Tuesday, May 22, 2012
May 22, 2012 Neither the Fed Nor the ECB Will Be Able to Stop What's Coming
- Gas being at $4 and food prices not far from record highs.
- This being an election year and the Fed now politically toxic.
- Growing public outrage over the Fed's actions (secret loans, etc.) in the past.
Labels: collapse, Crash, credit, Crisis Crash, Debt crisis, Default, Dollar, Euro Collapse, Euro crisis, Euro default
Monday, April 30, 2012
April 30, 2012 The Secrets of the Spanish Banking System That 99% of Analysts Fail to Grasp
Spain is a catastrophe on such a level that few analysts even grasp it.
Indeed, to fully understand just why Spain is such a catastrophe, we need to understand Spain in the context of both the EU and the global financial system.
The headline economic data points for Spain are the following:
- Spain's economy (roughly €1 trillion) is the fourth largest in Europe and the 12th largest in the world.
- Spain sports an official Debt to GDP of 68% and a Federal Deficit between 5.3-5.8% (as we'll soon find out the official number)
- Spain's unemployment is currently 24%: the highest in the industrialized world.
- Unemployment for Spanish youth is 50%+: on par with that of Greece
The answer to these questions lies within the dirty details of Spain's economic "boom" of the 2000s as well as its banking system.
For starters, the Spanish economic boom was a housing bubble fueled by Spain lowering its interest rates in order to enter the EU, not organic economic growth.
Moreover, Spain's wasn't just any old housing bubble; it was a mountain of a property bubble (blue line below) that made the US's (gray line below) look like a small hill in comparison.
In the US during the boom years, it was common to hear of people quitting their day jobs to go into real estate. In Spain the boom was so dramatic that students actually dropped out of school to work in the real estate sector (hence the sky high unemployment rates for Spanish youth).
Spanish students weren't the only ones going into real estate. Between 2000 and 2008, the Spanish population grew from 40 million to 45 million (a whopping 12%) as immigrants flocked to the country to get in on the boom.
In fact, from 1999 to 2007, the Spanish economy accounted for more than ONE THIRD of all employment growth in the EU.
This is Spain, with a population of just 46 million, accounting for OVER ONE THIRD of the employment growth for a region of 490 million people.
This, in of itself, set Spain up for a housing bust/ banking Crisis worse than that which the US faced/continues to face. Indeed, even the headline banking data points for Spain are staggeringly bad:
- Spanish banks just drew €227 billion from the ECB in March: up almost 50% from its February borrowings
- Spanish banks account for 29% of total borrowings from the ECB
- Yields on Spanish ten years are approaching 7%: the tipping point at which Greece and other nations have requested bailouts
Spain's banking system is split into two tiers: the large banks (Santander, BBVA) and the smaller, more territorial cajas.
The caja system dates back to the 19th century. Cajas at that time were meant to be almost akin to village or rural financial centers. As a result of this, the Spanish country is virtually saturated with them: there is approximately one caja branch for every 1,900 people in Spain. In comparison there is one bank branch for every 3,130 people in the US and one bank branch for every 6,200 people in the UK.
Now comes the bad part...
Until recently, the caja banking system was virtually unregulated. Yes, you read that correctly, until about 2010-2011 there were next no regulations for these banks (which account for 50% of all Spanish deposits).
They didn't have to reveal their loan to value ratios, the quality of collateral they took for making loans... or anything for that matter.
As one would expect, during the Spanish property boom, the cajas went nuts lending to property developers. They also found a second rapidly growing group of borrowers in the form of Spanish young adults who took advantage of new low interest rates to start buying property (prior to the housing boom, traditionally Spanish young adults lived with their parents until marriage).
In simple terms, from 2000 to 2007, the cajas were essentially an unregulated banking system that leant out money to anyone who wanted to build or buy property in Spain.
Things only got worse after the Spanish property bubble peaked in 2007. At a time when the larger Spanish banks such as Santander and BBVA read the writing on the wall and began slowing the pace of their mortgage lending, the cajas went "all in" on the housing market, offering loans to pretty much anyone with a pulse.
