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Gene Ellis

Euro Zone Interest Rate Remains Unchanged - NYTimes.com - 0 views

www.nytimes.com/...st-rate-remains-unchanged.html

euro zone interest interest rate rate remains nytimes nytimes com com

shared by Gene Ellis on 08 Nov 12 - No Cached
  • But some analysts warn that the calm could prove temporary because the underlying causes of the crisis remain: too much debt and poorly performing national economies. “The E.C.B. has been very active since Mr. Draghi has been president, and this has been a major factor contributing to stabilize financial markets and thereby avoid much worse outcomes for the euro zone,” Marie Diron, an economist who advises the consulting firm Ernst & Young, said in a note.
  • “But the E.C.B. is not the sole actor and cannot save the euro on its own,” Ms. Diron said. “Ultimately the sustainability of the euro zone is down to structural changes at the country and European levels that are beyond the E.C.B.’s remit.”
  • Banks in the euro zone can borrow unlimited funds from the E.C.B. at the benchmark rate, provided they post collateral. But banks are not obligated to pass that rate on to their customers and might not do so in countries like Spain where banks are already struggling with large numbers of bad loans.
  • ...1 more annotation...
  • Meanwhile, interest rates may be too low for countries like Germany, helping to fuel a rise in real estate prices, Dirk Schumacher, an economist at Goldman Sachs in Frankfurt, said. “Cutting rates in the current environment of segmented markets is likely to boost growth in those places where it is needed least,” he wrote in a note to clients before the rate decision.
Gene Ellis

Mario Draghi Cannot Save the Euro - Bloomberg - 0 views

www.bloomberg.com/...aghi-cannot-save-the-euro.html

Simon_Johnson

shared by Gene Ellis on 06 Aug 12 - No Cached
  • Once you have understood that the ECB does not necessarily stand behind euro-area government debt, it is hard to disabuse yourself of the notion.
  • A broader question is what, if anything, Draghi might achieve with a looser monetary policy.
  • The euro area has many problems, including a lack of competitiveness in the periphery, chronically poor growth in countries such as Portugal and Italy, deeply damaged public finances in Greece and Spain, and a labor force that’s not mobile enough to go where the jobs are. Which of these could be resolved by reducing interest rates across the board?
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  • Maybe Draghi’s policies can buy time for deeper “structural changes” in the periphery, although quite what those are and what difference they would make in the near term remains elusive
  • It’s hard to see how providing politicians in troubled countries with unlimited credit will increase the likelihood of real reform of any kind.
  • More likely, a shift in ECB policies would make the European situation uglier. For one, Draghi would essentially be conceding fiscal dominance, demonstrating that if governments run budget deficits, they can count on the central bank to finance them.
  • Perhaps Draghi is planning the same game with fiscal authorities that the Banca d’Italia used to play with Italian politicians in the 1980s and early 1990s -- keep interest rates low enough to prevent fiscal collapse, yet high enough to keep fiscal prudence as a priority. Make no mistake about it, inflation or not, this is a strategy of high real interest rates.
  • Gene Ellis on 06 Aug 12
     
    Simon Johnson article - good
Gene Ellis

The delicate balance of fixing the eurozone | Martin Wolf's Exchange - 0 views

blogs.ft.com/...balance-of-fixing-the-eurozone

shared by Gene Ellis on 17 Jul 12 - No Cached
  • The euro itself was a leading cause of this crisis by ushering in a remarkably swift convergence in interest rates, which had the effect of directing too much capital into countries that formerly had had to pay high interest rates. This undermined the competitiveness of these countries through inflation and gave rise to huge deficits in their current accounts.
  • The euro is not suffering from a mere confidence crisis that can be resolved by assuaging the markets; it is experiencing a profound balance‐of‐payment crisis that is being prolonged by the expansion of public financial aid.
  • Since autumn 2007, long before the official bail‐out initiatives began, some of the crisis‐hit countries have replaced dwindling private capital imports and capital flight with their money‐printing presses (Target credits).
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  • 5. Export surpluses create no real value if they translate into claims vis‐à‐vis countries which ultimately cannot pay their debts,
  • 6. The ECB Council overstepped its mandate when it transferred to Eurozone national central banks, primarily the Bundesbank, the task of financing the public and private deficits of other countries.
  • 7. Germany’s liability for the bail‐out initiatives does not total 211 billion euros, as often cited, but is actually now close to 600 billion euros if the far larger bailout initiatives of the ECB are included in this figure.
  • 8. The Target credits and the purchase of government bonds by the ECB system transfer the investment risk of private investors and banks to the taxpayers of economically sound countries, posing a threat to the euro because they offer debtor countries incentives to advocate inflationary policies at the ECB Council which would help them defer their obligation to repay their foreign debts.
  • 9. Eurobonds would undermine debt discipline, lead to much higher interest burdens for the German state, and anew induce capital flows in Europe that would exacerbate the external imbalances.
  • ) Target debts are to be settled on an annual basis with interest‐bearing, marketable assets as in the US.
  • g) Countries that are not competitive enough to repay their foreign debts should, in their own interest, leave the Monetary Union.”
  • I also appreciate the fact that the declaration envisages a credit boom in Germany that would ultimately rebalance the eurozone economy. Nevertheless, this rebalancing is likely to prove painfully slow and certainly requires a prolonged period of relatively high inflation in Germany, to offset relatively low inflation in the vulnerable countries. It is far from clear that German public opinion is prepared for such an outcome.
  • More important, I do not believe a currency union that takes for granted the possibility of sovereign defaults and even exit would prove workable. It is a recipe for extreme financial instability, with huge runs on credit to banks, private non-banks and governments built in.
  • mechanisms of financing and adjustment. Permanent transfers from some countries to others, merely to offset a lack of
  • competitiveness (rather than accelerate income convergence), are indeed undesirable. Nevertheless, financing needs to be sufficiently large and generous to give vulnerable countries some chance of managing the adjustment to shocks, without sovereign default, mass private bankruptcies and implosion of financial systems.
  • Gene Ellis on 17 Jul 12
     
