This GEAB issue marks the fifth anniversary of the publication of the Global Europe Anticipation Bulletin. In January 2006, on the occasion of the first issue, the LEAP/E2020 team indicated that a period of four to seven years was opening up which would be characterized by the “Fall of the Dollar Wall”, an event similar to the fall of the Berlin Wall which resulted, in the following years, in the collapse of the communist bloc then that of the USSR. Today, in this GEAB issue, which presents our thirty-two anticipations for 2011, we believe that the coming year will be a pivotal year in the roll out of this process between 2010 and 2013. It will be, in any case, a ruthless year because it will mark the entry into the terminal phase of the world before the crisis (1).
Since September 2008, when the evidence of the global and systemic nature of the crisis became clear to all, the United States, and behind it the Western countries, were content with palliative measures that have merely hidden the undermining effects of the crisis on the foundations of the present-day international system. 2011 will, according to our team, mark the crucial moment when, on the one hand, these palliative measures see their anesthetic effect fade away whilst, in contrast, the consequences of systemic dislocation in recent years will dramatically surge to the forefront (2).
In summary, 2011 will be marked by a series of violent shocks that will explode the faulty safety devices put in place since 2008 (3) and will carry off, one by one, the “pillars” on which the “Dollar Wall” has rested for decades. Only the countries, communities, organizations and individuals which, over the last three years, have actually undertaken to learn the lessons from the current crisis to distance themselves as quickly as possible from the pre-crisis patterns, values and behavior will get through this year unscathed; the others will be carried away in the procession of monetary, financial, economic, social and political difficulties that 2011 holds.
Thus, as we believe that 2011 will, globally, be the most chaotic year since 2006, the date of the beginning of our work on the crisis, in this GEAB issue our team has focused on 32 anticipations for 2011, which also include a number of recommendations to deal with future shocks. Thus, this GEAB issue offers a kind of map forecasting financial, monetary, political, economic and social shocks for the next twelve months.
If our team believes that 2011 will be the worst year since 2006, the beginning of our anticipation work on the systemic crisis, it’s because it’s at the crossroads of three paths to global chaos. Absent fundamental treatment of the causes of the crisis, since 2008 the world has only gone back to take a better jump forward.
A bloodless international system
The first path that the crisis can take to cause world chaos is simply a violent and unpredictable shock. The dilapidated state of the international system is now so advanced that its cohesion is at the mercy of any large-scale disaster (4). Just look at the inability of the international community to effectively help Haiti over the past year (5), the United States to rebuild New Orleans for six years, the United Nations to resolve the problems in Darfur, Côte d'Ivoire for a decade, the United States to progress peace in the Middle East, NATO to beat the Taliban in Afghanistan, the Security Council to control the Korean and Iranian issues, the West to stabilize Lebanon, the G20 to end the global crisis be it financial, food, economic, social, monetary, ... to see that over the whole range of climatic and humanitarian disasters, like economic and social crises, the international system is now powerless.
In fact, since the mid-2000s at least, all the major global players, at their head of course the United States and its cortege of Western countries, do no more than give out information, or gesticulate. In reality, all bets are off: The crisis ball rolls and everyone holds their breath so it doesn’t fall on their square. But gradually the increasing risks and issues of the crisis have changed the casino’s roulette wheel into Russian roulette. For LEAP/E2020, the whole world has begun to play Russian roulette (6), or rather its 2011 version, “American Roulette” with five bullets in the barrel.
Monthly progression of the FAO food index (2010) and the price of principal foodstuffs (2009/2010) (base 100: averaged over 2002-2004) - Source: FAO/Crikey, 01/2011
Soaring commodity prices (food, energy (7),...) should remind us of 2008 (8). It was indeed in the six months preceding Lehman Brothers and Wall Street’s collapse that the previous episode of sharp increases in commodity prices was set. And the actual causes are the same as before: a flight from financial and monetary assets in favour of “concrete” investments. Last time the big players fled the mortgage market and everything that depended on it, as well as the U.S. Dollar; today they are fleeing all financial stocks, Treasury bonds (9) and other public debts. Therefore, we have to wait for a time between Spring and Autumn 2011 for the explosion of the quadruple bubble of Treasury bonds, public debt (10), bank balance sheets (11) and real estate (American, Chinese, British, Spanish,... and commercial (12)), all taking place against a backdrop of a heightened currency war (13).
The inflation induced by US, British and Japanese Quantitative Easing and similar stimulus measures of the Europeans and Chinese will be one of the destabilizing factors in 2011 (14). We will come back to this in more detail in this issue. But what is now clear with respect to what is happening in Tunisia (15), is that this global context, especially the rise in food and energy prices, now leads on to radical social and political shocks (16). The other reality that the Tunisian case reveals is the impotence of the French, Italian or American “godfathers” to prevent the collapse of a “friendly regime” (17).
Impotence of the major global geopolitical players
And this impotence of the major global geopolitical players is the other path that the crisis can use to produce world chaos in 2011. In effect, one can place the major G20 powers in two groups whose only point in common is that they are unable to influence events decisively.
On one side we haves a moribund West with, on the one hand, the United States, for whom 2011 will show that its leadership is no more than fiction (see this issue) and which is trying to freeze the entire international system in its configuration of the early 2000s (18), and on the other hand we have Euroland, “sovereign” in the pipeline, which is currently mainly focused on adapting to its new environment (19) and new status as an emerging geopolitical entity (20), and which, therefore, has neither the energy nor the vision necessary to influence world events (21).
And on the other side are the BRIC countries (with China and Russia in particular) who are, at the moment, proving to be incapable of taking control of all or part of the international system and whose only action is therefore limited to quietly undermine what remains of the foundations of the pre-crisis order (22).
Ultimately, impotence is widespread (23) at the international community level, increasing not only the risk of major shocks, but also the significance of the consequences of these shocks. The world of 2008 was taken by surprise by the violent impact of the crisis, but paradoxically the international system was better equipped to respond being organized around an undisputed leader (24). In 2011, this is no longer the case: not only is there no undisputed leader, but the system is bloodless as we have seen above. And the situation is aggravated further by the fact that the societies of many countries in the world are on the verge of socio-economic break-up.
US petrol prices (2009-2011) - Source: GasBuddy, 01/2011
Societies on the edge of socio-economic break-up
This is particularly the case in the United States and Europe where three years of crisis are beginning to weigh very heavily on the socio-economic and therefore political balance. US households, now insolvent in their tens of millions, oscillate between sustained poverty (25) and rage against the system. European citizens, trapped between unemployment and the dismantling of the welfare state (26), are starting to refuse to pay the bills for financial and budget crises and are beginning to look for culprits (banks, the Euro, government political parties…).
But amongst the emerging powers too, the violent transition which constitutes the crisis is leading societies towards situations of break-up: in China, the need to control expanding financial bubbles is hampered by the desire to improve the lot of whole sectors of society such as the need for employment for tens of millions of casual workers; in Russia, the weakness of the social security system fits badly with the enrichment of the elite, just as in Algeria shaken by riots. In Turkey, Brazil and India, everywhere the rapid change these countries are seeing is triggering riots, protests and terrorist attacks. For reasons that are sometimes contradictory, growth for some, penury for others, across the globe our diverse societies tackle 2011 in a context of strong tensions and socio-economic break-up, which have the making of political time bombs.
It’s its position at the crossroads of three paths which thus makes 2011 a ruthless year. And ruthless it will be for the States (and local authorities) which have chosen not to draw hard conclusions from the three years of crisis which have gone before and / or who have contented themselves with cosmetic changes not altering their fundamental imbalances at all. It will also be so for businesses (and States (27)) who believed that the improvement in 2010 was a sign of a return to “normal” of the global economy. And finally it will be so for investors who have not understood that yesterday’s investments (securities, currencies,...) couldn’t be those of tomorrow (in any case for several years). History is usually a “good girl”. She often gives a warning shot before sweeping away the past. This time, it gave the warning shot in 2008. We estimate that in 2011, it will do the sweeping. Only players who have undertaken, even painstakingly, even partially, to adapt to the new conditions generated by the crisis will be able to hang on; for the others, chaos is at the end of the road.
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Notes:
(1) Or of the world that we have known since 1945 to repeat our 2006 description.
(2) The recent decision by the US Department of Labor to extend the inclusion of the measure of long-term unemployment in the US employment statistics to five years instead of the maximum of two years until now, is a good indicator of the entry into a new stage of the crisis, a step that has seen the disappearance of the “practices” of the world before. As a matter of fact, the US government cites “the unprecedented rise” of long-term unemployment to justify this decision. Source: The Hill, 12/28/2010
(3) These measures (monetary, financial, economic, budgetary, strategic) are now closely linked. That’s why they will be carried away in a series of successive shocks.
(4) Source: The Independent, 01/13/2011
(5) It’s even worse because it was international aid that brought cholera to the island, causing thousands of deaths.
(6) Moreover Timothy Geithner, US Treasury Secretary, little known for his overactive imagination, has just indicated that “the US government could once again have to do exceptional things”, referring to the bank bailout in 2008. Source: MarketWatch, 01/13/2011
(7) Moreover, India and Iran are in the course of establishing a system of exchange “gold for oil” to try and avoid supply disruptions. Source: Times of India, 01/08/2011
(8) In January 2011 the FAO food price index (at 215) has just exceeded its previous record set in May 2008 (at 214).
(9) Wall Street banks are currently unloading their US Treasury bonds as fast as possible (unseen since 2004). Their official explanation is “the remarkable improvement in the US economy which no longer requires us to seek refuge in Treasury Bonds”. Of course, you are free to believe it, like Bloomberg ’s journalist on 01/10/2011.
(10) Thus Euroland is already taking big steps forward along the path described in the GEAB N°50 with a discount in the case of refinancing the debts of a member state, whilst Japanese and US debt are now about to enter the storm. Sources: Bloomberg, 01/07/2011; Telegraph, 01/05/2011
(11) We believe that, in general, global banks’ balance sheets contain at least 50% ghost assets which in the coming year will require to be discounted by between 20% to 40% due to the return of the global recession combined with austerity, the rise in defaults on household, business, community and state loans, currency wars and a pickup in the fall of real estate prices. The American, European, Chinese, Japanese and others “stress-tests” can still continue to try and reassure markets with “Care Bears” scenarios except that this year it’s “Alien against Predator ” which is on the banks’ agenda. Source: Forbes, 01/12/2011
(12) Each of these real estate markets will fall sharply again in 2011 in the case of those which have already started falling in recent years, or in the case of China, which will begin its sharp deflation amid economic slowdown and monetary tightening.
(13) The Japanese economy is, moreover, one of the first victims of this currency war, with 76% of the CEOs of 110 major Japanese companies surveyed by Kyodo News now reported being pessimistic about Japanese growth in 2011 following the rise in the yen. Source: JapanTimes, 01/04/2011
(14) Here are several instructive examples put together by the excellent John Rubino. Source: DollarCollapse, 01/08/2011
(15) By way of reminder, in the GEAB N°48 we had classified Tunisia in the category of countries “with significant risks” in 2011.
(16) No doubt, moreover, that the Tunisian example is generating a round of reassessment amongst the rating agencies and the “experts in geopolitics”, who, as usual, didn’t see anything coming. The Tunisian case also illustrates the fact that it’s now the satellite countries of the West in general and the US in particular, who are on the way to shocks in 2011 and in the years to come. And it confirms what we regularly repeat: a crisis accelerates all the historical processes. The Ben Ali regime, twenty-three years old, collapsed in a few weeks. When political obsolescence is involved everything changes quickly. Now it's all the pro-Western Arab regimes which are obsolete in the light of events in Tunisia.
(17) No doubt this « Western godfather » paralysis will be carefully analyzed in Rabat, Cairo, Jeddah and Amman, for example.
(18) A configuration that was all the more favorable because it was without a counterweight to their influence.
(19) We will return in more detail in this GEAB issue, but seen from China we are not mistaken. Source: Xinhua, 01/02/2011
(20) Little by little Europeans are discovering that they are dependent on centres of power other than Washington. Beijing, Moscow, Brazilia, New Dehli,… Source: La Tribune, 01/05/2011; Libération, 12/24/2010; El Pais, 01/05/2011
(21) All Japan's energy is focused on its desperate attempt to resist the attraction of China. As for other Western countries, they are not able to significantly influence global trends.
(22) The US Dollar’s place in the global system is a part of these last foundations that the BRIC countries are actively eroding day after day.
(23) As regards deficit, the US case is textbook. Beyond the speeches, everything continues as before the crisis with a deficit swelling exponentially. However, even the IMF is now ringing the alarm. Source: Reuters, 01/08/2011
(24) Moreover, even the Wall Street Journal on 01/12/2011, echoing the Davos Forum, is concerned over the lack of international coordination, which is in itself a major risk to the global economy.
(25) Millions of Americans are discovering food banks for the first time in their lives, whilst in California, as in many other states, the education system is disintegrating fast. In Illinois, studies on the state deficit are now comparing it to the Titanic. 2010 broke the record for real estate foreclosures. Sources: Alternet, 12/27/2010; CNN, 01/08/2011; IGPA-Illinois, 01/2011; LADailyNews, 01/13/2011
(26) Ireland, which is facing, purely and simply, a reconstruction of its economy, is a good example of situations to come. But even Germany, with remarkable current economic results however can’t escape this development as shown by the funding crisis for cultural activities. Whilst in the United Kingdom, millions of retirees are seeing their incomes cut for the third year running. Sources : Irish Times, 12/31/2010; Deutsche Welle, 01/03/2011; Telegraph, 01/13/2011
(27) In this regard, US leaders confirm that they are rushing straight into the wall of public debt, failing to anticipate the problems. Indeed, the recent statement by Ben Bernanke, the Fed chairman, that the Fed will not help the States (30% fall in 2009 tax revenues according to the Washington Post on 01/05/2011) and the cities collapsing under their debts, just as Congress decides to stop issuing “Build America Bonds” which enabled States to avoid bankruptcy these last few years, shows a Washington blindness only equal to that which Washington demonstrated in 2007/2008 in the face of the mounting consequences of the “subprime” crisis. Sources: Bloomberg, 01/07/2011; WashingtonBlog, 01/13/2011
Dimanche 16 Janvier 2011
http://www.leap2020.eu/geab-n-51-is-available-systemic-global-crisis-2011-the-ruthless-year-at-the-crossroads-of-three-roads-of-global-chaos_a5775.html
Showing posts with label europe. Show all posts
Showing posts with label europe. Show all posts
20 January 2011
21 December 2010
GEAB N°50 is available! Global systemic crisis: Second half of 2011 - European context and US catalyst - Explosion of the Western public debt bubble
The second half of 2011 will mark the point in time when all the world’s financial operators will finally understand that the West will not repay in full a significant portion of the loans advanced over the last two decades. For LEAP/E2020 it is, in effect, around October 2011, due to the plunge of a large number of US cities and states into an inextricable financial situation following the end of the federal funding of their deficits, whilst Europe will face a very significant debt refinancing requirement (1), that this explosive situation will be fully revealed. Media escalation of the European crisis regarding sovereign debt of Euroland’s peripheral countries will have created the favourable context for such an explosion, of which the US “Muni” (2) market incidentally has just given a foretaste in November 2010 (as our team anticipated last June in GEAB No. 46 ) with a mini-crash that saw all the year’s gains go up in smoke in a few days. This time this crash (including the failure of the monoline reinsurer Ambac (3)) took place discreetly (4) since the Anglo-Saxon media machine (5) succeeded in focusing world attention on a further episode of the fantasy sitcom "The end of the Euro, or the financial remake of Swine fever" (6). Yet the contemporaneous shocks in the United States and Europe make for a very disturbing set-up comparable, according to our team, to the "Bear Stearn " crash which preceded Lehman Brothers’ bankruptcy and the collapse of Wall Street in September 2008 by eight months. But the GEAB readers know very well that major crashes rarely make headlines in the media several months in advance, so false alarms are customary (7)!