To give you an idea of how out of control things got in Spain, consider that in 1998, Spanish Mortgage Debt to GDP ratio was just 23% or so. By 2009 it had more than tripled to nearly 70% of GDP. By way of contrast, over the same time period, the US Mortgage Debt to GDP ratio rose from 50% to 90%. Like I wrote before, Spain's property bubble dwarfed the US's in relative terms.
The cajas went so crazy lending money post-2007 that by 2009 they owned 56% of all Spanish mortgages. Put another way, over HALF of the Spanish housing bubble was funded by an unregulated banking system that was lending to anyone with a pulse who could sign a contract.
Indeed, these banks became so garbage laden that a full 20% of their assets were comprised of loan payments being made by property developers. Mind, you, I'm not referring to the loans themselves (the mortgages); I'm referring to loan payments: the money developers were sending in to the banks.
To try and put this into perspective, imagine if Bank of America suddenly announced that 20% of its "assets" were payments being sent in by borrowers to cover mortgage debts. Not Treasuries, not mortgages, not loans... but payments being sent in to the bank on loans and mortgages.
This is the REAL problem with Spain's banking system. It's saturated with subprime and sub-subprime loans that were made during one of the biggest housing bubbles in the last 30 years.
Indeed, to give you an idea of how bad things are with the cajas, consider that in February 2011 the Spanish Government implemented legislation demanding all Spanish banks have equity equal to 8% of their "risk-weighted assets." Those banks that failed to meet this requirement had to either merge with larger banks or face partial nationalization.
The deadline for meeting this capital request was September 2011. Between February 2011 and September 2011, the number of cajas has in Spain has dropped from 45 to 17.
Put another way, over 60% of cajas could not meet the capital requirements of having equity equal to just 8% of their risk-weighted assets. As a result, 28 toxic caja balance sheets have been merged with other (likely equally troubled) banks or have been shifted onto the public's balance sheet via partial nationalization.
On that note, I fully believe the EU in its current form is in its final chapters. Whether it's through Spain imploding or Germany ultimately pulling out of the Euro, we've now reached the point of no return: the problems facing the EU (Spain and Italy) are too large to be bailed out. There simply aren't any funds or entities large enough to handle these issues.
Labels: collapse, Crash, credit, Crisis Crash, Default, depression, Euro default, Euro finished, Spain
Friday, March 09, 2012
Mr. Market: Get It Through Your Head, The PSI DOESN'T Matter
I don't know how many times I have to say this, but I'm saying it again.
Greece and the Euro are finished. The math is impossible. There is no way on earth that this Second Bailout accomplishes anything worthy of note. The idea that this country will somehow return to economic growth within two years, based on an additional €130billion in bailouts is outright insane.
Remember, Greece already received €110 billion in bailout funds in 2010... and still posted GDP growth of -4.5% in 2010 and -6.8% in 2011. Greece's economy is only €227 billion, so the country failed to post any economic growth and in fact saw its economic collapse accelerate after receiving a bailout equal to 57% of its GDP!!!
And somehow another 130€ billion is going to get this country back to economic growth in two years' time? Greece hasn't experienced any growth in five years.
Again, this entire deal is just stupid. And all it's done is alert Spain and Italy to the fact that handing over fiscal sovereignty and implementing austerity measures in exchange for bailouts is a waste of time.
As I wrote several weeks ago:
Meanwhile, on the other side of EU equation, Spain and Italy must be watching what's happening in Greece and asking themselves whether they want to go through this whole process of negotiating for bailouts via austerity measures.
Both countries have already had a small sampling of the austerity measure medicine. Spain recently implemented a meager 19€ billion in austerity measures while Italy passed 30€ billion in austerity measures in 2011... hardly a drop out of their respective 1.06€ trillion and 1.5€ trillion economies.
Yet, even these tiny moves resulted in protests and riots. One can only imagine what Spanish and Italian politicians are thinking as they witness the widespread civil unrest, country-wide strikes, and economic depression that have occurred in Greece as a result of that country's full commitment to the EU's austerity measure demands.
