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.
Display comments as (Linear | Threaded)
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 -
http://ampedstatus.com/the-financial-oligarchy-reigns-democracys-death-spiral-from-greece-to-the-united-states I don't believe that the “Stock Jobbers" will sop their attack on the euro, they'll start again at the next opportunity money attacks explained to the dummies Europe's Debt Crisis: Your Questions Answered - New York Times (blog) http://tinyurl.com/2dscn7r http://www.zerohedge.com/ "Goldman Can Create Shorts Faster Than Europe Can Print Money" and Moody should be rated BBB- too "Hey, Moody’s, why didn’t you tell us about the SEC’s Wells Notice until now? " http://bit.ly/aEXCVy
Joe Noory - #2.1 - 2010-05-11 15:47 -
SO what you're saying is that it's all about outsiders rubbing their hands insideously, and that a financial "fortress Europe" a la anti-globalization fanticists would be a prosperous Eurozone. Ridiculous. Who would they trade their overpriced, ueber-goods with? These ratings agencies, if anything OVERvalue instruments, not undervalue them. Fitch, S&P, and Moody's aren't some fantasy branch of a malevolent CIA operation that dreams of taking away your shoes. They simply evaluate the risk that they think an investor would take on an investment offered by a national bank or company. Nothing more. Think abou this: the Euro is dropping, which would ERASE any gains an investor in Euro-denominated bonds would have, even with interest. Lets say you buy €100000 in bonds today at $1,27, and cash it in when the Euro might be !1,15 or $1,00. THAT, includint the risk of the bank issuing them to not pay out on the interest, is what they are rating. It's the ONLY WAY anyone knows what the real value of the instrument is. Otherwise, the government SELLING the bond is the only other entity that can estimate it's future value, and they are one benefitting from that valuation. It's like buying a used car without being abel to look at it, or look up the real price. The idea that a rating agency will simply raise the valuation on bonds for the sake of a government, only to see happen what will happen anyway - it's re-sale at a loss for its' actual, un-inflated value would cause even MORE uncertainty, and a crash. But if surrealism in accounting is what you want, I'm sure there are any number of Banana Republics who will sell you an unrated bond.
Marie Claude - #2.1.1 - 2010-05-11 16:36 -
you are more intelligent than the experts, and we need your science
Joe Noory - #126.96.36.199 - 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 - #188.8.131.52.1 - 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 -
I read your links. (it would sure help if they were hyperlinks!) It turns out it wasn't just the Journal, the NY Times also says “shock and awe” in quotes. So, some politician must have said it but we still don't know who. Reading these quotes and also the self-congratulations, they are clearly thinking to themselves, "Mission Accomplished". We now know that those words, uttered almost exactly 7 years ago to the day (May 1, 2003), were very premature.
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.
David - #5 - 2010-05-11 14:47 -
Very good piece. The EU did finally do the right thing and even Angela Merkel came out passionately (much too late) for the eurozone. Still, there is an uneasy feeling that the massive bailout just kicks the can down the road. I tend to agree with what Marek Belka of the IMF said yesterday: "This is some kind of morphine that stabilizes the patient -- and the real medication and the real treatment has to come.”
Marie Claude - #5.1 - 2010-05-11 16:39 -
""This is some kind of morphine that stabilizes the patient -- and the real medication and the real treatment has to come.” that's right, but the medication will have to be given to the US, to Japan too !