    The second major article on Professor Hans-Werner Sinn's attack on the premises of the eurozone. TARGET 2 analysis, plus...
Gene Ellis

"The Euro's Latest Reprieve" by Joseph E. Stiglitz | Project Syndicate - 0 views

www.project-syndicate.org/...the-euro-s-latest-reprieve

shared by Gene Ellis on 10 Jul 12 - No Cached
  • Like an inmate on death row, the euro has received another last-minute stay of execution. It will survive a little longer. The markets are celebrating, as they have after each of the four previous “euro crisis” summits – until they come to understand that the fundamental problems have yet to be addressed.
  • Europe’s leaders have finally understood that the bootstrap operation by which Europe lends money to the banks to save the sovereigns, and to the sovereigns to save the banks, will not work.
  • Likewise, they now recognize that bailout loans that give the new lender seniority over other creditors worsen the position of private investors, who will simply demand even higher interest rates.CommentsView/Create comment on this paragraph
  • ...12 more annotations...
  • It is deeply troubling that it took Europe’s leaders so long to see something so obvious
  • What is now proposed is recapitalization of the European Investment Bank, part of a growth package of some $150 billion. But politicians are good at repackaging, and, by some accounts, the new money is a small fraction of that amount, and even that will not get into the system immediately. In short: the remedies – far too little and too late – are based on a misdiagnosis of the problem and flawed economics.
  • Eurobonds and a solidarity fund could promote growth and stabilize the interest rates faced by governments in crisis. Lower interest rates, for example, would free up money so that even countries with tight budget constraints could spend more on growth-enhancing investments.
  • Even well-managed banking systems would face problems in an economic downturn of Greek and Spanish magnitude; with the collapse of Spain’s real-estate bubble, its banks are even more at risk.
  • Europe’s leaders did not recognize this rising danger, which could easily be averted by a common guarantee, which would simultaneously correct the market distortion arising from the differential implicit subsidy.
  • The euro was flawed from the outset, but it was clear that the consequences would become apparent only in a crisis.
  • Workers may leave Ireland or Greece not because their productivity there is lower, but because, by leaving, they can escape the debt burden incurred by their parents.
  • Germany worries that, without strict supervision of banks and budgets, it will be left holding the bag for its more profligate neighbors. But that misses the key point: Spain, Ireland, and many other distressed countries ran budget surpluses before the crisis. The down
  • turn caused the deficits, not the other way around.CommentsView/Create comment on this paragraph
  • If these countries made a mistake, it was only that, like Germany today, they were overly credulous of markets, so they (like the United States and so many others) allowed an asset bubble to grow unchecked.
  • Moreover, Germany is on the hook in either case: if the euro or the economies on the periphery collapse, the costs to Germany will be high.
  • While structural problems have weakened competitiveness and GDP growth in particular countries, they did not bring about the crisis, and addressing them will not resolve it.CommentsView/Create comment on this paragraph
Gene Ellis

Ruble Continues Its Decline in Russia, Despite Interest Rate Increase - NYTimes.com - 0 views

www.nytimes.com/...ssia-ruble-interest-rates.html

shared by Gene Ellis on 16 Dec 14 - No Cached
  • Ruble Continues Its Decline in Russia, Despite Interest Rate Increase
Gene Ellis

PORTFOLIO.HU | Blanchard: Eurozone integration needs to go forward or go back, but it c... - 0 views

www.portfolio.hu/...it_cant_stay_here.24931-2.html

shared by Gene Ellis on 04 Oct 12 - No Cached
  • There is no question that, when it was introduced, inflation targeting represented progress. But we have learnt that it has serious limitations. You can have an economy in which inflation is stable and low, but behind the scenes the composition of the output is wrong, and the financial system accumulates risks. It’s very clear that, to deal with all these issues, just using the policy rate is not enough.
  • The way to think about monetary policy in the future is that the central bank has in effect two sets of tools. One is a traditional one, the policy interest rate. The other is the set of macro prudential tools, from loan to value ratios, to cyclical capital ratios, etc. If there is a housing boom, you do not want to kill it through an increase in the policy rate which would affect the whole economy. You want to use measures that will limit mortgage lending to households.
  • I think that it has either to go forward or to go back, but it cannot stay where it is. I think nobody really wants to go back, so it has to go forward.
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  • I suspect that, in order to limit country specific shocks, euro members may have to actively use macro prudential tools such as rules on the amount of liquidity that banks should hold, or upper limit to loans to value ratios, much more so that they have in the past.
  • If the U.S. and a number of other advanced countries are going to decrease their current account deficits, then some countries will have to decrease their current account surpluses. And for this to happen, there has to be, among other changes, an adjustment of the exchange rates. Put more bluntly, most emerging markets have to accept an appreciation.
Gene Ellis

