Archive for the ‘Euro’ Category

I’m a bit late to the party on this, but here goes: last week the St. Louis Fed released its U.S. Recession Probabilities chart, which shows the risk of a U.S. recession near zero. I’ve been following the progress of the U.S. economy pretty closely for the past couple years as it has struggled to emerge from the Great Recession and gain a more steady footing, so I’m finding this assessment interesting.

While I believe that the risk of recession is less than it has been in the past few years, I wouldn’t say that it is near zero. Although the recovery does seem to be gaining more traction, that’s happened before. The last couple of Springs, the economy will seem to firm up on a couple of different fronts, whether that’s housing, consumer spending, business investment, industrial production or whatever, only to fallback later in the year because of external or internal issues.

Last year the political uncertainty surrounding the election and the Fiscal Cliff slowed the economy down in the second half, the year before — and the year before that — Europe was the focus of economic fears along with the continuing housing crisis. This year, we’re into Sequestration and the debt ceiling battle is coming up.

Risks from Europe seem to be on the back burner and less fraught than they used to be, but the fact is that nothing fundamental has changed about the European situation except that the European Central Bank is printing a lot of money. Austerity is taking a huge tool, unemployment is sky high and EU leaders are no closer to solving the region’s problems than they were a few years ago.

Anyone of these risks, or a combination of them or other risks that we are unaware of at this time could push the economy into recession. There are a number of positive developments that could continue to keep the economy on a growth track, including the recovering housing market and the brightened employment picture — I’m hopeful because I want a growing economy and it’s benefits just as much as the next person.

Re big picture risk, whether the risks of a recession are low or high, I do believe that we eventually will experience another financial crisis. I actually had an argument on Twitter the other day based on expressing the opinion that another global financial crisis is all but inevitable.

I base that belief on the fact that the fundamental problems in the global economy that lead to the Great Recession haven’t been solved in any meaningful way and that the systems that we have are so complex and interact in so many unforeseen ways that it is a matter of when, not if, another crisis occurs. It could be next month, next year or in five years. I have no idea.

But if you look at economic cycles and the recent history of boom and busts, it is evident that these crises occur periodically and that they are happening more frequently. I would love to be wrong, because the havoc they create causes so much suffering. We’ll just have to wait and see.

With the stock market closing in on new highs, there are legitimate questions about the market being overbought in that it seems to be disconnected with economic fundamentals in the U.S. and overseas. On the heels of that, PIMCO’s Bill Gross is raising new questions about valuations in the credit markets, which he calls “somewhat exuberantly” priced.

First, the stock market: while there is certainly cause for optimism for the growth prospects for the U.S. economy this year versus the past couple of years, optimism is just that. True, housing markets are on the rebound, the job market is inching forward and consumer and business confidence is decent. OTOH, the upcoming sequestration and debt ceiling dramas (the sequester on the table now and the debt ceiling again in August) could potentially trim economic growth and dampen consumer confidence and events in Europe aren’t anything to write home about. Most EU economies are in active recession, even “official” unemployment numbers are alarming and voters are actively rebelling against austerity (see Italian elections).

I honestly don’t see where all this optimism is coming from and what is driving the stock markets to new heights, outside of the fact that the Fed’s low interest rate policies are driving investors into risk assets and overt speculation.

In terms of the bond markets, as interest rates have fallen and stayed at rock bottom lows during the past several years, various sectors have had their time in the sun, most recently, as Gross states, corporate credit and high yield. Before that Treasuries were on fire. He views the bond market at a six on a scale of one to 10 in terms of overvaluation.

The real shadow over the bond markets is the prospect of higher interest rates and inflation. Various pundits have been predicting inflation, followed by higher rates, for years but it hasn’t happened yet. There does seem to be more incipient inflation in the economy this year than in recent years and any inflation spike that is extended could force the Fed to raise interest rates sooner than expected.

All in all, both U.S. stock and bond markets seem to be in frothy territory, where asset prices aren’t supported by fundamentals. Time to be wary…

Now that the election is over, the ongoing crisis in Europe is back front and center — if it isn’t on your radar, it should be. That’s because all the “solutions” so far have merely kicked the can down the road a bit farther. Meanwhile, as politicians negotiate, meet and talk, actual people are suffering. More.