Marie Claude - #6 - 2010-05-11 16:52 -
comment #59 “All bubbles are also information problems. Values and prices go out of whack. Where do we find the truth about the real value of things to prevent the emergence of a bubble?” I have been giving this topic a lot of thought recently. I work for a company that provides risk management software for the financial industry, and I have long felt that securitized products such as collateralized debt obligations coupled with credit default swaps were simply too complex for accurately measuring and valuing risk exposure. 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. At the heart of this recent financial shock was the downturn in the US housing market. While the housing market, like most markets, has historically been subject to periodic downturns, this cycle was different due to the widespread of securities linked to subprime mortgages. The International Monetary Fund estimated that costs associated with subprime write-offs could reach as high as $1 trillion. These securities were linked to subprime mortgages through complex securitized products known as collateralized debt obligations. The 1968 Charter Act allowed the newly created organization, Fannie Mae, to purchase mortgages from banks and pool them into what is known as mortgage-backed-securities. These new securities were then sold off to investors. As the market for these mortgage-backed securities matured, investment banks found ways for creating new products. One such way was pooling these assets yet again through securitization. This became a method for financing assets that were combined into pools that were then split into shares, or ‘tranches,’ and sold as collateralized debt obligations – ‘CDOs.’ This was a method widely used for packaging and selling subprime mortgages to investors seeking higher yields. What made these new synthetic instruments difficult to accurately value and model from a risk perspective was their complex structure. A subprime mortgage would be pooled into a mortgage-backed security containing other subprime mortgages and sold as securities. These mortgage-backed securities would then be pooled further into new securitized products, CDOs, that would then be carved into specific tranches and sold. The higher tranches had the best ratings and had the least chance of default. These tranches were rated AAA. The lowest tranches were BBB, and were considered on par with junk bonds, risky, but carried high premiums attractive to investors. In many cases, insurance products known as credit default swaps would be tied to specific tranches to help increase their credit worthiness. If a tranche were in trouble due to payment default, the issuer of the credit default swap would step in to pay the principal. Trying to measure a firm’s risk exposure with regards to these instruments is challenging. One of the most widely used risk models is called VaR – Value at Risk. This model measures the boundaries of risk in a portfolio over short durations. In the 1990’s, as the use of derivative securities were exploding, the Securities and Exchange Commission, and later, the Basel Committee on Bank Supervision validated VaR’s calculations by allowing financial institutions to use it for measuring risk exposure and setting their capital requirements to offset that risk. However, a risk information management system is only as good as the quality of the underlying data used and the ability to accurately model information. Making the risk modeling effort difficult was the complex nature of these securitized of debt instruments. There was insufficient data and the modeling techniques used were poor. The standard risk models used for CDO portfolios failed to take into account the whole risk distribution of the subprime assets within them. It was extremely difficult and time consuming to actually determine the underlying details of a subprime mortgage within a mortgage-backed security, within a CDO, broken out into a specific tranche. Instead, risk managers often analyzed CDO’s by relying on computer simulation techniques such as a Monte Carlo simulation. The Monte Carlo simulation was the primary risk model used by the rating agency, Moody’s Investor Services, in determining the default risk of specific tranches within a CDO. Despite relying on this sophisticated and highly quantitative model, Moody’s still had problems getting sufficient data and being able to accurately model these complex instruments. During their process for assigning ratings, absent of the necessary data, they had to review each contractual document of the issued CDO and any credit default swap assigned to a specific tranche. This was a highly intensive manual process in a market where over $520 Billion worth of CDO’s were issued in 2006, alone. Nevertheless, financial institutions were relying on these quantitative models either directly, or through the credit rating agency. This gave a false comfort that their risk models were complete and that everything they needed to measure was within them. These firms tended to focus on risk modeling where there was data, rather