Greece's Bogus Debt Deal by Ashoka Mody - Project Syndicate - 0 views

www.project-syndicate.org/...-sovereign-debt-by-ashoka-mody

greece debt deal project syndicate

shared by Gene Ellis on 12 Dec 12 - No Cached
  • The economist Larry Summers has invoked the analogy of the Vietnam War to describe European decision-making. “At every juncture they made the minimum commitments necessary to avoid imminent disaster – offering optimistic rhetoric, but never taking the steps that even they believed could offer the prospect of decisive victory.”
  • Instead of driblets of relief, a sizeable package, composed of two elements, is the way forward.
  • A simple structure would be to make all debt payable over 40 years, carrying an interest rate of 2%.
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  • The second element of the debt-relief package would be more innovative: If Greece’s economy performs well, the generous extension of maturities can be clawed back or the interest rate raised. A formula for this could be linked to the debt/GDP ratio
  • Why bother? Because the very premise of the current deal and the expectations it sets out are wrong. First, the notion that there is a smooth transition path for the debt/GDP ratio from 200% to 124% is fanciful. Second, even if, by some miracle, Greece did reach the 124% mark by 2020, the claim that its debt will then be “sustainable” is absurd.
  • Make no mistake: policymakers’ track record on forecasting Greek economic performance during the crisis has been an embarrassment. In May 2010, the International Monetary Fund projected – presumably in concurrence with its European partners – that Greece’s annual GDP growth would exceed 1% in 2012. Instead, the Greek economy will shrink by 6%. The unemployment rate, expected to peak this year at 15%, is now above 25% – and is still rising. The debt/GDP ratio was expected to top out at 150%; absent the substantial write-down of privately held debt, which was deemed unnecessary, the ratio would have been close to 250%.CommentsView/Create comment on this paragraphIn September 2010, four months after the official Greek bailout was put in place, the IMF issued a pamphlet asserting that “default in today’s advanced economies is unnecessary, undesirable, and unlikely.” The conclusion was that official financing would carry Greece past its short-term liquidity problems. Calls for immediate debt restructuring went unheeded. Six months later, after substantial official funds had been used to pay private creditors, the outstanding private debt was substantially restructured.CommentsView/Create comment on this paragraphSuch were the errors committed over short time horizons.
  • And, again, even if Greece somehow did achieve the 124% milestone, its debt would still not be sustainable.
  • Staying the course, as Summers warns, will lead only to “needless suffering” before that course inevitably collapses, bringing Greece – and much else –­ crashing down.
Gene Ellis

Europe Can't Handle the Euro - 0 views

www.nber.org/...wj020800.html

shared by Gene Ellis on 31 May 12 - No Cached
  • When leaders of the 11 nations that agreed to combine their currencies gathered in January 1999, they predicted great things: the single currency would shift global portfolios to euro assets, depressing the value of the dollar relative to the euro, and the new eurozone would be a strong player in the global economy, reflecting the size of an integrated European market. Instead the euro plummeted, Europes economy remains weak, and unemployment is more than twice the U.S. level.
  • The ECB will eventually be judged not by its words but by whether it achieves low inflation and does so without increasing cyclical unemployment. I am not optimistic about either part of this goal.
  • The ECB must make monetary policy for "Europe as a whole," which in practice means doing what is appropriate for Germany, France and Italy, the eurozones three largest countries. Last year demand conditions in those countries were relatively weak, while demand conditions in Spain and Ireland were very strong. That meant a monetary policy that was too expansionary for Spain and Ireland, causing a substantial acceleration of their inflation and threatening their competitiveness.
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  • Such disparities of demand conditions will undoubtedly persist in the future because European countries differ substantially in industrial composition and in a variety of economic policies.
  • the time will come when the ECB will set a policy that is too tight for the outliers, leading to substantially higher unemployment than if they were free to set their own monetary policies. Even without discretionary monetary policies, the interest rates in countries with weak demand would naturally decline, and the external values of their currencies would fall, both acting as offsetting stabilizers of the countries weak demand. But this will not be possible within the EMU, where a single interest rate and a single exchange rate prevail. Result: higher average cyclical unemployment.
  • In the U.S., a fall in regional demand leads to lower wages, which help to maintain employment; to movements of labor to regions where demand is stronger; and to a net fiscal transfer from Washington (because lower regional income means lower federal tax liability). None of this happens in Europe, where wages are inflexible, mobility is severely limited by language and custom, and there are no significant fiscal transfers.
  • Politicians can now blame the ECB for high unemployment and complain that it is a powerful force beyond national control. Instead of seeking to make labor markets more flexible, European governments are talking more about "social wages," about mandatory 35-hour workweeks, and about rolling back even the small reductions in social benefits Germany achieved under Helmut Kohls government. Worse yet, there are attempts to eliminate differences in labor practices and even differences in wages among the EMU countries.
  • Moreover, these policies reduce the international competitiveness of many European industries and encourage the adoption of protectionist policies to keep out non-European products.
  • Forcing a single monetary policy on all of Europe will cause the countries that suffer what they regard as unnecessarily high unemployment to resent the actions of others. Attempts to force a Europewide tax system, especially if taxes are used to redistribute incomes among European countries, will compound the potential for conflict.
  • EMU is meant to be a marriage made in heaven with no possibility of divorce.
Gene Ellis