Spain's official Debt to GDP is only 64%, but its private sector debt is at an astounding 227% of GDP. And the Spanish banking system is leveraged at 19 to 1 (worse than Greece).
Moreover, the country is already experiencing an economic Crisis with an unemployment rate of 20+% and an economy that has been contracting since mid-2011 (in fact Spain's GDP just actually went negative in the first quarter of 2012)...
So... we must consider that it is highly likely the option of simply defaulting is being discussed at the highest levels of the Spanish and Italian government. Should either country decide that austerity measures don't work and it's simply easier to opt for a default, then we are heading into a Crisis that will make 2008 look like a joke.
Well, Spain just woke up and smelled the coffee:
Spain's sovereign thunderclap and the end of Merkel's Europe
As many readers will already have seen, Premier Mariano Rajoy has refused point blank to comply with the austerity demands of the European Commission and the European Council (hijacked by Merkozy).
Taking what he called a "sovereign decision", he simply announced that he intends to ignore the EU deficit target of 4.4pc of GDP for this year, setting his own target of 5.8pc instead (down from 8.5pc in 2011).
In the twenty years or so that I have been following EU affairs closely, I cannot remember such a bold and open act of defiance by any state. Usually such matters are fudged. Countries stretch the line, but do not actually cross it.
With condign symbolism, Mr Rajoy dropped his bombshell in Brussels after the EU summit, without first notifying the commission or fellow EU leaders. Indeed, he seemed to relish the fact that he was tearing up the rule book and disavowing the whole EU machinery of budgetary control.
So... if you still think the Greek PSI matters in any way, you're not thinking past the next 24 hours. Spain has just told the EU to "shove it." Having seen Greece enter a depression and get pushed around by Germany and France for two years, Spain's just told the EU that it's not going that route.
So... if Greece, whose economy is roughly the size of Massachusetts, nearly took down the European banking system... what do you think will happen when Spain decides to it doesn't want to play ball and would rather just default.
Hint: It will be Lehman times ten.
Labels: Crash, Crisis Crash, Default, depression, Euro Collapse
Thursday, February 23, 2012
Fearless Prediction: On March 20, Greece Will Default
Of course, Greece doesn’t have €14.3 billion—that’s why the Troika of the IMF, the EC and the ECB are trying to hammer out a deal to bail them out again: A bailout to the tune of €136 billion. They’ve had marathon-length negotiating sessions, one “crucial emergency meeting” after another—hell, they even called the Pope to send them a case of holy water and a truckload of wooden stakes. I’m serious!
Last Monday, a deal seemed to have emerged: That’s what the announcement sounded like. In fact, it looked so much like a done deal—it was spun so decisively as a done deal—that I was all set to write something snarky like, Greece Takes It Greek Style: “Thank You Troika, May I Have Another” Bailout On Its Way. (What can I say: I’m a vulgar bastard.)
But then . . . then we all started looking at the fine print of the deal. And that’s when everyone who follows this stuff started to realize that the deal wasn’t a deal—merely the illusion of a deal.
A motto of mine: Never try to do the work someone else has already done for you. In the case of analyzing the Greak “deal”, I turn to John Ward, who pretty much nailed the critique of the deal:
1. [A]lthough the ECB has made a reasonable fist of complicating its subordination of the private bondholders – money out, profits redistributed, local central banks reinvesting and so forth – it remains a preferential deal done outside this so-called ‘bailout with PSI’. The IIF creditors have sort of voluntarily taken the extra 3.5% hit, but the coupon they’ve been offered is worth less than the original. In a statement issued by representatives of private bondholders, the new interest rates – 2% for the first three years, 3% for the next five, and 4.2% thereafter were described as “well below market rates”, and the creditors will lose money on them. The tone of the statement screams ‘involuntary’. In English, all these factors spell default.John Ward nails the essence of the Greek deal: There is no Greek deal—just the illusion of one.
