You should look at it more holistically. We wouldn't have been able to increase our exports if the other countries had behaved like us and had not increased their demand for an entire decade.
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Bringer of Prosperity or Bottomless Pit? 'Putting the Virtuous in the Dock Rather than ... - 0 views
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Excluding Greece from the union would be the completely wrong approach. Greece's problem is its inefficiency in terms of public finances. That can be corrected.
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Starbatty: In my experience, speculators are only successful when political promises diverge from economic reality, as has become clear in Greece.
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In the German Council of Economic Experts, we proposed a consolidation pact, under which each country would be required to specify a fully verifiable path that it will follow as it puts its financial house in order. It wouldn't just be a solution for Greece; it would be for everyone.
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And you seriously believe that would help? Following that approach, the Greeks would save themselves to death, just as the Germans did in the early 1930s under then-Reich Chancellor Heinrich Brüning. What you expect the Greeks to do is Brüning squared. The real problem is that Greece shouldn't have been accepted into the monetary union in the first place.
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But government debt is still growing considerably. Doesn't this also increase the risk of inflation? Starbatty: That's what I assume. Inflation would be an elegant means of reducing debt, and many academics are discussing this scenario. But it becomes truly problematic when government bonds eventually lose their status as a safe haven. If China or Japan arrive at this conclusion and sell their bonds, a bubble could burst that is far more dangerous than any other bubble. If that happens, markets will plunge, and interest rates will shoot up.
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Likewise, when it comes to assistance, I think we have a clear legal framework, according to which neither any member state nor the entire Union can be held liable for the debt of another member state.
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Analysis: Euro zone fragmenting faster than EU can act - 0 views
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Deposit flight from Spanish banks has been gaining pace and it is not clear a euro zone agreement to lend Madrid up to 100 billion euros in rescue funds will reverse the flows if investors fear Spain may face a full sovereign bailout.
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Many banks are reorganising, or being forced to reorganise, along national lines, accentuating a deepening north-south divide within the currency bloc.
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Since government credit ratings and bond yields effectively set a floor for the borrowing costs of banks and businesses in their jurisdiction, the best-managed Spanish or Italian banks or companies have to pay far more for loans, if they can get them, than their worst-managed German or Dutch peers.
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European Central Bank President Mario Draghi acknowledged as he cut interest rates last week that the north-south disconnect was making it more difficult to run a single monetary policy.
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Two huge injections of cheap three-year loans into the euro zone banking system this year, amounting to 1 trillion euros, bought only a few months' respite.
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Conservative German economists led by Hans-Werner Sinn, head of the Ifo institute, are warning of dire consequences for Germany from ballooning claims via the ECB's system for settling payments among national central banks, known as TARGET2.
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If a southern country were to default or leave the euro, they contend, Germany would be left with an astronomical bill, far beyond its theoretical limit of 211 billion euros liability for euro zone bailout funds.
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As long as European monetary union is permanent and irreversible, such cross-border claims and capital flows within the currency area should not matter any more than money moving between Texas and California does.But even the faintest prospect of a Day of Reckoning changes that calculus radically.In that case, money would flood into German assets considered "safe" and out of securities and deposits in countries seen as at risk of leaving the monetary union. Some pessimists reckon we are already witnessing the early signs of such a process.
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Either member governments would always be willing to let their national central banks give unlimited credit to each other, in which case a collapse would be impossible, or they might be unwilling to provide boundless credit, "and this will set the parameters for the dynamics of collapse", Garber warned.
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"The problem is that at the time of a sovereign debt crisis, large portions of a national balance sheet may suddenly flee to the ECB's books, possibly overwhelming the capacity of a bailout fund to absorb the entire hit," he wrote in 2010,
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national regulators in some EU countries are moving quietly to try to reduce their home banks' exposure to such an eventuality. The ECB itself last week set a limit on the amount of state-backed bank bonds that banks could use as collateral in its lending operations.