Net cash outflows from Mutual Funds investing in « Munis » (2007-11/2010) (in USD billions) - Withdrawals were higher than in October 2008 - Source: New York Times, 11/2010
In this GEAB issue, we therefore anticipate the progression of the terminal crash of Western public debt (in particular US and European debt) as well as ways to protect oneself. Furthermore, we analyze the very important structural consequences of the Wikileaks revelations on the United States’ international influence as well as their interaction with the global consequences of the US Federal Reserve’s QE II programme. This GEAB December issue is, of course, the opportunity to assess the validity of our anticipations for 2010, with a of 78% success rate for the year. We also develop strategic advice for Euroland (8) and the United States. And we publish the GEAB-$ index that will now allow us to synthetically follow the progress of US Dollar against major world currencies every month (9).
In this issue, we have chosen to present an excerpt of the forecast on the explosion of the Western public debt bubble.
Thus, the Western public debt crisis is growing very rapidly under the pressure of four increasingly strong limitations:
. the absence of economic recovery in the United States which strangles all public bodies (including the federal state (10)) accustomed to an easy flow of debt and significant tax revenues in recent decades (11)
. the accelerated structural weakening of the United States in monetary, financial as well as diplomatic (12) affairs which reduces their ability to attract world savings (13)
. the global drying up of sources of cheap finance, which precipitates the crisis of excessive debt in Europe’s peripheral countries (in Euroland like Greece, Ireland, Portugal, Spain, ... and the United Kingdom as well (14)) and is starting to touch key countries (USA, Germany, Japan) (15) in a context of very large European debt refinancing in 2011
. the transformation of Euroland into a new "sovereign" that gradually develops new rules for the continent’s public debts.
These four constraints generate varying phenomena and reactions in different regions / countries.
The European context: the price of the path from laxity to austerity will be partly paid for by investors
From the European side, we have thus witnessed the difficult, but ultimately incredibly fast, transformation of the Eurozone into a sort of semi-state entity, Euroland. The delays in the process weren’t only due to the poor quality of the political individuals concerned (16) as the interviews of the "forerunners" such as Helmut Schmidt, Valéry Giscard d'Estaing or Jacques Delors hammered on at length. They themselves never having had to face a historic crisis of this magnitude, a little modesty would have done them good.
These delays are equally due to the fact that current developments in the Eurozone are on a huge political scale (17) and conducted without any democratic political mandate: this situation paralyzes the European leaders who consequently spend their time denying that they are really doing what they do, i.e. namely, building a kind of political entity with its own economic, social and fiscal constituent parts, .... (18) Elected before the crisis erupted, they do not know that their voters (and the economic and financial players at the same time) would be largely satisfied with an explanation about the decisions being planned (19). Because most of major decisions to come are already identifiable, as we analyze in this issue.
Finally, it is a fact that the actions of these same leaders are dissected and manipulated by the main media specializing in economic and financial issues, none of which belong to the Eurozone, and all of which are, on the contrary, entrenched in the $ / £ zone where the strengthening of the euro is considered a disaster. This same media very directly contributes to blur the process underway in Euroland (20) even more.
However, we can see that this adverse effect decreases because between the "Greek crisis" and the "Irish crisis", the resulting Euro exchange rate volatility has weakened. For our team, in spring 2011, it will become an insignificant event. This only leaves, therefore, the issue of the quality of Euroland’s political personnel which will be profoundly changed beginning in 2012 (21) and, more fundamentally, the significant problem of the democratic legitimacy of the tremendous advances in European integration (22). But in a certain fashion, we can say that by 2012/2013, Euroland will have really established mechanisms which will have allowed it to withstand the shock of the crisis, even if it’s necessary to legitimize their existence retrospectively (23).
Comparison of yields on Euroland 10 year government bonds - Source: Thomson Reuters Datastream, 11/16/2010
In this regard, what will help accelerate the bursting of the Western public debt bubble, and what will occur concomitantly for its US catalyst, is the understanding by financial operators of what lies behind the "Eurobligations” (or E-Bonds) (24) debate which has begun to be talked about in recent weeks (25). It is from late 2011 (at the latest) that the merits of this debate will begin to be unveiled within the framework of the preparation for the permanent European Financial Stabilisation Fund (26). Although, what will suddenly appear for the majority of investors who currently speculate on the exorbitant rates of Greek, Irish,... debt is that Euroland solidarity will not extend to them, especially when the case of Spain, Italy or Belgium will start being posed, whatever European leaders say today (27).
In short, according to LEAP/E2020, we should expect a huge operation of sovereign debt transactions (amid a government debt global crisis) which will offer Euroland guaranteed Eurobligations at very low rates in exchange of national securities at high interest rates with a 30% to 50% discount since, in the meantime, the situation of the entire Western public debt market will have deteriorated. Democratically speaking, the newly elected Euroland leaders (28) (after 2012) will be fully authorized to effect such an operation, of which the major banks (including European ones (29)) will be the first victims. It is highly likely that some privileged sovereign creditors like China, Russia, the oil producing countries,... will be offered preferential treatment. They will not complain since the undertaking will result in their sizeable assets in Euros being guaranteed.
Charts at link
Net cash outflows from Mutual Funds investing in « Munis » (2007-11/2010) (in USD billions) - Withdrawals were higher than in October 2008 - Source: New York Times, 11/2010
In this GEAB issue, we therefore anticipate the progression of the terminal crash of Western public debt (in particular US and European debt) as well as ways to protect oneself. Furthermore, we analyze the very important structural consequences of the Wikileaks revelations on the United States’ international influence as well as their interaction with the global consequences of the US Federal Reserve’s QE II programme. This GEAB December issue is, of course, the opportunity to assess the validity of our anticipations for 2010, with a of 78% success rate for the year. We also develop strategic advice for Euroland (8) and the United States. And we publish the GEAB-$ index that will now allow us to synthetically follow the progress of US Dollar against major world currencies every month (9).
In this issue, we have chosen to present an excerpt of the forecast on the explosion of the Western public debt bubble.
Thus, the Western public debt crisis is growing very rapidly under the pressure of four increasingly strong limitations:
. the absence of economic recovery in the United States which strangles all public bodies (including the federal state (10)) accustomed to an easy flow of debt and significant tax revenues in recent decades (11)
. the accelerated structural weakening of the United States in monetary, financial as well as diplomatic (12) affairs which reduces their ability to attract world savings (13)
. the global drying up of sources of cheap finance, which precipitates the crisis of excessive debt in Europe’s peripheral countries (in Euroland like Greece, Ireland, Portugal, Spain, ... and the United Kingdom as well (14)) and is starting to touch key countries (USA, Germany, Japan) (15) in a context of very large European debt refinancing in 2011
. the transformation of Euroland into a new "sovereign" that gradually develops new rules for the continent’s public debts.
These four constraints generate varying phenomena and reactions in different regions / countries.
The European context: the price of the path from laxity to austerity will be partly paid for by investors
From the European side, we have thus witnessed the difficult, but ultimately incredibly fast, transformation of the Eurozone into a sort of semi-state entity, Euroland. The delays in the process weren’t only due to the poor quality of the political individuals concerned (16) as the interviews of the "forerunners" such as Helmut Schmidt, Valéry Giscard d'Estaing or Jacques Delors hammered on at length. They themselves never having had to face a historic crisis of this magnitude, a little modesty would have done them good.
These delays are equally due to the fact that current developments in the Eurozone are on a huge political scale (17) and conducted without any democratic political mandate: this situation paralyzes the European leaders who consequently spend their time denying that they are really doing what they do, i.e. namely, building a kind of political entity with its own economic, social and fiscal constituent parts, .... (18) Elected before the crisis erupted, they do not know that their voters (and the economic and financial players at the same time) would be largely satisfied with an explanation about the decisions being planned (19). Because most of major decisions to come are already identifiable, as we analyze in this issue.
Finally, it is a fact that the actions of these same leaders are dissected and manipulated by the main media specializing in economic and financial issues, none of which belong to the Eurozone, and all of which are, on the contrary, entrenched in the $ / £ zone where the strengthening of the euro is considered a disaster. This same media very directly contributes to blur the process underway in Euroland (20) even more.
However, we can see that this adverse effect decreases because between the "Greek crisis" and the "Irish crisis", the resulting Euro exchange rate volatility has weakened. For our team, in spring 2011, it will become an insignificant event. This only leaves, therefore, the issue of the quality of Euroland’s political personnel which will be profoundly changed beginning in 2012 (21) and, more fundamentally, the significant problem of the democratic legitimacy of the tremendous advances in European integration (22). But in a certain fashion, we can say that by 2012/2013, Euroland will have really established mechanisms which will have allowed it to withstand the shock of the crisis, even if it’s necessary to legitimize their existence retrospectively (23).
Comparison of yields on Euroland 10 year government bonds - Source: Thomson Reuters Datastream, 11/16/2010
In this regard, what will help accelerate the bursting of the Western public debt bubble, and what will occur concomitantly for its US catalyst, is the understanding by financial operators of what lies behind the "Eurobligations” (or E-Bonds) (24) debate which has begun to be talked about in recent weeks (25). It is from late 2011 (at the latest) that the merits of this debate will begin to be unveiled within the framework of the preparation for the permanent European Financial Stabilisation Fund (26). Although, what will suddenly appear for the majority of investors who currently speculate on the exorbitant rates of Greek, Irish,... debt is that Euroland solidarity will not extend to them, especially when the case of Spain, Italy or Belgium will start being posed, whatever European leaders say today (27).
In short, according to LEAP/E2020, we should expect a huge operation of sovereign debt transactions (amid a government debt global crisis) which will offer Euroland guaranteed Eurobligations at very low rates in exchange of national securities at high interest rates with a 30% to 50% discount since, in the meantime, the situation of the entire Western public debt market will have deteriorated. Democratically speaking, the newly elected Euroland leaders (28) (after 2012) will be fully authorized to effect such an operation, of which the major banks (including European ones (29)) will be the first victims. It is highly likely that some privileged sovereign creditors like China, Russia, the oil producing countries,... will be offered preferential treatment. They will not complain since the undertaking will result in their sizeable assets in Euros being guaranteed.
Charts at link
11 December 2010
GEAB N°49 is available! Warning Global systemic crisis – First quarter 2011: Breach of the critical threshold of global geopolitical dislocation
As the LEAP/E2020 team anticipated in its open letter to the G20 leaders published in the international edition of the Financial Times of 24 March 2009, on the eve of the London Summit, the question of a fundamental reform of the international monetary system is central to any attempt to solve the current crisis. But sadly, as was demonstrated again at the failure of the G20 summit in Seoul, the window of opportunity for achieving such a reform peaceably closed at the end of summer 2009 and will not open again before 2012/2013 (1). The world is indeed in the throes of the global geopolitical dislocation that we had announced as beginning at the end of 2009 and which can be seen, less than a year later, in the proliferation of movements, the economic woes, the fiscal deficits, the monetary disagreements, all setting the scene for major geopolitical shocks. With the G20 summit in Seoul, which signalled to the planet in its entirety the end of US domination of the international agenda and its replacement by a generalised mood of “every man for himself”, a new phase of the crisis has begun, prompting the LEAP/E2020 team to issue a new warning. The world is about to breach a critical threshold in this phase of global geopolitical dislocation. And as with every breach of threshold in a complex system, this will generate, as from the first quarter of 2011, a suite of non-linear phenomena: developments that do not conform to the usual rules and the traditional projections, be they economic, monetary, financial, social or political.
In this GEAB N°49, in addition to the analysis of the six main steps marking the breach of this critical threshold of the global geopolitical, our team presents numerous recommendations to help cope with the consequences of this new phase of the crisis. They address, for example the currency/interest rates/gold and precious metals group; wealth preservation and the replacement of the US dollar by another measure of net worth; the bubbles in asset classes denominated in US dollars; and the stock markets and the most vulnerable corporate categories in this phase of the crisis. The LEAP/E2020 team also presents the “three simple reflexes” to adopt to understand and anticipate better the new world taking shape. Also in this issue, our team describes the double Franco-German electoral shock in store for 2012/2013. And we also present an excerpt from the Manual of Political Anticipation, written by the president of LEAP, Marie-Hélène Caillol, and published by Anticipolis in French, English, German and Spanish.
Trade balances of the G20 countries (forecast for 2010) - Source: Spiegel, 11/2010
In this press release for the GEAB N°49, our team chose to present three of the six steps that characterise the critical threshold that the world is about to breach.
The crisis that we are experiencing is characterised by developments on a planetary scale, taking place at two levels that, while correlated, are different in nature. On the one hand, the crisis is symptomatic of the profound changes to our world’s economic, financial and geopolitical reality. It accelerates and amplifies the underlying trends that have been at work for several decades, trends that we have described regularly in the GEAB since its launch at the beginning of 2006. On the other hand it reflects the steadily increasing collective awareness of those changes. This growing awareness is in itself a phenomenon of collective psychology on a global level and it influences the way the crisis develops and triggers sharp bursts of speed in its evolution. Several times in recent years, we have anticipated “inflexion points” in the crisis, corresponding to “sudden leaps” in this collective awareness of the changes under way. And we consider that all the pre-requisites for “rupture” crystallised around the G20 summit in Seoul, enabling a crucial advance in collective awareness of the global geopolitical dislocation. It is that phenomenon that led LEAP/E2020 to identify the breach of a critical threshold and to issue a warning about the consequences of that breach as from the first quarter of 2011.
Around the date of the G20 summit in Seoul, LEAP/E2020 identified a build-up of events likely to lead to “rupture”. Let us examine the main events concerned (2) and their chaotic consequences.
Concluding the quantitative easing: the Fed placed under “house arrest”
The Federal Reserve’s decision to launch “QE2” (by purchasing USD 600 billion of US Treasuries from now to 2011), triggered an outcry, for the first time since 1945, amongst almost all the other global powers: Japan, Brazil, China (3), India, Germany, the ASEAN countries (4), …(5) It is not the Fed’s decision that marks a rupture: it is the fact that for the first time, America’s central bank had its ears boxed by the rest of the world (6), and in a very public and determined manner (7). This is certainly not the cosy atmosphere of Jackson Hole and the central bankers’ meetings. It seems that Ben Bernanke’s threats to his colleagues, conveyed to our readers in GEAB No. 47, did not have the effect that the Fed’s chairman had hoped. The rest of the world made it clear in November 2010 that it had no intention of letting the US central bank continue printing US dollars at will in an attempt to solve America’s problems at the expense of every other country on the globe (8). The dollar is now getting back to being what every national currency is supposed to be: the currency and thus the problem of the country that prints it. In fact, in these last weeks of 2010, we have witnessed the end of an era where the dollar was the currency of the US and the problem of the rest of the world, as John Connally put it so neatly in 1971, when the US unilaterally terminated the convertibility of the dollar into gold. Why? Simply because from now on the Fed must take into account the opinion of the outside world (9). It is not yet under guardianship, but it is under “house arrest” (10). According to LEAP/E2020, we can already anticipate that there will be no QE3 (11) regardless of the US leaders’ opinions on the subject (12); or it will take place at the end of 2011 to the tune of major geopolitical conflict and the collapse of the US dollar (13).
