THE Eurozone Economics Thread pt 1 (merged) Archived

[pawancarrot]

US dollar index is lower today, declining as better news encourages cautious optimism and improves risk appetite.

[dolanbaker]

http://www.bbc.co.uk/news/business-17611764

European stock indexes have fallen after a disappointing Spanish bond sale and continuing weak eurozone economic data hit investors' confidence.

The Spanish government had hoped to sell up to 3.5bn euros ($4.6bn; £2.9bn) of medium-term bonds, but it was only able to find buyers for 2.6bn euros.

It once again raised concerns about high levels of sovereign debt in several eurozone member states.

Germany's main Dax share index and France's Cac were both down 2.5%.

In the UK, the FTSE 100 was 1.8% lower, while Wall Street's Dow Jones was down 1.2% in morning trading in New York.

Looks like Merkozy's big bazookas are not so appealing any more!

Oil is taking a dive as well.

[radon]

Looks like Merkozy's big bazookas are not so appealing any more!

Was always puzzled - why are they called Merkozy rather than Sarkel? Upper hand?

[dolanbaker]

Looks like Merkozy's big bazookas are not so appealing any more!

Was always puzzled - why are they called Merkozy rather than Sarkel? Upper hand?

Now that would be Sarkolastic!

[eXpat]

Lol, the headline doesn´t precisely conjure images of stability in Spain.
Analysis - Investors run scared of Spain's battered banks

(Reuters) - Spain's banks are fast joining the ranks of the most unloved in Europe just as many need to raise capital urgently, deserted by investors who believe the country is on the brink of a recession that many lenders will not survive.

The government has ruled out more state aid for a sector that comprises a motley mix of international lenders and heavily indebted local savings banks. That leaves two options: raising private capital or turning to the EU for bailout funds.
Prospects for a private sector solution are poor. Nothing on the horizon looks likely to persuade foreign fund managers to invest, such is the fear of the banks' growing bad loans, their holdings of shaky sovereign debt and the worsening economy.

Already battered by a property market crash that began four years ago and continues unabated, few Spanish banks are able to borrow funds on wholesale credit markets and the majority are instead relying on the European Central Bank.

"Most are currently on liquidity life support from the ECB but asset quality continues to deteriorate as house prices keep falling and unemployment is still rising," said Georg Grodzki, head of credit research at Legal & General Investment Management.

"Their funding remains constrained and competition for deposits intense," he told Reuters.
...
Analysts at Citigroup suggest Spanish house prices could fall a further 20-25 percent before hitting a floor. This will eat further into the value of the 300-plus billion euros' worth of property assets on banks' balance sheets - 176 billion euros of which is already classed as "troubled" by the Bank of Spain.

Typical loan-to-deposit ratios, a measure of financial strength, show Spanish banks are already lending more cash than they have on deposit and the ratio is set to widen even further as unemployed Spaniards plunder their savings.

"It is still not clear where the resources will be found to close the gap in capital and required top up in provisioning for a number of the weaker banks that form a significant part of the domestic sector," said Virna Valenti, senior credit research analyst at UniCredit subsidiary Pioneer Investments.

"Only a couple of institutions currently have access to the wholesale funding market and this will continue to be the situation for a while," Valenti said.

Paul Vrouwes, senior financials manager at ING Investment Management, said the majority of his peers would probably steer clear of buying Spanish bank shares until the country showed it could shrink its ballooning debts and generate economic growth at the same time.

"I think that Spanish banks will have to pay a lot more to investors like me to raise funds in the future. I am not so sure how they will manage when the ECB money needs to be paid back," Vrouwes said.

http://uk.reuters.com/article/2012/04/11/uk-spain-banking-idUKBRE83A08F20120411?feedType=RSS&feedName=GCA-GoogleNewsUK&google_editors_picks=true
Panic is knocking the door.

[dorlomin]

Soros dishes the gloom on Eurodoom.

At the onset of the crisis, the eurozone’s break-up was inconceivable: assets and liabilities denominated in the common currency were so intermingled that it would have caused an uncontrollable meltdown. But, as the crisis has progressed, the eurozone has been reoriented along national lines.

The LTRO enabled Spanish and Italian banks to engage in very profitable and low-risk arbitrage in their own countries’ bonds. And the preferential treatment received by the ECB on its Greek bonds will discourage other investors from holding sovereign debt. If this continues for a few more years, a eurozone break-up would become possible without a meltdown – but would leave creditor countries’ central banks holding big claims that would be hard to enforce against debtor countries’ central banks.