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In one high-profile case, Germany's financial regulator Bafin ordered HypoVereinsbank (HVB), the German subsidiary of UniCredit, to curb transfers to its parent bank in Italy last year, people familiar with the case said.
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In any case, common supervision without joint deposit insurance may be insufficient to reverse capital flight.
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Spain to Test Bond Markets as Economy Minister Warns on Debt - NYTimes.com - 0 views
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the country’s economy minister, Luis de Guindos, warned Tuesday that European debt markets were not working properly because foreign investors were being deterred by the euro zone’s slow and complex decision-making procedures.
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In recent weeks the interest demanded by investors on longer-term debt has crept up around 6 percent for Italy and 7 percent for Spain, close to the level that analysts say could make government finances unsustainable in the medium term.
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In an interview in the Spanish daily La Vanguardia, Mr. de Guindos said that foreign investors were increasingly staying away from bond auctions, leaving only domestic buyers.
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Debt auctions in Italy at the end of last week came off better than some observers had expected and, although borrowing costs remain high, the successful debt sale has increased the prospect that the euro zone can avert another crisis during the summer break.
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Mr. de Guindos said that debt purchases between countries within the 17-nation single currency area had virtually ground to a halt.
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The ministers are expected to hold talks on Friday to agree to extend 30 billion euros for the rescue by the end of the month. By agreement of European Union leaders last month, the debt will go direct to banks, rather than being added to the Spanish government’s finances, once plans for a new regulatory structure for Europe’s banks is put in place.
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Banks' Fire Drill for Greece Election - NYTimes.com - 0 views
dealbook.nytimes.com/...fire-drill-for-greece-election
banks fire drill greece election nytimes nytimes com com
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In New York and London, banks have set up dedicated crisis teams, and rehearsed elaborate responses.
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Citigroup has $84 billion in loans, bonds and other types of exposure to troubled European countries, plus France. The bank’s filings indicate that all but $8 billion of that exposure is offset with collateral it has collected and hedges on the portfolio.
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Some banks are testing their systems to deal with the possibility of new currencies and preparing guidance for clients on how to operate in such an environment.
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Banks like Goldman Sachs and Morgan Stanley are also looking into the severe legal challenges that would arise if a country exited the euro. Contracts that govern loans, bonds and derivatives in Europe rarely take into account such a situation.
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Consider an Italian corporation that owed a foreign bank 5 million euros, with a loan agreement struck under Italian law. If Italy left the euro, the bank might have less chance of getting euros back after the exit. In that case, the financial firm might be exposed to a new, less valuable currency.
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Recognizing that threat, some banks are trying to move contracts into new jurisdictions like the United States or Britain. By transferring such loan agreements to English law, the banks may increase the chances of getting repaid in euros after an exit, according to legal experts.
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The banks are also trying to protect their balance sheets if they do get stuck with large amounts of assets denominated in a new, weaker currency.
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By doing so, they can better match their assets (the loans) within a specific country with their liabilities (the deposits). Then if a country left the euro zone, the value of the loan might fall in euros, but the banks wouldn’t owe as much to depositors in euros.
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Mr. Lim notes, however, that some large banks, including Deutsche Bank, still have a lot more loans than deposits in countries like Italy and Spain.
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Op-ed: The End of the Euro: A Survivor's Guide - 0 views
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Ms. Lagarde's empathy is wearing thin and this is unfortunate—particularly as the Greek failure mostly demonstrates how wrong a single currency is for Europe.
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The Greek backlash reflects the enormous pain and difficulty that comes with trying to arrange "internal devaluations" (a euphemism for big wage and spending cuts) in order to restore competitiveness and repay an excessive debt level.
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During the next stage of the crisis, Europe's electorate will be rudely awakened to the large financial risks which have been foisted upon them in failed attempts to keep the single currency alive. When Greece quits the euro, its government will default on approximately 121 billion euros of debt to official creditors and about 27 billion euros owed to the IMF.