than risk modeling where there was risk. The US Government Accountability Office’s reviewed many of the leading financial institutions and presented their findings in a testimony to the Subcommittee on Securities, Insurance and Investments, Committee on Banking, Housing, and Urban Affairs, in the U.S. Senate. In their ‘Oversight of Risk Management Systems,’ they found weaknesses throughout the risk management systems these firms were using. Even though the weaknesses were known to exist before the crisis occurred, many of the troubled financial institutions still used their results to justify capital reserves. These reserves proved to be grossly inadequate, causing a liquidity crisis where the government was forced to step in. Despite the faultiness of these quantitative models, there were warning signs that the US housing market was in trouble. Two such signs were the rapid growth of the number of subprime loans that were being packaged into CDOs, and the alarming concentration of these loans in specific areas of the country. In 2000, there was $130 billion in subprime mortgage lending, with $55 billion of that repackaged as Collateral Debt Obligations. By 2005, there was $625 billion in subprime mortgage loans, $507 billion of which found its way into mortgage bonds. In 5 years, the total number of subprime mortgages had grown by 400%, while the number of subprime mortgages that were packaged into securitized products had grown over 820%. Equally alarming, was that the historical average home price ratio to income was 3:1. However, it had increased to over 11:1 in Los Angeles, 8.5:1 in Miami, and 8:1 in New York. It was these distortions that caught the attention of the few firms who spotted a problem in the subprime housing market. As early as 2004, Ivy Zelman, the housing market analyst for Credit Suisse voiced her concern. It wasn’t just the unprecedented distortions in certain areas that alarmed her, but also that many of the buyers in these areas were not real buyers, they were speculators. All that was required for a BBB bond tranche, the lowest tranche in a CDO to go to zero was for the default rate on the underlying loans to reach 14 percent. Areas such as Los Angeles, Miami and New York could easily hit these default rates. Why weren’t alarm bells going off in the standard risk models that were being used? This goes back to the difficulty in understanding the risk distribution of the subprime assets within them. Due to the numerous layers of securitization that took place, it was a challenge to determine what percentage, if any, of the tranche was concentrated in these high-risk regions and what the default rates were. Francis Diebold, a professor of economics, finance and statistics at Wharton argues that it is important for users of models to maintain a healthy skepticism about those models. Managers involved in analyzing their firm’s risk exposure must constantly question the models that are being used and assume something can be terribly wrong. There were a few firms that managed to get out in time. These firms were able to spot early signs indicating that the subprime market was in trouble, and they managed to avoid its collapse. What separated these firms from everyone else was that when the warning signs began to appear, they refused to solely rely on their quantitative models, and instead, verified their skepticism through alternative approaches that the market was in trouble. This skepticism is what helped Steve Eisman, general partner at the Hedge Fund FrontPoint Partners, a firm that successfully shorted the subprime market. Prior to FrontPoint, Steve was a finance analyst that researched companies tied to the housing market. By the spring of 2005, FrontPoint was convinced that the underpinnings of the US mortgage market was in trouble. Where Steve turned next was not to his risk models, but to examine what was actually happening in the market, particularly to the major players, the mortgage brokers themselves. Throughout the subprime industry, by 2006, mortgage brokers and firms specializing in subprime mortgages were in trouble. In January 2006, Ameriquest Mortgage Company, one of the largest subprime lenders, was investigated and fined $325 Million for misleading and predatory lending. By Q4 of 2006, New Century, the third largest mortgage broker in the US was in trouble suffering major losses, and in early 2007, two Bear Stearns hedge funds that invested in subprime mortgages were shut down suffering losses of over $4 Billion. Paulson and Co., a hedge fund that reaped significant profits of almost $15 Billion by shorting the subprime market between 2007 and 2008, became concerned as early as 2005. In his statement before the U.S. House of Representatives Committee on Oversight and Government Reform, Paulson stated that due to weak credit underwriting standards and excessive leverage among the firms investing in these assets, he began tracking published delinquency rates and determined that the subprime mortgage market was in trouble. If the quantitative risk models were not picking up that something was wrong in the