Posts Tagged ‘Eurozone’

Neither in or out, but a temporary Grexit is now on the table

July 12, 2015

As always in the EU or in the Eurozone countries, differences of opinion end up with wishy-washy compromises which only maximise the level of dissatisfaction. The EU has become expert at choosing the least attractive solutions in its quest for divine consensus.

After 5 years of trying to keep Greece from leaving the Euro, Germany has finally put forward the compromise position of a 5 year time-out from the Euro, a temporary Grexit which, in all likelihood, would become permanent if it is adopted. The time-out would be offered to Greece if they do not manage to pass some emergency resolutions through their parliament by Wednesday. But the matter of greatest significance, which highlights the fundamentally flawed nature of the Euro, is that a Grexit – even just a temporary one – is for the first time formally acknowledge by the Eurozone countries as being on the table.

It will be painful in the short term but the best for Greece is to leave the Euro, stay in the EU and build up a strong New Drachma. I hope they do take a time-out, that their debt is then restructured, that they get help to and do get back on to their feet and eventually that they make the time-out a permanent exit. And that then leads to an orderly dismantling of the Euro – or at least a suspension of the Euro – to be revisited again when political union is achieved – if ever.

A currency union has to be the natural consequence of a political union and cannot be used to coerce politically unequal nations into a phoney political union that their populations do not want.

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Greek deal will be done: Bread rather than Guernica

June 22, 2015

I was listening to Swedish, UK and German radio this morning and one could be forgiven for being utterly depressed. But surprisingly, the blackness went over the top. It was too much. The picture being painted by all the pundits and commentators seemed a little surreal. The picture left in my mind is of  Salvador Dali’s “Basket of Bread” rather than Picasso’s “Guernica”.

bread rather than destruction

bread rather than destruction

So instead, I am feeling remarkably upbeat. Maybe I am just an optimist and would rather see bread than destruction. But I am sufficiently “moved” that I shall make a forecast for the next few weeks.

Tsipras will make statements which seem like that he will do something about curtailing pensions. These will be worded sufficiently loosely such that the Eurozone Finance Ministers can accept the assurances and still have their posteriors covered. Tsipras will have sufficient face-saving text so that he can argue domestically that pensions will not actually be cut when the turnaround occurs and that the turnaround is just around the next corner (or maybe the one after that).

The ECB will make further emergency arrangements so that the current run on Greek banks will not be unmanageable. (By some accounts Greek banks have seen some €20 billion withdrawn).

The payment due to the IMF will be paid.

A short-term (6 month?) deal will be done and the whole problem of a non-homogeneous and splintered Eurozone will be patched up for the short term

Which is good for the short term but which, in the long term and if the Eurozone does not become homogeneous, will give a very big bang when it implodes.

There is a little more brinkmanship to go through until the Greek payment actually falls due at then end of the month.  But I expect a real jump in European markets – and followed by the Asian markets – when Greece makes the payment due and a “deal” is announced. Probably by the end of June.

Maybe it is time to pick up some equity bargains.

Greek negotiating tactics are vacillating between “playing chicken” and bad faith

June 15, 2015

Another negotiating session ended in failure yesterday – after just 45 minutes. The Greek delegation were the visitors in Brussels. In any negotiation, the home side always has the “time” advantage in that that they can go as slow as they like. To neutralise this home advantage, a visiting side in a negotiation always needs to show more patience and always give the impression that they can sit there for ever. For a negotiating session to end in just 45 minutes would need the “visiting” delegation to actually walk away. And if the Greeks did walk away then it would seem that they are either playing a dangerous game of chicken or else that they are negotiating in “bad faith” with no intention of reaching a settlement. If the latter then they are just waiting for an opportune time – for domestic consumption – to bring this to an end and initiate a Grexit. If the former then they are waiting for a Grexit to appear inevitable such that they get some “final” concessions.

