Tuesday, May 11. 2010
Posted by Andrew Zvirzdin in International Economics on Tuesday, May 11. 2010
Sixteen months ago, I began to grow worried about Greece's debt problems and its implications for the euro. At the time, I wrote,
The euro area has yet to demonstrate its cohesiveness when confronted with the growing economic divergence of its member states and even the specter of a sovereign debt default....Leaders will have to act together to show their commitment to preserving the single monetary policy in the euro area.Yesterday, EU leaders rose to the challenge and solidified the euro's position in world monetary affairs. The announced $1 trillion package does more than provide indebted countries with a source of funds during periods of crisis; it demonstrates the commitment of leaders to the concept of European integration. In so doing, European officials have significantly increased the credibility of the EU in the eyes of their American counterparts and taken the first step towards some degree of fiscal integration.
A few details of the announced aid package are particularly noteworthy:
First, the ECB will directly purchase eurozone bonds, reversing a strong position it had taken in December. The move gives the ECB significant discretion and authority but also introduces political complexities far beyond its once simple inflation mandate. I called the ECB "Scrooge" when they categorically rejected to enter the secondary bond market in December; what ghost of fiscal crisis future did they see to make them change their minds now?
Second, the IMF has a prominent role in the aid package. I find this significant because it introduces an important transatlantic dimension to sovereign debt crises. As the market fluctuations of the past few weeks have demonstrated, a sovereign debt crisis in one country affects everyone. Those with longer institutional memories will of course remember the debt crises of Argentina and Mexico. The difference now is the aid money is being contributed to a pooled insurance fund for an international organization. I think this will set an important precedent for the future.
Third, the European Commission is contributing money to the fund. Sure, it is only a measly $60 billion, but this is an important signal. For the first time that I am aware of, the Commission has a federal role in fiscal policy. The lack of a fiscal transfer mechanism in the EU is the primary reason why economists such as Martin Feldstein and Paul Krugman have been so dismissive of the euro project up to now. If the Commission is successful in its contribution here, this could mark the beginning for more forays into fiscal federalism.
Fourth, and perhaps most importantly, this "bailout" will have huge political ramifications. Like the TARP plan in the US two years ago, the EU rescue plan will agitate populist and conservative sentiment. In Europe however, there will also be an additional level of discontent aimed against "creeping EU federalism." Just yesterday, Angela Merkel's party suffered dramatically in regional elections in large part because of her leadership on the Greece debt crisis. Do European leaders have the political capital to justify their role in bailing out Greece without losing political power? Could we see an anti-EU backlash throughout European countries who have their fiscal house in order? I believe the issue of EU federalism will be a defining element in national elections in Europe during the next five years.
It is still early, but the EU rescue plan seems to be a game-changer. The markets seem to believe so. And though the measures are supposed to be temporary, they nonetheless represent a firm commitment to keep the eurozone cohesive. Frankly, I cannot imagine any other tenable option.
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Pat Patterson - #1 - 2010-05-11 05:05 -
But as it turns out the kind of massive bank bailout that the EU and the IMF are striving for has backfired in the US. Many of the even minor players who voted for the bailout are now facing grassroots opposition to their reelection. And the targets are not simply Democrats in red districts or states but even, withness Gov Crist and Sen Bennett, areas that are supposedly moderate and safe seat for Republican incumbents. I suspect if the German public is unhappy now just wait until the next round of elections. It's panic and when other nations figure out they can get money without budgetary reform then it will cost even more.