subprime mortgage market, there were still numerous warning signs that were widely available. Why didn’t firms such as Lehman Brothers, who filed for bankruptcy on September 15th, 2008, see them? Between 2006 and the first two quarters of 2008, Lehman Brothers sought an aggressive 13% annual growth model for revenues. This was reflected in its share price. On January 29, 2008, Lehman reported revenues of nearly $60 billion and record earnings in excess of $4 billion for its fiscal year ending November 30th, 2007. On September 12th, 2008, Lehman’s stock declined to $4 per share. Three days later, Lehman Brothers filed for Chapter 11 protection. During this period, as a way to achieve this incredible growth, Lehman increased its use of leverage and its risk appetite with a major concentration in the subprime market. By 2007, the firm had raised its risk limits from $2.3 billion to $3.5 billion, eventually reaching as high as $4 billion in early 2008. Using this expanded increase in acceptable risk, in early 2007, Lehman was still aggressively expanding its presence in the subprime market through its Aurora subsidiary. This was occurring at a time when Lehman’s own housing analysts were sounding alarms about disturbing trends with regards to Aurora’s mortgage maker program. In the United States Bankruptcy Court Southern District of New York. In Re: Lehman Brothers Holdings Inc. Chapter 11 – Case No. 08-13555, the examiner, Anton Valukas provided internal emails of those sounding alarms: “Looking at the trends on originations and linking them to first payment defaults, the story is ugly: The last four months of Aurora has originated the riskiest loans ever, with every month being riskier than the one before – the industry meanwhile has pulled back during that time” By May, 2007, Lehman got further involved in real estate investments through the $22 Billion acquisition of Archstone, a massive real estate investment trust, even though this deal would cause the firm to completely exceed its already increased risk limits and wipe out any liquidity. Lehman was not alone in their reliance on complex risk models in navigating through the decline in the U.S. housing market. AIG was in a similar situation. The Financial Products unit at AIG had made billions of dollars by underwriting insurance through credit default swaps that were packaged into CDOs. Throughout 2007, AIG was increasingly alarmed at their exposure to this declining market. Internal emails at AIG show their executives laboring to understand the flaws in Financial Product’s once vaunted mathematical models and debated how much to disclose to investors. By the end of 2007, AIG was in a dispute with their client, Goldman Sachs, regarding the valuation methods that they were using to measure a number of CDOs that they insured. PriceWaterhouseCoopers, AIG’s auditors, demanded that AIG provide greater disclosure on the risks in the credit insurance it had written. By forcing AIG to pay the terms on the insurance products, which totaled $6.6 billion, Goldman pushed AIG into a liquidity crisis In comparing AIG and Lehman, we see a common pattern of two firms who relied heavily on questionable risk and valuation models in making decisions on their capital reserves. Due to the prior enormous growth and profitability, these firms became overzealous and stopped being careful, despite clear warning signs that the US housing market was in trouble. As a result, these firms took greater risk where they became overly leveraged and ill prepared for when the market deflated. While I think that there were many dirty players, Franks Schumer & Dodd were among them along with Fannie and Freddie. They were just as bad as the mortgage brokers pushing this junk. However, it takes two to tango and investors were at fault as well. 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. comment #78 “The first is the phenomenon of outrunning your information headlights.” I attended a recent lecture with Jonathan Lu, professor of structured finance at MIT where he spoke about the risk of data silos and the difficulty in concentrating on complex data sets, especially with outside noise that could distract us. In this exercise, he played this video (there was no narration in his), and to make things challenging, he counted out random numbers to distract us: http://viscog.beckman.illinois.edu/flashmovie/15.php looks like that those who are supposed to get infos aren't perfect, and can miss important infos, and thus not preventing them to happen, it's so that Moody missed the infos on Greece earlier http://pajamasmedia.com/richardfernandez/2010/05/08/the-trouble-with-tulips/#comments
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 - #184.108.40.206 - 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 -
just a bit of light onto what is the reality in EU, that you criticised so much before ! now, for the fun, one more: http://tinyurl.com/284moso Russia Fears Weaker Obama, Rise of ‘Military Establishment’ Germany, France Favored also Italy & Spain becuz we deserve it, we don't attack bears in our countries ! amuse yourself !