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More importantly and less known to German taxpayers, Greece will also default on 155 billion euros directly owed to the euro system (comprised of the ECB and the 17 national central banks in the euro area). This includes 110 billion euros provided automatically to Greece through the Target2 payments system—which handles settlements between central banks for countries using the euro. As depositors and lenders flee Greek banks, someone needs to finance that capital flight, otherwise Greek banks would fail. This role is taken on by other euro area central banks, which have quietly lent large funds, with the balances reported in the Target2 account. The vast bulk of this lending is, in practice, done by the Bundesbank since capital flight mostly goes to Germany, although all members of the euro system share the losses if there are defaults.
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But between Target2 and direct bond purchases alone, the euro system claims on troubled periphery countries are now approximately 1.1 trillion euros (this is our estimate based on available official data). This amounts to over 200 percent of the (broadly defined) capital of the euro system.
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No responsible bank would claim these sums are minor risks to its capital or to taxpayers. These claims also amount to 43 percent of German Gross Domestic Product,
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Jacek Rostowski, the Polish Finance Minister, recently warned that the calamity of a Greek default is likely to result in a flight from banks and sovereign debt across the periphery, and that—to avoid a greater calamity—all remaining member nations need to be provided with unlimited funding for at least 18 months. Mr. Rostowski expresses concern, however, that the ECB is not prepared to provide such a firewall, and no other entity has the capacity, legitimacy, or will to do so.
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The most likely scenario is that the ECB will reluctantly and haltingly provide funds to other nations—an on-again, off-again pattern of support—and that simply won't be enough to stabilize the situation.
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he automatic mechanics of Europe's payment system will mean the capital flight from Spain and Italy to German banks is transformed into larger and larger de facto loans by the Bundesbank to Banca d'Italia and Banco de Espana—essentially to the Italian and Spanish states. German taxpayers will begin to see through this scheme and become afraid of further losses.
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there will be recognition that the ECB has lost control of monetary policy, is being forced to create credits to finance capital flight and prop up troubled sovereigns—and that those credits may not get repaid in full. The world will no longer think of the euro as a safe currency; rather investors will shun bonds from the whole region, and even Germany may have trouble issuing debt at reasonable interest rates.
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Lucrezia Reichlin and Luis Garicano offer three options for severing the link between s... - 0 views
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Although eurozone sovereign-debt markets have stabilized, the share of sovereign bonds held by domestic banks has increased sharply in the last few months, accounting for more than half of the net increase in debt emissions in some countries. In Spain and Italy, sovereign bonds now account for roughly 10% of banks’ total assets
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Greek Euro Exit Unavoidable if IMF, Euro Zone Can't Agree- IMF Stream - WSJ.com - 0 views
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So the need for an agreement between the euro zone and the IMF is paramount. The IMF as a senior creditor can't accept losses of its own in the Greek program and it has to convince unhappy members from the emerging world that lent it money to continue financing Greece that the country's debt is sustainable. For this to happen, about 50 billion euros ($65 billion) must be forgiven from Greece's giant debt and the decision for such action including the political backlash is squarely in Europe's court.
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There are ways that the Europeans can make it happen. One would involve the European Stability Mechanism, a newly activated bailout mechanism that would take over the recapitalization of Greek banks, which is set to cost €50 billion, instead of the amount being added to the country's debt.
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In typical fashion the creditors are demanding from Athens another set of painful austerity cuts which the country can't afford and the IMF is openly saying that it won't sign off on the loan payment before a haircut takes place.
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The Limits to ECB Policy - The Euro Crisis - WSJ - 0 views
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Although it has yet to be implemented or even clearly delineated, the mere threat of an ECB bond-buying program, which is what the OMT boils down to, has been enough to drive down yields and reopen the fixed-income markets to the single currency’s struggling sovereigns.
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Those in employment don’t want their salaries to adjust downwards and insist on maintaining regulations that protect them from competition from the unemployed. Impossible to justify regulatory barriers to entry remain in many employment sectors (such as French rules that make becoming a ski guide almost as onerous as it is to get a pilot’s license).