Europe Needs the Bond Vigilantes - 0 views

www.nber.org/...wsj04042012.html

shared by Gene Ellis on 30 May 12 - No Cached
  • The rapid growth of European sovereign debt can be traced back to the adoption of the euro in 1999. That shift to a single currency caused a sharp drop in inflation in countries like Greece, Italy and Spain. The lower inflation rates caused interest rates on their bonds to fall sharply. Governments responded to lower interest rates by borrowing more to finance expansions of their social programs.
Gene Ellis

Waiting for the Markets to Blink - NYTimes.com - 0 views

www.nytimes.com/...-for-the-markets-to-blink.html

shared by Gene Ellis on 19 Feb 15 - No Cached
  • “You get these occasional disconnects and start asking who’s right and who’s wrong,” said Daniel Morris, global investment strategist at TIAA-CREF.
  • “We think the equity market is right,” he said. “If that’s the case, bond yields are too low.”
  • “We’re constructive about the future and think all this intervention is going to work, but how much is priced in” to the stock market? So much, in his view, that “we’ve been selling into the strength,” he said.
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  • “Do you believe that things are going to get better? If you do, you don’t want to be in Treasuries at 2.5 percent,” he said. “Some things don’t make sense to me. It’s frustrating.”
  • He says it doesn’t make sense that the stock market has held up as well as it has amid the Fed’s debt purchases and its policy of maintaining short-term interest rates near zero, a measure taken in a crisis that is supposed to be over.
  • “How do you know there has been an economic recovery and the patient is breathing normally when it’s in an oxygen tent?”
  • For all of 2013, gross domestic product increased by 1.9 percent, compared with 2.8 percent for 2012.
  • Orders and shipments of durable goods
  • were flat in 2013, and housing has weakened. February was the eighth consecutive month of declines in pending home sales, leaving them down 10.2 percent from 12 months earlier.
  • “It will be extremely difficult for the U.S. economy to escape its Great Recession hangover with this poor profits backdrop,” Mr. Edwards wrote. “Indeed it leaves the economy extremely vulnerable to adverse shocks,” like declining growth in Asia.
  • “We’re keeping a very close eye on China,” Ms. Patterson said. “If there are signs that it’s slowing more than we expect, that would hurt our view of emerging markets and worsen the outlook for developed markets due to contagion” because of the increasing importance of China in the global economy.
  • American real estate companies and European banks, for instance — but he is keeping 13 percent of his fund in cash because of a dearth of attractive investment choices.
  • Mr. Morris finds a wider array of opportunities. He likes shares of consumer-discretionary companies, which provide the products and services that people want but do not need. The sector includes businesses as diverse as hotels, carmakers and clothing stores.
  • the industrial sector, which includes manufacturers of business equipment. Another preferred segment is banks; he expects them to flourish as interest rates rise and the gap widens between what they charge in interest and what they pay.
  • Mr. Morris encourages stock investors to buy American.
  • “You can’t just unwind quantitative easing, with all of its distortions, and achieve stability without some pain along the way,” he warned. “What that pain is, when it happens, that’s where the uncertainties lie. The margin to maneuver is getting less and less with the passage of time.”
Gene Ellis

Op-ed: Greece's Exit May Become the Euro's Envy - 0 views

www.iie.com/...oped.cfm

greece euro

shared by Gene Ellis on 18 Jul 12 - No Cached
  • The immediate consequences of Greece leaving or being forced out of the euro area would certainly be devastating. Capital flight would intensify, fuelling depreciation and inflation. All existing contracts would need to be redenominated and renegotiated, creating financial chaos. Perhaps most politically devastating, fiscal austerity might actually need to intensify, since Greece still runs a primary deficit, which it would have to correct if EU and International Monetary Fund financing vanished.
  • But this process would also produce a substantially depreciated exchange rate (50 drachmas to the euro, anyone?) And that would set in motion a process of adjustment that would soon reorient the economy and put it on a path of sustainable growth. In fact, Greek growth would probably surge, possibly for a prolonged period, if it adopted sensible policies to rapidly restore and sustain macroeconomic stability.
  • Just look at what happened to the countries that defaulted and devalued during the financial crises of the 1990s. They all initially suffered severe contractions. But the recessions lasted only one or two years. Then came the rebound. South Korea posted nine years of growth averaging nearly 6 percent. Indonesia, which experienced a wave of defaults that toppled nearly every bank in the entire system, registered growth above 5 percent for a similar period; Argentina close to 8 percent; and Russia above 7 percent. The historical record shows clearly that there is life after financial crises.
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  • Today, Germany grudgingly does the minimum needed to keep the euro area intact. If exit to emulate Greece becomes an attractive proposition, Germany will be put on the spot—and the magnanimity it shows in place of its current miserliness will be the ultimate test of how much it values the euro area.
  • The answer might prove surprising. The German public might suddenly realize that the euro area confers on Germany not one but two “exorbitant privileges”: low interest rates as the haven for European capital and a competitive exchange rate by being hitched to weaker partners. In that case, Germany would have to offer its partners a much more attractive deal to keep them in the euro area.
Gene Ellis