Nowhere is this more evident than in Greece, which is about to be further brutalized by more austerity as the government just passed another multi-billion austerity package to keep the Euro’s leaders sweet. The bailout funds will keep rolling in, but at a steep price. If nothing else tells the story of the toll austerity is taking, this horrible photo of a riot police officer engulfed in flames should.

Protestors rioted in vain against this latest round of austerity, which looks to be the worst yet. More spending cuts will weaken the already frayed social safety net as tax increases will hit the poorest the hardest and labor reforms will allow further exploitation of workers. All this is happening with a backdrop of Greece entering its sixth year in a row of economic contraction with more than 25 percent of its population out of work.

The leader of the radical left main opposition Syriza party blasted the government for “leading the Greek people to catastrophe and chaos.” The government clung to the fact that these cuts will keep Greece in the Euro, which they believe is better than the alternative. Better for whom? The political and economic elite, no doubt, but not the unemployed, poor and disenfranchised, who make up an increasingly large share of the Greek populace.

I don’t see any good outcome for all of this. All the bailouts are doing is bailing out European banks, who could go under, bringing the entire financial system down with them a la Lehman Brothers. While I certainly don’t relish the idea of another global financial crisis, I really wonder if any kind of meaningful change is possible without one. The grip that the banks have on the political and economic leaders of the West is truly a stranglehold one, and I’m not sure what it would take to break it.

No regulatory reforms have succeeded in denting that power and it doesn’t look like the West has the political will to break the too big to fail banks and make the changes in the system necessary to restore some balance of power between the haves and the have-nots. No wishful thinking in the form of the granting of the Nobel Peace Prize to the Leaders of the Euro Zone or the G-7 leaders monitoring the crisis will have much of an impact. So, onward we go, with some type of economic crisis or catastrophe all but inevitable.

As the global economy inches closer to Global Financial Crisis 2.0 or GFC2, the Leadership of the Group of 20 Nations is attempting to head it off at the pass by assembling a Frankenstein coalition of nations willing to underwrite a huge new bailout of ailing banks. Although estimates vary as to the total amount that might be needed, figures from $2.5 to $6.7 trillion dollars have been floated (hat tip to @paulstpancras):

These forecasts — excepting the Times article — are all old: the NPR article is a month old and the other two are from the Spring. So, conceivably, the total could be higher today. And, considering how the leadership of the world usually waffles over exactly how to handle these situations until a bad situation gets worse, the total price tag will continue to increase while some kind of solution is found.
I don’t know about you but I can’t even wrap my head around these numbers. As if the first round of bailouts during the first global financial crisis wasn’t bad enough — these numbers are higher, and even more offensive. Really, we know better. But so little has been done to change the regulatory, economic, political and financial environment that this outcome is virtually inevitable.
Worst yet, another bailout won’t change anything. Well, it might change something: banks and the financial elite who run them will be further emboldened by the wholesale enabling of the politicians and taken even more risks with someone else’s money. And the people who are already struggling to make ends meet will find themselves facing benefit cuts, higher unemployment in recession-oriented economies. That’s because politicians will justify even more austerity in the name of deficit reduction following this next round of bailouts.
But even if the G-20 can conjure up this mind-blogging sum, it still might not be enough. That’s because the system is so volatile, so full of risk, that something unexpected could come out of left field and bust the system wide open before this new bailout is put together.
Obviously, the banks are the biggest risk out there right now. Markets are pricing bank stocks in an eerily similar fashion to pre-bailout 2008; 186 US financial institutions are trading at 60 percent of book value, including Bank of America, Citigroup and Morgan Stanley, according to Bloomberg.
Then, the problem was toxic mortgage assets. Now, the problem is toxic sovereign debt AND an overhang of toxic mortgage debt. Not only have banks not cleared all the bad mortgages from the housing boom, but they are being sued right, left and center over bad securitization and underwriting practices from that era. Not surprising.
Credit rating agencies are one wildcard; we’ve seen the turmoil that one rating agency downgrade of the US can foster. In this unstable economic environment, an ill-timed sovereign debt downgrade could start a cascade of bank downgrades or write-downs, sending the global economy into a Lehman Brothers style crisis.
Actually, the rumors surrounding French Bank Societe Generale are already raising fears that a French sovereign debt downgrade would negatively impact the bank’s capital, according to the New York Times. Conversely, a bailout of this or any other French bank would also potentially imperil the country’s AAA credit rating.
And if France losses it’s top-notch credit rating, say goodbye to the AAA credit rating of the European Central Bank (ECB), one of the main entities behind the attempt to save the Euro.
And what about the banks here in the USA? Rumors have been swirling for weeks that Bank of America is in a perilous financial situation, and may need some kind of bailout. BOA or any other large bank failure could start a destabilizing chain reaction impacting other banks and freezing up the bank system internationally.
And that’s not even including the whole issue of credit default swaps, a type of insurance that banks and companies can take out to hedge against default. No one even knows the CDS exposure on sovereign debt or what might happen if a big sovereign, such as Italy or Spain, needed a massive bailout or a systemically important bank did.
Ugh. I’m getting a headache. The longer the situation goes on, the more potential there is for destabilizing events that could blow up the entire system. Sounds like the choices are:
  1. A horrifically expensive bailout that will kick the can down the road a few more years
  2. A financial crisis that will cripple the global economy and all but destroy the TBTF banks
  3. The unknown
None of these alternatives is particularly appetizing. But I’m betting it won’t be too long before one of them is a reality.