U.S. Federal Reserve’s Assets (2008-2010) – Sources: Federal Reserve of Cleveland / New York Times, 10/2010
European austerity: spread of social resistance movements; mounting populism; risk of fostering radicalism in rising generations; higher taxes
From Paris to Berlin (14), Lisbon to Dublin, Vilnius to Bucharest, London to Rome,… the protest marches and strikes are spreading. The social dimension of the global geopolitical dislocation is clearly visible in the Europe of end-2010. While these events have not yet managed to disrupt the austerity programmes planned by the European governments, they point to a significant collective development: public opinions are emerging from their torpor at the beginning of the crisis, suddenly aware of its duration and cost (social and financial) (15). So the next elections should prove costly for all the current political teams who have forgotten that without fair treatment, austerity will never win popular support (16). In the meantime, the teams in office are still applying the recipes of the pre-crisis period (i.e. neo-liberal solutions based on tax cuts for the richest households and an assortment of higher indirect taxes). But the rise in social disputes (inevitable according to LEAP/E2020) and the policy changes that will emerge in the next national elections, country by country, will lead to a questioning of those solutions; and a dramatic strengthening of the populist and extremist parties (17): Europe is going to get politically “tougher”. In parallel, in view of what looks increasingly like an unconscious desire on the part of the baby-boomers to have younger citizens shoulder their costs, we can expect to see an increase in violent reactions from the rising generations (18). According to our team, they will probably become more radical if they feel that the situation is hopeless, unless a compromise can be reached. But without an improvement in tax receipts, the only compromise credible in their eyes would be cuts in existing pensions, rather than higher education costs. Today is always a compromise between yesterday and tomorrow, particularly when it comes to taxes. And the most likely fiscal consequences of these developments are higher taxes on high earnings and capital gains, a new bank tax and a new, community-wide drive to protect the borders (19). The EU’s trade partners should take rapid note (20).
Selected governments’ borrowing needs (2010-2011) - Sources: FMI / Wall Street Journal, 10/2010
Japan: the latest efforts to resist China’s power
For several weeks now Tokyo and Beijing have been locked in a diplomatic dispute of rare intensity. Under various pretexts (a Chinese trawler about to enter Japanese territorial waters (21), massive Chinese purchases of Japanese assets, causing the yen to appreciate) the two powers exchanged harsh words, suspended their high-level talks and appealed to international public opinion. To the countries in the region, the international visibility of this Sino-Japanese spat is especially revealing because of a glaring absence –that of the US. While these quarrels clearly illustrate Beijing’s growing determination to be recognised as the dominant power in East and South-East Asia and Japan’s bid to oppose that regional Chinese hegemony, there is no denying that the power supposed to dominate in this region of the world since 1945, namely the US, is strangely absent from table. We can therefore assume that what we are witnessing is a real-life test on China’s part to measure its new influence on Japan; and on Japan’s part to evaluate how much scope for action the US still has in Asia, faced with China. The events of recent weeks have shown that, hampered by political paralysis and its economic and financial dependence regarding China, Washington prefers not to get involved. No doubt throughout Asia this spectacle serves to accelerate the awareness that a new milestone has been passed in terms of regional order (22); and that in Japan, mired in an endless recession (23) the economic interests linked to the Chinese market have not been strengthened by the experience.
Global changes under way – massive growth in world port traffic, benefiting Asia (1994-2009) - Sources : Transport Trackers / Clusterstock, 10/2010
In conclusion, this accumulation of events, centred round a G20 summit that was patently incapable of resolving the sources of economic, financial and monetary tension between its principal members, contributed to a decisive advance in the world’s collective awareness of the process of global geographic dislocation under way. And in its turn, this increased awareness will, as from the beginning of 2011, accelerate and amplify the changes affecting the international system and our various societies, generating non-linear, chaotic phenomena such as those described in this issue of GEAB and previous issues. As we emphasised in September 2010, we focus on the fact that chief among those phenomena will be the entry of the US into an austerity phase, beginning in spring 2011. But we also bear in mind that one of the surprises of the next eighteen months could simply be the announcement that the Chinese economy had overtaken the US economy as from 2012 as the Wall Street Journal of 10/11/2010 indicates in its report of the Conference Board’s analysis.
http://www.leap2020.eu/GEAB-N-49-is-available-Warning-Global-systemic-crisis-First-quarter-2011-Breach-of-the-critical-threshold-of-global_a5458.html
- Public announcement GEAB N°49 (November 16, 2010) -
In this GEAB N°49, in addition to the analysis of the six main steps marking the breach of this critical threshold of the global geopolitical, our team presents numerous recommendations to help cope with the consequences of this new phase of the crisis. They address, for example the currency/interest rates/gold and precious metals group; wealth preservation and the replacement of the US dollar by another measure of net worth; the bubbles in asset classes denominated in US dollars; and the stock markets and the most vulnerable corporate categories in this phase of the crisis. The LEAP/E2020 team also presents the “three simple reflexes” to adopt to understand and anticipate better the new world taking shape. Also in this issue, our team describes the double Franco-German electoral shock in store for 2012/2013. And we also present an excerpt from the Manual of Political Anticipation, written by the president of LEAP, Marie-Hélène Caillol, and published by Anticipolis in French, English, German and Spanish.
Trade balances of the G20 countries (forecast for 2010) - Source: Spiegel, 11/2010
In this press release for the GEAB N°49, our team chose to present three of the six steps that characterise the critical threshold that the world is about to breach.
The crisis that we are experiencing is characterised by developments on a planetary scale, taking place at two levels that, while correlated, are different in nature. On the one hand, the crisis is symptomatic of the profound changes to our world’s economic, financial and geopolitical reality. It accelerates and amplifies the underlying trends that have been at work for several decades, trends that we have described regularly in the GEAB since its launch at the beginning of 2006. On the other hand it reflects the steadily increasing collective awareness of those changes. This growing awareness is in itself a phenomenon of collective psychology on a global level and it influences the way the crisis develops and triggers sharp bursts of speed in its evolution. Several times in recent years, we have anticipated “inflexion points” in the crisis, corresponding to “sudden leaps” in this collective awareness of the changes under way. And we consider that all the pre-requisites for “rupture” crystallised around the G20 summit in Seoul, enabling a crucial advance in collective awareness of the global geopolitical dislocation. It is that phenomenon that led LEAP/E2020 to identify the breach of a critical threshold and to issue a warning about the consequences of that breach as from the first quarter of 2011.
Around the date of the G20 summit in Seoul, LEAP/E2020 identified a build-up of events likely to lead to “rupture”. Let us examine the main events concerned (2) and their chaotic consequences.
Concluding the quantitative easing: the Fed placed under “house arrest”
The Federal Reserve’s decision to launch “QE2” (by purchasing USD 600 billion of US Treasuries from now to 2011), triggered an outcry, for the first time since 1945, amongst almost all the other global powers: Japan, Brazil, China (3), India, Germany, the ASEAN countries (4), …(5) It is not the Fed’s decision that marks a rupture: it is the fact that for the first time, America’s central bank had its ears boxed by the rest of the world (6), and in a very public and determined manner (7). This is certainly not the cosy atmosphere of Jackson Hole and the central bankers’ meetings. It seems that Ben Bernanke’s threats to his colleagues, conveyed to our readers in GEAB No. 47, did not have the effect that the Fed’s chairman had hoped. The rest of the world made it clear in November 2010 that it had no intention of letting the US central bank continue printing US dollars at will in an attempt to solve America’s problems at the expense of every other country on the globe (8). The dollar is now getting back to being what every national currency is supposed to be: the currency and thus the problem of the country that prints it. In fact, in these last weeks of 2010, we have witnessed the end of an era where the dollar was the currency of the US and the problem of the rest of the world, as John Connally put it so neatly in 1971, when the US unilaterally terminated the convertibility of the dollar into gold. Why? Simply because from now on the Fed must take into account the opinion of the outside world (9). It is not yet under guardianship, but it is under “house arrest” (10). According to LEAP/E2020, we can already anticipate that there will be no QE3 (11) regardless of the US leaders’ opinions on the subject (12); or it will take place at the end of 2011 to the tune of major geopolitical conflict and the collapse of the US dollar (13).
U.S. Federal Reserve’s Assets (2008-2010) – Sources: Federal Reserve of Cleveland / New York Times, 10/2010
European austerity: spread of social resistance movements; mounting populism; risk of fostering radicalism in rising generations; higher taxes
From Paris to Berlin (14), Lisbon to Dublin, Vilnius to Bucharest, London to Rome,… the protest marches and strikes are spreading. The social dimension of the global geopolitical dislocation is clearly visible in the Europe of end-2010. While these events have not yet managed to disrupt the austerity programmes planned by the European governments, they point to a significant collective development: public opinions are emerging from their torpor at the beginning of the crisis, suddenly aware of its duration and cost (social and financial) (15). So the next elections should prove costly for all the current political teams who have forgotten that without fair treatment, austerity will never win popular support (16). In the meantime, the teams in office are still applying the recipes of the pre-crisis period (i.e. neo-liberal solutions based on tax cuts for the richest households and an assortment of higher indirect taxes). But the rise in social disputes (inevitable according to LEAP/E2020) and the policy changes that will emerge in the next national elections, country by country, will lead to a questioning of those solutions; and a dramatic strengthening of the populist and extremist parties (17): Europe is going to get politically “tougher”. In parallel, in view of what looks increasingly like an unconscious desire on the part of the baby-boomers to have younger citizens shoulder their costs, we can expect to see an increase in violent reactions from the rising generations (18). According to our team, they will probably become more radical if they feel that the situation is hopeless, unless a compromise can be reached. But without an improvement in tax receipts, the only compromise credible in their eyes would be cuts in existing pensions, rather than higher education costs. Today is always a compromise between yesterday and tomorrow, particularly when it comes to taxes. And the most likely fiscal consequences of these developments are higher taxes on high earnings and capital gains, a new bank tax and a new, community-wide drive to protect the borders (19). The EU’s trade partners should take rapid note (20).
Selected governments’ borrowing needs (2010-2011) - Sources: FMI / Wall Street Journal, 10/2010
Japan: the latest efforts to resist China’s power
For several weeks now Tokyo and Beijing have been locked in a diplomatic dispute of rare intensity. Under various pretexts (a Chinese trawler about to enter Japanese territorial waters (21), massive Chinese purchases of Japanese assets, causing the yen to appreciate) the two powers exchanged harsh words, suspended their high-level talks and appealed to international public opinion. To the countries in the region, the international visibility of this Sino-Japanese spat is especially revealing because of a glaring absence –that of the US. While these quarrels clearly illustrate Beijing’s growing determination to be recognised as the dominant power in East and South-East Asia and Japan’s bid to oppose that regional Chinese hegemony, there is no denying that the power supposed to dominate in this region of the world since 1945, namely the US, is strangely absent from table. We can therefore assume that what we are witnessing is a real-life test on China’s part to measure its new influence on Japan; and on Japan’s part to evaluate how much scope for action the US still has in Asia, faced with China. The events of recent weeks have shown that, hampered by political paralysis and its economic and financial dependence regarding China, Washington prefers not to get involved. No doubt throughout Asia this spectacle serves to accelerate the awareness that a new milestone has been passed in terms of regional order (22); and that in Japan, mired in an endless recession (23) the economic interests linked to the Chinese market have not been strengthened by the experience.
Global changes under way – massive growth in world port traffic, benefiting Asia (1994-2009) - Sources : Transport Trackers / Clusterstock, 10/2010
In conclusion, this accumulation of events, centred round a G20 summit that was patently incapable of resolving the sources of economic, financial and monetary tension between its principal members, contributed to a decisive advance in the world’s collective awareness of the process of global geographic dislocation under way. And in its turn, this increased awareness will, as from the beginning of 2011, accelerate and amplify the changes affecting the international system and our various societies, generating non-linear, chaotic phenomena such as those described in this issue of GEAB and previous issues. As we emphasised in September 2010, we focus on the fact that chief among those phenomena will be the entry of the US into an austerity phase, beginning in spring 2011. But we also bear in mind that one of the surprises of the next eighteen months could simply be the announcement that the Chinese economy had overtaken the US economy as from 2012 as the Wall Street Journal of 10/11/2010 indicates in its report of the Conference Board’s analysis.
http://www.leap2020.eu/GEAB-N-49-is-available-Warning-Global-systemic-crisis-First-quarter-2011-Breach-of-the-critical-threshold-of-global_a5458.html
- Public announcement GEAB N°49 (November 16, 2010) -
17 May 2010
Global systemic crisis – From « Eurozone coup d’Etat » to the tragic solitude of the United Kingdom, global geopolitical dislocation quickens
Just as anticipated by LEAP/E2020 in issues N°40 (December 2009) and N°42 (February 2010), spring 2010 really marks a tipping point of the global systemic crisis, characterized by a sudden expansion due to the intolerable size of public deficits (see issue N° 39, November 2009) and the inexistence of the recovery, so often announced (see issue N°37, September 2009). Besides, the dramatic social and political consequences of this development clearly reflect the beginning of the process of global geopolitical dislocation as anticipated in issue N°32 (February 2009). Finally, the Eurozone leaders’ recent decisions confirm LEAP/E2020’s anticipations, contrary to the dominant chatter of these last few months, of the fact that not only will the Euro not « explode » because of the Greek problem but, on the contrary, a strengthened Eurozone will emerge from this stage of the crisis (1). One could even consider that, since the Eurozone decision, a kind of « Eurozone coup d’Etat » supported by Sweden and Poland, to create a huge apparatus to protect the interests of the 26 EU member states (2), the geopolitical deal in Europe has changed radically. Because it runs contrary to the prejudices which fashion their vision of the world, several months will be needed by the majority of the media and players to accept that, behind the appearance of a purely European budgetary-financial decision, lies a geopolitical split with worldwide impact.
Current increases in national debt for the USA, United Kingdom, Euroland and Japan (in green: % of debt to GDP / in red: forecast debt increase for 2009 and 2010 / in yellow: comparative figures for Germany) - Source: European Commission, 2010
Eurozone coup d’Etat in Brussels: The EU founding states regain control
In this issue N°45, we analyse in detail the numerous consequences for Europeans and for the world from what could be called the Eurozone « coup d’Etat » within the EU. In the face of the worsening crisis, the sixteen have indeed taken control of the EU reins of power, creating new tools and instruments which leave no other choice for the other members but to follow or find themselves isolated. Ten out of the eleven other member states have decided to follow, such as the two most important of them, Sweden and Poland, who have chosen to actively participate in the apparatus put into place by the Eurozone (the other eight are currently either in the course of negotiating their Eurozone entry, like Estonia from 2011 (3), or receiving direct help from the Eurozone, like Lithuania, Hungary, Romania, for example…). It is a (r)evolution that our team has clearly anticipated for over three years and we had even stated recently that events would rapidly unfold in the Eurozone once the German regional elections and the British general election had taken place. However, we would never have thought that it would happen in just a few hours, neither with such boldness as to the amount (750 billion Euros, or one trillion USD) and the character (EU control taken by the Eurozone (4) and a leap ahead in terms of economic and financial integration).
The fact remains that without knowing it, and without having asked their opinion, 440 million Europeans have just joined a new country, Euroland, of which some already share the currency, the Euro, and of which all now share the indebtedness and the joint means to solve the serious problems posed in the context of the global systemic crisis. The budgetary and financial decisions taken during the Summit of the weekend of the 8th May in terms of a response to the European public debt crisis can be evaluated differently according to one’s analysis of the crisis and its causes. LEAP/E2020 will roll out its own analyses on the subject in this issue N°45 but, without doubt, a radical unraveling of European governance has just taken place: a collective continental governance has just brutally emerged, ironically 65 years after the end of the Second World War, moreover celebrated with a big display in Moscow the same day (5) as the holiday celebrating the creation of the European Coal and Steel Community, the common ancestor of the EU and Euroland. This simultaneity isn’t a coincidence (6) and marks an important step forward in global geopolitical dislocation and the reconstitution of new global balances. Under the pressure of events set off by the crisis, the Eurozone has thus undertaken to grasp its independence with regard to the Anglo-Saxon world still expressed via the financial markets. This 750 billion Euros and this new European governance (of the 26) constitutes, at the one and the same time, the putting in place of the fortifications against the next storms caused by draconian Western indebtedness, and which will affect the United Kingdom and then the United States (cf. issue N°44 causing disturbances of which the « Greek crisis » has only given a small preview.