Sub-Saharan Africa's Subprime Borrowers by Joseph E. Stiglitz and Hamid Rashid - Projec... - 0 views

www.project-syndicate.org/...h-e--stiglitz-and-hamid-rashid

Africa subprime borrowers

shared by Gene Ellis on 10 Jan 14 - No Cached
  • Taking the lead in October 2007, when it issued a $750 million Eurobond with an 8.5% coupon rate, Ghana earned the distinction of being the first Sub-Saharan country – other than South Africa – to issue bonds in 30 years.
  • Nine other countries – Gabon, the Democratic Republic of the Congo, Côte d’Ivoire, Senegal, Angola, Nigeria, Namibia, Zambia, and Tanzania – followed suit. By February 2013, these ten African economies had collectively raised $8.1 billion from their maiden sovereign-bond issues, with an average maturity of 11.2 years and an average coupon rate of 6.2%. These countries’ existing foreign debt, by contrast, carried an average interest rate of 1.6% with an average maturity of 28.7 years.
  • So why are an increasing number of developing countries resorting to sovereign-bond issues? And why have lenders suddenly found these countries desirable?
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  • recent analyses, carried out in conjunction with the establishment of the new BRICS bank, have demonstrated the woeful inadequacy of official assistance and concessional lending for meeting Africa’s infrastructure needs, let alone for achieving the levels of sustained growth needed to reduce poverty significantly.
  • the conditionality and close monitoring typically associated with the multilateral institutions make them less attractive sources of financing. What politician wouldn’t prefer money that gives him more freedom to do what he likes? It will be years before any problems become manifest – and, then, some future politician will have to resolve them.
  • So, are shortsighted financial markets, working with shortsighted governments, laying the groundwork for the world’s next debt crisis?
  • he risks will undoubtedly grow if sub-national authorities and private-sector entities gain similar access to the international capital markets, which could result in excessive borrowing.
  • Nigerian commercial banks have already issued international bonds; in Zambia, the power utility, railway operator, and road builder are planning to issue as much as $4.5 billion in international bonds.
  • Signs of default stress are already showing. In March 2009 – less than two years after the issue – Congolese bonds were trading for 20 cents on the dollar, pushing the yield to a record high. In January 2011, Côte d’Ivoire became the first country to default on its sovereign debt since Jamaica in January 2010.
  • In June 2012, Gabon delayed the coupon payment on its $1 billion bond, pending the outcome of a legal dispute, and was on the verge of a default. Should oil and copper prices collapse, Angola, Gabon, Congo, and Zambia may encounter difficulties in servicing their sovereign bonds.
  • They need not only to invest the proceeds in the right type of high-return projects, but also to ensure that they do not have to borrow further to service their debt.
  • But borrowing money from international financial markets is a strategy with enormous downside risks, and only limited upside potential – except for the banks, which take their fees up front. Sub-Saharan Africa’s economies, one hopes, will not have to repeat the costly lessons that other developing countries have learned over the past three decades.
Gene Ellis

Irish Charm With Germans Leads Nation Out of Bailout Wilderness - Bloomberg - 0 views

www.bloomberg.com/...-german-love-ends-bailout.html

shared by Gene Ellis on 13 Dec 13 - No Cached
  • Before the new government could go on the offensive, it needed to play defense. It fended off an attack on Ireland’s 12.5 percent corporate tax rate, the cornerstone of an economic policy that transformed Ireland from a financial backwater into a European hub for companies such as Pfizer Inc., the maker of Viagra, and Google Inc.
  • Two days after commencing his premiership, Irish Prime Minister Enda Kenny, 62, became embroiled in what he called a Gallic spat with French President Nicolas Sarkozy after refusing to raise the tax rate in return for an interest-rate cut on aid.
  • “The attitude was: ‘You misbehaved and here’s what you have to do’,’”
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  • Within months, the central bank injected more than 1 trillion euros of three-year loans into the region’s banking system
  • The economy emerged from recession in the second quarter, unemployment dropped for six months in a row, and house prices in Dublin are rising again. The yield on 10-year bonds is down to 3.5 percent, lower than Italy and Spain.
  • Noonan then ramped up his efforts to broker a deal on banking debt. He had a consistent line: it was payback time. The government hadn’t imposed losses on senior bank bondholders, preventing contagion spreading across the euro region from the Irish banking crisis.
  • Banks used the cash to buy sovereign debt
  • “The Germans disagree all the time until the very end, and then they agree,” he said. “Once you realize that, you keep talking, you keep chipping away.”
Gene Ellis

