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.
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Shinzo Abe's Monetary-Policy Delusions by Stephen S. Roach - Project Syndicate - 0 views
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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
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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.
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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,
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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.
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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.
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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.
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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
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“The current- account deficits of countries that have been under stress diminished over the last years considerably.”
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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.
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“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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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.
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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.
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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.
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Prevented by membership of the euro from driving down currencies, governments and companies are squeezing labor costs to spur productivity.
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aising the retirement age, making it easier to fire workers in downturns and preventing unions from clinging to boom-time wage deals.
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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).
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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.
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The smaller trade imbalances really reflect a collapse in demand for imports as consumers and companies hunker down,
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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.
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“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.”
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They also say countries will need to run even healthier current accounts than now if they are to stabilize the debts they owe abroad.
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Some thoughts on German politics and the saver's tax in Cyprus | Credit Writedowns - 0 views
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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.
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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.
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“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.
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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.
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“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.
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“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.
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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.
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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%.
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The long and short of it was that the Germans had reached the end of their ability to support bailouts.
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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?
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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]
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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.
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Solutions Remain Elusive After Financial Crisis - NYTimes.com - 0 views
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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.
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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.
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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.
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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.
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Europe's Irrelevant Austerity Debate by Daniel Gros - Project Syndicate - 0 views
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But the debate about austerity and the cost of high public-debt levels misses a key point: Public debt owed to foreigners is different from debt owed to residents.
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If foreign debt matters more than public debt, the key variable requiring adjustment is the external deficit, not the fiscal deficit. A country that has a balanced current account does not need any additional foreign capital. That is why risk premiums are continuing to fall in the eurozone, despite high political uncertainty in Italy and continuing large fiscal deficits elsewhere. The peripheral countries’ external deficits are falling rapidly, thus diminishing the need for foreign financing.
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And the evidence confirms that the euro crisis is not really about sovereign debt, but about foreign debt.
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Second, if foreign debt is the real problem, the escalating debate about the Reinhart/Rogoff results is irrelevant for the euro crisis. Countries that have their own currency, like the United Kingdom – and especially the United States, which can borrow from foreigners in dollars – do not face a direct financing constraint.
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But austerity can never be self-defeating for the external adjustment. On the contrary, the larger the fall in domestic demand in response to a cut in government expenditure, the more imports will fall and the stronger the improvement in the current account – and thus ultimately the reduction in the risk premium – will be.
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By contrast, in the case of debt owed to foreigners, higher interest rates lead to a welfare loss for the country as a whole, because the government must transfer resources abroad, which usually requires a combination of exchange-rate depreciation and a reduction in domestic expenditure.
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But the eurozone’s peripheral countries simply did not have a choice: they had to reduce their deficits, because the foreign capital on which their economies were so dependent was no longer available.
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PORTFOLIO.HU | Blanchard: Eurozone integration needs to go forward or go back, but it c... - 0 views
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And, while lower investment since the beginning of the crisis has led to a smaller capital stock, again the effect appears quantitatively small. It is also difficult to see why the crisis would have led to a large decrease in total factor productivity. This being said, I would have expected a large output gap to lead to more downward pressure on inflation than we have seen. I see the fact that inflation is roughly stable is a puzzle. We are doing more research on this issue at the IMF.
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O.B.:There is no question internal devaluations are tougher to achieve than when you can adjust the nominal exchange rate. That’s well understood. A number of European countries have a competitiveness problem, which shows up in a large current account deficit.
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olve it. And there is no alternative for them than to become more competitive, to decrease the real exchange rate. Is it happening? I think it’s starting to happen, but it’s happening slowly, and it’s going to take a long time.
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Many countries have a tough adjustment to achieve. In doing so, they indeed have to be careful about their social implications. When adjustment requires a decrease in the real wage (or at least a decrease relative to productivity), it is essential that the decrease be fairly shared. You have to make sure that there is a safety net in place. If the pension system has to be made less generous, which is the case in a number of countries, you have to make sure the lowest pensions are protected.