John in Michigan, US - #8 - 2010-05-12 14:27 -
Andrew, It probably won't surprise you that the Wall St. Journal is skeptical of this Greek bailout: [quote]A trillion dollars is a lot of money, even these days, and the European Union has demonstrated that a check for €750 billion ($972 billion) can produce a rally in European debt markets and global equities. Too bad the larger price for Sunday night's "shock and awe" intervention is likely to be paid in the further erosion of Europe's fiscal and monetary credibility. French Finance Minister Christine Lagarde noted Monday's exuberant market reaction with satisfaction, saying that the "message had gotten through" that Euroland would defend its currency. Yes, creditors no doubt love that governments have guaranteed their high-yield loans to Greece, Portugal, Spain and any other profligate government that comes under bond-market siege. What investor doesn't like a risk-free loan that pays 9%?[/quote] [url=http://online.wsj.com/article/SB10001424052748703674704575233891226203932.html]Source[/url] I don't expect you agree with them, and there may not be much to discuss here -- much depends on what happens in the coming months and years to come. I mainly included this quote because of the amusing turn of the phrase "shock and awe". However, the WSJ also makes a point that perhaps can be discussed here, without an oracle's knowledge of the future: [quote]There is also the small matter of the rule of law. Such bailouts are expressly prohibited by the 1992 Maastricht treaty, and that promise is now in tatters.[/quote] If [url=http://en.wikipedia.org/wiki/Eurozone#Reform]Wikipedia [/url]is correct, apparently the work-around was to declare the bailout "voluntary". This may avoid a violation of the letter of the Maastricht Treaty, but doesn't it violate it in spirit? Or perhaps I (and the WSJ) have misunderstood the nature of the alleged no-bailouts clause? Apparently the money comes from three sources: "a full fund of €750 billion comprised of €440 billion from eurozone states [Germany and who else?], 60 billion from emergency European Commission funds and €250 billion from the IMF" I suppose "voluntary" means that the other Eurozone members who did not participate are not (yet?) formally, legally on the hook for funding the bailout? In other words, it will be on the books as series of separate loans from individual members to Greece, or from the IMF to Greece, rather than a loan from the EU to Greece. I also suppose this means that Germany (and who else?) must either hold the Greek debt by itself, or else use its political power within the Union to convince the other members, who didn't participate, to assume their fair share of the 440 billion. Still, I don't understand how the EC has authority to spend €60 billion without violating Maastricht. Aren't there limits on what is considered an emergency?
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 - #220.127.116.11 - 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 - #18.104.22.168 - 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 - #22.214.171.124.1 - 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 - #126.96.36.199 - 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 -
bad news for the euro http://tinyurl.com/29xtpng Congress blocks indiscriminate IMF aid for Europe c'est fini ni ni for Greece it’s the end of the beans for german banks (first) http://www.bloomberg.com/apps/news?pid=20601087&sid=aoElolQ0ELXc&pos=6 Swaps Soar on Germany’s ‘Act of Desperation’: Credit Markets
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 -
http://finance.yahoo.com/banking-budgeting/article/109581/are-german-banks-short-the-euro “Observers continue to question Merkel’s motives. It could be argued that the collapse of the Eurozone partnership would strengthen Germany’s financial system because it could go back to its own currency, but the country would then have to deal with significant fallout, some of which is not obvious. Some financial experts believe that Merkel is acting in the interest of German banks which hold billions of dollars in sovereign paper in Eurozone paper. Defaults could swamp the balance sheets of those banks. But, the real reasons behind Merkel actions may be more complex and sinister. There is a great deal of evidence that some of Germany’s large banks have bet against both the euro and sovereign debt in the weakest nations in the region. If so, these banks, like other speculators, probably made billions of dollars on such deals. Merkel may have to deal with the accusation, probably an accurate one, that Germany allowed its banks to take sides against the euro as the government helped drive its value down. How would it look if Germany then left the Eurozone and its banks became, under a set of circumstances helped by Merkel, rich in the process?” from an American commenter “Well, well, well. I am hearing some sinister stories about German banks from my ex-colleagues who work at German banks. German banks made massive bets against the Euro and against Greece bonds during this entire downturn in Europe. Effectively German banks are the speculators who Merkel has been protecting all along with this ban annouced this week. This will all come out in the news soon. Merkel has been colluding with the banks all along while watching the Euro dream go down.” “but for Merkel to come out and say (repeatedly) that these so-called specualtors sending down the currency and that foreign banks (e.g. GS) were to blame when it is so obvious now that she has just been protecting her own banks who were taking these massive trades as she knew exactly what they did and were doing”
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
Google the Site