The Bundesbank has seen the danger. It is now campaigning against the indefinite expansion of the money supply, and it has started taking measures to limit the losses it would sustain in a break-up. This is creating a self-fulfilling prophecy: once the Bundesbank starts guarding against a break-up, everybody will have to do the same. Markets are beginning to reflect this.

Whether or not the euro endures, Europe is facing a long period of economic stagnation or worse. Other countries have gone through similar experiences. Latin American countries suffered a lost decade after 1982, and Japan has been stagnating for a quarter of a century; both have survived. But the European Union is not a country and it is unlikely to survive. The deflationary debt trap threatens to destroy a still-incomplete political union.

The only way to escape the trap is to recognise that current policies are counterproductive and change course. I cannot propose a cut-and-dried plan, only some guidelines. First, the rules governing the eurozone have failed and need radical revision. Defending a status quo that is unworkable only makes matters worse. Second, the current situation is highly anomalous, and exceptional measures are needed to restore normality. Finally, new rules must allow for financial markets’ inherent instability.

Only half the story though george, its about energy and loss of manufacturing.

And it will be Americas story when they stop borrowing as much.

Cant cut enough to reduce the deficit and still grow. Cant borrow enough to get back to the 90s.

We are now in the era of extremes.

[smiley]

We are now in the era of extremes.

I would say the opposite. We're in an era of the decimals. People crying destruction if quarterly economic growth pans out at -0.1% instead of +0.3%, and shouting hallelujah when the unemployment rate unexpectedly comes in at 8.8% instead of 8.9%. The economy isn't acting extreme, but the people are.

Sure it is obvious that most governments will be restricted in their spending as they have to balance their books.

Is that bad? What did the spending of the past decades actually produce?

The millionaires of then are the billionaires of now, but are you four times as rich as 30 years ago? (GDP seems to suggest so).

In the US the debt doubled in the past 10 years, and so did the povery rate (couldn't find numbers for europe). Note that between 1993 and 2000 the poverty rate decreased despite Clinton cutting spending.


If anything there seems to be an inverse relation between government spending and the actual wellbeing of the average.

[eXpat]

Well, well, next thing we will find our is that the 2008 didn´t really go away, just got delayed by massive amounts of debt.
Europe now sees its financial crisis never really went away

The European “crisis” is back. Actually, it never went away — and won’t for many years. The problems are so deep and pervasive that there is no easy or obvious solution. Government debt and deficits in many countries are not sustainable, but the usual remedies of cutting spending and raising taxes — a.k.a. “austerity” — may make matters worse by deepening already severe recessions. Europe is caught in a trap that promises more political and social unrest.

The wonder is that, for a few months, there was a sense of complacency. Interest rates on vulnerable debtor countries Spain and Italy declined. Fears about European banks eased. Some commentators said “the worst is over.”
Well, probably not. Interest rates are headed up again, while European stocks have taken a pounding.

The momentary optimism reflected an unprecedented move by the European Central Bank (ECB) — Europe’s Federal Reserve — to make low-interest loans of 1 percent available to strapped banks for three years. In late December, more than 500 banks borrowed 489 billion euros (about $635 billion); and in February, 800 banks borrowed 530 billion euros ($690 billion).

The ECB “dumped tons of cash onto the banks,” says economist Jay Shambaugh of Georgetown University. As he notes, this had two beneficial effects. First, it relieved fears that some banks wouldn’t be able to repay maturing loans. Second, it helped reduce interest rates on government bonds because banks used the new cash to buy bonds. (Bond rates move in the opposite direction of prices; if bond prices rise — because investor demand increases — then interest rates fall.) For the banks, this seemed to present a huge profit opportunity: borrow at 1 percent; buy bonds yielding 5 percent or more.

But all this, though reassuring, barely affected debtor countries’ underlying problems.
Spain is the latest focus of concern. On March 2, Prime Minister Mariano Rajoy announced that the country would miss its 2012 budget deficit target of 4.4 percent of the economy (gross domestic product) and wanted to raise that to 5.8 percent of GDP. After complaints from other European leaders, the target was set at 5.3 percent of GDP. But this required more austerity in an economy in deep recession.

“Spain is a classic expression of the problem,” says Shambaugh. “You look at its almost 24 percent unemployment, and it’s hard to see austerity as the path out.”