Some thoughts on German politics and the saver's tax in Cyprus | Credit Writedowns - 0 views

www.creditwritedowns.com/...-the-savers-tax-in-cyprus.html

shared by Gene Ellis on 18 Mar 13 - No Cached
  • Now, the large 82.8% German government debt to GDP ratio is a source of shame for many because Germany was a driving force in enshrining the 60% government debt to GDP hurdle into the Maastricht Treaty that set out terms for the euro zone.
  • Moreover, the interest rate policy of the ECB, geared as it was to the slow growth core, produced negative real interest rates and credit bubbles in Spain and Ireland during the last decade. German banks piled in to those countries as prospects domestically stagnated.
  • “The average German worker feels like a cash cow being sucked dry by a quick succession of reforms and bailouts that take money out of her pocket. First it was for reunification, then for European integration, then to right the economy, then to bail out German banks, and finally to bail out the European periphery. Fatigue has set in.”
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  • The bottom line is that none of the major political parties in Germany are going to vote for bailouts for other euro zone countries unless massive strings are attached, since these bailouts are political losers.
  • The anti-bailout part of the FDP platform is the one part of their rhetoric which could successfully take them over the 5% hurdle. The FDP’s complicity in using German taxpayer money to bail out the so-called profligate periphery is a one-way ticket out of Parliament.
  • “First, the Greek reports come via statements made by Michael Fuchs, CDU deputy Bundestag head and a senior member of German Chancellor Angela Merkel’s party. Fuchs warned earlier today that Germany would veto further aid to Greece if the country has not met the conditions of its previous bailouts.
  • “Second, all along Germany has indicated that it is resistant to increasing funding of the ESM and EFSF bailout facilities. This presents a problem in the case of Spain and Italy because of the size of those economies.
  • Willem Buiter, Chief Economist at Citigroup, has been most vocal in predicting that these facilities will be inadequate when Spain and Italy hit the wall and that more extreme measures will have to be taken.
  • The basic dilemma here is that almost all of the eurozone governments including Germany carry high debt burdens in excess of the Maastricht Treaty. For example, Germany has been in breach of Maastricht Treaty in 8 of 10 years since 2002, has been over the Maastricht 60% hurdle in each of those ten years, and now carries a debt to GDP burden above 80%.
  • The long and short of it was that the Germans had reached the end of their ability to support bailouts.
  • All evidence is that this levy has created panic in Cyprus. After all, what is the use of having a deposit guarantee if government can arbitrarily circumvent it to impose losses on your deposits anyway?
  • One can't just blame Cyprus for this fiasco. The ECB, EC and European Union finance ministers signed off on the insured deposit grab too]
  • My view? It was inevitable that we would be in crisis again. The austerity world view of crisis resolution is completely at odds with the capacity of the euro zone’s institutional architecture to handle a crisis.
Gene Ellis

Solutions Remain Elusive After Financial Crisis - NYTimes.com - 0 views

www.nytimes.com/...ve-after-financial-crisis.html

shared by Gene Ellis on 24 Apr 13 - No Cached
  • In this world, financial bubbles matter, capital flows are of dubious merit, low interest rates fail to stimulate growth and government spending becomes the only tool with real traction to spur economic activity.
  • With total government debt in the rich world stuck at around 100 percent of its combined economic output, there is a legitimate fear that a rise in interest rates could tip off a financial death spiral. Moreover, if countries with debt levels well under 50 percent of G.D.P. were so devastated by the crisis, it is hard to imagine what might happen to them if another were to hit them.
  • If so, the urgent task is what kind of limits should be imposed on banking and the rest of finance to temper its propensity to careen toward disaster.
  • ...1 more annotation...
  • What good does the modern financial system do, for the rest of us? What determines financial fluctuations and shocks? How do they affect the broader economy? What can governments do to make them less disruptive? Economists have few answers.
Gene Ellis

German and French banks call the shots - European, Business - Independent.ie - 0 views

www.independent.ie/...ks-call-the-shots-2607577.html

german french banks ireland debt

shared by Gene Ellis on 11 Jul 12 - No Cached
  • German and French banks call the shots Print Email  NormalLargeExtra Large ShareNew  0  0   Also in European Debt crisis: European shares edge lower and growth worries persist Bank of England's Tucker 'wasn't encouraged to lean on Barclays' Draghi keeps door open to further interest rate cuts Marks and Spencers sales hit by summer deluge Spain's debt tops 7pc danger level as Madrid gets more time European Home "Shocking" 2012 HoroscopeWhat Does 2012 Have In Store For You? Shockingly Accurate. See Free!www.PremiumAstrology.comExpat Health InsuranceQuick, Compare, Trusted Website Expatriate Health Insurance Quoteswww.ExpatFinder.com/Instant-Quoteshttp://www.googleadservices.com/pagead/aclk?sa=L&ai=BMEejVeb8T8fDKoSG_QaAhrTCB-q_1OYBmoqphxvAjbcB0NkREAMYAyDgw6kIKAU4AFD4gumFAmCpsL6AzAGgAairsfEDsgESd3d3LmluZGVwZW5kZW50LmllyAEB2gFfaHR0cDovL3d3dy5pbmRlcGVuZGVudC5pZS9idXNpbmVzcy9ldXJvcGVhbi9nZX
  • d, for reasons best
  • known to itself, the ECB -- in clear contravention of both previous market precedent and financial logic -- has insisted that the senior bondholders be repaid in full and has lent the Irish banks, institutions which it must have known were hopelessly insolvent, €70bn to do so.
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  • Top of the list are German banks, to whom we owe €92bn with a further €38bn of other exposures. Does the fact that Irish banks potentially owe their counterparts up to €146bn explain the German government's implacable opposition to any write-down of the Irish banks' debts? After the British and the Germans, it is the French banks -- with total Irish bank loans of almost €32bn and a further €23bn of other exposures -- who have the biggest exposure to Ireland. Does this provide at least a partial explanation for French president Nicolas Sarkozy's truculence when faced with Irish requests that senior bondholders be forced to accept a haircut?
Gene Ellis