My own view is that any settlement now with Greece will only be a temporary fix – and the sins of past Greek profligacy will not have been fundamentally atoned for. The pension system that the Greeks awarded themselves are unsustainable even with the cuts implemented so far. A Greece forced to continue within the Eurozone will remain under debt pressure for a decade. Tourism will be constrained. No Icelandic type of recovery would be possible. Far better to bite the bullet now, allow a Grexit and begin to limit and later shrink the Eurozone. Both Greece and the Eurozone will eventually benefit.

Bloomberg:

Greece enters what could be a defining week after last-ditch negotiations between representatives of the Greek government and its creditors collapsed on Sunday.

The euro dropped as the European Commission said the talks in Brussels had broken up after just 45 minutes with the divide between what creditors asked of Greece and what its government was prepared to do unbridged. The focus now shifts to a June 18 meeting in Luxembourg of euro-area finance ministers, known collectively as the Eurogroup, that may become a make-or-break session deciding Greece’s ability to avert default and its continued membership in the 19-nation euro area. …..

……. “The shadow of a Greek exit from the euro zone is becoming increasingly perceptible,” German Vice Chancellor and Economy Minister Sigmar Gabriel wrote in an op-ed to be published in Bild on Monday. “Greece’s game theorists are gambling the future of their country. And Europe’s too.”

Hollande’s France is dragging down the Eurozone and the world

November 15, 2013
Photo - AFP

Photo – AFP

Francois Hollande is a socialist of the old school and about a century behind the times. Fundamentally he has few new ideas beyond tax the rich and create more public sector jobs. He is not even very popular at home just now – but the French have only themselves and Sarkozy’s excesses to blame for having him there. Dominique Strauss-Kahn’s sexual excesses also helped. He makes impossible promises with a straight face. He promises to cut state spending without reducing public sector jobs. He will improve competitiveness without  reducing state subsidies. And he has promised to reduce unemployment by the end of this year. Nonsense promises are not doing much for his credibility.

France’s credit rating is falling and even The Guardian has little good to say about his administration:

The GuardianFrance’s second credit-rating downgrade by Standard & Poor’s in less than two years is as damaging politically for the socialist François Hollande as it was for his rightwing predecessor Nicolas Sarkozy, who lost the election shortly after France lost its AAA rating in January 2012.

S&P directly attacked Hollande’s economic policy, questioning the socialist government’s capacity to repair Paris’s stuttering economic motor. It said the problem with France was that the government’s tentative reforms were not enough to lift growth in the eurozone’s second largest economy.

Hollande, recently found to be the most unpopular French president on record in a poll by BVA, was already struggling to sell his economic measures to the nation. “The recovery is here,” Hollande declared in August after a small rebound in growth following months of stagnation. But real, sustained growth is expected to be slow in returning. …… 

And now the economy of France, along with that of Italy, is actually shrinking. The global recovery needs Europe  – and not just Germany – to do its bit. Instead, Hollande’s schoolboy economics are not just threatening the Eurozone recovery but actually threatening to postpone the recovery.

ReutersThe euro zone economy all but stagnated in the third quarter of the year with France’s recovery fizzling out and growth in Germany slowing. The 9.5 trillion euro economy pulled out of its longest recession in the previous quarter but record unemployment, lack of consumer confidence and anaemic bank lending continue to prevent a more solid rebound.

In the three months to September, the combined economy of the 17 countries sharing the euro grew by a slower than expected 0.1 percent. In the previous quarter it rose 0.3 percent – the first expansion in 18 months. The euro fell to a session low in response.

The French economy contracted by 0.1 percent, snuffing out signs of revival in the previous three months. It had been expected to post quarterly growth of 0.1 percent and has now shrunk in three of the last four quarters. ……. 

Unemployment is still increasing even though the number of French seeking jobs outside the country is also increasing. The rich have been fleeing Hollande’s swingeing taxes in droves.

