ‘B’, and removed both from RWN.
Fitch has concluded its fourth-quarter review of Portugal’s sovereign rating, resolving the RWN in place since April 2011. The country’s large fiscal imbalances, high indebtedness across all sectors, and adverse macroeconomic outlook mean the sovereign’s credit profile is no longer consistent with an investment-grade rating.
Fitch has lowered Portugal’s growth forecasts in light of the worsened European outlook. The agency now expects GDP to contract by 3% in 2012. Significant structural reforms expected under the programme should leave Portugal in a more competitive position in the long term.
Guest Post by Macro Story.
In two previous posts (Europe Behind The Scenes Part 1 and Part 2 found here) I discussed that behind the scenes financial markets and thus the global economy was experiencing stress. On the surface the iceberg may not be much of a concern but below it is often formidable.
A few developments this evening point towards the first real stresses beyond the control of the current EFSF “plan” including the plan itself.