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ultimately, politicians will have to make the decisions on whether the euro zone can be saved by choosing to accept either inflation or massive, and unlimited, cross-border transfers or painful unwinding of past excesses through internal devaluation and restructuring.
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The Eurozone's Delayed Reckoning by Nouriel Roubini - Project Syndicate - 0 views
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For starters, the European Central Bank’s “outright monetary transactions” program has been incredibly effective: interest-rate spreads for Spain and Italy have fallen by about 250 basis points, even before a single euro has been spent to purchase government bonds.
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The introduction of the European Stability Mechanism (ESM), which provides another €500 billion ($650 billion) to be used to backstop banks and sovereigns, has also helped, as has European leaders’ recognition that a monetary union alone is unstable and incomplete, requiring deeper banking, fiscal, economic, and political integration.
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But, perhaps most important, Germany’s attitude toward the eurozone in general, and Greece in particular, has changed. German officials now understand that, given extensive trade and financial links, a disorderly eurozone hurts not just the periphery but the core.
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Moreover, balkanization of economic activity, banking systems, and public-debt markets continues, as foreign investors flee the eurozone periphery and seek safety in the core.
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Likewise, competitiveness losses have been partly reversed as wages have lagged productivity growth, thus reducing unit labor costs, and some structural reforms are ongoing.
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either the eurozone moves toward fuller integration (capped by political union to provide democratic legitimacy to the loss of national sovereignty on banking, fiscal, and economic affairs), or it will undergo disunion, dis-integration, fragmentation, and eventual breakup.
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but countries like Germany, which were over-saving and running external surpluses, have not been forced to adjust by increasing domestic demand, so their trade surpluses have remained large.
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imply a politically unacceptable transfer union whereby Germany and the core unilaterally and permanently subsidize the periphery.
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Of course, Germany fails to recognize that successful monetary unions like the United States have a full banking union with significant risk-sharing elements, and a fiscal union whereby idiosyncratic shocks to specific states’ output are absorbed by the federal budget. The US is also a large transfer union, in which richer states permanently subsidize the poorer ones.
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But the fundamental crisis of the eurozone has not been resolved, and another year of muddling through could revive these risks in a more virulent form in 2014 and beyond. Unfortunately, the eurozone crisis is likely to remain with us for years to come, sustaining the likelihood of coercive debt restructurings and eurozone exits.
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The Collateral Damage of Europe's Rescue by Hans-Werner Sinn - Project Syndicate - 0 views
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According to a study by Goldman Sachs, France would have to depreciate by around 20% relative to the eurozone average, and by about 35% vis-à-vis Germany, to restore external-debt sustainability.
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In order to stop these securities’ downward slide – and thus to save itself – the ECB bought these government bonds and announced that, if need be, it would do so in unlimited amounts.
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In short, Europe’s rescue policy is making the eurozone’s most serious problem – the troubled countries’ profound loss of competitiveness – even more difficult to solve.CommentsView/Create comment on this paragraph
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Op-Ed Columnist - The Euro Trap - NYTimes.com - 0 views
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The fact is that three years ago none of the countries now in or near crisis seemed to be in deep fiscal trouble.
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And all of the countries were attracting large inflows of foreign capital, largely because markets believed that membership in the euro zone made Greek, Portuguese and Spanish bonds safe investments.
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Then came the global financial crisis. Those inflows of capital dried up; revenues plunged and deficits soared; and membership in the euro, which had encouraged markets to love the crisis countries not wisely but too well, turned into a trap.
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During the years of easy money, wages and prices in the crisis countries rose much faster than in the rest of Europe. Now that the money is no longer rolling in, those countries need to get costs back in line.
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Now that Greece and Germany share the same currency, however, the only way to reduce Greek relative costs is through some combination of German inflation and Greek deflation. And since Germany won’t accept inflation, deflation it is.
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The problem is that deflation — falling wages and prices — is always and everywhere a deeply painful process. It invariably involves a prolonged slump with high unemployment. And it also aggravates debt problems, both public and private, because incomes fall while the debt burden doesn’t.