Austerity = Suffering

Posted: July 23, 2011 in Austerity, Economy, Euro, Europe, IMF, Risk

Seems to me that austerity is a fancy and disingenuous way of inflicting suffering on millions of people without acknowledging it or taking responsibility for it. Austerity sounds like a noble financial principle, not a method of crushing the already have-nots by taking their jobs away, depriving them of access to health care and starving them. But that’s exactly what it is, in varying degrees.

Austerity theory. The theory behind austerity, which really makes no sense at all if you think about it for more than five minutes, is that by readjusting an economy through budget cuts, wage cuts and benefit cuts, that economy will run more efficiently. This, allegedly, will reassure international investors that budgets can be cut and the nation can get it’s fiscal house in order. Then, such investors will flock towards that country’s bonds, bringing down interest rates and making investment possible again. Also, austerity will somehow produce economic growth, because, again, international markets will be reassured.

Except this doesn’t happen. Austerity doesn’t show that a national government can get and keep it’s fiscal house in order because budget cuts are being imposed on the orders of outsiders in cahoots with wealthy and corrupt public officials. And the idea that austerity can somehow pull a rabbit out of it’s hat and produce economic growth is a preposterous myth. It brings economic growth to it’s knees, condemning the people who actually live in that country to a viscous cycle of devaluation in currency and wages, producing economic anguish as standards of living fall and millions of people suffer. There’s nothing in the least noble about it.

Austerity impact. And the ultimate irony is that austerity is inflicted on the people who, in the vast majority of cases, aren’t responsible for the state that the country is in. The people who suffer from austerity are the ones who have little in the first place, who are just trying to survive and are trying to create a marginally better life for their children. The ones responsible for whatever horrible state an economy has descended to are generally the financial and political elite, who either by stupidity or plain greed, have ruined that economy and forced it to it’s knees. If they suffer, it’s in a pretty marginal way. Maybe they have to reduce their fleet of jets; more likely, they benefit by profiting from the inevitable asset-stripping that is part of the IMF austerity recipe. For the financial elite, austerity doesn’t produce homelessness or starvation or a marginal existence hanging on the edge of those states, like it does for many of the have-nots who are punished by these policies.

Austerity also inevitably involves an attack on social services, on the social safety net that not only the poor rely on but the alleged backbone of the economy, the middle class. Pensions, healthcare, employment, housing and other “entitlements” end up on the chopping block. Although the middle class doesn’t suffer as much as the poor, they are victims because their economic security is endangered through these cutbacks, which are another type of wealth transfer to the financial and political elite both inside and outside the country where the austerity is taking place.