"Which Eurobonds?" by Jeffrey Frankel | Project Syndicate - 0 views

www.project-syndicate.org/...which-eurobonds-

jeffrey project syndicate

shared by Gene Ellis on 16 Jun 12 - No Cached
  • Any solution to the eurozone crisis must meet a short-run objective and a long-run goal. Unfortunately, the two tend to conflict.Illustration by Paul LachineCommentsView/Create comment on this paragraphThe short-run objective is to return Greece, Portugal, and other troubled countries to a sustainable debt path (that is, a declining debt/GDP ratio). Austerity has raised debt/GDP ratios, but a debt write-down or bigger bailouts would undermine the long-term goal of minimizing the risk of similar debt crises in the future.CommentsView/Create comment on this paragraph
  • it is hard to commit today to practice fiscal rectitude tomorrow. Official debt caps, such as the Maastricht fiscal criteria and the Stability and Growth Pact (SGP), failed because they were unenforceable.
  • The introduction of Eurobonds – joint, aggregate eurozone liabilities – could be part of the solution, if designed properly. There is certainly demand for them in China and other major emerging countries, which are desperate for an alternative to low-yielding US government securities.
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  • But Germany remains opposed on moral-hazard grounds: a joint guarantee of Eurozone members’ liabilities would strengthen individual national governments’ incentive to spend beyond their means.
  • The German Council of Economic Experts has proposed a European Redemption Fund (ERF). The plan would convert into de facto 25-year Eurobonds the existing sovereign debt of member countries in excess of 60% of GDP, the threshold specified by the Maastricht criteria and the SGP.
  • But this seems upside down.
  • it offers absolution precisely on the 60%-of-GDP margin where countries will have the most trouble resisting temptation.
  • the main explanation for the absence of US moral hazard is that the right precedent was set in 1841, when the federal government let eight states and the Territory of Florida default.
  • Ever since 1841, the market requires that US states running up questionable levels of debt pay an interest-rate premium to compensate for the default risk.
  • Had the ECB operated from the outset under a rule prohibiting it from accepting SGP-noncompliant countries’ debt as collateral, the entire eurozone sovereign-debt problem might have been avoided.
  • the expansion in the US took place at the federal level, where spending today amounts to 24% of GDP, compared to just 1.2% of GDP for the European Union budget.
  • The version of Eurobonds that might work as the missing long-term enforcement mechanism is almost the reverse of the Germans’ ERF proposal: the “blue bonds” proposed two years ago by Jacques Delpla and Jakob von Weizsäcker. Under this plan, only debt issued by national authorities below the 60%-of-GDP threshold could receive eurozone backing and seniority. When a country issued debt above the threshold, the resulting “red bonds” would lose this status.
  • The point is that the enforcement mechanism would be truly automatic: market interest rates would provide the discipline that bureaucrats in Brussels cannot.
  • Of course, the eurozone cannot establish a blue-bond regime without first solving the problems of debt overhang and troubled banks. Otherwise, the plan itself would be destabilizing, because almost all countries would immediately be in the red.
  • But one thing seems clear. German taxpayers, whose longstanding suspicion of profligate Mediterranean euro members has been vindicated, will not be happy when asked to pay still more for the cause of European integration. At a minimum, they will need some credible reason to believe that 20 years of false assurances have come to an end – that this is the last bailout.
Gene Ellis

Past Rifts Over Greece Cloud Talks on Rescue - WSJ.com - 0 views

online.wsj.com/...4441404579119180237594344.html

shared by Gene Ellis on 29 Oct 13 - No Cached
  • It included no debt restructuring, such as forgiving principal, reducing the interest rate on the debt or stretching out the payment schedule to make servicing easier.
  • That spared the holders of the debt—chiefly European banks—the losses that would have come with restructuring.
  • Some of the IMF dissenters at the meeting and some IMF staff believe the interests of the European powers were placed above those of Greece, which has seen its economy contract by a fifth since 2009 and its jobless rate reach nearly 28%.
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  • "The Greek bailout was not a program for Greece, but for the euro zone itself,"
  • "In May 2010, we knew that Greece needed a bailout but not that it would require debt restructuring," IMF Managing Director Christine Lagarde said in a June interview. "We had no clue that the overall economic situation was going to deteriorate as quickly as it did."
    • Gene Ellis
      Gene Ellis on 29 Oct 13
       
      And this is the point, is it not?
  • Ms. Lagarde was French finance minister at the time and keen to avoid losses by her country's banks, which had lent heavily to Greece.
  • "An upfront debt restructuring would have been better for Greece although this was not acceptable to the euro partners," it said.
  • In retrospect, the report said, the "program served as a holding operation" that allowed "private creditors to reduce exposures…leaving taxpayers and the official sector on the hook."
  • Much of the debt was held by already fragile French and German banks, so European nations wouldn't consider it. And the U.S. feared its own trillion-dollar exposure to European banks.
  • Several IMF directors had warned of just that outcome three years earlier. The program "may be seen not as a rescue of Greece, which will have to undergo a wrenching adjustment, but as a bailout of Greece's private debtholders, mainly European financial institutions," Brazil's executive director, Paulo Nogueira Batista, said at the May 2010 meeting.
  • now confront the prospect of a third bailout in which they would also forgive some of Greece's debt.
Gene Ellis