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It is clear that adjustment in the Euro zone requires a decrease in the relative price of periphery countries and an increase in the relative price of core countries. If the ECB wants to maintain two percent inflation for the Euro zone as a whole, this implies, arithmetically, that core countries have to have inflation higher than two percent, periphery countries have to have inflation lower than two percent, until the adjustment has taken place.
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Germany May Not Offer Best Lessons for Weaker Euro-Zone States - WSJ.com - 0 views
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Wage restraint was instead a function of weak demand after the collapse of the reunification-fueled construction boom in the mid-1990s.
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Even if one accepts the story, economists also point out that Germany undertook its labor-market reforms when the winds of the world economy were extremely favorable. The global economy was growing, and China and other emerging economies were sucking in machine tools and other capital goods in which German manufacturers excelled.
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While German interest rates remained little changed, rates in Greece, Spain, Portugal, Ireland and Italy tumbled, fueling consumption and swelling their imports of German cars and other products.
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"The ECB was created with the mission to avoid the inflation of the 1970s and 1980s, when there was global inflation. Now we have global deflationary pressure, we need a different point of view," he says.
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They say it's arithmetically impossible for every economy in the world to build growth on the German model of export success; and if every country in the euro zone is to do it, they need to find others willing to run big deficits in the rest of the world.
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Bringer of Prosperity or Bottomless Pit?: Top German Economists Debate the Euro - SPIEG... - 0 views
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No, of course not. Today, we live in a currency zone that, despite everything, is significantly more stable than where the dollar or yen are used. The euro has brought growth and prosperity to Europe.
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Actually, the euro was a mistake with particularly serious consequences. A monetary union requires its members to pursue the same policies and be similarly productive. The so-called convergence criteria were meant to ensure that this would happen. But -- as the dramatic developments in Greece are now showing -- they didn't.
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Unfortunately, our fears have become a reality. The monetary union was launched with real self-deception.
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The euro was sold to us as a modernization program for Europe, and we were also told that it would push the Community toward stability. But, in reality, it has drifted apart and become a truly unstable entity.
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The euro was sold to us as a modernization program for Europe, and we were also told that it would push the Community toward stability. But, in reality, it has drifted apart and become a truly unstable entity.
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There is no reason why the euro should be coming under pressure. The decision to introduce it was smart and far-sighted.
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thanks to the common currency, it's no longer possible, for example, to wage speculative attacks on individual currencies. This eliminates a key disruptive factor that massively destabilized markets in the past.
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Still, thanks to the common currency, it's no longer possible, for example, to wage speculative attacks on individual currencies. This eliminates a key disruptive factor that massively destabilized markets in the past.
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Today, there are two blocs within the monetary union: a strong currency bloc in the north and a weak one in the south.
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Starbatty: But that's exactly the problem! In the past, exchange rates served as a valve. Individual countries could control their economies by allowing their currencies to gain or lose value.
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SPIEGEL: What would happen if the old currencies were reintroduced in the euro zone tomorrow? Bofinger: It would be a catastrophe. The German mark would have to appreciate significantly -- I'd say by 10 percent to 20 percent. Everything that we've worked so hard to attain in terms of competitiveness would vanish overnight.
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What would happen if the old currencies were reintroduced in the euro zone tomorrow? Bofinger: It would be a catastrophe. The German mark would have to appreciate significantly -- I'd say by 10 percent to 20 percent. Everything that we've worked so hard to attain in terms of competitiveness would vanish overnight.
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SPIEGEL: Would it have been better if all countries in Europe had kept their own currencies? Starbatty: Yes. A community can't function when it's made up of unequal partners who are supposed to behave as equals. With the euro, Germany has created an artificial competitive advantage for itself, which has enabled us to conquer markets all over the world.