The EMF will, in the long run, deprive the IMF of 50% of its major contributions: those of the Europeans
Concerning this, LEAP/E2020 reminds readers of a fact that the majority of the media has been oblivious of for many weeks. Contrary to the prevailing discussion, the IMF is first and foremost European money. In effect one out of three IMF Dollars is contributed by Europeans, compared to only one in six by the USA (their share has been cut in half in 50 years) and one of the consequences of the European decisions of these last few days is that it will not be the case for very much longer. Our team is convinced that, within three years at the latest, when it is time to formalize the integration of the intervention fund created on the 8th and 9th May 2010 into the European Monetary Fund, the EU will reduce its contribution to the IMF by a similar proportion. One could guess already that this reduction in the European contribution (UK excluded) will be in the order of 50% at least. That will allow the IMF to become more globally representative by automatically rebalancing the BRIC share and, in the same breath, requiring the USA to abandon its right of veto (7). But that will equally contribute to it becoming heavily marginalized since Asia has already created its own emergency intervention fund. It is an example which illustrates just how many of the European decisions of the beginning of May 2010 are full of wide sweeping geopolitical changes which will scale out in all of the coming years. In fact, it is unlikely that the majority of the decision makers involved in the « Eurozone coup d’Etat » have clearly understood the implications of their decisions. But no-one has ever said that history was largely made by those people who knew what they were doing.
Countries’ and markets’ IMF contributions (1948-2001) - Source: IMF / Danmarks National Bank - 2001
The United Kingdom: isolated in the face of an historic crisis
One of the simultaneous causes and consequences of this development is the complete marginalization of the United Kingdom. Its increasing weakness since the beginning of the crisis, along with that of its US sponsor, has created the possibility of a complete takeover, without concessions, of the march forward of the European project by the continental countries. This loss of influence reinforces, in return, Great Britain’s marginalization because British leaders are trapped in a denial of reality which they have made their people share as well. None of the British political parties, not even at this point the Liberal Democrats, even though showing greater clarity than the other political parties of the country, could consider reconsidering the decades of diatribe accusing Europe for all the ills and dressing-up the Euro for all the losses. Indeed, even if their leaders were aware of the folly of a strategy consisting of isolating Great Britain a little more day-by-day, even when the world crisis has moved up a gear, they will collide with this public Euroscepticism which they have fostered over the course of the past years. The irony of history was, once again, clearly shown during this historic weekend of the 8th/9th May 2010: in refusing to participate in the Eurozone’s joint defensive and protective measures, the British leaders have, de facto, refused to catch the last lifeline within their grasp (8). The European continent will now content itself with watching them try to find the 200 billion Euros which their country needs to balance this year’s budget (9). And if the leaders in London think that City speculators will have any qualms breaking the Pound sterling and selling Gilts, it is because they haven’t understood the basics of global finance (10), nor checked the nationalities of these same players (11). Between Wall Street, which will do anything to attract the world’s capital (one only needs to ask the Swiss market what it thinks of the war that world markets are currently delivering one another), Washington, which is knocking itself out to hover up all the world’s available savings, and a European continent which has, from now on, placed itself under the protection of a common currency and debt, the dice have been cast. At this stage, we are still in the drama, because the major English players have not yet realised that they are caught in a trap; a few weeks from now, we will move on to the British tragedy because, this summer, the whole country will have discovered the historic trap into which the country, on its own, has fallen.
So, at the moment when Euroland emerges in Brussels, the United Kingdom struggles with a hung parliament, compelling it to move on to the first coalition government since 1945 and which will take the country to a further election between now and the end of the year.
The British and their leaders in trouble, who are going to have to « think the unthinkable »
Whatever the supporters of the coalition now running the country may tell, LEAP/E2020 thinks it highly unlikely that this alliance will last more than a few months. The very different structure of the two parties involved (Conservatives and Liberal Democrats are divided on a number of issues), combined with unpopular decisions, is leading this team straight to internal crises for each party and, then, to a government collapse. The Conservatives will play this card because, unlike the Liberal Democrats, they have sufficient funds to « finance » a new electoral campaign between now and the end of the year (12). But the most dangerous underlying stumbling-block is intellectual: to avoid the tragedy which portends, the United Kingdom is going to have to « think the unthinkable », i.e. reconsider its basic beliefs on its insular outlook, its transatlantic « relationship », its relationship with a continent now on the road to complete integration, while, for centuries, it has thought of the continent as a disunion. However the problem set is simple: if the United Kingdom has always thought that its power depended on a divided European continent, then logically, considering current events, it must now admit that it is heading to a state of impotence... and draw the necessary conclusions, i.e. that it too should make a « quantum leap ». If Nick Clegg seems intellectually equipped to make such a leap, neither David Cameron’s Conservatives, nor the British leaders altogether, seem mature enough yet. In such a case, Great Britain, sadly, must take the « tragic » path (13).
In any case, this weekend of the 8th/9th May 2010 in Europe dips a number of its roots directly into the Second World War and its consequences (14). It is, besides, one of the features of the global systemic crisis as foretold by LEAP/E2020 in February 2006 in issue N°2: it brings to « an end the West as one has known it since 1945 ».
Another of these features is the take-off in the gold price (compared to the US Dollar especially), in the face of the growing distrust in all fiat currencies (see issue N°41, January 2010 (15)). Indeed, whilst all the world speak of the Euro/US Dollar exchange rate, the Dollar remains at its historically lowest levels compared to its major trade partners (see chart below), a sign of the US currency’s structural weakness. In the coming months, as GEAB anticipated, the Euro will climb back to its medium-term equilibrium level of above 1.45/€.
In this issue, before giving our recommendations on currencies, the stock exchange and gold, LEAP/E2020 will analyse in greater detail the US pseudo-recovery which internally is basically a vast focused news operation aimed at re-starting household spending (an impossible task now) and externally at avoiding panicking foreign investors (at best, several quarters can be gained). Thus the United States maintains that it will be able to escape brutal austerity treatment, like the other Western countries, whilst, in fact, the recovery is an « unrecovery » as Michael Panzner, with a touch of humour, called his excellent article of 04/27/2010, published in Seeking Alpha.investors (at best, several quarters can be gained). Thus the United States maintains that it will be able to escape brutal austerity treatment, like the other Western countries, whilst, in fact, the recovery is an « unrecovery » as Michael Panzner, with a touch of humour, called his excellent article of 04/27/2010, published in Seeking Alpha.
Charts and Data
Current increases in national debt for the USA, United Kingdom, Euroland and Japan (in green: % of debt to GDP / in red: forecast debt increase for 2009 and 2010 / in yellow: comparative figures for Germany) - Source: European Commission, 2010
Eurozone coup d’Etat in Brussels: The EU founding states regain control
In this issue N°45, we analyse in detail the numerous consequences for Europeans and for the world from what could be called the Eurozone « coup d’Etat » within the EU. In the face of the worsening crisis, the sixteen have indeed taken control of the EU reins of power, creating new tools and instruments which leave no other choice for the other members but to follow or find themselves isolated. Ten out of the eleven other member states have decided to follow, such as the two most important of them, Sweden and Poland, who have chosen to actively participate in the apparatus put into place by the Eurozone (the other eight are currently either in the course of negotiating their Eurozone entry, like Estonia from 2011 (3), or receiving direct help from the Eurozone, like Lithuania, Hungary, Romania, for example…). It is a (r)evolution that our team has clearly anticipated for over three years and we had even stated recently that events would rapidly unfold in the Eurozone once the German regional elections and the British general election had taken place. However, we would never have thought that it would happen in just a few hours, neither with such boldness as to the amount (750 billion Euros, or one trillion USD) and the character (EU control taken by the Eurozone (4) and a leap ahead in terms of economic and financial integration).
The fact remains that without knowing it, and without having asked their opinion, 440 million Europeans have just joined a new country, Euroland, of which some already share the currency, the Euro, and of which all now share the indebtedness and the joint means to solve the serious problems posed in the context of the global systemic crisis. The budgetary and financial decisions taken during the Summit of the weekend of the 8th May in terms of a response to the European public debt crisis can be evaluated differently according to one’s analysis of the crisis and its causes. LEAP/E2020 will roll out its own analyses on the subject in this issue N°45 but, without doubt, a radical unraveling of European governance has just taken place: a collective continental governance has just brutally emerged, ironically 65 years after the end of the Second World War, moreover celebrated with a big display in Moscow the same day (5) as the holiday celebrating the creation of the European Coal and Steel Community, the common ancestor of the EU and Euroland. This simultaneity isn’t a coincidence (6) and marks an important step forward in global geopolitical dislocation and the reconstitution of new global balances. Under the pressure of events set off by the crisis, the Eurozone has thus undertaken to grasp its independence with regard to the Anglo-Saxon world still expressed via the financial markets. This 750 billion Euros and this new European governance (of the 26) constitutes, at the one and the same time, the putting in place of the fortifications against the next storms caused by draconian Western indebtedness, and which will affect the United Kingdom and then the United States (cf. issue N°44 causing disturbances of which the « Greek crisis » has only given a small preview.
The EMF will, in the long run, deprive the IMF of 50% of its major contributions: those of the Europeans
Concerning this, LEAP/E2020 reminds readers of a fact that the majority of the media has been oblivious of for many weeks. Contrary to the prevailing discussion, the IMF is first and foremost European money. In effect one out of three IMF Dollars is contributed by Europeans, compared to only one in six by the USA (their share has been cut in half in 50 years) and one of the consequences of the European decisions of these last few days is that it will not be the case for very much longer. Our team is convinced that, within three years at the latest, when it is time to formalize the integration of the intervention fund created on the 8th and 9th May 2010 into the European Monetary Fund, the EU will reduce its contribution to the IMF by a similar proportion. One could guess already that this reduction in the European contribution (UK excluded) will be in the order of 50% at least. That will allow the IMF to become more globally representative by automatically rebalancing the BRIC share and, in the same breath, requiring the USA to abandon its right of veto (7). But that will equally contribute to it becoming heavily marginalized since Asia has already created its own emergency intervention fund. It is an example which illustrates just how many of the European decisions of the beginning of May 2010 are full of wide sweeping geopolitical changes which will scale out in all of the coming years. In fact, it is unlikely that the majority of the decision makers involved in the « Eurozone coup d’Etat » have clearly understood the implications of their decisions. But no-one has ever said that history was largely made by those people who knew what they were doing.
Countries’ and markets’ IMF contributions (1948-2001) - Source: IMF / Danmarks National Bank - 2001
The United Kingdom: isolated in the face of an historic crisis
One of the simultaneous causes and consequences of this development is the complete marginalization of the United Kingdom. Its increasing weakness since the beginning of the crisis, along with that of its US sponsor, has created the possibility of a complete takeover, without concessions, of the march forward of the European project by the continental countries. This loss of influence reinforces, in return, Great Britain’s marginalization because British leaders are trapped in a denial of reality which they have made their people share as well. None of the British political parties, not even at this point the Liberal Democrats, even though showing greater clarity than the other political parties of the country, could consider reconsidering the decades of diatribe accusing Europe for all the ills and dressing-up the Euro for all the losses. Indeed, even if their leaders were aware of the folly of a strategy consisting of isolating Great Britain a little more day-by-day, even when the world crisis has moved up a gear, they will collide with this public Euroscepticism which they have fostered over the course of the past years. The irony of history was, once again, clearly shown during this historic weekend of the 8th/9th May 2010: in refusing to participate in the Eurozone’s joint defensive and protective measures, the British leaders have, de facto, refused to catch the last lifeline within their grasp (8). The European continent will now content itself with watching them try to find the 200 billion Euros which their country needs to balance this year’s budget (9). And if the leaders in London think that City speculators will have any qualms breaking the Pound sterling and selling Gilts, it is because they haven’t understood the basics of global finance (10), nor checked the nationalities of these same players (11). Between Wall Street, which will do anything to attract the world’s capital (one only needs to ask the Swiss market what it thinks of the war that world markets are currently delivering one another), Washington, which is knocking itself out to hover up all the world’s available savings, and a European continent which has, from now on, placed itself under the protection of a common currency and debt, the dice have been cast. At this stage, we are still in the drama, because the major English players have not yet realised that they are caught in a trap; a few weeks from now, we will move on to the British tragedy because, this summer, the whole country will have discovered the historic trap into which the country, on its own, has fallen.
So, at the moment when Euroland emerges in Brussels, the United Kingdom struggles with a hung parliament, compelling it to move on to the first coalition government since 1945 and which will take the country to a further election between now and the end of the year.
The British and their leaders in trouble, who are going to have to « think the unthinkable »
Whatever the supporters of the coalition now running the country may tell, LEAP/E2020 thinks it highly unlikely that this alliance will last more than a few months. The very different structure of the two parties involved (Conservatives and Liberal Democrats are divided on a number of issues), combined with unpopular decisions, is leading this team straight to internal crises for each party and, then, to a government collapse. The Conservatives will play this card because, unlike the Liberal Democrats, they have sufficient funds to « finance » a new electoral campaign between now and the end of the year (12). But the most dangerous underlying stumbling-block is intellectual: to avoid the tragedy which portends, the United Kingdom is going to have to « think the unthinkable », i.e. reconsider its basic beliefs on its insular outlook, its transatlantic « relationship », its relationship with a continent now on the road to complete integration, while, for centuries, it has thought of the continent as a disunion. However the problem set is simple: if the United Kingdom has always thought that its power depended on a divided European continent, then logically, considering current events, it must now admit that it is heading to a state of impotence... and draw the necessary conclusions, i.e. that it too should make a « quantum leap ». If Nick Clegg seems intellectually equipped to make such a leap, neither David Cameron’s Conservatives, nor the British leaders altogether, seem mature enough yet. In such a case, Great Britain, sadly, must take the « tragic » path (13).
In any case, this weekend of the 8th/9th May 2010 in Europe dips a number of its roots directly into the Second World War and its consequences (14). It is, besides, one of the features of the global systemic crisis as foretold by LEAP/E2020 in February 2006 in issue N°2: it brings to « an end the West as one has known it since 1945 ».
Another of these features is the take-off in the gold price (compared to the US Dollar especially), in the face of the growing distrust in all fiat currencies (see issue N°41, January 2010 (15)). Indeed, whilst all the world speak of the Euro/US Dollar exchange rate, the Dollar remains at its historically lowest levels compared to its major trade partners (see chart below), a sign of the US currency’s structural weakness. In the coming months, as GEAB anticipated, the Euro will climb back to its medium-term equilibrium level of above 1.45/€.
In this issue, before giving our recommendations on currencies, the stock exchange and gold, LEAP/E2020 will analyse in greater detail the US pseudo-recovery which internally is basically a vast focused news operation aimed at re-starting household spending (an impossible task now) and externally at avoiding panicking foreign investors (at best, several quarters can be gained). Thus the United States maintains that it will be able to escape brutal austerity treatment, like the other Western countries, whilst, in fact, the recovery is an « unrecovery » as Michael Panzner, with a touch of humour, called his excellent article of 04/27/2010, published in Seeking Alpha.investors (at best, several quarters can be gained). Thus the United States maintains that it will be able to escape brutal austerity treatment, like the other Western countries, whilst, in fact, the recovery is an « unrecovery » as Michael Panzner, with a touch of humour, called his excellent article of 04/27/2010, published in Seeking Alpha.
Charts and Data
10 February 2010
How Brussels Is Trying to Prevent a Collapse of the Euro
Hat Tip to charles Powell.