In a recent paper, Shambaugh argued that Europe’s problems are so intractable because they reflect three parallel crises that feed on each other. First, there’s a banking crisis. Banks have too little capital (a buffer against losses) and have a hard time raising funds. Next is the sovereign debt crisis. The high debts of many countries raise fears that, like Greece, they may default. And, finally, there’s an economic growth crisis. Low growth or slumps afflict most of the 17 countries using the euro.

Each crisis aggravates the others. Because banks hold huge portfolios of government bonds, fears about the bonds’ values weaken the banks and threaten their failure. Weak banks in turn don’t provide ample business and consumer loans to increase economic growth. And feeble or nonexistent growth shrinks tax revenues and makes it harder for governments to service their debts.

http://www.washingtonpost.com/opinions/europes-financial-crisis-never-really-went-away/2012/04/12/gIQAsZrwCT_story.html

[eXpat]

You don´t get the IMF to say this every day:
IMF admits for first time that eurozone crisis could destroy the euro - and send world economy into depression

The eurozone could break up and trigger a global economic slump to rival the Great Depression, the IMF warned last night.

In its World Economic Outlook report, the International Monetary Fund said the collapse of the crisis-torn single currency could not be ruled out.

It was the first time the Washington-based institution has accepted the prospect of the eurozone splitting up and follows fears over the health of the Spanish economy.
The IMF predicted a return to recession in the eurozone this year but upgraded its growth forecasts for Britain.

However, it warned that the world remains at risk of collapsing into a slump that would rival the Great Depression – with ‘acute risks in Europe’ the major threat.

‘Things have quietened down but there is a very uneasy calm,’ said IMF chief economist Olivier Blanchard. ‘I have a feeling that at any moment things could get very bad again.’

Speaking at the launch of the half-yearly report in Washington, Mr Blanchard said there was ‘no plan’ in place to deal with a country leaving the euro.
However Greece is widely expected to default on its crippling debts and quit the doomed single currency.

‘If such an event occurs, it is possible that other euro area economies would come under severe pressure as well, with a full-blown panic in financial markets,’ the IMF report said.

‘Under these circumstances, a break-up of the euro area could not be ruled out. This could cause major political shocks that could aggravate economic stress to levels well above those after the Lehman collapse.’

Read more: http://www.thisismoney.co.uk/money/news/article-2131299/IMF-warns-time-euro-collapse.html#ixzz1sOZuu2fF

[smiley]

You don´t get the IMF to say this every day:
IMF admits for first time that eurozone crisis could destroy the euro - and send world economy into depression

However, it warned that the world remains at risk of collapsing into a slump that would rival the Great Depression – with ‘acute risks in Europe’ the major threat.

The actual text of the WEO "disclaimer" section:

Several tail risks are hard to quantify but merit attention:
• The potential consequences of a disorderly default and exit by a euro area member are unpredictable and thus not possible to map into a specific scenario. If such an event occurs, it is possible that other euro area economies perceived to have similar risk characteristics would come under severe pressure as well, with a full-blown panic in financial markets and depositor flight from several banking systems. Under these circumstances, a breakup of the euro area could not be ruled out.

http://www.imf.org/external/pubs/ft/weo ... pdf/c1.pdf

The other two tail risks mentioned are an oil shock and a Japanese / US debt crisis

[eXpat]

There we go again
New eurozone crisis looms as Spain prepares bail-out

A new eurozone crisis is looming as Spain signalled on Monday it was ready to bail out ailing banks after markets shrugged off the election results in France and Greece.
Prime minister Marian Rajoy indicated the Government was ready to intervene to save banks wrestling with the collapse of the housing market.

Bankia, Spain's fourth biggest bank, is the first in line for state aid. Rodrigo Rato, chairman and former IMF managing director, swiftly resigned after it was disclosed the finance ministry was preparing to refinance the bank and introduce legislation to protect the balance sheets of others.

Spain, which also signalled it could dock its only aircraft carrier to save €30m a year, is already struggling to cope with an austerity drive that has pushed the jobless total up to nearly 25pc of the workforce.

Mr Rajoy insisted that any bank bail-out would not compromise the tough targets set by Brussels to reduce the budget deficit.

Peter Kenny, managing director at Knight Capital, said Spain's action was positive because "it's them taking ownership of their own issues".

Fears of a fall-out in financial markets after the election results in France and Greece were short-lived. Shares and the euro recovered after initial falls as investors reasoned any policy changes in the eurozone recovery programme were some way off.