2. Nobody has actually signed up to anything yet: as usual with all things EuroZen, the bankers are alleged to be on-board, but the IIF statement made after the press conference suggests otherwise: ‘We recommend all investors carefully consider the proposed offer, in that it is broadly consistent with the October agreement’. That’s not true for one thing: but as a recommendation, it’s somewhat limp. Further, there is still a body of hardline ezone sovereigns who don’t want to do the deal – and in Germany itself, a growing rearguard campaign to stop it. (See this morning’s Spiegel for immediate evidence). And finally, most Greek citizens themselves will react violently to some of the more pernicious clauses.
3. The ‘agreement’ contains almost a full bottle of poison pills: Berlin has got its debt Gauleiters in the end, only 19 cents on the euro will go to the Greek Government itself, 325 million euros in additional spending cuts have been found, Athens has agreed to change its constitution to make debt repayment the top priority in government spending, the escrow account must have three months debt money in it at all times etc etc. The idea that Greece can now toddle off and have a liberal democratic general election without any of these being issues is Brussels space-cadet stuff at its most tragi-comic. (An opinion poll taken just before the Brussels deal showed that support for the two Greek parties backing the rescue package had fallen to an all-time low while leftist, anti-bailout parties showed gains.)
4. Several Grand National leaps lie ahead before the default is avoided. Parliaments in three countries that have been most critical of Greece’s second bailout – Germany, the Netherlands and Finland – must now approve the package. In Greece itself, further violence will test political resolve about yet more cuts in wages, pensions and jobs. Greece’s two biggest labour unions have already lined up protests in the capital tomorrow. Very significantly, Jean-Claude Juncker of Luxembourg and the IMF’s Christine Lagarde stressed at the press conference that Greece still had to live up to a series of “prior actions” by the end of the month before eurozone governments or the IMF can sign off on the new programme. If ever I saw a get-out clause, that’s it.
5. Other loose ends are left hanging everywhere. Nobody has elicitied any response so far from the Hedge Fund creditors. Entirely absent from comments was the IMF’s contribution to the €130bn bail-out. Christine Lagarde would say only that the contribution would be ‘significant’, but my information is that she’s lying through her $240,000 teeth as usual: the IMF will only contribute €13bn to the in new Greek funding. Not exactly a resounding vote of confidence for the deal. Juncker said he was optimistic that ezone members would cough up more cash at the EU summit in March, but this too simply doesn’t bear examination: Portugal is broke, Spain is technically insolvent, Italy has asked to be excused from this dance, and Germany has already shown extreme reluctance to to increase its exposure further still. Fritz Schmidt in dem Strasse isn’t too keen either. Finally, as Bruno Waterfield notes in his latest column at the London Daily Telegraph, the agreement remains ‘overshadowed by the pessimistic debt sustainability report compiled by the IMF, ECB and Commission, that warned of a “downside scenario” of Greek debt hitting 160 per cent of GDP in 2020 – far higher that the agreed 120.5 per cent target’.
6. This is where we get to what the MSM will largely dismiss as ‘conspiracy theory’….but for which the circumstantial and corroborative evidence gets increasingly compelling: whole crowd-scenes of actors off-stage (and several on it) simply do not want this deal to reach fruition: they have factored in a Greek default, and believe that the best way to avoid further debt-crisis contagion is for the money earmarked for bailouts to be invested in bank-propping and growth.
The cast of players who think this include David Cameron, Mario Monti, Mario Draghi, Wolfgang Schauble and most of the German Finance ministry, Christine Lagarde, probably Angela Markel herself, Tim Geithner, huge swathes of the German banking community, The White House – and elements in both Beijing and Tokyo.
( Emphasis added.)
My only quibble with Mr. Ward is his point 6.: He writes that “whole crowd-scenes of actors off-stage (and several on it) simply do not want this deal to reach fruition”, which I think is accurate—but not for the reason Mr. Ward posits: I think the eurocrats have given up on Greece not because they “believe that the best way to avoid further debt-crisis contagion is for the money earmarked for bailouts to be invested in bank-propping and growth,” as Mr. Ward writes.
Mr. Ward is making a smart financial analysis of the situation. But the big decisions in macro-economics are never financial: They are always political—always. And politics is ultimately about psychology.
I think the eurocrats won’t bail out Greece not because they believe letting Greece default is the best way to avoid contagion: No, I believe the eurocrats will let Greece default because they no longer trust the Greeks or the Greek leadership.