The Telegraph: 

France’s economy has buckled once again amid official warnings of an explosive political mood across the nation that threatens to spin out of control.

French output fell by 0.1pc in the third quarter and Italy remained trapped in recession, dashing hopes of a sustained recovery in Europe. “It is no longer a question of whether the eurozone can achieve ‘escape velocity’, but whether it can grow at all,” said sovereign bond strategist Nicholas Spiro.

The latest data show a continued erosion of France’s industrial base and export share. It risks shattering the credibility of President François Hollande, who has been talking up recovery for months. A YouGov poll showed his approval ratings have dropped to 15pc, the lowest recorded for a French leader in modern times.

While the risk of a eurozone bond crisis has greatly receded since the European Central Bank agreed to act as a lender of last resort in July 2012, this has been replaced by slow economic attrition. It resembles the mid-1930s slump under the Gold Standard and is fuelling political crises in a string of countries.

Le Figaro said loss of confidence in the French government is turning dangerous, citing a confidential report based on surveys by “prefects” in each of the 101 departments. “All across the country, the prefects described the same picture of a society that is angry, exasperated and on edge. A mix of latent discontent and resignation is being expressed through sudden eruptions of fury, almost spontaneously,” said the document. The report warned that people were no longer venting their feelings within normal social structures. Increasing numbers are questioning the “legitimacy” of taxes. …… 

But there is no sign that Hollande will change from his classic policies of more taxes to support a profligate state sector and a bloated welfare system. Regulated austerity is called for but Hollande’s approach will only lead to an unregulated, painful and enforced austerity as in Greece and Spain.

I still believe in Europe and in many French firms but I have taken the precaution of shifting some of my (small) savings out of French stocks. France has not reached its bottom yet!

Cyprus could be the straw that breaks the Euro’s back

March 26, 2013

The wunderkind of the EU have just established a two-currency Europe and have undermined the trust any depositor can have in a Eurozone bank. The Cyprus solution has effectively created a Cypriot Euro which is – in practice – worth a lot less than a normal Euro. And every depositor holding more than €100,000 will be taking a very large risk if he puts his money in a weak Eurozone bank or in a weak Eurozone country. The depositor will need to demand a risk premium to cover the risk that his money could be stolen by the bank or by the State.

A Cypriot Euro (Κ€) is now worth less than a “normal” Euro (€). What that value is is a little difficult to judge but it lies somewhere between 60% and 90% of a normal Euro. All K€ which are outside of the deposit guarantee are now only worth 80% of a normal €. Moreover currency restrictions apply which are not so different to exchange control regulations for movement outside the country but which apply – in addition – to movement of money within Cyprus. A K€ still has the same buying power as a normal Euro but, on the other hand, it will no longer be possible to get any “outside Euros” to move into Cyprus and risk confiscation!

Jeroen Dijsselbloem, the Dutch chairman of the Eurozone announced (rather idiotically) yesterday that the Cyprus solution was the template to be used in the future.  Cyprus itself does not have an economy large enought to be so significant. But effectively  he was confirming that “Savings accounts in Spain, Italy and other European countries will be raided if needed to preserve Europe’s single currency by propping up failing banks”. But the resulting, ostensibly “single currency” will , de facto, have to distinguish between the currency held in different countries and just calling it a “single” currency will not hide the reality.  Mr. Dijsselbloem later tried to back-pedal on his statement but the truth was out by then. No amount of denials will change the fact that the Cyprus solution now sets the precedent and every weak bank will now be required to try and protect its shareholders by attacking its depositors.