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Starbatty: Yes. A community can't function when it's made up of unequal partners who are supposed to behave as equals. With the euro, Germany has created an artificial competitive advantage for itself, which has enabled us to conquer markets all over the world.
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Since 1995, there have been almost no appreciable wage increases in Germany, partly as a result of pressure brought on from increases in subcontracted labor. Politicians have done everything to relieve employers of the burden of paying social security contributions because we fell into this strange panic, believing we weren't globally competitive. With our economic policies, we placed too much of a lopsided emphasis on exports.
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Politicians have done everything to relieve employers of the burden of paying social security contributions because we fell into this strange panic, believing we weren't globally competitive.
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PIMCO | - TARGET2: A Channel for Europe's Capital Flight - 0 views
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Its full name is more than a mouthful. Trans-European Automated Real-time Gross Settlement System is better known as TARGET2 for short. It is the behind-the-scene payments system that conveniently enables citizens across the euro area to settle electronic transactions in euro. And at just over €500 billion, its TARGET2 claim on the Eurosystem is also the largest and fastest growing item on the Bundesbank’s balance sheet, as well as a source of much misunderstanding and debate.
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The allocation of TARGET2 balances among the seventeen national central banks, which together with the ECB make up the Eurosystem, reflects where the market allocates the money created by the ECB. The fact that the Bundesbank has a large TARGET2 claim (asset) on the Eurosystem, while national central banks in southern Europe and Ireland together have an equally large TARGET2 liability, simply reflects that a lot of the ECB’s newly created money has ended up in Germany. Why? Because of capital flight.
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Since the euro eliminated exchange rate risk among its member states, Germany has invested a substantial portion of its savings in Europe’s current account deficit countries. Some of those savings are now returning home. That’s the capital flight.
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The ECB stepped into the void left by foreign investors pulling their savings out of these current account deficit countries by lending their banks more money.
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When large capital flight to Germany occurred before the euro’s introduction, the deutschemark would appreciate against other European currencies. While pegged against the deutschemark, these exchange rates were still flexible. That flexibility disappeared with the euro. When capital flight occurs today, the Bundesbank effectively ends up with loans to the other national central banks that are reflected in the TARGET2 claims on the Eurosystem.
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Debt overhangs persist, growth is mediocre and the governance structure – a common monetary policy without a centralized fiscal policy – is a challenge.
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The ECB has allowed banks to borrow as much money as they want for up to three years. Indeed, at the end of February banks were borrowing €1.2 trillion from the ECB, twelve times the amount of their required reserves. With so much excess liquidity in the money markets, further capital flight is likely to cause a disproportionable share of this money to end up in Germany
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Concerned about the stability of the euro, Germany’s savers are shifting their money into real estate. German residential house prices and rents rose by 4.7% last year, the fastest increase since 1993’s reunification boom. So far, Germans are not leveraging to buy houses. Growth in German mortgages is paltry at just 1.2% per annum according to the ECB as of December 2011, but in our view all ingredients for a debt-financed house price boom are there. Distrust in the euro is rising,
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The ECB’s generous monetary policy will delay the internal devaluation adjustment of the eurozone’s current account deficit countries.
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Mexico’s current account deficit fell by 5.3% of GDP in 1995, according to Haver Analytics, in the wake of capital flight following the government’s decision to float the peso in 1994, while its recession lasted only one year.
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German and French banks call the shots - European, Business - Independent.ie - 0 views
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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
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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?
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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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No ordinary recession: There is much to fear beyond fear itself | vox - 0 views
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Richard Koo (2003) coined the term “balance sheet recession” to characterise the endless travail of Japan following the collapse of its real estate and stock market bubbles in 1990. The Japanese government did not act to repair the balance sheets of the private sector following the crash. Instead, it chose a policy of keeping bank rate near zero so as to reduce deposit rates and let the banks earn their way back into solvency. At the same time it supported the real sector by repeated large doses of Keynesian deficit spending. It took a decade and a half for these policies to bring the Japanese economy back to reasonable health.