Shinzo Abe's Monetary-Policy Delusions by Stephen S. Roach - Project Syndicate - 0 views

www.project-syndicate.org/...save-japan-by-stephen-s--roach

shared by Gene Ellis on 18 Jan 13 - No Cached
  • The reason is not hard to fathom. Hobbled by severe damage to private and public-sector balance sheets, and with policy interest rates at or near zero, post-bubble economies have been mired in a classic “liquidity trap.” They are more focused on paying down massive debt overhangs built up before the crisis than on assuming new debt and boosting aggregate demand.
  • The sad case of the American consumer is a classic example of how this plays out. In the years leading up to the crisis, two bubbles – property and credit – fueled a record-high personal-consumption binge. When the bubbles burst, households understandably became fixated on balance-sheet repair – namely, paying down debt and rebuilding personal savings, rather than resuming excessive spending habits.CommentsView/Create comment on this paragraph
  • US consumers have pulled back as never before.
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  • Central banks that buy sovereign debt issued by fiscal authorities offset market-imposed discipline on borrowing costs, effectively subsidizing public-sector profligacy.
  • Zombie-like companies were kept on artificial life-support in the false hope that time alone would revive them. It was not until late in the decade, when the banking sector was reorganized and corporate restructuring was encouraged,
  • Like Japan, America’s post-bubble healing has been limited – even in the face of the Fed’s outsize liquidity injections. Household debt stood at 112% of income in the third quarter of 2012 – down from record highs in 2006, but still nearly 40 percentage points above the 75% norm of the last three decades of the twentieth century. Similarly, the personal-saving rate, at just 3.5% in the four months ending in November 2012, was less than half the 7.9% average of 1970-99.
  • Crisis-torn peripheral European economies still suffer from unsustainable debt loads and serious productivity and competitiveness problems. And a fragmented European banking system remains one of the weakest links in the regional daisy chain.
  • That leaves a huge sum of excess liquidity sloshing around in global asset markets. Where it goes, the next crisis is inevitably doomed to follow.
Gene Ellis

Even Greece Exports Rise in Europe's 11% Jobless Recovery - Bloomberg - 0 views

www.bloomberg.com/...ope-s-11-jobless-recovery.html

undefined greece exports rise europe recovery bloomberg

shared by Gene Ellis on 21 Mar 13 - No Cached
  • “The current- account deficits of countries that have been under stress diminished over the last years considerably.”
  • Just two of 14 euro-zone government leaders have kept their posts in elections since late 2009 and extremists such as Golden Dawn in Greece are gaining support.
  • “The internal rebalancing in the euro area is progressing,” said Fels. “Some of them, especially Spain but also Portugal not to speak of Ireland, are regaining competitiveness.”
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    • Gene Ellis
      Gene Ellis on 21 Mar 13
       
      This is the same sort of response which companies would have made to a depreciation in the local currency without the euro, but with the added problem of deflationary effects on the rest of the economy.
  • Ford Motor Co. (F) (F) said at the end of last year it will increase capacity near Valencia as it shuts plants in the U.K. and Belgium.
  • While a slide in imports accounts for some of the correction, Greece boosted its exports outside the EU by about 30 percent in the fourth quarter of 2012 from the previous year, while Italy’s rose 13 percent in January from a year ago, he said.
  • In Ireland, U.S. companies such as EBay Inc (EBAY) (EBAY)., Google Inc. (GOOG) (GOOG) and Facebook Inc (FB). all have expanded in the past two years, taking advantage of a corporate-tax rate of just 12.5 percent compared to Spain’s 30 percent.
    • Gene Ellis
      Gene Ellis on 21 Mar 13
       
      'Beggar thy neighbor' kinds of effects.
  • The metamorphosis is known as internal devaluation
  • Prevented by membership of the euro from driving down currencies, governments and companies are squeezing labor costs to spur productivity.
  • aising the retirement age, making it easier to fire workers in downturns and preventing unions from clinging to boom-time wage deals.
  • reducing social- security payments
  • On average, the periphery is about halfway to eliminating large structural current-account deficits, which allow for declines related to recession-driven weaker import demand, estimates Goldman Sachs (GS).
  • The OECD today published an index showing that relative labor costs in Spain and Portugal have now dropped below Germany’s for the first time since 2005.
  • “It’s potentially good for the economy but only if it results in faster investment,”
  • “If not then there’s a downward spiral risk.”
  • It’s the mirror image of the euro’s first decade, when historically low interest rates in the periphery fueled inflationary spending booms, reflected in credit bubbles and deteriorating current accounts and government budgets.
  • The smaller trade imbalances really reflect a collapse in demand for imports as consumers and companies hunker down,
    • Gene Ellis
      Gene Ellis on 21 Mar 13
       
      An important point.
  • “At this stage it is still demand destruction which has helped current-account deficit countries balance their accounts,” said Mayer. “It’s not a healthy situation.”
  • They also say countries will need to run even healthier current accounts than now if they are to stabilize the debts they owe abroad.
  • Gene Ellis on 21 Mar 13
     
    Good update article, as of March, 2013.
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