Marie Claude - #2 - 2010-05-11 05:39 -
Joe Noory - #2.1 - 2010-05-11 15:47 -
Marie Claude - #2.1.1 - 2010-05-11 16:36 -
you are more intelligent than the experts, and we need your science
Joe Noory - #220.127.116.11 - 2010-05-11 16:44 -
I never said any such thing. What you're trying to tell me is that the people who imagine that simply NOT RATING anything will magically become better are the experts? Watch [url=http://www.businessweek.com/news/2010-05-11/euro-stocks-commodities-retreat-as-bailout-optimism-ebbs.html]the markets[/url]. The behaviour of individuals with their own assets at risk are more telling that some guy who writes for "Blacklisted News", and think's [url=http://www.google.com/custom?domains=www.blacklistednews.com&q=9%2F11&sa=Search&sitesearch=www.blacklistednews.com&client=pub-1259739693885865&forid=1&ie=ISO-8859-1&oe=ISO-8859-1&cof=GALT%3A%23008000%3BGL%3A1%3BDIV%3A%23336699%3BVLC%3A663399%3BAH%3Acenter%3BBGC%3AFFFFFF%3BLBGC%3AFFFFFF%3BALC%3A0000FF%3BLC%3A0000FF%3BT%3A000000%3BGFNT%3A0000FF%3BGIMP%3A0000FF%3BLH%3A50%3BLW%3A481%3BL%3Ahttp%3A%2F%2Fwww.blacklistednews.com%2Fimages%2Fsmalltopbanner.jpg%3BS%3Ahttp%3A%2F%2Fwww.blacklistednews.com%3BFORID%3A1&hl=en]"9/11 was an inside job"[/url]
Marie Claude - #18.104.22.168.1 - 2010-05-11 16:57 -
never said so, but you said that I said it, when I just brought links, must be your desir to prove that I'm wrong, or your love for me ! LMAO
Andrew Zvirzdin - #3 - 2010-05-11 05:51 -
Two articles from the New York Times add some important extra details and questions about the rescue package: 1)http://www.nytimes.com/2010/05/11/business/global/11reconstruct.html 2)http://www.nytimes.com/2010/05/11/business/global/11assess.html
John in Michigan, US - #3.1 - 2010-05-12 22:23 -
Marie Claude - #3.1.1 - 2010-05-12 23:57 -
I don't to be Cassandra, but May-be, that also explains why Obama pressed on Merkel for the big EU plan, that wasn't on board before the black thursday. http://market-ticker.denninger.net/archives/2309-Record-Deficit-For-An-April.html knowing that the Deutsches bank ows quite a lot of the insane debt bons in the US too
Marie Claude - #4 - 2010-05-11 07:14 -
there is no end to this vicious circle, only the abandon of the euro, will make the economical engine of Europe restart ! and just keep the euro as a exchange money only for the banks Why the Euro Is Doomed http://bit.ly/bPxE5E
Joe Noory - #4.1 - 2010-05-11 15:34 -
It isn't doomed at all. The central bank funding committment will result in the equivalent to simply printing more money. While tje ECB was willfully structured to avoid that kind of thing, and David can speak to this with more authority than I can, it's one of the only levers a central bank has to rebuild confidence. It's only doomed to devaluation for some period of time. With cycles of 12 month loans, I don't know what that term can be estimated to be. In fact, for the exporting focussed economic areas in (and around) the Eurozone, a lower Euro will raise productivity, and get those export costs into a closer proximity to global pricing. In this sense, the only people of any significant scale shorting the euro are the European entities borrowing in Euros at present value - one which will drop against other currencies when it's time to pay them back. So those banks and holding companies that have a hedge monetized in other currencies will be able to offset that shift in value. In effect they will be buying back the assets tied to whatever they borrowed at a discount with dollars and yen. Artificially underpriced lending causes carry-trade activity to move around the world.
Marie Claude - #5.1 - 2010-05-11 16:39 -
Marie Claude - #6 - 2010-05-11 16:52 -
Joe Noory - #6.1 - 2010-05-11 17:29 -
[i]"While I still hold this opinion, I believe it is only part of the story. The real culprit, I feel, is how management makes decision based upon incomplete information during market bubbles."[/i] ...which is why ratings are needed. This entire article which you've cut and pasted in is about the US housing bubble, and the way government policy increased the risk, NOT soverign debt or backstoping banks. and yes, OF COURSE if you call in a bum loan, that the borrower can't pay, that the borrower will have a liquidity problem. It's why they're a bum. What would you have them do? NOT seek repayment on a loan they've made, and bankrupt themselves because of a borrower?