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At the time, a majority of forecasts predicted that the economy would slip back into depression once defence expenditures were terminated and the armed forces demobilised. The forecasts were wrong. This famous postwar “forecasting debacle” demonstrated how simple income-expenditure reasoning, ignoring the state of balance sheets, can lead one completely astray.
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The lesson to be drawn from these two cases is that deficit spending will be absorbed into the financial sinkholes in private sector balance sheets and will not become effective until those holes have been filled.
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The present administration, like the last, would like to recapitalise the banks at least partly by attracting private capital. That can hardly be accomplished as long as the value of large chunks of the banks’ assets remains anybody’s guess.
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When the entire private sector is bent on shortening its balance sheet and paying down debt, the public sector’s balance sheet must move in the opposite, offsetting direction. When the entire private sector is striving to save, the government must dis-save. The political obstacles to doing these things on a sufficient scale are formidable.
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The Swedish policy following the 1992 crisis has been often referred to in recent months. Sweden acted quickly and decisively to close insolvent banks, and to quarantine their bad assets into a special fund.2 Eventually, all the assets, good and bad, ended up in the private banking sector again. The stockholders in the failed banks lost all their equity while the loss to taxpayers of the bad assets was minimal in the end. The operation was necessary to the recovery but what actually got the economy out of a very sharp and deep recession was the 25-30% devaluation of the krona which produced a long period of strong export-led growth.
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Businesses will use depreciation charges and sell off inventories to do so. Households are trying once more to save. Less investment and more saving spell declining incomes.
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er self-imposed constitutional balanced budget requirements and are consequently acting as powerful amplifiers of recession with respect to both income and employment.
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"Europe's Divided Visionaries" by Barry Eichengreen | Project Syndicate - 0 views
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Europe’s leaders now agree on a vision of what the EU should become: an economic and monetary union complemented by a banking union, a fiscal union, and a political union. The trouble starts as soon as the discussion moves on to how – and especially when – the last three should be established.
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The 1992 exchange-rate crisis then tipped the balance. Once Europe’s exchange-rate system blew up, the southerners’ argument that Europe could not afford to postpone creating the euro carried the day.
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The consequences have not been happy. Monetary union without banking, fiscal, and political union has been a disaster.CommentsView/Create comment on this paragraph
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ECB Raises Pressure on Greece - WSJ.com - 0 views
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FRANKFURT—The European Central Bank said it would reject Greek government bonds as collateral for its normal lending operations beginning Wednesday,
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Government bonds and other debt securities backed by Greece "will become for the time being ineligible for use as collateral" in the ECB's monetary policy operations, the bank said in a statement.
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Greek banks, which are largely shut out of private markets for financing, depend critically on cheap ECB loans to meet their daily funding needs. In June, Greek banks tapped the ECB and Greece's central bank for a combined €136 billion ($166 billion) in loans through normal refinancing operations and emergency credit, an amount roughly equal to two-thirds of the country's gross domestic product.
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Banks can still access emergency funds through the Greek central bank, but at a higher interest rate than normal ECB loans. The credit risk stays on Greece's books and isn't spread throughout the 17-member currency bloc,
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It is the second time the ECB declined to accept Greek bonds as collateral. The first was in February, after Athens imposed steep losses on private creditors in a debt restructuring. That suspension ended after a little more than an week, when the ECB received guarantees from euro-zone governments that Greek bonds posted to the ECB as collateral would be repaid.
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For banks, which are already under intense pressure, it means that they will have to resort to emergency liquidity assistance which will lend them with a higher rate.It is bad news and all we can hope for is that it won't last for long," a senior Greek banker said.
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A Declining Euro Can't Cure All Ills - WSJ.com - 0 views
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Before the crisis, actions such as the European Central Bank rate cuts two weeks ago would have had a twofold effect in reviving the economy: Banks would have passed the lower rate on to their clients, while foreign-exchange markets would have marked the currency down, giving exporters better chances to sell their products abroad.
