Archive for the ‘European Central Bank’ 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.

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.

From the way everyone’s talking, Greece is in deep sh**. ┬áHere’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).