Not only does austerity involve dismantling social safety nets, it also ultimately attacks sovereignty. When the IMF comes into rescue a national economy, it requires that state to agree to financial reforms which undermine it’s sovereignty. In Greece, in fact, the EU and IMF have the upper in hand regarding issues such as asset sales — or asset stripping — and certain economic reforms.

Austerity history. For years, austerity was the by-word in the third world when the International Monetary Fund (IMF) “rescued” a floundering economy. Through methods designed to “restructure” an economy — another fancy and disingenuous term — the IMF would dismember an economy, strip assets and impoverish millions, all in the name of dispensing benevolent assistance. Bullshit. Economies would recover eventually, usually in spite of rather than because of the IMF. But not without inflicting widespread damage on the people such assistance was allegedly trying to help. The powerful in those economies would benefit via asset stripping and graft, but the suffering would flood downstream, inflicting severe pain on millions. But few paid attention because after all, this was the third world, and in some obscure way it seemed right, because they didn’t manage their financial affairs correctly afterwards and deserved a bit of punishment or austerity to teach them a lesson.

Austerity today. Now austerity is moving closer to home. In Europe, the peripheral economies of Portugal, Ireland, Italy, Greece and Spain are teetering, and the IMF, in concert with the European Union, European Central Bank and the Euro Zone itself, are determined to punish these wayward economies by inflicting severe austerity on the people in return for financial rescue. The impact of austerity on Ireland is so severe, that at this point the economy is in a economic depression, as if a recession wasn’t bad enough. Official unemployment rates in Spain are 20 percent for the populace as a whole and more than 40 percent for youth.

But despite bailout after bailout, Greece is still floundering and the markets are no more sanguine than they were last year. All austerity has accomplished is to send an already teetering economy into a deep recession, inflict vast amounts of economic pain on the populace and make it that much harder to climb out of the debt-engendered economic hole that the country finds itself in. Ireland and Portugal are also receiving bailout funds and both Spain and Italy are at risk. Italy has the third largest bond market in the world, and if it goes, watch out for the Euro.

The IMF, EU and ECB seem to be coming to their senses a bit, because the latest bailout trims borrowing costs for the peripheral countries and forces bondholders to take a haircut, reducing the ultimate debt loan for those countries. But it’s not nearly enough. Without the option of an internal devaluation of currencies, the peripheral countries will have a long, painful journey of years trying to work their way out of a massive load of debt with a shrinking economy. Not a pleasant prospect.

And the US, the debt ceiling issue still hasn’t been solved. Massive amounts of budget cuts in the federal budget are on the table, on top of city and state budget cuts. With the economy barely growing, the housing market on its knees and employment growth anemic at best, all this budget cutting will do is send the economy back into a recession. The social safety net is being shredded further with gigantic cuts in education, healthcare, employment and housing just when people need it the most.

Where will it end?

From the way everyone’s talking, Greece is in deep sh**.  Here’s the case for deep sh** :