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In today's polarized euro zone, it isn't that simple. For one thing, tThere is no certainty that euro-zone banks will pass on the cut in borrowing costs.
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Even if they did, he explained, the euro zone's problems are now so acute that few companies seem to want to borrow.
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Mario Boselli, chairman of the Italian Chamber of Fashion, frets that larger emerging economies still account for only 10% of total Italian exports. "This is not enough" to offset the weakness in developed economies, he says.
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Both Mr. Boselli and Philip Halpin, an adviser to the Irish Exporters' Association, say the euro would have to fall as low as $1.10 (from about $1.23 currently), to produce a robust export-led recovery.
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Ludovic Subran, chief economist at French trade-credit insurer Euler Hermes, warns that might not be enough. Such a depreciation would have little effect in France because high taxes and rigid labor costs reduce the potential benefits, he says.
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Any euro-zone economy would benefit from a drop in the euro to the extent that it can redirect more resources to external markets. But the willingness and ability of businesses to do that differs across the region. Nadio Delai, chairman of Italian research and consultancy firm Ermeneia, say a host of smaller, less prestigious Italian shoe and textile companies have started to export to emerging markets, riding the coattails of more famous names.
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The delicate balance of fixing the eurozone | Martin Wolf's Exchange - 0 views
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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.
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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.
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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,
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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.
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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.
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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.
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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.
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) Target debts are to be settled on an annual basis with interest‐bearing, marketable assets as in the US.
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g) Countries that are not competitive enough to repay their foreign debts should, in their own interest, leave the Monetary Union.”
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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.
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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.
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mechanisms of financing and adjustment. Permanent transfers from some countries to others, merely to offset a lack of
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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.
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"Which Eurobonds?" by Jeffrey Frankel | Project Syndicate - 0 views
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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
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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.
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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.
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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.
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it offers absolution precisely on the 60%-of-GDP margin where countries will have the most trouble resisting temptation.
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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.
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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.
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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.
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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.
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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.
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The point is that the enforcement mechanism would be truly automatic: market interest rates would provide the discipline that bureaucrats in Brussels cannot.
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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.
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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.
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Greek Credit-Default Swaps Are Activated - NYTimes.com - 0 views
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The decision by the International Swaps and Derivatives Association ends months of speculation that a Greek default might not set off the swaps, a result that could have undermined their role as insurance against debt defaults.
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Still, doubts about the instruments’ effectiveness may linger. European officials initially shaped the Greek debt restructuring to avoid activating them. The concern is that future restructurings could be arranged to stop swaps from paying out.
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The Greek government chose to apply so-called collective action clauses, which it had earlier inserted into its bonds registered under Greek law. The deal maximized total debt relief for the country,
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Since then, banks and regulators have taken steps to strengthen the market, mostly by making sure that investors can pay out the money they owe on swaps.
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Nearly $70 billion of swaps are currently outstanding on Greek debt. But after both sides settle their accounts, the amount that will need to be paid out should be no more than $3.2 billion.
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Some investors entered swaps on Greece as a way of effectively insuring themselves against losses on their Greek bonds, while others used them as a way to bet on a default happening.
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Before investors doubted Greece’s solvency, the swaps offered insurance at what turned out to be an extremely cheap price. At the start of 2008, an investor buying protection on Greek debt had to pay only $22,000 annually to insure against default on $10 million of Greek bonds over five years, according to Markit, a data provider. Now, the protection would cost about $7.6 million.
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Investors will most likely continue to want default swaps to protect against losses on Greece’s new bonds. These bonds, to be issued Monday, are expected to have yields of well over 15 percent, according to advance pricing. This suggests investors have strong doubts about Greece’s creditworthiness even after its restructuring. Fitch Ratings said on Friday that it would probably give Greece’s new bonds a low, junk-bond rating.