I think the damage has been done and it is already too late for the EU to try and soften the message. I heard today that financial advisers in India and China were already suggesting to clients with Euro holdings to make sure it was in a strong country. This eliminates Greece, Italy, Spain, Ireland and even Hollande’s France. This only leaves Germany. The Russians are probably already shifting their legitimate Euro funds to Germany or the Netherlands and their not-so-legitimate money to the Bahamas or Mauritius or the Seychelles. In the short term Germany is the main beneficiary. Not only are their exports being helped by a weak Euro (kept weak because of the weak countries persisting within the Euro) but their banks are likely to see Euro deposits from the weak countries moving their way. But in the long term a flight from the Euro will not help anyone in Europe. The ideological – and almost dogmatic – attachment to the single Euro is now damaging all of Europe and delaying the recovery. Every single one of the bailed-out countries would recover faster if only they had a currency which could have been devalued.

The Cyprus solution is also a more general attack on Europe’s middle class (admittedly the richer part of the middle class). The population of the EU is about 500 million. With an average of about 2.5 individuals per household this represents about 200 million households. Probably 15-20 million households have a net worth exceeding  €200,000 which implies financial assets (as opposed to property and other non-liquid assets) of about €100,000. So an attack on European deposits of greater than €100,000 could affect some 40 – 50 million individuals.

Cyprus could be the straw that breaks the Euro’s back.

“Single currency needs a single government” and a single European government would be a monster

May 9, 2012

Finally, David Cameron actually voiced what all politicians in Europe know but will not voice publicly. And they will not voice it publicly because a single European Government – in the current state of European politics – would be a many-headed monster – of bureaucracy, of over-represented fanatic fringes, of minority oppression, of waste, of scams and inefficiency.

Reuters:

A successful euro zone requires a single government if it is to work properly, British Prime Minister David Cameron said in a newspaper interview on Wednesday.

“There’s nowhere in the world that has a single currency without having more of a single government,” Cameron told Britain’s Daily Mail.

(more…)

More turmoil awaits Europe as Sarkozy loses and Greeks vote against Europe

May 6, 2012

Sarkozy has lost in France according to Belgian and Swiss sources though the exit polls in France are not yet out. Hollande is expected to win by 5%.

The exit polls are also out in Greece.

In Greece, the only two parties supporting the Eurozone bailout and the austerity measures – PASOK and New Democracy – will probably not be able to form the next government. And that means that the chances of Europe leaving the Euro are greatly enhanced. In the short term this will cause massive turbulence in the Eurozone.

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Berlusconi bungas while Italy burns

November 7, 2011
CONSTANTINE PALACE, STRELNA. Italian Prime Min...

Image via Wikipedia

Il Cavaliere , Sylvio “bunga-bunga” Berlusconi is 75 years old, has a personal fortune of some $9billion, and has been Italy’s Prime Minister for longer than anyone else. He is clinging desperately to power as Italy slides towards a Greece-like crevice and it is not apparent as to why he bothers. Whereas the Greek debt is only about 4% of Eurozone debt, Italy’s debt is closer to 20%. Italy’s public debt in 2010 was 118.4% of GDP. The annual budget deficit was 4.6% of GDP. Italy’s public debt-to-GDP ratio is the second highest in the euro zone after Greece’s, while its debt in absolute terms, which stood at 1.84 trillion euros at the end of 2010, is second to Germany’s.

It might seem to be just a powerful politician in denial of the approaching flames when Berlusconi declares that “Life in Italy is good. The restaurants are full. It’s difficult to get a seat on a plane they’re so busy; holidays are all booked up”.

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Sarkozy attacks Cameron – much to Cameron’s delight

October 24, 2011

While European leaders are struggling to put together a rescue package for Greece which will not have a domino effect for Italy and Spain or drown too many European banks, David Cameron is facing renewed opposition to membership in the EU from within his own party. But it is not only in the UK that opposition to the growing exercise of powers by Brussels is increasing. Almost every EU member which has not adopted the Euro (Sweden, Denmark, Norway and the UK along with some of the newer members) has rising voices calling for the limitation of European power and a return of powers to the country parliaments. Voices against the Euro can even be heard in Germany where there is a widespread feeling ( not entirely wrong) that German taxpayers are paying twice for the spendthrift ways of Southern Europe; first directly by subsiding these countries and secondly by the devaluation of their savings in Euro. The Swiss are just thankful that they were never a part of this experiment.