  • Greece hasn’t met any of the debt reduction/budget austerity measures imposed during the joint EU/IMF bailout last year. Even more hilariously, the Greek government continues to deny that this is the case while earnestly stating that they are studying the situation.
  • Everyone, and everybody, from Angela Merkel to the Dutch to the IMF to Nicholas Sarkozy is absolutely, positively insisting that Greece not only must re-commit to austerity, but it must also double down by immediately implementing what it’s already promised to do, plus new austerity measures, or Greece will not get once single Euro in new bailout money. This includes selling just about everything the country owns that isn’t nailed down, which will fetch anything from 50 to 300 billion Euros…we think.
  • From the European Central Bank (ECB) to the EU ministers, there’s not one single unified voice on exactly what it will take to get Greece out of this mess. In fact, it sounds just like “same time, last year” when everyone ran around like chickens with their heads cut off insisting that there wasn’t a problem until the problem was so big it took a huge, gigantic bailout package to soothe the fears of the hysterical market. Wait a minute, what’s the definition of insanity? Isn’t it doing the same thing over and over again, expecting a different result?
  • Credit rating agencies are declaring that if the EU/IMF dares to even try to extend the maturities on Greek debt (known as a soft restructuring), that will be akin to a default, leading to the imposition of the credit rating death penalty for Greece and a horrific credit rating fate for everyone and anyone associated, including the other PIIGS and perhaps the entire membership of the EU.
  • The banks: ah, the banks. It’s no secret that European banks have exposure to Greek and other PIIGS debt, as do the sovereigns, including and especially, Germany. Oh, and don’t forget the ECB. And because the EU stress tests recently imposed were a joke, it’s not really apparent exactly how strong the banks are and if they could withstand a haircut, let alone a wholesale default on the part of Greece. And if banks are destablized, financial crisis part 2 is just around the corner. So it’s in the financial system’s interest to force Greece to stick to “the plan” whatever that may be.
  • Fears of another financial crisis: what the IMF and ECB seriously fear is another banking crisis (see above) where banks are so freaked out about their balance sheets and liabilities that they won’t lend to each other because they rightly suspect that the other banks are in just as bad, or worse, financial shape, than they are. Then the IMF/ECB/USA/UK, etc will have to bail out the banks again. OMG! Riots are a piece of cake compared to bank bailouts and financial system chaos, apparently. (Thanks to @Frances_Coppola for this point).
All this being said, it would be easy to think that Greece is really, seriously in deep sh**. It makes me wonder, though, if Greece really is in a better position that everyone thinks. From where I sit, it looks like the EU/ECB/IMF/USA/UK and other powers-that-be are so committed to the ongoing existence of the Euro in it’s present form that they will do just about anything to preserve the status quo.
If that’s the case, Greek leaders can just tell the IMF/EU/ECB/USA/UK axis to go to hell, that they won’t embrace austerity (like this is a big secret, everyone knows they aren’t going to do what they’ve said they are going to do) and that if the powers-that-be don’t cook up a better recipe for fixing the situation than that old austerity pie, they are going to ditch the Euro and bring back the drachma. I know, I know, I know, Greece really doesn’t WANT to leave the EU. At least not yet.
But I’m just saying that at some point, if Greece continues to go along with the austerity recipe, it will get to the point where staying in the Euro Zone at that price will be more painful than leaving. At the point, Greece and it’s new political leaders (does anything think that the present government has a prayer to stay in power if it meekly follows the EU/IMF/USA/ECB/UK’s directives? Please!) will wake up, smell the coffee and decide that it’s easier to at least have control over their currency and interest rates and economy destiny rather than experience a slow economic death under the boot of austerity.
Greece is in a better position to demand a better deal that most think. Whether they will get it is another story, but really, there’s got to be a better way. Ireland is already in an economic depression. Unemployment is OFFICIALLY at 20 percent in Spain, 43 percent for young people. There are riots spreading all over Europe. And the austerity hasn’t even gotten to the point where it “should be.”
That’s because the IMF/ECB, etc. doesn’t really care about what the average person is going through. Lose your house, lose your job, live on the streets, starve, so what. It’s preserving the sacred cow known as the Euro, because that’s what will prop up the current system, which is run, bought and paid for by too big to fail banks.The term regulatory capture doesn’t even begin to describe what’s going on. Maybe regulatory incarceration would be better?
The Euro, at least in it’s present state, may very well be doomed. It’s just too bad that it has to go down in such a protracted, awful and messy way. I guess the next question to consider is whether a slow, messy unraveling of the Euro is better than a quick blow up. Time will tell.
Here are a few links on point:
  • Stiglitz vs. the Blood Suckers – IMF’s Four Steps to Damnation: an oldy, but goodie, about the IMF’s recipe for emerging market countries in financial trouble. That’s exactly what’s going on in Greece, except Greece’s situation is worse, because they can’t devalue their currency. None of the IMF’s prescriptions benefit the countries they are designed to “help” in any way, shape or form. They just benefit the haves further at the expense of the have-nots and deprive the have-nots of the little bit that they have. Shameful. Thanks again to @Frances_Coppola.
  • Vampire City – the brilliant and talented Frances Coppola deconstructs the current financial system for us, explains how we got in the mess that we did (banks, are you surprised?) and why the current system is so invested in the status quo (Coppola Comment)
  • What was Juncker thinking? – an analysis of the ECB president’s “hand grenade” re the potential for Greek default; like that’s gonna happen any time soon. See above, Greece has more power than they think. What a mess (FT Alphaville).
  • Here’s What’s Going to Happen When Greece Defaults – Greece issues the New Drachma, other PIIGS default and why the EU/IMF/ECB/USA/UK axis can’t and won’t let this happen despite all their posturing (Business Insider).