Trust is like virginity: Once you lose it, it’s gone for good. Add to that truism a basic observation: If two parties truly want to make a deal happen, then the deal happens as if it’s on rails.
The key players of the Troika and the eurodrones generally just don’t trust Greece anymore. The Greeks have burned through that particular capital a long time ago. And by the passive-aggressive negotiation style of the eurocrats, they’re making it crystal clear that they do not want a deal with Greece. If they truly wanted a deal, it would’ve happened by now.
They don’t want a deal because the eurocrats and Establishment drones charged with saving Greece—for all their obvious flaws—are neither stupid nor blind: They realize that Greece is in all likelihood a never-ending hole. Whatever deal they hammer out now, they’ll have to hammer out yet another bailout package in 12 to 24 months’ time.
They realize—even if they don’t want to or can’t articulate it—that saving Greece is simply throwing good money after bad.
So they won’t. They will let Greece default. And the way they will do that is by demanding such egregious conditions—such as giving up Greek sovereignty—that Greece will refuse the bailout, or get locked into more and more negotiations, until March 20 finally rolls around.
Then it’s game over for the Greeks: They will default, exit the eurozone, go to the drachma, devalue, and go through hell for a few years.
It has now become too expensive—financially, politically, psychologically—to save Greece. The holes in the Monday deal show that there is no deal—and there won’t be any deal.
So on March 20, Greece defaults.
Now . . . if Greece defaults . . . then what about the rest of the eurozone?
Ahhh : That is the real question.
Labels: Crisis Crash, Default, Euro Collapse, Euro finished, Greece
Tuesday, February 14, 2012
The Triumvirate of Wall Street/ The Fed/ and the White House is Beginning to Crumble
According to the BLS, we ADDED 243,00 jobs that month. That's an odd claim given that the BLS admits, in the very same report, that without adjustments, the US actually LOST 2.69 MILLION jobs in January
This is roughly a discrepancy of 3 MILLION jobs. And this 243,000 jobs number for January also comes along with revisions that saw roughly 50,000 jobs added in both October and November.
So according to the BLS, the US is on the upswing again, maybe not in a HUGE way, but overall things are improving: we're adding jobs and unemployment is falling (from 8.5% to 8.3%).
These numbers make the Obama administration look good, at least relative to how it's looked in the previous 12 months. However, they're not reflecting as positively on two of Obama's primary support groups: Wall Street and the US Federal Reserve.
As a brief refresher, let's take a look at Obama's top campaign contributors in 2008:
Altogether, the finance industry ponied up $24 million for Obama in 2008. And Wall Street has not only been cutting their growth forecasts but has actually been firing people based on the fact the economy is so rough.
N.Y. faces 10,000 Wall St. cuts through 2012
(From October 2011)
Bank of America Corp. plans to cut 30,000 jobs over the next few years, while UBS AG intends to shave 3,500 jobs and Goldman Sachs Group expects to eliminate 1,000 jobs.
As for the forecasting component:
Wall Street banks curb economic growth forecasts
(From January 2012)
Wall Street banks lowered their outlook for U.S. economic growth due to concerns over the European debt crisis, oil prices, regulatory uncertainties and "continued disarray in Washington," according to a financial industry survey released on Tuesday.
The survey, which included bankers from Morgan Stanley, Wells Fargo Securities and Citigroup, forecast that the U.S. economy will grow at a rate of 2.2 percent this year, down from a previous forecast of 3.1 percent.
The January jobs report not only makes these guys look like they can't forecast anything... but that they don't even know how to run their own businesses. It also adds to the image that they're heartless and will lay people off to maintain profits (if the economy is improving, why are they firing people?)
This is not exactly the best policy to maintain for constituents who have put up some big money for Obama's campaigns in the past. One wonders if Obama's campaign managers considered this.
The January jobs report also reflects poorly on the White House's monetary buddy, the Obama's administration's "go to" guy for any kind of uptick in economic data: Ben Bernanke. After all, the Fed has also been cutting its growth forecasts and expecting higher unemployment.