How Brussels Is Trying to Prevent a Collapse of the Euro
By Armin Mahler, Christian Reiermann, Wolfgang Reuter and Hans-Jürgen Schlamp
The problems facing Greece are just the beginning. The countries belonging to Europe's common currency zone are drifting further and further apart, and national bankruptcies are a distinct possibility. Brussels is faced with a number of choices, none of them good.
Men like Wilhelm Nölling, former member of the German Central Bank Council, and Wilhelm Hankel, an economics professor critical of the euro, have been out of the spotlight for years. In the 1990s, they fought against the introduction of the common currency, even calling on Germany's high court to prevent the creation of the euro zone. But none of it worked.
Now both men are in demand again, and the old euro critics' beliefs are more relevant than ever. Were the skeptics right back then, when they said Europe wasn't ready for the euro zone? Were the differences too great and the politicians too weak to ensure a strict and stable course?
"The euro should really be called the Icarus," Hankel suggested back then. He predicted the currency would meet the same end as the hero of Greek legend, who paid for his dream of flight with his life.
Is the euro's high flight over now too? The news these days is alarming. It's causing a commotion on financial markets and intense discussion in capitals across Europe, as well as in Frankfurt, seat of the European Central Bank (ECB).
Brussels took a hard line with Athens last week. Greece must cut costs drastically under close European Union supervision, a sacrifice of a share of its sovereignty. Risk premiums for Greek government bonds have risen drastically, and the country has to pay higher and higher charges.
The Possibility of State Bankruptcies
Accruing debt is becoming increasingly expensive for other countries in the euro zone as well, among them Portugal and Spain. The southern members of the euro zone are especially being eyed with mistrust. Speculators are betting that bonds will continue to fall and that, eventually, the countries won't be able to borrow any more money at all. State bankruptcies are seen as a possibility.
"We've reached a point where it's possible to deal individual countries a lethal blow by downgrading their credit and boycotting their government bonds," Nölling warns.
Many are now wondering how the stronger euro-zone countries should react -- whether it's possible to help the weaker ones without jeopardizing themselves and the common currency. Furthermore, there is a risk that euro-zone members will continue to grow apart economically, a trend that could cause the monetary union to eventually collapse.
Doing nothing is not an option. In light of the national debt in Greece, Portugal, Spain and Ireland, the euro zone is in danger of transforming from a "common destiny to a common liability," Nölling says.
And so it won't be any ordinary meeting when finance ministers from the 16-euro zone countries meet for a regularly scheduled get-together in Brussels next Monday. The European Commission plans to assign each country homework to be completed in the coming years.
Cohesion and Stability
The Commission doesn't hold Greece solely responsible for the current euro woes. Experts close to Economic and Monetary Affairs Commissioner Joaquín Almunia say nearly every participating country is compromising the cohesion and stability of the common currency.
"The combination of decreasing competitiveness and excessive accumulation of national debt is alarming," the experts wrote in a recent report, adding that if the member countries don't get their problems under control, it will "jeopardize the cohesion of the monetary union."
Differing economic development within the euro zone and a lack of political coordination are to blame, they say. In the more than 10 years since the euro was introduced, the Commission states, it has become clear that simply controlling the development of member states' budgets is not enough. What that means, more concretely, is that the stability provisions stipulated in the Maastricht Treaty to regulate the common currency aren't working, and member states need to better coordinate their financial and economic policy measures.
That is precisely what euro skeptics have said from the beginning -- that a common currency can't work in the long run without a common economic and financial policy. The member countries' governments ignored these objections, unready to give up a further aspect of their national sovereignty.
Now politicians are facing a difficult decision: Should they continue as they have, thus potentially undermining the euro's ability to function? Or should they yield a portion of their national sovereignty to Brussels?
Without common policies, the individual countries drift further and further apart. Before the euro was introduced, exchange rate adjustments served to dispel tensions. Now the common currency zone lacks the option of adapting by revaluing currencies.
Watching with Alarm
EU officials are watching with alarm as the various euro-zone countries' competitiveness diverges sharply. The differences are especially large between countries like Germany, the Netherlands and Finland, which are characterized by current account surpluses, and countries with high budget deficits. Along with Greece, this second category includes especially Spain, Portugal and Ireland.
These countries' competitiveness has dropped steadily since the euro was introduced. They lived on credit for years, seduced by the unusually low interest rates within the euro zone, and imported far more than they exported.
When demand collapsed in the wake of the global financial crisis, governments jumped in to fill the gap, with serious consequences -- debt skyrocketed. Spain's budget deficit was at 11 percent last year, while Greece's was nearly 13 percent. Such high debt is simply not sustainable in the long term.
In the past, the solution for these countries would have been to devalue their currency, which in turn would make imports more expensive and exports cheaper. Such a move would stimulate their national economies and strengthen their competitiveness.
Now, however, these countries must submit to a drastic therapy regime at the hands of the European Commission. They need to balance their budgets, while simultaneously creating more competition on the labor and goods markets.
The directives from Brussels translate into difficult sacrifices for the citizens of the affected countries. Employees will have to scale back wage demands for years, and civil servants will see their salaries cut. Ireland has already embarked on this path; Greece and Spain will follow.
Is Germany to Blame?
The Commission has recommended that Spain, booming until recently, radically restructure its economy. Spain must significantly shrink its bloated construction sector and focus on economic sectors with higher productivity.
France and Italy have been given homework assignments of their own. Both countries are being asked to apply austerity packages and increase labor-market flexibility. France must also get its significant welfare and unemployment expenses under control.
Resentment is growing in the countries most directly affected. But that frustration is not directed, as might be expected, toward the Commission. Instead, it is increasingly surplus countries coming under fire -- with Germany at the forefront.
Representatives from Spain and Portugal especially -- but also from France -- hold Germany accountable for their current woes. They aren't alone in that opinion either. "The Greek crisis has German roots," says Heiner Flassbeck, chief economist at the United Nations Conference on Trade and Development (UNCTAD), in Geneva. It was German wage dumping that got the country's European neighbors in trouble, he says.
At Its Neighbors' Expense
EU officials don't phrase it quite so strongly, but they still accuse Germany more than any other country of gaining advantages for itself at its neighbors' expense, using its policy of low wages to make German products increasingly attractive relative to those from other countries.
As a precautionary measure, officials at Berlin's Finance Ministry have gathered arguments that Finance Minister Wolfgang Schäuble can put forward in the country's defense. Germany's position is that the countries now in crisis are themselves at fault for their situation. They lived beyond their means for years, the German government says, financing their economic boom on credit. Now the financial crisis has revealed their weaknesses.
Germany didn't have it easy with the euro in the beginning either, continues the argument, because the country wasn't competitive compared to other member countries -- but it regained its strength with a great deal of trouble and effort, through reforms.
German officials point to the fact that the country made its labor market more flexible through the Hartz package of welfare reforms and say that state finances are more stable than before, despite the crisis. They add that taking this same path would lead the currently troubled countries out of the crisis. And, they continue, the federal government is not responsible for lagging wage growth because, in Germany, salaries and wages are negotiated between employers and unions rather than being imposed by the government.
The German government also claims no responsibility for the country's export surplus. German firms are competitive not because of government policy, it says, but because of entrepreneurial decisions and the preferences of customers around the world.
Create More Competition
When this debate flared up recently within the euro-zone countries, Schäuble received support from the top for his position. The southern members of the euro zone shouldn't be ungrateful, warned ECB President Jean-Claude Trichet. After all, he reasons, Germany funded the deficits with its surpluses. Nonetheless, the Commission called on Germany to make further changes as well. The country should boost domestic demand, increase investment in infrastructure and create more competition in the service sector.
The Commission believes the currency union can exist in the long term only if member countries' governments implement reforms and coordinate their economic policies. Schäuble's experts agree. They are proposing -- partly with an eye toward mollifying France -- a common German-French initiative.
Both countries' governments should work toward better coordination, the German financial experts say. Merely monitoring deficits has turned out to be inadequate. In the future, they suggest, euro-zone governments should also focus on combating differing inflation rates and step in early when capital bubbles develop.
France, no doubt, would gladly accept such a proposal. Paris, after all, has long called for Europe-wide financial governance. Until now it was Germany that opposed the idea.
The euro-zone governments have started to rethink their positions, but will action necessarily follow? The past never lacked in good intentions either, but political calculation always won out in the end. How else would Greece have managed to become a member of the common currency zone? Why else would Brussels stand by for so long without taking action? It was far from secret that Greece had been cooking its books for years.
Financial Trickery
Back in the fall of 2004, Eurostat, the EU body in charge of statistics, calculated that Greece's officially announced debts of between 1.4 percent and 2.0 percent of gross domestic product between 2000 and 2003 were incorrect. In reality, the amount was nearly three times as high, falling between 3.7 percent and 4.6 percent. The statisticians surmised that Athens had whitewashed its finances in previous years, too. Greece, in fact, would never have met the conditions for membership in the common currency without such trickery.
But the country was not immediately banned from the euro zone, nor were other sanctions imposed. Instead, member countries discussed how the statistics could be improved and made more accurate. Not much emerged from all the talk.
Outgoing European Commissioner for Enterprise and Industry Günter Verheugen remembers all too well that, for a long time, the problem with Greece was simply not something that was talked about. He finds it hard to believe that this "disproportionate regard" for Greece had nothing to do with that fact that conservative allies of European Commission President José Manuel Barroso governed in Athens for five years.
Not until last fall's elections brought Greece's socialist opposition to power did new data arrive from Athens -- and new questions and accusations from Brussels.
The Greek parliament and government are now virtually stripped of power. They're not allowed to decide on any new expenditures without EU approval. Finance Minister Giorgos Papakonstantinou is required to report every four weeks on progress made in budget restructuring.
An EU Protectorate
Brussels, not Athens, now controls whether and how the austerity program takes effect. If "detailed and ongoing inspection" shows that the actual results fall short of those predicted, Almunia says, then Brussels' watchdogs will demand additional measures. There were even calls at the European Parliament last week to send a special EU representative with extensive authority to Greece. The small country has become little more than an EU protectorate.
The EU Commission and the euro-zone leaders hope these compulsory measures will steady markets. They also hope Greek unions and associations, from farmers to taxi drivers, won't mobilize against the reduction in the country's standard of living that will accompany these new measures.
German Finance Minister Schäuble and German Federal Bank President Axel Weber rule out giving aid to the struggling country. Indeed, EU treaties strictly forbid any such aid. The message is that Greece must help itself.
As a precautionary measure, though, both German officials, along with their colleagues in other EU countries, are keeping open the possibility of lending a hand anyway. The EU can't afford for a member state to go bankrupt, either politically or economically.
Out of the Question
The experts always debate the same possibilities. The first would be a common euro-zone bond, which would be placed at Greece's disposal. The advantages for Greece are obvious -- the country would receive funds more cheaply than it currently does because the euro zone as a whole wouldn't have to pay as high a risk premium as Greece alone does. The disadvantage is that countries with good credit, like Germany, would have to pay higher interest rates. Consequently, the German government insists that such a loan is out of the question.
An alternative would be bilateral financial aid. Solvent countries, such as Germany, would take out loans on the financial market at good rates and pass these on to Greece. But euro-zone governments are also reluctant to take this path.
The last option is the International Monetary Fund (IMF), which could use its resources to help Greece out of its credit crunch. It would likely impose much stricter conditions on its aid money than the EU would. But the IMF's involvement would also mean a loss of face for the entire euro zone and a triumph for the Washington-based institution, which was always skeptical of the euro.
If Greece doesn't stabilize in the coming weeks, the euro-zone's leaders will be left facing a choice between a rock and a hard place, with the third option being even worse.
Translated from the German by Ella Ornstein
http://www.spiegel.de/international/business/0,1518,druck-676507,00.html
How Brussels Is Trying to Prevent a Collapse of the Euro
By Armin Mahler, Christian Reiermann, Wolfgang Reuter and Hans-Jürgen Schlamp
The problems facing Greece are just the beginning. The countries belonging to Europe's common currency zone are drifting further and further apart, and national bankruptcies are a distinct possibility. Brussels is faced with a number of choices, none of them good.
Men like Wilhelm Nölling, former member of the German Central Bank Council, and Wilhelm Hankel, an economics professor critical of the euro, have been out of the spotlight for years. In the 1990s, they fought against the introduction of the common currency, even calling on Germany's high court to prevent the creation of the euro zone. But none of it worked.
Now both men are in demand again, and the old euro critics' beliefs are more relevant than ever. Were the skeptics right back then, when they said Europe wasn't ready for the euro zone? Were the differences too great and the politicians too weak to ensure a strict and stable course?
"The euro should really be called the Icarus," Hankel suggested back then. He predicted the currency would meet the same end as the hero of Greek legend, who paid for his dream of flight with his life.
Is the euro's high flight over now too? The news these days is alarming. It's causing a commotion on financial markets and intense discussion in capitals across Europe, as well as in Frankfurt, seat of the European Central Bank (ECB).
Brussels took a hard line with Athens last week. Greece must cut costs drastically under close European Union supervision, a sacrifice of a share of its sovereignty. Risk premiums for Greek government bonds have risen drastically, and the country has to pay higher and higher charges.
The Possibility of State Bankruptcies
Accruing debt is becoming increasingly expensive for other countries in the euro zone as well, among them Portugal and Spain. The southern members of the euro zone are especially being eyed with mistrust. Speculators are betting that bonds will continue to fall and that, eventually, the countries won't be able to borrow any more money at all. State bankruptcies are seen as a possibility.
"We've reached a point where it's possible to deal individual countries a lethal blow by downgrading their credit and boycotting their government bonds," Nölling warns.
Many are now wondering how the stronger euro-zone countries should react -- whether it's possible to help the weaker ones without jeopardizing themselves and the common currency. Furthermore, there is a risk that euro-zone members will continue to grow apart economically, a trend that could cause the monetary union to eventually collapse.
Doing nothing is not an option. In light of the national debt in Greece, Portugal, Spain and Ireland, the euro zone is in danger of transforming from a "common destiny to a common liability," Nölling says.
And so it won't be any ordinary meeting when finance ministers from the 16-euro zone countries meet for a regularly scheduled get-together in Brussels next Monday. The European Commission plans to assign each country homework to be completed in the coming years.
Cohesion and Stability
The Commission doesn't hold Greece solely responsible for the current euro woes. Experts close to Economic and Monetary Affairs Commissioner Joaquín Almunia say nearly every participating country is compromising the cohesion and stability of the common currency.
"The combination of decreasing competitiveness and excessive accumulation of national debt is alarming," the experts wrote in a recent report, adding that if the member countries don't get their problems under control, it will "jeopardize the cohesion of the monetary union."
Differing economic development within the euro zone and a lack of political coordination are to blame, they say. In the more than 10 years since the euro was introduced, the Commission states, it has become clear that simply controlling the development of member states' budgets is not enough. What that means, more concretely, is that the stability provisions stipulated in the Maastricht Treaty to regulate the common currency aren't working, and member states need to better coordinate their financial and economic policy measures.
That is precisely what euro skeptics have said from the beginning -- that a common currency can't work in the long run without a common economic and financial policy. The member countries' governments ignored these objections, unready to give up a further aspect of their national sovereignty.
Now politicians are facing a difficult decision: Should they continue as they have, thus potentially undermining the euro's ability to function? Or should they yield a portion of their national sovereignty to Brussels?
Without common policies, the individual countries drift further and further apart. Before the euro was introduced, exchange rate adjustments served to dispel tensions. Now the common currency zone lacks the option of adapting by revaluing currencies.
Watching with Alarm
EU officials are watching with alarm as the various euro-zone countries' competitiveness diverges sharply. The differences are especially large between countries like Germany, the Netherlands and Finland, which are characterized by current account surpluses, and countries with high budget deficits. Along with Greece, this second category includes especially Spain, Portugal and Ireland.
These countries' competitiveness has dropped steadily since the euro was introduced. They lived on credit for years, seduced by the unusually low interest rates within the euro zone, and imported far more than they exported.