Marie Claude - #6.1.1 - 2010-05-12 01:18 -
"This entire article which you've cut and pasted in is about the US housing bubble, and the way government policy increased the risk, NOT soverign debt or backstoping banks" If you've read that, I'd rather cared for the description of computer data risks models, and that they aren't adequate for certain products "Risk models such as VaR, were inadequate for capturing the complex information necessary for measuring risk associated with securitized products such as collateralized debt obligations and credit default swaps. Until risk models such as VaR can accurately value and measure risk, financial firms should not be permitted in using them to justify and set their capital reserves."
Joe Noory - #22.214.171.124 - 2010-05-12 14:25 -
So what you're trying to say is that if Europeans' assets are involved, the data must be undermined to improve the pride of the participants, even based on an individuals' opinion about the risk modelling of a vast array of home loans on another continent, based on no evidence that it's used at add up (lesser in number and larger in value, professionally managed) bank loans in Europe. As to your idea that "the same will be given to the US and Japan", there is no evidence of anything like that taking place. The only developed countires that the IMF has ever helped to date have been in Europe. Oh, and it's going to cost the US taxpayer $50-60 bn right off the bat too, with neither choice or recourse. The AIG bailout ended up largely paying for the reinsurance of European bank loans, and the Federal Reserve will be [url=http://www.nytimes.com/2010/05/10/business/global/10swap.html?src=mv]opeining up its' swap lines[/url] to the ECB. Yes, yes, of course. All of your unhappiness was caused by anonymous greedy men from abroad who wear top hats and rub their handlebar mustaches.
Marie Claude - #7 - 2010-05-12 01:08 -
STRATFOR's newest Geopolitical Weekly by George Friedman - The Global Crisis of Legitimacy http://bit.ly/cSkqGK This week's GeoPol examines the concept of European identity and how it contributes to the Greek crisis http://bit.ly/9NT150
Pat Patterson - #7.1 - 2010-05-12 01:39 -
Interesting posts by George Friedman at StratFor but what exactly do either have to do Andrew's argument? It's like watching confetti being tossed in the air and then trying to divine the intent by examaming which side landed face up.
Marie Claude - #7.1.1 - 2010-05-12 19:23 -
John in Michigan, US - #8 - 2010-05-12 14:27 -
Andrew Zvirzdin - #8.1 - 2010-05-12 15:47 -
John, You raise some very good points, and I appreciate your comments. Yes, the shock and awe strategy can only work if Europe gets serious in the next few months. And I mean really serious. For this to be a credible strategy, investors will need to see substantive changes, not just in Greece, but in Italy, Spain, and even Eastern European countries like Hungary and Austria. This buys time--valuable time to be sure--but it doesn't put Europe off the hook. What I like so much about this strategy however is that it seems to be a very clear signal that EU leaders remain committed to the euro. As in, they will do whatever it takes to keep the euro viable. I just hope it is not a bluff. As for the legality of the issue, you are right on again. I have been perplexed by Maastricht's restrictions throughout the crisis and how little they seem to matter. I'm trying to get some info from a colleague who works for the Commission, but as it stands, the bailout appears to violate Maastricht. Of course, the Maastricht also forbade excessive deficits, debt loads, and so forth but those restrictions were more or less abandoned well before the crisis. The great question thus for me is: does Maastricht even matter anymore? Necessity is the mother of invention, and leaders the world over are coming up with "creative" solutions. (A related question: does the Federal Reserve really have the authority to enter the commercial paper market or engage in quantitative easing or have unlimited currency swaps or use any of the other myriad instruments created during the financial crisis?) After everything settles, EU leaders will need to really reconsider the legal structure of the Union and determine whether it is adequate for the EU's stated goals.
John in Michigan, US - #8.1.1 - 2010-05-13 02:36 -
"does Maastricht even matter anymore" Clearly the only possible answers are either "no" or "only in part". Followed by, does Lisbon even matter anymore? More importantly, who decides? The people or the experts? One more reason Europe needs a simple yet elegant document. Constitutions should be like Chess -- an hour to learn, a lifetime to master. There is some elegant language in the EU treaties, but the parts that really matter are technical and banal. The experts are the new European aristocracy.