US Fed cuts growth forecasts for 2012
(From November 2011)
The Federal Reserve said it now expects US growth to be weaker and unemployment higher than it thought in its last set of forecasts, as the central bank left the door open to fresh measures to help the world's biggest economy.
Also...
Fed foresees weak US growth through 2014
(From January 2012)
The Federal Reserve cut its US growth forecast Wednesday and said that with business investment and the housing sector depressed, it expected to keep interest rates near zero for another three years
Despite an upturn late last year, the Fed said ongoing economic weaknesses and strains in global financial markets mandated continued easy-money policies...
"I don't think we're ready to declare that we have entered a strong phase at this point.
So add the Fed to the group of people Obama's jobs report leaves looking less than on top of things. On a side note, it also makes the likelihood of more QE or monetary easing from the Fed more remote (if the economy is improving, they have no reason to announce more policies... which is not positive for asset prices... or Wall Street).
This all returns to two primary themes I've been expounding on for months now: that the political environment has changed dramatically in the US and that we are going to see escalating tension between Wall Street, the Fed, and the White House.
The reason for this is simple: the public is growing more outraged by the minute. That anger will have to be directed somewhere. And when push comes to shove, it's likely we're going to see some actual real litigation relating to what happened in 2008-2009.
When this happens, the whole Fed/ Wall Street/ Politician triumvirate will begin to change dramatically. Some of these groups will try to portray themselves as "men of the people" (Obama is doing this, and so is the Fed with its recent town-hall meetings and Bernanke's efforts to appear like a average joe who reads his kindle). Others will prepare for battle (Goldman Sachs' CEO has hired a defense attorney).
How this will all play out remains to be seen. But the debt markets are going to speed this process up dramatically as Europe implodes and the great debt implosion comes to the US. With 48% of US citizens living in a house in which at least one person receives Government aid, you can imagine the impact that the sort of large cuts in social welfare programs that a debt restructuring in the US would have on the political process in here.
My assessment, this January jobs report is the tip of the iceberg. Tensions will be rising in the US over the next 12 months. How exactly this will play out remains to be seen (there are too many factors), but changes are coming to the political arena as well as the monetary balance between Wall Street and the Fed (remember, the Fed actually sued Goldman Sachs last year). These changes will be dramatic.
Labels: Crash, crisis, Crisis Crash, Default, depression
Friday, February 10, 2012
Greece has No Idea What It's Gotten Itself Into
The Greeks have no idea what they've gotten themselves into.
A few facts about Greece...
First off, demographics wise, Greece is a disaster.
Real Clear Markets shares the following facts.
- Greece's fertility rate is 1.3 children per women. This is nearly a full child below the "replacement rate": the number of children needed to maintain the current population.
- Greece's population of 65 and over has soared from 11% in 1970 to 24% in 2010. It will hit 33% by 2050. Meanwhile, Greece's working population will decline to 20% over the same time period.
- Because of this, Greece spends 12% of its GDP on pensions.
As if this weren't bad enough, the unemployment rate for Greeks aged 15-24 is 40%. For Greeks aged 24-34 it's 22%. Imagine being a young person, not being able to find a job, and then knowing that huge percentage of your efforts (42%) are going to be taxed to fund all the crazy social welfare programs for Greece's aging population. Small wonder that seven out of ten young Greeks want to work abroad and four of out ten are actively seeking work outside of Greece.
Also, it's no surprise that those Greeks who do have jobs, don't want to pay this massive tax load. Consider that the Greek working population is roughly seven million people. 95 percent of them declare annual income of less than 30,000 euros.
So that's the situation in Greece. Terrible age demographics, an economy that's in the toilet, and politicians who simply don't get it.
Now let's consider who's actually got the cash to potentially help Greece from a default, and what they want in return.
We're talking about Germany.
For most of the Greece Crisis, the supposed "saviors" were the IMF, the ECB, and Germany. That all changed in the last month. The IMF has called for more funds. Those funds aren't coming. Remember, the IMF is largely a US-backed organization. And the US sure as heck won't go for a US-backed bailout of Europe.