When demand collapsed in the wake of the global financial crisis, governments jumped in to fill the gap, with serious consequences -- debt skyrocketed. Spain's budget deficit was at 11 percent last year, while Greece's was nearly 13 percent. Such high debt is simply not sustainable in the long term.
In the past, the solution for these countries would have been to devalue their currency, which in turn would make imports more expensive and exports cheaper. Such a move would stimulate their national economies and strengthen their competitiveness.
Now, however, these countries must submit to a drastic therapy regime at the hands of the European Commission. They need to balance their budgets, while simultaneously creating more competition on the labor and goods markets.
The directives from Brussels translate into difficult sacrifices for the citizens of the affected countries. Employees will have to scale back wage demands for years, and civil servants will see their salaries cut. Ireland has already embarked on this path; Greece and Spain will follow.
Is Germany to Blame?
The Commission has recommended that Spain, booming until recently, radically restructure its economy. Spain must significantly shrink its bloated construction sector and focus on economic sectors with higher productivity.
France and Italy have been given homework assignments of their own. Both countries are being asked to apply austerity packages and increase labor-market flexibility. France must also get its significant welfare and unemployment expenses under control.
Resentment is growing in the countries most directly affected. But that frustration is not directed, as might be expected, toward the Commission. Instead, it is increasingly surplus countries coming under fire -- with Germany at the forefront.
Representatives from Spain and Portugal especially -- but also from France -- hold Germany accountable for their current woes. They aren't alone in that opinion either. "The Greek crisis has German roots," says Heiner Flassbeck, chief economist at the United Nations Conference on Trade and Development (UNCTAD), in Geneva. It was German wage dumping that got the country's European neighbors in trouble, he says.
At Its Neighbors' Expense
EU officials don't phrase it quite so strongly, but they still accuse Germany more than any other country of gaining advantages for itself at its neighbors' expense, using its policy of low wages to make German products increasingly attractive relative to those from other countries.
As a precautionary measure, officials at Berlin's Finance Ministry have gathered arguments that Finance Minister Wolfgang Schäuble can put forward in the country's defense. Germany's position is that the countries now in crisis are themselves at fault for their situation. They lived beyond their means for years, the German government says, financing their economic boom on credit. Now the financial crisis has revealed their weaknesses.
Germany didn't have it easy with the euro in the beginning either, continues the argument, because the country wasn't competitive compared to other member countries -- but it regained its strength with a great deal of trouble and effort, through reforms.
German officials point to the fact that the country made its labor market more flexible through the Hartz package of welfare reforms and say that state finances are more stable than before, despite the crisis. They add that taking this same path would lead the currently troubled countries out of the crisis. And, they continue, the federal government is not responsible for lagging wage growth because, in Germany, salaries and wages are negotiated between employers and unions rather than being imposed by the government.
The German government also claims no responsibility for the country's export surplus. German firms are competitive not because of government policy, it says, but because of entrepreneurial decisions and the preferences of customers around the world.
Create More Competition
When this debate flared up recently within the euro-zone countries, Schäuble received support from the top for his position. The southern members of the euro zone shouldn't be ungrateful, warned ECB President Jean-Claude Trichet. After all, he reasons, Germany funded the deficits with its surpluses. Nonetheless, the Commission called on Germany to make further changes as well. The country should boost domestic demand, increase investment in infrastructure and create more competition in the service sector.
The Commission believes the currency union can exist in the long term only if member countries' governments implement reforms and coordinate their economic policies. Schäuble's experts agree. They are proposing -- partly with an eye toward mollifying France -- a common German-French initiative.
Both countries' governments should work toward better coordination, the German financial experts say. Merely monitoring deficits has turned out to be inadequate. In the future, they suggest, euro-zone governments should also focus on combating differing inflation rates and step in early when capital bubbles develop.
France, no doubt, would gladly accept such a proposal. Paris, after all, has long called for Europe-wide financial governance. Until now it was Germany that opposed the idea.
The euro-zone governments have started to rethink their positions, but will action necessarily follow? The past never lacked in good intentions either, but political calculation always won out in the end. How else would Greece have managed to become a member of the common currency zone? Why else would Brussels stand by for so long without taking action? It was far from secret that Greece had been cooking its books for years.
Financial Trickery
Back in the fall of 2004, Eurostat, the EU body in charge of statistics, calculated that Greece's officially announced debts of between 1.4 percent and 2.0 percent of gross domestic product between 2000 and 2003 were incorrect. In reality, the amount was nearly three times as high, falling between 3.7 percent and 4.6 percent. The statisticians surmised that Athens had whitewashed its finances in previous years, too. Greece, in fact, would never have met the conditions for membership in the common currency without such trickery.
But the country was not immediately banned from the euro zone, nor were other sanctions imposed. Instead, member countries discussed how the statistics could be improved and made more accurate. Not much emerged from all the talk.
Outgoing European Commissioner for Enterprise and Industry Günter Verheugen remembers all too well that, for a long time, the problem with Greece was simply not something that was talked about. He finds it hard to believe that this "disproportionate regard" for Greece had nothing to do with that fact that conservative allies of European Commission President José Manuel Barroso governed in Athens for five years.
Not until last fall's elections brought Greece's socialist opposition to power did new data arrive from Athens -- and new questions and accusations from Brussels.
The Greek parliament and government are now virtually stripped of power. They're not allowed to decide on any new expenditures without EU approval. Finance Minister Giorgos Papakonstantinou is required to report every four weeks on progress made in budget restructuring.
An EU Protectorate
Brussels, not Athens, now controls whether and how the austerity program takes effect. If "detailed and ongoing inspection" shows that the actual results fall short of those predicted, Almunia says, then Brussels' watchdogs will demand additional measures. There were even calls at the European Parliament last week to send a special EU representative with extensive authority to Greece. The small country has become little more than an EU protectorate.
The EU Commission and the euro-zone leaders hope these compulsory measures will steady markets. They also hope Greek unions and associations, from farmers to taxi drivers, won't mobilize against the reduction in the country's standard of living that will accompany these new measures.
German Finance Minister Schäuble and German Federal Bank President Axel Weber rule out giving aid to the struggling country. Indeed, EU treaties strictly forbid any such aid. The message is that Greece must help itself.
As a precautionary measure, though, both German officials, along with their colleagues in other EU countries, are keeping open the possibility of lending a hand anyway. The EU can't afford for a member state to go bankrupt, either politically or economically.
Out of the Question
The experts always debate the same possibilities. The first would be a common euro-zone bond, which would be placed at Greece's disposal. The advantages for Greece are obvious -- the country would receive funds more cheaply than it currently does because the euro zone as a whole wouldn't have to pay as high a risk premium as Greece alone does. The disadvantage is that countries with good credit, like Germany, would have to pay higher interest rates. Consequently, the German government insists that such a loan is out of the question.
An alternative would be bilateral financial aid. Solvent countries, such as Germany, would take out loans on the financial market at good rates and pass these on to Greece. But euro-zone governments are also reluctant to take this path.
The last option is the International Monetary Fund (IMF), which could use its resources to help Greece out of its credit crunch. It would likely impose much stricter conditions on its aid money than the EU would. But the IMF's involvement would also mean a loss of face for the entire euro zone and a triumph for the Washington-based institution, which was always skeptical of the euro.
If Greece doesn't stabilize in the coming weeks, the euro-zone's leaders will be left facing a choice between a rock and a hard place, with the third option being even worse.
Translated from the German by Ella Ornstein
http://www.spiegel.de/international/business/0,1518,druck-676507,00.html
12 December 2009
Greece, China, USA and the Euro - All Connected?
Hat tip to Charles Powell for this one.
I spoke with some friends who are Greek and also in the shipping business. They hate the problems that Greece is facing. The 12.7% budget deficit is the highest in the EU and is not sustainable. Efforts to cut government expenses have caused a political backlash against PM Papandreou. The only available solution is to raise taxes and crack down on tax evaders.
The Shippers are largely untaxed on their global operations. Their status is ‘protected’ under the constitution. Taxing the shippers would go a long way toward closing the budget gap. The changes in tax laws will not come easy. There is no certainty of the outcome. The sense that I got from these discussions was that there is a short window open for Greece to come up with a plan to cut its deficit to approximately 9%. I asked for both a ”good” and a “bad” news scenario. Although the responses to the question I asked are speculation, they have interesting implications.
GOOD NEWS:
"If Greece is able to restructure its tax code and install a plan to reduce its deficits to 8% of GDP, then China will invest Euro 25 billion in Greek bonds."
The issue of the Chinese investing in Greece was first raised on November 29 by the WSJ. I think it was one of those well placed rumors. If this were to happen, it would be of significance. It would establish that China is assuming a role as some form of 'lender of last resort'. The bilateral trade conditions that would be attached to a deal of this magnitude would re-raise the issue of China’s trade hegemony and economic muscle. For me, the most significant aspect of this is that it would represent yet another significant diversion of China’s investable funds away from the US.
If this were to happen, the $40 billion under discussion would not impact the supply demand equation for US debt. But the direction of this would be significant. The US desperately needs China to significantly increase their holdings of US IOU’s in the coming years. They are under no obligation to do so. What if they were to take a stance with the US similar to Greece? We would get a headline that looked like:
China to Purchase $200 Billion of US Debt
Terms include: Higher interest rate, a commitment to buy Chinese goods and a promise to reduce the deficit.
Of course we are not going to see a headline like that anytime soon, but the developments in Greece are a possible first step in that direction. If China bails out Greece in 2010 it is a game changer from a number of perspectives.
BAD NEWS:
"If Greece is unable to address its budget deficit the Chinese will not invest and financial conditions for the country will deteriorate quickly. One consequence would be that Greece would be forced to separate from the Euro."
This is not a high probability outcome. However, talk of it would have a very significant impact on the FX markets. The people who I spoke with made an interesting observation, "Switzerland is very much integrated with the EU and the Euro, but they have maintained their own currency. If Greece had its own currency it could adjust it to achieve a trade advantage that would address the fundamental imbalances." (Same argument as "the weak dollar is good for the USA"). These same people point to the fact that the Swiss National Bank has been intervening in the currency market to weaken the Swiss Franc in order to achieve a trade advantage. The thinking is, “If it works for the Swiss, then Greece should do it too!”
Consider where this could go. If there is talk of this happening, it would raise the same issue for Spain and Italy who are suffering from their association with they Euro. This could lead in the direction of a two-tiered Euro. One would be strong. The other weak. The implications for the dollar would be significant in both the short and long term. It could be the source of instability as the process unfolds.
The Greece story has already gotten the money moving. It is a story that could take us in some surprising directions. I got the sense that there was a short fuse on this. The next three months may put some powerful forces into play.
Is there anything behind the Chinese/Greece connection? I think so. I always assume there is something to it when you get statements like the following. Asked whether Greece is negotiating with China to sell bonds, a government spokesman said:
"It may be true, and if it is true, we do not want to comment. But even if it isn't true we wouldn't want to comment.”
http://brucekrasting.blogspot.com/2009/12/greece-china-usa-and-euro-all-connected.html
I spoke with some friends who are Greek and also in the shipping business. They hate the problems that Greece is facing. The 12.7% budget deficit is the highest in the EU and is not sustainable. Efforts to cut government expenses have caused a political backlash against PM Papandreou. The only available solution is to raise taxes and crack down on tax evaders.
The Shippers are largely untaxed on their global operations. Their status is ‘protected’ under the constitution. Taxing the shippers would go a long way toward closing the budget gap. The changes in tax laws will not come easy. There is no certainty of the outcome. The sense that I got from these discussions was that there is a short window open for Greece to come up with a plan to cut its deficit to approximately 9%. I asked for both a ”good” and a “bad” news scenario. Although the responses to the question I asked are speculation, they have interesting implications.
GOOD NEWS:
"If Greece is able to restructure its tax code and install a plan to reduce its deficits to 8% of GDP, then China will invest Euro 25 billion in Greek bonds."
The issue of the Chinese investing in Greece was first raised on November 29 by the WSJ. I think it was one of those well placed rumors. If this were to happen, it would be of significance. It would establish that China is assuming a role as some form of 'lender of last resort'. The bilateral trade conditions that would be attached to a deal of this magnitude would re-raise the issue of China’s trade hegemony and economic muscle. For me, the most significant aspect of this is that it would represent yet another significant diversion of China’s investable funds away from the US.
If this were to happen, the $40 billion under discussion would not impact the supply demand equation for US debt. But the direction of this would be significant. The US desperately needs China to significantly increase their holdings of US IOU’s in the coming years. They are under no obligation to do so. What if they were to take a stance with the US similar to Greece? We would get a headline that looked like:
China to Purchase $200 Billion of US Debt
Terms include: Higher interest rate, a commitment to buy Chinese goods and a promise to reduce the deficit.
Of course we are not going to see a headline like that anytime soon, but the developments in Greece are a possible first step in that direction. If China bails out Greece in 2010 it is a game changer from a number of perspectives.
BAD NEWS:
"If Greece is unable to address its budget deficit the Chinese will not invest and financial conditions for the country will deteriorate quickly. One consequence would be that Greece would be forced to separate from the Euro."
This is not a high probability outcome. However, talk of it would have a very significant impact on the FX markets. The people who I spoke with made an interesting observation, "Switzerland is very much integrated with the EU and the Euro, but they have maintained their own currency. If Greece had its own currency it could adjust it to achieve a trade advantage that would address the fundamental imbalances." (Same argument as "the weak dollar is good for the USA"). These same people point to the fact that the Swiss National Bank has been intervening in the currency market to weaken the Swiss Franc in order to achieve a trade advantage. The thinking is, “If it works for the Swiss, then Greece should do it too!”
Consider where this could go. If there is talk of this happening, it would raise the same issue for Spain and Italy who are suffering from their association with they Euro. This could lead in the direction of a two-tiered Euro. One would be strong. The other weak. The implications for the dollar would be significant in both the short and long term. It could be the source of instability as the process unfolds.
The Greece story has already gotten the money moving. It is a story that could take us in some surprising directions. I got the sense that there was a short fuse on this. The next three months may put some powerful forces into play.
Is there anything behind the Chinese/Greece connection? I think so. I always assume there is something to it when you get statements like the following. Asked whether Greece is negotiating with China to sell bonds, a government spokesman said:
"It may be true, and if it is true, we do not want to comment. But even if it isn't true we wouldn't want to comment.”
http://brucekrasting.blogspot.com/2009/12/greece-china-usa-and-euro-all-connected.html
17 October 2009
GEAB N°38 is available! Global Systemic Crisis – The European Union at a crossroads in 2010: an accomplice or a victim of the collapse of the dollar?
The major trends at work in the 4th and 5th phases of the global systemic crisis (the decanting phase and the global geopolitical dislocation phase) are unveiling every day (1). Everyone has now realized that the United States is being swept into an uncontrollable spiral involving widespread insolvency of the country and gross incompetence of the U.S. elite in implementing the necessary solutions. The foretold US default is well underway as exemplified by the falling dollar and the flight of capital from the country: only the name of the liquidator and the recognition of the bankruptcy are still missing, but it shouldn’t be long now. Following the example of its leader, the Western bloc (which Japan has undertaken to move away from, implementing completely new political, economic, financial and diplomatic policies (2)), is in total decay symbolized by NATO’s coalition in Afghanistan (3).
According to LEAP/E2020, in 2010, the European Union having four strategic core requirements, will be compelled to take a number of urgent decisions in a context of a fast collapse of the Western camp that could be summed up as the US Dollar’s fate. The decisions taken by the EU will define the role the Europeans will be playing in the post-crisis world: either they start to appear as key-players in recasting tomorrow’s world and bring forward their own vision of the future, seeking the partners they need with no exceptions; or they remain the willing victims of a sinking Western Bloc, blindly following Washington's descent into hell. In the first case, the EU fulfills its historic purpose of restoring the Europeans’ command over their collective destiny; in the latter, it would just prove to be the Western equivalent of the Comecon (4), a futureless appendix of the protective superpower.