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Earlier this week, when it downgraded Greek debt, Standard & Poor’s suggested that the euro value of Greek G.D.P. may not return to its 2008 level until 2017, meaning that Greece has no hope of growing out of its troubles.
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Until recently, most analysts, myself included, considered a euro breakup basically impossible, since any government that even hinted that it was considering leaving the euro would be inviting a catastrophic run on its banks. But if the crisis countries are forced into default, they’ll probably face severe bank runs anyway, forcing them into emergency measures like temporary restrictions on bank withdrawals. This would open the door to euro exit.
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Europe in Depression? by Federico Fubini - Project Syndicate - 0 views
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For Italy, Europe’s fourth-largest economy, the current slump is proving to be deeper than the one 80 years ago. Meanwhile, huge savings and potential demand for consumer and capital goods remain locked up next door.
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How did this happen? As Kemal Derviş has pointed out, the cumulated current-account surplus of the Scandinavian countries, the Netherlands, Austria, Switzerland, and Germany is now around $500 billion. This dwarfs China’s surplus at its mercantilist peak of the mid-2000’s, when the G-7 (including Germany) regularly scolded the Chinese for fueling global imbalances.
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The second exception is France. Over the last year, France’s external deficit deteriorated further, from a 2.4% to 3.5% of GDP. France now faces zero or negative growth in 2013, and seems to have reached the point at which it must reverse course on competitiveness or risk more trouble ahead.
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For example, in November 2011, interest rates on Italian sovereign bonds were around 8% all along the curve, even as the government faced refinancing needs totaling nearly 30% of GDP over the following year. Because debt monetization was not an option, austerity had to ensue at that point, regardless of what Merkel – or anyone else – had to say.
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Southern countries, still largely in denial, should accept the need for deeper, competiveness-enhancing reforms. Germany and its allies, for their part, should accept that running high external surpluses is damaging the eurozone and themselves, and that it is time for them to put part of their huge excess savings to work to support growth.
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ECB Resisting Calls to Cheapen Euro as Currency War Rages - SPIEGEL ONLINE - 0 views
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The central bank chief is coming under increasing pressure because he can't quite bring himself to embrace the concept of quantitative easing, the latest fashion in the world of finance. It involves central bankers engaging in the large-scale purchase of bonds issued by their governments and other securities, thereby injecting huge sums of money into the financial system. In this way, they hope to stimulate the domestic economy and keep their own currencies cheap, thereby strengthening exports.
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The country is in the process of "boldly rebuilding" monetary policy, Prime Minister Shinzo Abe declared. Indeed, the Japanese yen has lost 12 percent of its value against the dollar in the last two months.
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The US central bank, the Federal Reserve Bank, has also been printing money to a previously unimaginable extent since the financial crisis. Calling its efforts QE 1 and QE 2, the Fed has pumped more than a trillion dollars into the US economy.
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For years, China has defended its currency by pegging the exchange rate to the dollar, and the Swiss National Bank now only permits appreciation of the franc up to a certain limit, because investors have viewed the Swiss currency as one of the last safe currencies since the outbreak of the sovereign debt crisis in Europe.
Europe's Debt-Relief Calculus by Andres Velasco - Project Syndicate - 0 views
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Martin Feldstein: The Euro Zone's Double Failure - WSJ.com - 0 views
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but that they don't constitute an official EU treaty and therefore cannot be enforced by the commission and other EU institutions.
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Italy has a good shot at persuading investors that it has a favorable long-term budget outlook. Its fiscal deficit is now less than 4% of GDP.
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If the new government can now enact changes in labor rules and investment incentives that raise GDP growth to a 2% annual rate, Italy's ratio of debt to GDP could fall to 60% in less than 15 years.
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Greece cannot hope to get its deficit under control fast enough to stabilize its debt and attract private lenders. Instead of remaining a permanent ward of Germany and the IMF, Greece should default on its debt, leave the euro zone, and return to a more competitive drachma.