So the IMF is out of the picture in terms of helping Greece in any meaningful way.
Now, how about the ECB? Well Germany has told the ECB to its face that if it continues to monetize EU sovereign bonds that Germany will walk out on the Euro. So the ECB may continue to meddle in the bond market to avert a Crisis, but if it ever decides to publicly state it will be monetizing EU debt going forward, Germany's out and the Euro implodes.
Which leaves Germany as the official backstop/ savior for Greece. And here's how Germany recently address the IMF when the IMF asked Germany for help with the Greek situation.
Berlin resists pressure to give Greece more
Germany, the biggest and richest country in the euro zone, has provided the bulk of the funds for the bailouts of Ireland, Portugal and Greece. Now it is firmly rejecting calls to come up with yet more funds for Greece to compensate for any shortfalls in a debt relief deal with private creditors.
On Friday Foreign Minister Guido Westerwelle defended Berlin's tough stance. The Greeks, he insisted, should show that they are willing to implement reforms before getting more money.
"We Germans do not expect from anyone in Europe more than what we are asking from our own citizens. We cannot explain to taxpayers in Germany that they have to do things that others do not want to do while at the same time asking for their money," Westerwelle said in Brussels.
He pointed out that Germany had already come up over 200 billion euros ($262 billion) for the bailout funds. "It makes no sense" he said, to give more money to Greece, "if we don't know whether the reforms which have been agreed upon will be really implemented." He argued that coming up with more money just lessened the pressure to reform.
http://www.globalpost.com/
Diplomatically, this is about as close as Germany can come to telling the IMF to "stuff it." Germany knows the IMF doesn't have the funds and won't be getting them (the IMF is primarily a US-backed entity and the US won't stand for a US-backed European bailout).
Indeed, just a few days after Germany said "nein" to more Greece bailouts, it then threw the following suggestion out:
German proposal seeks EU commissioner with sweeping powers to directly control Greece's budget
Germany is proposing that debt-ridden Greece temporarily cede sovereignty over tax and spending decisions to a powerful eurozone budget commissioner before it can secure further bailouts, an official in Berlin said Saturday.
The idea was quickly rejected by the European Union's executive body and the government in Athens, with the EU Commission in Brussels insisting that "executive tasks must remain the full responsibility of the Greek government, which is accountable before its citizens and its institutions."
http://www.washingtonpost.com/
In plain terms, push has now to come shove in Europe. Germany permitted the ECB to implicitly monetize various EU sovereign nations' debts during 2011 because Germany hadn't yet taken the steps to prepare for a collapse of the EU.
It now has. In the last six months, Germany has:
- Passed legislation permitting it to leave the Euro without leaving the EU.
- Passed legislation permitting it to nationalize German banks during times of Crisis.
- Demanded that German banks in general raise capital.
In plain terms, Germany is now prepared to walk away if it has to. And it's made its demands very clear: if you want German funds, you will need to give up fiscal sovereignty.
It's also made it clear that it will tolerate neither the issuance of Eurobonds OR direct and open monetization by the ECB.
In other words, Germany has said "it's our way or the highway." True, this borders on an act of financial warfare, but in the end, Germany has never truly been interested in a monetary union so much as a political union.
Germany will not suffer inflation (they've seen how monetization works out, e.g. Weimar), nor internal discord (in November 78% of Germans thought the Euro would survive... by December 60% of them though the Euro was a "bad idea".)
Put another way, if Greece wants to remain Greece it's no getting any more funds and its bond markets will implode. The alternative is that if Greece wants German funds, it's going to have to give up its fiscal sovereignty and essentially become a vassal state for Germany. End of story.
With that in mind, I believe the next round of the Euro Crisis is now at our doorstep. Indeed, this latest short-covering rally in the Euro (Euro shorts were at a record high) looks ready to end and reverse.
So if you think the EU Crisis is over, think again. True we've got until March 20th for the Greek deal to be reached, but things have already gotten to the point that Germany has essentially issued its ultimatum. Either Greece hands over fiscal sovereignty, or it defaults in a BIG way.
Labels: Crisis Crash, Default, Euro Collapse