Heavy trends are already visible which, according to our team, have began to push Europe in a number of predictable directions. However, the intellectual weakness of Europe’s present political leadership (in the EU and member-states alike) compels us to soften our forecasts.
In all cases, since the EU is the world’s largest economic and trade power (5), the continuing development of these trends will soon impact directly on a large number of major economic, financial, and strategic factors: exchange rates, commodity prices, growth, social systems, budget balances, global governance…
In this 38th issue of the GEAB, besides ‘strategic and operational recommendations to survive the crisis’ and their ‘crisis-related country-risk anticipations for 2009-2014’, our team has decided to analyze these four requirements to which the EU will be compelled to find answers full of consequences:
1. Addressing the failure of the monetary system based on the USD and not becoming helpless when 1EUR=2USD
2. Avoiding exploding budget deficits like those in the US and UK
3. Responding to the aggravation of the Iran/Israel/USA crisis and war in Afghanistan by defining a specific European position
4. Learning to deal independently and constructively with the new key players of the post-crisis world: China, India, Brazil and Russia in particular.
It impossible to envisage waiting later than 2011 to deal with everyone of these crucial aspects (crucial for both the Europeans and the rest of the world). Just imagine what would happen if the Europeans remained passive beyond 2010, while faced with these four requirements:
1. If the Europeans are content to watch the Dollar sink, their exports to the US and the dollar-pegged countries will fall dramatically, exacerbating the economic and social crisis in the EU.
2. If the Europeans, their leaders in particular, are content to let public deficits swell, like France is currently doing, the Eurozone will soon become prey to profound disagreements between Northern and Southern Europe.
3. If European leaders are content to follow the Israel/Washington line in dealing with Iran’s nuclear issue and to fall in behind the Obama administration regarding Afghanistan, they will soon be faced with growing public dissatisfaction which they are not prepared nor in a good position to face, a guarantee of serious political instability in every member state.
4. If the Europeans are content to refuse independently debating the interests they have in common with the Chinese, Indians, Brazilians and Russians, they willingly deprive themselves of any means to bring forward their perspective on the previous three issues, as no significant move can be accomplished without them (6).
Historical change in China-India share of global GDP (1500-2008) - Sources: Bloomberg / Gluskin Sheff - 2009
According to our researchers, 2010 is certainly a crucial year for the Europeans and their collective future. The relationship of the EU, and particularly of the Euro, with the dollar will be decisive for the Europeans, as much as for the Dollar and the global monetary order altogether. Not that the Europeans chose the year (2010) or the subject (the Dollar) (the leaders of the Euroland would certainly prefer to go on with their « business as usual »), but History is very ironical in calling the US “allies” bluff: sinking now with Washington or swimming without Washington.
In the image of all the developments involved in the ongoing global systemic crisis, time is going through a process of contraction: events are happening a lot faster. On this subject, we are surprised to hear various « experts » describing Robert Fisk’s article entitled « The Demise of the Dollar » (7) - where the author suggests that the Russians, Chinese, French, Japanese and Gulf oil-producing countries would be discussing the idea of pricing oil in a currency other than the US Dollar within nine years - as eccentric. According to LEAP/E2020, the only surprising element in this analysis is in the nine year delay. In fact, this development will occur much earlier, within two years, under the pressure of events.
In order to realize the extraordinary speeding up of History created by the crisis, let’s remember what kind of a place the world was nine years ago. Nine years ago, G. W. Bush had recently been elected; 9/11 would take place in two years from then; the US were neither stuck in Afghanistan nor in Iraq; Katrina had not yet destroyed New-Orleans; one Euro was worth 0.9 USD; Russia was a country adrift the EU was preparing a constitution meant to be popular; China was a poor international player; the US economy was shown to the world as an example and the United Kingdom was preaching ultra-liberalism throughout Europe; Wall Street’s investment banks seemed invincible,… the list could go on and on. What is highlighted is that each of these events seemed unthinkable to most “experts” just a few weeks before they happened. Therefore it is, in fact, very naïve to consider that it will take nine years until oil is priced other than in dollars, a currency utterly dependent on central banks’ will (increasingly a « bad » will, by the way) to buy, buy and buy more just for the sake of its survival.
As early as the second quarter of 2009, central banks from all over the world undertook to stop accumulating US dollars (dollars accounted for 37 percent only of their currency purchases while they account for 63 percent of their reserves) (8). As early as July 2009, close to USD 100 billion worth of net capital fled the US (9), at the precise moment when the US was claiming to be able to attract more than USD 100 billion a month to help finance the federal deficit (not to mention the other deficits).
In this situation, a fundamental question must be asked: who is really buying these USD 100 billion worth in Treasuries each month? Certainly not US citizens, indebted beyond any reason and left without savings or credit. Certainly not foreign private investors, more and more concerned about the economic health of the US. Certainly not the Chinese, Russian or Japanese central banks, more concerned about curbing their purchases of long-term bonds, and even starting to sell their Treasuries or exchange their long-term bonds against short-term ones. Strangely enough, the Bank of England alone seems to still have this appetite (10). Therefore, we are left we the “usual suspects’, i.e. the Fed and its network of « primary dealers ». “Money printing” is taking place on a far greater scale than acknowledged by the Fed under its official policy of « quantitative easing ».
Change in foreign purchases of Long-Term US securities (1979 – 2009) - Source: Market Oracle / Sean Brodick - 09/2009
As the US announced a federal budget deficit of USD 1,000 billion a year over the next decade (11), who can honestly believe that the rest of the world would accept nine more years being paid in funny money? Maybe those who found it impossible that Wall Street could collapse in September 2008? Or those who thought Obama would change America and the world (12)? Or else those who persist in thinking that the American consumer will rise from his ashes and fuel the « impossible recovery » (13)?
Unlike last year, no panic will come to the rescue of the dollar. This time, the US currency is seen more as a sham than as a safe haven. Indeed decoupling of the rest of the world (Asia, South America and Europe in particular) is underway (14) and it is precisely the reason why 2010 is such a crucial year for the Europeans. If they don’t do anything about it, the Euro will become a safe-haven currency and it will rise until it suffocates the European economy. The Eurozone must therefore become more aggressive and discuss with the other big economic and financial players how to avoid the Euro soaring against the Yuan, the Yen and all the other currencies of its trade partners.
On this aspect, the EU doesn’t have a choice: it cannot be lasting policy to purchase billions of USD every day that lose value every day as a result of the increasing pace at which they are printed (15). Moreover, the EU is in the strongest position to negotiate with the IMF for the suppression of the US right of veto and for sharing power with the « re-emerging » powers (16).
Relative weight of big players in global wealth - Source: IMF - 2009
As usual, external events will push the Europeans to act in a united and proactive manner. In the present case, according to LEAP/E2020, the issue of the Dollar will be a powerful stimulus for European action in 2010. History, whose only “sense” is the sense of irony as often recalled by our team, is apparently ready to give the Europeans the role everyone thought would be played by the Chinese…
http://www.leap2020.eu/GEAB-N-38-is-available!-Global-Systemic-Crisis-The-European-Union-at-a-crossroads-in-2010-an-accomplice-or-a-victim-of_a3885.html
According to LEAP/E2020, in 2010, the European Union having four strategic core requirements, will be compelled to take a number of urgent decisions in a context of a fast collapse of the Western camp that could be summed up as the US Dollar’s fate. The decisions taken by the EU will define the role the Europeans will be playing in the post-crisis world: either they start to appear as key-players in recasting tomorrow’s world and bring forward their own vision of the future, seeking the partners they need with no exceptions; or they remain the willing victims of a sinking Western Bloc, blindly following Washington's descent into hell. In the first case, the EU fulfills its historic purpose of restoring the Europeans’ command over their collective destiny; in the latter, it would just prove to be the Western equivalent of the Comecon (4), a futureless appendix of the protective superpower.
Heavy trends are already visible which, according to our team, have began to push Europe in a number of predictable directions. However, the intellectual weakness of Europe’s present political leadership (in the EU and member-states alike) compels us to soften our forecasts.
In all cases, since the EU is the world’s largest economic and trade power (5), the continuing development of these trends will soon impact directly on a large number of major economic, financial, and strategic factors: exchange rates, commodity prices, growth, social systems, budget balances, global governance…
In this 38th issue of the GEAB, besides ‘strategic and operational recommendations to survive the crisis’ and their ‘crisis-related country-risk anticipations for 2009-2014’, our team has decided to analyze these four requirements to which the EU will be compelled to find answers full of consequences:
1. Addressing the failure of the monetary system based on the USD and not becoming helpless when 1EUR=2USD
2. Avoiding exploding budget deficits like those in the US and UK
3. Responding to the aggravation of the Iran/Israel/USA crisis and war in Afghanistan by defining a specific European position
4. Learning to deal independently and constructively with the new key players of the post-crisis world: China, India, Brazil and Russia in particular.
It impossible to envisage waiting later than 2011 to deal with everyone of these crucial aspects (crucial for both the Europeans and the rest of the world). Just imagine what would happen if the Europeans remained passive beyond 2010, while faced with these four requirements:
1. If the Europeans are content to watch the Dollar sink, their exports to the US and the dollar-pegged countries will fall dramatically, exacerbating the economic and social crisis in the EU.
2. If the Europeans, their leaders in particular, are content to let public deficits swell, like France is currently doing, the Eurozone will soon become prey to profound disagreements between Northern and Southern Europe.
3. If European leaders are content to follow the Israel/Washington line in dealing with Iran’s nuclear issue and to fall in behind the Obama administration regarding Afghanistan, they will soon be faced with growing public dissatisfaction which they are not prepared nor in a good position to face, a guarantee of serious political instability in every member state.
4. If the Europeans are content to refuse independently debating the interests they have in common with the Chinese, Indians, Brazilians and Russians, they willingly deprive themselves of any means to bring forward their perspective on the previous three issues, as no significant move can be accomplished without them (6).
Historical change in China-India share of global GDP (1500-2008) - Sources: Bloomberg / Gluskin Sheff - 2009
According to our researchers, 2010 is certainly a crucial year for the Europeans and their collective future. The relationship of the EU, and particularly of the Euro, with the dollar will be decisive for the Europeans, as much as for the Dollar and the global monetary order altogether. Not that the Europeans chose the year (2010) or the subject (the Dollar) (the leaders of the Euroland would certainly prefer to go on with their « business as usual »), but History is very ironical in calling the US “allies” bluff: sinking now with Washington or swimming without Washington.
In the image of all the developments involved in the ongoing global systemic crisis, time is going through a process of contraction: events are happening a lot faster. On this subject, we are surprised to hear various « experts » describing Robert Fisk’s article entitled « The Demise of the Dollar » (7) - where the author suggests that the Russians, Chinese, French, Japanese and Gulf oil-producing countries would be discussing the idea of pricing oil in a currency other than the US Dollar within nine years - as eccentric. According to LEAP/E2020, the only surprising element in this analysis is in the nine year delay. In fact, this development will occur much earlier, within two years, under the pressure of events.
In order to realize the extraordinary speeding up of History created by the crisis, let’s remember what kind of a place the world was nine years ago. Nine years ago, G. W. Bush had recently been elected; 9/11 would take place in two years from then; the US were neither stuck in Afghanistan nor in Iraq; Katrina had not yet destroyed New-Orleans; one Euro was worth 0.9 USD; Russia was a country adrift the EU was preparing a constitution meant to be popular; China was a poor international player; the US economy was shown to the world as an example and the United Kingdom was preaching ultra-liberalism throughout Europe; Wall Street’s investment banks seemed invincible,… the list could go on and on. What is highlighted is that each of these events seemed unthinkable to most “experts” just a few weeks before they happened. Therefore it is, in fact, very naïve to consider that it will take nine years until oil is priced other than in dollars, a currency utterly dependent on central banks’ will (increasingly a « bad » will, by the way) to buy, buy and buy more just for the sake of its survival.
As early as the second quarter of 2009, central banks from all over the world undertook to stop accumulating US dollars (dollars accounted for 37 percent only of their currency purchases while they account for 63 percent of their reserves) (8). As early as July 2009, close to USD 100 billion worth of net capital fled the US (9), at the precise moment when the US was claiming to be able to attract more than USD 100 billion a month to help finance the federal deficit (not to mention the other deficits).
In this situation, a fundamental question must be asked: who is really buying these USD 100 billion worth in Treasuries each month? Certainly not US citizens, indebted beyond any reason and left without savings or credit. Certainly not foreign private investors, more and more concerned about the economic health of the US. Certainly not the Chinese, Russian or Japanese central banks, more concerned about curbing their purchases of long-term bonds, and even starting to sell their Treasuries or exchange their long-term bonds against short-term ones. Strangely enough, the Bank of England alone seems to still have this appetite (10). Therefore, we are left we the “usual suspects’, i.e. the Fed and its network of « primary dealers ». “Money printing” is taking place on a far greater scale than acknowledged by the Fed under its official policy of « quantitative easing ».
Change in foreign purchases of Long-Term US securities (1979 – 2009) - Source: Market Oracle / Sean Brodick - 09/2009
As the US announced a federal budget deficit of USD 1,000 billion a year over the next decade (11), who can honestly believe that the rest of the world would accept nine more years being paid in funny money? Maybe those who found it impossible that Wall Street could collapse in September 2008? Or those who thought Obama would change America and the world (12)? Or else those who persist in thinking that the American consumer will rise from his ashes and fuel the « impossible recovery » (13)?
Unlike last year, no panic will come to the rescue of the dollar. This time, the US currency is seen more as a sham than as a safe haven. Indeed decoupling of the rest of the world (Asia, South America and Europe in particular) is underway (14) and it is precisely the reason why 2010 is such a crucial year for the Europeans. If they don’t do anything about it, the Euro will become a safe-haven currency and it will rise until it suffocates the European economy. The Eurozone must therefore become more aggressive and discuss with the other big economic and financial players how to avoid the Euro soaring against the Yuan, the Yen and all the other currencies of its trade partners.
On this aspect, the EU doesn’t have a choice: it cannot be lasting policy to purchase billions of USD every day that lose value every day as a result of the increasing pace at which they are printed (15). Moreover, the EU is in the strongest position to negotiate with the IMF for the suppression of the US right of veto and for sharing power with the « re-emerging » powers (16).
Relative weight of big players in global wealth - Source: IMF - 2009
As usual, external events will push the Europeans to act in a united and proactive manner. In the present case, according to LEAP/E2020, the issue of the Dollar will be a powerful stimulus for European action in 2010. History, whose only “sense” is the sense of irony as often recalled by our team, is apparently ready to give the Europeans the role everyone thought would be played by the Chinese…
http://www.leap2020.eu/GEAB-N-38-is-available!-Global-Systemic-Crisis-The-European-Union-at-a-crossroads-in-2010-an-accomplice-or-a-victim-of_a3885.html
19 July 2009
"If you lend me $5 trillion today, I will gladly repay you Tuesday." Europe on the Brink..~ Mauldin
Hat tip to Charles Powell for being alert to the problems in European Banks, and for reminding me of the importance of the Mauldin piece. The internationalisation of bad practice amid a race for yield and bonuses is staggering. All the recovery talk is facile and a new world is on the cards.
Europe on the Brink
Globalization is a two-edged sword. On balance, it has brought prosperity to those who have embraced it, with rising lifestyles, better health, longer lives, and more. The more we need each other, the less likely it is that we'll shoot each other. Shooting your customers is not a good business strategy. And while the growth has not been even or smooth, only a Luddite would want to return to the early 1800s or 1900s, or even 1975.