In hindsight, what has become obvious is that the Euro-zone has few built in sanctions to prevent the profligacy of some countries which has to be paid for by others. What is also becoming clear is that without a fiscal uniformity – which would seem like being taxed from Brussels – the possibility of  “bad” members being spendthrift will always remain.

France has always seen the Euro as part of a long-term move towards a European political and fiscal uniformity in which France would be the centre of political power. A return to the glory days of the Holy Roman Empire which lasted over 800 years, except of course that the centre would be in France rather than in what today is Germany. Sarkozy could certainly see himself as the first Emperor.

Yesterday, as the Telegraph reports:

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Eurozone crisis: Greece considering leaving the Euro and bringing back the drachma

May 6, 2011

The economic and fiscal variations within the Eurozone have become too large to be hidden away and perhaps it is time for the Euro to split. A two-tier Euro could be an interim solution but it makes no sense to force the currency to compensate for and match the wildly different shapes of the member economies.

Greece going back to the drachma or to an “olive” Euro may not be such a bad thing for the rest of the Eurozone though it will only probably lead the Greeks to delay taking the actions that will anyway be necessary. Fiscal profligacy cannot be sustained.

back from the euro to the drachma?

Der Spiegel:

The debt crisis in Greece has taken on a dramatic new twist. Sources with information about the government’s actions have informed SPIEGEL ONLINE that Athens is considering withdrawing from the euro zone. The common currency area’s finance ministers and representatives of the European Commission are holding a secret crisis meeting in Luxembourg on Friday night.

Greece’s economic problems are massive, with protests against the government being held almost daily. Now Prime Minister George Papandreou apparently feels he has no other option: SPIEGEL ONLINE has obtained information from German government sources knowledgeable of the situation in Athens indicating that Papandreou’s government is considering abandoning the euro and reintroducing its own currency.

Alarmed by Athens’ intentions, the European Commission has called a crisis meeting in Luxembourg on Friday night. In addition to Greece’s possible exit from the currency union, a speedy restructuring of the country’s debt also features on the agenda. One year after the Greek crisis broke out, the development represents a potentially existential turning point for the European monetary union — regardless which variant is ultimately decided upon for dealing with Greece’s massive troubles.

Given the tense situation, the meeting in Luxembourg has been declared highly confidential, with only the euro-zone finance ministers and senior staff members permitted to attend. Finance Minister Wolfgang Schäuble of Chancellor Angela Merkel’s conservative Christian Democratic Union (CDU) and Jörg Asmussen, an influential state secretary in the Finance Ministry, are attending on Germany’s behalf.

…… Sources told SPIEGEL ONLINE that Schäuble intends to seek to prevent Greece from leaving the euro zone if at all possible. He will take with him to the meeting in Luxembourg an internal paper prepared by the experts at his ministry warning of the possible dire consequences if Athens were to drop the euro.

“It would lead to a considerable devaluation of the domestic currency against the euro,” the paper states. According to German Finance Ministry estimates, the currency could lose as much as 50 percent of its value, leading to a drastic increase in Greek national debt. Schäuble’s staff have calculated that Greece’s national deficit would rise to 200 percent of gross domestic product after such a devaluation. “A debt restructuring would be inevitable,” his experts warn in the paper. In other words: Greece would go bankrupt.

It remains unclear whether it would even be legally possible for Greece to depart from the euro zone. Legal experts believe it would also be necessary for the country to split from the European Union entirely in order to abandon the common currency. At the same time, it is questionable whether other members of the currency union would actually refuse to accept a unilateral exit from the euro zone by the government in Athens.

What is certain, according to the assessment of the German Finance Ministry, is that the measure would have a disastrous impact on the European economy…..



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