But the turmoil in Greece produced by a backlash against a tough austerity programme and the failure of early efforts to form a coalition government heightened speculation the country would be forced out of the eurozone.

Citi's European economics team said there was a "rising risk of a Greek exit from the euro within the next 12 to 18 months."

Angela Merkel, the German chancellor, urged the Greek political parties to stick to the bail-out programme but her pleas fell on deaf ears.

Markets remain more interested in whether France's new president, François Hollande, will be able to persuade her to support policy changes that would meet demands for more emphasis on growth and economic recovery rather than austerity.

http://www.telegraph.co.uk/finance/financialcrisis/9250986/New-eurozone-crisis-looms-as-Spain-prepares-bail-out.html

[eXpat]

Oppsss!!!
Greek Left Coalition Leaders Says Bailout Accord "Null And Void", Demands Greek Debt Moratorium

Hardly a surprise to anyone, but here it is black on white - Greece officially makes the odds for a Euro departure well over 50%:

TSIPRAS SAYS GREEK RESULTS MAKES BAILOUT ACCORD NULL AND VOID
TSIPRAS SAYS GREEKS HAVE VOTED AGAINST BARBARIC BAILOUT
TSIPRAS SAYS WON'T JOIN A GOVT OF NATIONAL SALVATION FOR LOAN
TSIPRAS SAYS GREEKS HAVE ENDED PLANS FOR ADDITIONAL AUSTERITY
TSIPRAS SAYS TO REDISTRIBUTE TAX BURDEN, DEVELOP GROWTH PLANS
TSIPRAS SAYS WILL STICK TO PRE-ELECTION PLEDGES
TSIPRAS ASKS VENIZELOS, SAMARAS TO RENEGE PLEDGES IN WRITING

And here it comes

GREECE'S TSIPRAS SAYS WANTS INTERNATIONAL COMMISSION TO INVESTIGATE IF GREECE'S DEBT IS LEGAL
TSIPRAS SAYS MUST BE MORATORIUM ON GREEK DEBT PAYMENTS

http://www.zerohedge.com/news/greek-left-coalition-leaders-says-bailout-accord-null-and-void

[Roryrules]

Well, it looks like the Eurozone crisis is back with a vengeance and once again Greece is at the centre of it all. The elections over the weekend have led to a complete power vacuum, with supporters of the bailouts in the minority. Greece is starting to look ungovernable; is a Euro exit now inevitable?

[QUOTE=]A new eurozone crisis looms as Greece's leftist forces attempt to form a government opposed to the country's bailout, while Spain signals it is ready to rescue ailing banks and Japan urges France to stick to reforms.[/QUOTE]

http://www.telegraph.co.uk/finance/debt ... -live.html

http://blogs.telegraph.co.uk/finance/ph ... ll-spread/

[radon]

In the meantime:

The Ukrainian government is negotiating the issue of rouble-denominated government bonds, making the country no longer reliant on International Monetary Fund assistance. Ukraine's 2010 IMF assistance package of US$15.6 billion was suspended in March 2011 because of the country's refusal to continue with IMF reforms, in particular raising household utility prices to reduce subsidies to the state gas company Naftohaz Ukrainy. This confirms what the Nikolai Azarov government has been discussing since summer 2011.
...
Until now, Ukraine has paid Russia for gas in US dollars and has been negotiating since last year to reduce the price by a third, or $250 per 1,000 cubic meter, compared with $416 last quarter. Ukraine has already borrowed $2 billion to pay for Russian gas from VTB Group - a loan that matures in June. Last month, Ukraine negotiated a second credit line of $2 billion from Gazprombank to pay for imported gas.
http://www.atimes.com/atimes/Central_Asia/NE09Ag01.html

[eXpat]

Am I the only one that thinks that this is nuts? Solution to weak economics is more spending and debt??
Hollande: My Win Is A Rejection Of Austerity

French President-elect Francois Hollande has told tens of thousands of cheering supporters that his victory was a rejection of austerity measures as the answer to the euro crisis.

The 57-year-old won 51.6% of the vote in the presidential run-off, unseating Nicolas Sarkozy after a fractious campaign in which rising unemployment and the faltering economy were the key battlegrounds.

After hearing the news in his political power base of Tulle, Mr Hollande travelled to Paris to address his supporters in the symbolic heart of revolutionary France.

"In all the capitals... there are people who, thanks to us, are hoping, are looking to us, and want to reject austerity," he shouted above the din.