Is it 1961 or 2011? I’m wondering because the International Monetary Fund (IMF) is acting more like the former than the latter. If it was 1961 (the year of my birth, BTW), there would no question that the next leader of the IMF should be a European. But it’s 2011, folks, and the outdated, cosy, cold-war agreement that the leader of the IMF should come from Europe while the leader of the World Bank should come from the U.S. is not only outdated, it’s dangerous.

As Bob Dylan would say, “the times, they are a changin” but as far as the Western Global Political and Economic elite goes, change isn’t desirable or good. It’s clear to anyone with a brain in their heads that the economic and political momentum on the planet has shifted from the west to the east. But instead of trying to make this transition work as seamlessly and painlessly as possible, the soon-to-be-have-nots are kicking and screaming and hanging to every ounce of political and economic power they have for every possible second.

If the stakes weren’t so high, it would almost be funny. But they couldn’t be higher: with the global financial system in danger yet again — this time from the Euro zone yet again — Western political leaders are intent on reinforcing the status quo by selecting another French politician as the leader of the IMF. Outside of her gender, is Christine Lagarde that much different from Dominique Strauss-Kahn? Does France, and Europe itself, a country and a continent with declining economic and political influence, really deserve this job, especially in a time of financial crisis?

Frankly, no, they don’t. And shame on anyone who is pretending that this selection process will be merit based and include everyone. Come on! People, it’s a done deal. The US and Europe have the votes to sew this up and nothing else but raw votes and raw political power matter. Yes, Australia and South Africa are in favor of a change to the status quo, but Brazil is willing to go along with a European candidate, God knows why. A back-room deal, maybe?

Really, it is shameful, short-sighted and flat-out stupid that preserving the status quo and the delicate feelings of the Europeans matters more than saving the global financial system. Because that’s what’s at stake. The weaker members of the EU are literally burning with riots in Spain and Greece, economic depression in Ireland and any kind of sensible solution off the table, but so what. We’ve got important status-quo preservation work to do.

Not that actually opening up the IMF managing director selection process and choosing someone from outside of the current EU-US power axis would necessarily make a difference, but a different outlook and some emerging market cred might help. But we’ll never know, will we because we’re getting more of the same.

As Martin Luther King once said, “Freedom is never voluntarily given by the oppressor; it must be demanded by the oppressed.” If it was up to the current powers that be, IMF vote re-alignment would happen eventually, say in about 100 years. If emerging markets want more say commensurate with their growth prospects and potential to contribute funds to all these bailouts, they better start demanding more. Because otherwise, it ain’t gonna happen.

Next time, I’ll share more of my thoughts on the so-called solutions being put forth by the powers that be in regard to Greece, what’s likely with Spain and a few other thoughts. For now, I’ll leave you with some links:

  • Markets aren’t going to give the Euro any breathing room: The markets are going to continue to pound the Euro, Greek, Spanish and Portuguese debt until the Euro Zone, IMF, US and anyone else with influence on the situation realizes that more needs to be done beside rearranging the deck chairs on the Titanic currently known as the Euro (from Business Insider).
  • Political protests go viral across Europe: Many Europeans are fed up with austerity; it’s being seen in elections, which many not produce the desired results, but will at least send a message (Roar Mag).
  • IMF Candidates by the numbers: Are you kidding me? This should be in The Onion, not the New York Times. Right, a candidate from Azerbaijan has a chance because that country has the highest growth rate in the world. And sure, Singapore is right in there because it’s unemployment rate is 2.5 percent. Or, OMG, maybe Paraguay, because it has low debt. Yeah. (Reuters via New York Times).