Marie Claude - #8.2 - 2010-05-12 17:09 -
http://www.cnbc.com/id/37084075 looks like the US is the missing link Ihave read worst than the WS journal Now Lagarde is trying to confort french people, that everything is all right, but the hidden face of the plan, is that the EU banks are all involved in the insane debt bonds, and more than a bail out of Greece, it was a bail out of the banking system. Until now the plan is still virtual, still yet there isn't concrete money behind. ECB is at stakes, it riskes its credit and might disappear in the next storm, than means, that any other EU state can be attacked,France, Germany... Though, if this plan hadn't decided, the crisis that started with a tiny EU country would have become a world crisis, see how the stocks exchanges got mad last week. This is not the end of the worries, this world crisis will happen anyways, (unless a miracle happens, some new confidence into the marckets...) just that the EU plan delayed it. The problem in EU is that we aren't really unified ! As far as Maestrich, it has been a smoke screen, no state really respected it as far as their debt rate, and money loans. May-be only ECB with it stabilization rules ! and definitly, the last week-end burried it ! uh who's got to pay for Greece, Spain, Portugal, Ireland... http://www.nytimes.com/interactive/2010/05/02/weekinreview/02marsh.html?ref=global but mainly, we, the EU taxpayers ! I wonder why UK didn't want (no I don't) to participate, cause, UK banks are exposed too !
Marie Claude - #9 - 2010-05-12 23:13 -
why is Deutsches bank going to probe too ? W Government Probe into Wall Street Sales Widening - FOXBusiness.com http://shar.es/mh8lt
Marie Claude - #10 - 2010-05-13 00:20 -
Amazing, the good pupil was cheating: http://www.spiegel.de/international/europe/0,1518,693973,00.html
Pat Patterson - #11 - 2010-05-13 02:02 -
I imagine that the average German is probably more than a little upset that, especially with Italy and Greece, they are guaranteeing loans French banks made. In fact of the three creditor nations involved with the PIIGs France holds the largest amount of loans by well over $211 billion. France $911 billion, Germany $704 billion and the UK $398 billion. So in this case the Euro zone basically consists of German and to a much lesser extent the UK being called upon to act on their "European" solidarity to bail out not only the PIIGs (it's inevitable) But their own and the French lenders as well. http://www.nytimes.com/interactive/2010/05/02/weekinreview/02marsh.html
Marie Claude - #11.1 - 2010-05-13 03:22 -
your fairness is obvious you deliberatly read the papers with a negative eye for France If Germany hasn't the biggest amount of the PIIGS, she has enough of the american bonds to get drowned, and as the last coverage of your income taxes is lagely deficitary, so the alarm will soon ring !
Pat Patterson - #11.1.1 - 2010-05-13 04:50 -
That's why I provided a link rather than simply respond with hurt feelings. Complain to the NYT if you don't like the figures.
Marie Claude - #126.96.36.199 - 2010-05-13 05:20 -
I know this link, I provided it a few times on discussions boards
Marie Claude - #11.1.2 - 2010-05-13 04:53 -
as far as Britain, she already refused to participate, but I have also read that she is in the speculators collimator, so urgency made that she didn't want to add more debt to her debt, and above all, she wouldn't have been able to negociate it a good rate. And as she isn't in the eurozone...
Pat Patterson - #188.8.131.52 - 2010-05-13 05:06 -
Britain is part of the IMF and will pay a percentage of the IMF package and rewrite part of the Greek debt to specifically immunize some of the British banks. They may not be in the Eurozone but they will provide bailout money.
Marie Claude - #184.108.40.206.1 - 2010-05-13 05:22 -
like we are, like Germany and a few other EU countries
Joe Noory - #11.1.3 - 2010-05-13 14:56 -
As opposed to your view where the world must arrange itself in such a way because it owes France, or YOU something?
Marie Claude - #220.127.116.11 - 2010-05-13 19:19 -
you're so predictable, BORING !