"You are a movement lifting up everywhere in Europe, and perhaps the world."

Certainly the world has taken notice: he received congratulatory telephone calls from Germany's Chancellor Angela Merkel, US President Barack Obama and British Prime Minister David Cameron.

Mr Hollande's first official foreign trip will be to Berlin for a meeting with Ms Merkel after his inauguration on May 15.

The German Chancellor said on Monday she would welcome the President-elect "with open arms".

She said they agreed during a phone call to work "well and intensively" together, adding: "Franco-German co-operation is essential for Europe and we all want Europe to succeed."

Observers agree that Mr Hollande's election represents a sea-change in the governance of the eurozone and the management of the single currency crisis.

Under the outgoing presidency, France and Germany led an austerity drive to enforce budget discipline across the 17 single currency nations.

Now Mr Hollande is vowing to amend their signature compact - agreed in principle by all EU nations except the UK and the Czech Republic - to include an enhanced commitment to growth.

http://web.orange.co.uk/article/news/hollande_challenges_eurozone_austerity

[Plantagenet]

Hollande: My Win Is A Rejection Of Austerity
French President-elect Francois Hollande has told tens of thousands of cheering supporters that his victory was a rejection of austerity measures as the answer to the euro crisis.

"In all the capitals... there are people who, thanks to us, are hoping, are looking to us, and want to reject austerity," he shouted above the din.

We'll find out soon enough how sincere Mr. Hollande in his rejection of austerity measures in the EU.

Greece is scheduled to get another tranche (bailout check) from the EU soon, on the condition that they have met the austerity goals set by the EU.

Obviously Greece will fail to meet their austerity target.

Then Hollande will have to show if France will stand will with Germany (i.e. Merkozy will seamlessly turn into Merde) in favor of austerity, or if France will abandon Germany and stand with Greece against more austerity.

[dolanbaker]

It's more the bat* up Merkel's nightdress that will cause the most commotian.


*Here are a couple of videos I watched the other night, long story short;
FT economist suggests that Germany & Holland need to have a depression to level the playing field of the Eurozone as most other states are incapable of reaching German levels fiscal stability.
All the money of the EU has migrated to Germany, for the EU to work in the long term it needs to flow back out again.

http://youtu.be/HNvJ-okKwuc
http://youtu.be/-qUPkmK7xdU

[dolanbaker]

http://www.telegraph.co.uk/news/worldnews/europe/germany/9255534/Eurozone-crisis-Angela-Merkel-forced-to-postpone-fiskalpakt-ratification.html
Eurozone crisis: Angela Merkel forced to postpone 'fiskalpakt' ratification

Angela Merkel was on Wednesday forced to postpone German ratification of the eurozone's "fiskalpakt" until after an Irish referendum on May 31 by a gathering domestic and European backlash against austerity.

Even the Germans are having second thoughts!
Unravelling faster than Dougal's sweater!

[eXpat]

Things are getting interesting
Greece in chaos as Alexis Tsipras's coalition talks fail

Greece's political turmoil deepened last night after a key Leftist leader failed in his bid to form a coalition government, making fresh elections next month all but inevitable.
Alexis Tsipras, whose Syriza party was the surprise runner-up in Sunday’s election and is expected to fare even better in a second election, had earlier declared the €130 billion (£104 billion) EU bail-out of Greece dead in a letter to Brussels.

He told colleagues "we cannot make true our dream of a Left-wing government" after failing in a bold challenge to the two mainstream parties, Pasok and New Democracy, to renounce the recovery plan they supported last year.

Antonis Samaras, leader of the conservative New Democracy party, who has already tried and failed to form a coalition, said the pulling out of the loan package would lead to "Greece's exit from the euro and the country's bankruptcy".

http://www.telegraph.co.uk/news/worldnews/europe/greece/9255939/Greece-in-chaos-as-Alexis-Tsiprass-coalition-talks-fail.html

[dolanbaker]

Greek bailout: Eurozone holds back 1bn-euro payment

http://www.bbc.co.uk/news/business-18014075

The eurozone's rescue fund has decided to hold back 1bn euros ($1.3bn; £800m) of the latest instalment of its bailout to Greece.

This comes after a majority of Greeks voted against the political parties that supported the country's bailouts and the austerity they have imposed.

The rescue fund said that it would disburse 4.2bn euros of the 5.2bn euros due to Greece.

It said that Greece did not need the remaining funds this month.

A bit of arm twisting going on!