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But he should also make it clear that lending against private collateral should not be used by commercial banks to free up funds to purchase newly issued government bonds
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As Italy shows its determination and its ability to reduce future deficits, it should be welcomed back to the capital markets.
AFP: Eurozone bond market tension rises - 0 views
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Op-Ed Contributor - The Greek crisis shows why Germany should leave the European Moneta... - 0 views
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THE European Monetary Union, the basis of the euro, began with a grand illusion. On one side were countries — Austria, Finland, Germany and the Netherlands — whose currencies had persistently appreciated, both within Europe and worldwide; the countries on the other side — Belgium, France, Greece, Italy, Portugal and Spain — had persistently depreciating currencies.
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Rather than pulling the lagging countries forward, the low interest rates of the European Central Bank have lured governments and households, especially in the southern part of the euro zone, into frivolous budgetary policies and excessive consumption.
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the solution is clear: the only way to avoid further harm to the global economy is for Germany to lead its fellow stable states out of the euro and into a new and stronger currency bloc.
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Unlike their northern neighbors, the countries in the zone’s southern half have difficulty placing bonds — issued to finance their national deficits — with international capital investors. Nor are these countries competitive in the global economy, as shown by their high trade deficits.
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Instead, the fiscal strictures of the euro zone are forcing the country to curtail public expenditures, raise taxes and cut government employees’ salaries, actions that may push Greece into a deep depression and further undermine its already weak international credit standing.
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hat opportunity and pull out of the euro, it wouldn’t be alone. The same calculus would probably lure Austria, Finland and the Netherlands — and perhaps France — to leave behind the high-debt states and join Germany in a new, stable bloc, perhaps even with a new common currency.
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A strong-currency bloc could fulfill the euro’s original purpose. Without having to worry about laggard states, the bloc would be able to follow a reliable and consistent monetary policy that would force the member governments to gradually reduce their national debt. The entire European economy would prosper. And the United States would gain an ally in any future reorganization of the world currency system and the global economy.
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European Banks Unprepared for Pandora's Box of Greek Exit (Bloomberg) - 0 views
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Lenders in Germany, France and the U.K. had $1.19 trillion of claims on those four nations at the end of 2011, Bank for International Settlements data show.
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Lenders in Germany and France saw an increase in deposits of 217.4 billion euros, or 6.3 percent, in the same period.
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To prevent contagion, countries in the euro area would have to form a full-fledged political and fiscal union immediately and implement uniform guarantees on bank deposits throughout the region, Thomas Wacker and Juerg de Spindler, economists at Zurich-based UBS, said in a separate note. They said such a response can be ruled out.
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Bank of France Governor Christian Noyer told journalists in Paris last week that “whatever happens in Greece” won’t place any French financial institution in difficulty.
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What’s changed is that banks in the so-called core EU countries of Germany, France and the U.K. used funds from the ECB in December and February to insulate their southern European units against losses should one or more country exit the euro. “If you’re a U.K. lender and you’ve lent 10 billion euros to your Spanish subsidiary and Spain exits, you’re suddenly only going to get paid back in 50 percent devalued pesetas and you’re on the hook for 5 billion euros,” said Philippe Bodereau, London-based head of European credit research at Pacific Investment Management Co., the world’s largest bond investor.
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One way multinational banking groups are mitigating that risk is by replacing their own funding lines to subsidiaries in the region with ECB loans. Deutsche Bank, Europe’s biggest bank by assets, tapped “a small amount” of ECB cash to help fund corporate and retail business in continental Europe, where it has sizeable operations in Italy and Spain. BNP Paribas, Europe’s third-biggest bank, used the programs to help fund its Italian unit as it reduces intergroup backing.
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European banks also have cut their sovereign-debt holdings and exposures to Ireland, Italy, Spain and Portugal.
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ermany, France and the U.K. reduced exposure to Greece by more than half in the two years through the end of 2011 to $68.2 billion, BIS data show.