Marie Claude - #12 - 2010-05-13 05:26 -
I have read that the hunting party for gold and silver is hot, and the sources are dry, each country that had the possibility to buy some on the markets have already done it. Also the the bailing out of the euro is going to need a new bailing out. Time to think to buy a field and to plant potatoes !
Andrew Zvirzdin - #13 - 2010-05-13 19:34 -
Here's an excellent idea that also makes Maastricht viable: http://economix.blogs.nytimes.com/2010/05/13/preventing-future-debt-crises-in-europe/
Pat Patterson - #13.1 - 2010-05-13 20:53 -
But won't this have to mean that the Maastricht Treaty itself will have to be renotiated? And I doubt that too many nations, especially as the rightward creep continues, will simply so OK without demanding some form of referendum on this change. Plus how can rates be fixed on bonds unless there are enough buyers for face value or for those that are still shorting the Euro. Which in turns creates would create enough inflation to make the bonds only slightly less than toxic.
Marie Claude - #14 - 2010-05-13 21:19 -
uh, one more "economist" idea ! if EU wants to remain a strong entity, one must accept FEDERALISM, but the last decade show us that this is rather the contrary that is happening, NATIONALIM isn't dead ! and I don't give a damn bet for future of the Nations that have not a sufficient gold reserve. Again Germany France Italy in EU still have this second chance. Well things are moving so quickly these days... if no strong good will politicians remove the automatic pilot of EU, and then navigate at view, then we are lost as EU ideology
Marie Claude - #15 - 2010-05-19 03:06 -
Joe Noory - #15.1 - 2010-05-19 14:47 -
It isn't the end of the world. As I said before, it's a correction. Pointy heads for the past year have been howling that an inflated Euro makes the Eurozone uncompetative, and it has. Besides, $1,20 might be the actual fair value of the currency, in this or any range of growth that we'll see for a long time yet. Political maneuvering, culture, yelling, screaming, and the rest of the bla-bla that many like to think drive these matters simply don't. Expect diminished buying power, more complaints that government should do something about it, and a [url=http://www.google.com/finance?q=NYSE:EUO]$1,17 Euro for a few months[/url]. On the other hand, the exporters will start [url=http://www.google.com/finance?q=feu]getting very busy soon[/url]. The brilliant move Merkel made was to drag the bailout resolution long enough to make the IMF do the political dirty work, because frankly, all of Europe was unfairly looking to her to do that for a lack of their own bravery and committment. Either way, they will have to wait for their purchasing power to [url=http://www.google.com/finance?q=NYSE:URR]bounce back[/url]. The history of communist Socialism also taugh us that a big, invasive government does not insure a population against an economic downturn, so neither will any set of controls, laws, committees, or any other palliative measure the public and businesses demands of governments.
Marie Claude - #16 - 2010-05-22 08:24 -
Pat Patterson - #16.1 - 2010-05-22 13:19 -
Beware of articles that begin paragraphs containing the words "Some observers,"Some financial experts," or continue with a liberal sprinklings of maybes for not having much beyond hedged opinions. And quoting from unsourced unanymous comments?
Marie Claude - #16.1.1 - 2010-05-22 13:30 -
hmm, no this person knows well Germany and is American but it's not the alone paper that says that Germany would like to make a common currency with Austria, and Benelux
Joe Noory - #16.2 - 2010-05-24 15:34 -
Actually, anyone in their right mind is short the Euro, at least this week. I've also gotten short oil and gold too, except I did it 3 months too soon. Oh well. At least it's whiskey money. As to banking problems, all the major banks in Switzerland, the UK, France, and benelux were overleveraged - and that was more than a year ago. The problem is that they really haven't bulked up their holdings since. Their loan-to-asset ratios are still very high. It risks a splat. Basically, the banks were depended upon to buy government bonds that were shaky, and governments were expected to not let the banks go [i]pfft.[/i] So really, it's more like a venereal disease than anything else.
Marie Claude - #17 - 2010-05-23 17:15 -
http://seekingalpha.com/article/205794-der-tarp-germany-is-hiding-a-big-banking-problem Germany is hiding a big bank problem
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