The other edge of that sword? We are connected in so very many ways, far more than most of the world suspected. Who thought that insane lending policies at US mortgage banks would bring the world financial system to its knees, increasing unemployment and leading to a global recession? World trade is down 20% or more. US railroad shipments are down more than 20% year-over-year. Chinese (and Asian) factories have seen their orders drop, as US consumers have gone on strike. The US trade deficit was just $25 billion last month; and while our exports are still dropping, our imports are dropping more. Oil is becoming a bigger and bigger share of imports, and that does not come from Asian exporters.
The US is far and away the country with the largest gross domestic product (GDP). California would be the 7th largest country, but few think of California in such terms. For this letter, at least, I would like to think of Europe as a whole rather than as 27 countries. From that perspective, Europe is as economically important to the world as the US. What happens in Europe makes a difference in the US.
Last week we looked at the precarious position of Japan, the second largest economy (or third if you think of Europe as a whole). It was a sobering letter. When you realize the extent to which Japan has funded Asian expansion, what is happening there cannot be good for the world.
But Europe's banks have been much more aggressive in funding emerging-market expansion than US or Japanese banks. Western European banks have lent $4.5 trillion to various emerging-market countries, businesses, and consumers. Many Eastern European businesses borrowed in low-interest-rate euros. New homeowners in Hungary and the rest of Eastern Europe borrowed in Swiss francs and euros, and as their currencies have collapsed they now find they owe more on their homes than they're worth.
And here's the problem. Europe's banking system is in far worse shape than the US system. The losses may be bigger, and their capital to meet those losses is certainly less. Let's look at some charts. Remove sharp objects or pour another adult beverage.
As I noted last week, one of the real benefits of writing this letter is that I get to see a lot of really interesting information from readers and meet with very savvy investment professionals. I recently had the privilege of sitting with a team of analysts from Hayman Capital here in Dallas. Hayman runs a global macro hedge fund, so they spend a lot of time thinking about how all the different aspects of the global markets fit together. This week we again look at some of their analysis. There was a lot of work (as in months) done here; and Kyle Bass, the founder of the firm, graciously allowed me to share some of it with you (and kudos to Wes Swank, who pulled this together). The graphs are theirs, and my discussion about them is certainly informed by our meeting; but I am using the material as a launching point, so they are not responsible for my conclusions and interpretations.
And Then There Was Leverage
In the first few years of the G.W. Bush administration, the banking authorities decided it would be OK to allow five banks to increase their leverage from 12:1 up to 30:1. Which five banks, you ask? Bear Stearns, Lehman, Merrill Lynch, JPMorgan, and Goldman Sachs. How did that work out, just five years later? Three are gone and two survived with large dollops of taxpayer money.
(Sidebar: Is it really any surprise that Goldman and JPMorgan are making record profits on the underwriting and trading side of the business? Hell, if I could eliminate 50% of my competition, my profits would grow too! JPMorgan's consumer credit, credit card, and other business groups are losing money big-time.)
Thirty times leverage means that if you lose 3.3%, you wipe out all your capital. And we watched as banks too big to fail were bailed out with taxpayer dollars. Slowly, banks are buying time, writing down assets. Remember, this month is the second anniversary of the onset of the credit crisis. I wrote back then that the strategy would be to stretch this out as long as possible. Time heals a lot of bad debts, especially at a 0% Fed Funds rate.
Banks that are reporting so far this quarter seem to be saying that the write-offs will start to level off in about two quarters, although banking expert Chris Whalen says that the level may stay higher than we think for longer than we think. There are a lot of assets to write off, and they are just now getting to the commercial real estate problems. This is going to take time. (For an interesting interview on CNBC with Maine fishing buddy Chris Whalen, click here: http://www.ritholtz.com/blog/2009/07/christopher-whalen-banking/.)
The point, before we get to Europe, is that here there was a central bank and a government that not only could step in but was willing to. I know former Treasury Secretary Paulson had his critics, but I am not one of them. Did he do some things that in hindsight he might like to take a "mulligan" on? Sure. But he dealt with the problems in the best manner he could. The time to have taken action was when we were making liar and no-doc loans and calling then AAA, or allowing banks to go to 30:1 leverage. Paulson had to deal with eggs that were already broken. That the system did not crater is to his credit. Securitizing what he and everyone else should have known would be garbage while he was head of Goldman Sachs is not to his credit. But I digress.
I am going to give you four charts showing the leverage of banks in the US, the United Kingdom, the Eurozone, and Switzerland. The bottom, blue portion is assets to common and preferred stock; the red is assets to common equity, which can include good will; and the purple is assets to tangible common equity.
Tangible common equity is all the rage, and that is what the recent "stress tests" measured, as opposed to tier 1 capital, which includes preferred stock (which would basically be the blue portion.) TCE only includes common shares. Now, let's start with the US. These graphs show leverage. The average leverage of tier 1 capital of the five largest banks is in the range of 12:1, and is actually down from ten years ago. (By the way, a very good and simple explanation of all this can be found at http://baselinescenario.com/2009/02/24/tangible-common-equity-for-beginners/.)
While the TCE has obviously been rising and taking total leverage to rather lofty levels in the mid-40s, banks are raising capital, and over time leverage will come back down. It helps if you can borrow money at almost nothing and lend it out at much higher rates. Now, let's turn to the United Kingdom. This is uglier.
Regulators in the UK allowed 20:1 leverage on a regular basis. It is now almost 40: and with TCE is around 55. The assets of UK banks are about five times as large as UK GDP. By comparison, for the US the ratio is barely 2:1.
Think about that for a second. The UK has banking assets which are five times as large as the annual domestic output of the country. They also had a housing bubble. They have their own bailouts to deal with, which are massive and will potentially get much larger. But at least they have a central bank and government that can try to fix the problems.
But as the commercial says, "But wait, there's more!" Let's look at the Eurozone.
Leverage is now 35:1 and with TCE is almost 55. How did 35:1 work out for the US? Given the massive credit problems that Eurozone banks have with emerging markets (plus Spain's housing bubble, which is every bit as bad as that of the US), will this not end up in wailing and weeping?
Too Big To Save
And here's the real issue. They have no Paulson and Bernanke. Now some of my Austrian-economist friends will say, "Good, they should all be allowed to die;" but that is a very cavalier attitude when you start talking about actually increasing the unemployment rate to something like 20%. I agree that management should be changed (as well as the regulators: 35:1 to 1 - really? What were they thinking?) and shareholders wiped out, but I do not want the system to collapse. And this is a global risk, not just localized to Ireland or Spain or Austria. Sure, the pain might be worse in the local region, but we will all feel it.
The European Central Bank, at least as of now, cannot step in and start saving individual banks. How do you save a Spanish bank and not an Austrian bank? Austria's banks have made large loans to Eastern Europe, in euros and Swiss francs, and are going to have large losses, far more than 3%, which would wipe out their capital. But bank assets in Austria are 4 times GDP. What we have are banks that are too big to save for relatively small Austria. And for Italy, Spain, Greece, et al. More on this below. For now, let's turn our eyes to Switzerland.
Those Wild and Crazy Swiss
We think of Switzerland as a stodgy, by-the-numbers, clockwork type of banking country. I have done business with Swiss private bankers, and they are conservative. But somewhere, somehow, UBS and Credit Suisse ran up a little leverage. Before the crisis, they were over 40:1. And now they're nearly at a nosebleed-high 70!
As an aside, I was in Switzerland about two years ago, meeting with some very well-known Swiss, let's call them dignitaries. In a very off-the-record conversation, they told me UBS was technically bankrupt. As it turns out, there were a lot of banks around the world that were technically bankrupt.
Now, the next graph underscores the problem of "too big to save." Let's say the US will eventually pump $1 trillion into the banking system (in taxpayer losses). That is about 7% of US GDP. We may not like it, but it doesn't stop the game. US bank assets are only twice US GDP. Switzerland and Ireland are over 7 times, the UK is over 5, and the Eurozone is at 4 times. And so it goes.
Eurozone banks are already reeling from losses from US subprime-related problems. They are now getting ready to deal with even deeper losses from their own lending portfolios. If the losses were just 5% of the portfolio (an optimistic assumption), it would be 20% of Eurozone GDP. But each country is responsible for its own banks. While it is thought Germany will be able to handle its problems, the prognostication for Austria and Italy is not so sanguine. Italy is already running a massive deficit, and has no central bank to monetize its debt. The same goes for Portugal, Spain, Greece, and Ireland. 5% loan losses in Ireland would be 40% of GDP, the equivalent for my fellow US citizens of about $5 trillion. Where does Europe find a few trillion dollars?
I was writing in late 2006 that the subprime lending market would end in tears. And I think the European banking crisis that is on the horizon has the potential to be every bit as big a problem as subprime loans. The world depended on Europeans banks for much of the lending that allowed for growth and development. Like their counterparts in the US, they are going to have to reduce their loan portfolios. Deleveraging is not fun.
It takes time to build up a banking infrastructure that can raise the capital necessary to make and process loans. A lot of time. Europe is a big customer of the US and Asia. Their businesses are going to be hit hard by the lack of capital, which is of course no good for employment, etc. We are all connected. What happens in Rome no longer stays in Rome.
Let me reprint a graph from last week. Burn it into your mind. The world is going to need to find $5 trillion to finance government debt issuance. And we need to fund private business and consumer debt. Where is all this money going to come from? "If you lend me $5 trillion today, I will gladly repay you Tuesday
PDF and charts Charts
http://www.frontlinethoughts.com/article.asp?id=mwo071709
Europe on the Brink
Globalization is a two-edged sword. On balance, it has brought prosperity to those who have embraced it, with rising lifestyles, better health, longer lives, and more. The more we need each other, the less likely it is that we'll shoot each other. Shooting your customers is not a good business strategy. And while the growth has not been even or smooth, only a Luddite would want to return to the early 1800s or 1900s, or even 1975.
The other edge of that sword? We are connected in so very many ways, far more than most of the world suspected. Who thought that insane lending policies at US mortgage banks would bring the world financial system to its knees, increasing unemployment and leading to a global recession? World trade is down 20% or more. US railroad shipments are down more than 20% year-over-year. Chinese (and Asian) factories have seen their orders drop, as US consumers have gone on strike. The US trade deficit was just $25 billion last month; and while our exports are still dropping, our imports are dropping more. Oil is becoming a bigger and bigger share of imports, and that does not come from Asian exporters.
The US is far and away the country with the largest gross domestic product (GDP). California would be the 7th largest country, but few think of California in such terms. For this letter, at least, I would like to think of Europe as a whole rather than as 27 countries. From that perspective, Europe is as economically important to the world as the US. What happens in Europe makes a difference in the US.
Last week we looked at the precarious position of Japan, the second largest economy (or third if you think of Europe as a whole). It was a sobering letter. When you realize the extent to which Japan has funded Asian expansion, what is happening there cannot be good for the world.
But Europe's banks have been much more aggressive in funding emerging-market expansion than US or Japanese banks. Western European banks have lent $4.5 trillion to various emerging-market countries, businesses, and consumers. Many Eastern European businesses borrowed in low-interest-rate euros. New homeowners in Hungary and the rest of Eastern Europe borrowed in Swiss francs and euros, and as their currencies have collapsed they now find they owe more on their homes than they're worth.
And here's the problem. Europe's banking system is in far worse shape than the US system. The losses may be bigger, and their capital to meet those losses is certainly less. Let's look at some charts. Remove sharp objects or pour another adult beverage.
As I noted last week, one of the real benefits of writing this letter is that I get to see a lot of really interesting information from readers and meet with very savvy investment professionals. I recently had the privilege of sitting with a team of analysts from Hayman Capital here in Dallas. Hayman runs a global macro hedge fund, so they spend a lot of time thinking about how all the different aspects of the global markets fit together. This week we again look at some of their analysis. There was a lot of work (as in months) done here; and Kyle Bass, the founder of the firm, graciously allowed me to share some of it with you (and kudos to Wes Swank, who pulled this together). The graphs are theirs, and my discussion about them is certainly informed by our meeting; but I am using the material as a launching point, so they are not responsible for my conclusions and interpretations.
And Then There Was Leverage
In the first few years of the G.W. Bush administration, the banking authorities decided it would be OK to allow five banks to increase their leverage from 12:1 up to 30:1. Which five banks, you ask? Bear Stearns, Lehman, Merrill Lynch, JPMorgan, and Goldman Sachs. How did that work out, just five years later? Three are gone and two survived with large dollops of taxpayer money.
(Sidebar: Is it really any surprise that Goldman and JPMorgan are making record profits on the underwriting and trading side of the business? Hell, if I could eliminate 50% of my competition, my profits would grow too! JPMorgan's consumer credit, credit card, and other business groups are losing money big-time.)
Thirty times leverage means that if you lose 3.3%, you wipe out all your capital. And we watched as banks too big to fail were bailed out with taxpayer dollars. Slowly, banks are buying time, writing down assets. Remember, this month is the second anniversary of the onset of the credit crisis. I wrote back then that the strategy would be to stretch this out as long as possible. Time heals a lot of bad debts, especially at a 0% Fed Funds rate.
Banks that are reporting so far this quarter seem to be saying that the write-offs will start to level off in about two quarters, although banking expert Chris Whalen says that the level may stay higher than we think for longer than we think. There are a lot of assets to write off, and they are just now getting to the commercial real estate problems. This is going to take time. (For an interesting interview on CNBC with Maine fishing buddy Chris Whalen, click here: http://www.ritholtz.com/blog/2009/07/christopher-whalen-banking/.)
The point, before we get to Europe, is that here there was a central bank and a government that not only could step in but was willing to. I know former Treasury Secretary Paulson had his critics, but I am not one of them. Did he do some things that in hindsight he might like to take a "mulligan" on? Sure. But he dealt with the problems in the best manner he could. The time to have taken action was when we were making liar and no-doc loans and calling then AAA, or allowing banks to go to 30:1 leverage. Paulson had to deal with eggs that were already broken. That the system did not crater is to his credit. Securitizing what he and everyone else should have known would be garbage while he was head of Goldman Sachs is not to his credit. But I digress.
I am going to give you four charts showing the leverage of banks in the US, the United Kingdom, the Eurozone, and Switzerland. The bottom, blue portion is assets to common and preferred stock; the red is assets to common equity, which can include good will; and the purple is assets to tangible common equity.
Tangible common equity is all the rage, and that is what the recent "stress tests" measured, as opposed to tier 1 capital, which includes preferred stock (which would basically be the blue portion.) TCE only includes common shares. Now, let's start with the US. These graphs show leverage. The average leverage of tier 1 capital of the five largest banks is in the range of 12:1, and is actually down from ten years ago. (By the way, a very good and simple explanation of all this can be found at http://baselinescenario.com/2009/02/24/tangible-common-equity-for-beginners/.)
While the TCE has obviously been rising and taking total leverage to rather lofty levels in the mid-40s, banks are raising capital, and over time leverage will come back down. It helps if you can borrow money at almost nothing and lend it out at much higher rates. Now, let's turn to the United Kingdom. This is uglier.
Regulators in the UK allowed 20:1 leverage on a regular basis. It is now almost 40: and with TCE is around 55. The assets of UK banks are about five times as large as UK GDP. By comparison, for the US the ratio is barely 2:1.
Think about that for a second. The UK has banking assets which are five times as large as the annual domestic output of the country. They also had a housing bubble. They have their own bailouts to deal with, which are massive and will potentially get much larger. But at least they have a central bank and government that can try to fix the problems.
But as the commercial says, "But wait, there's more!" Let's look at the Eurozone.
Leverage is now 35:1 and with TCE is almost 55. How did 35:1 work out for the US? Given the massive credit problems that Eurozone banks have with emerging markets (plus Spain's housing bubble, which is every bit as bad as that of the US), will this not end up in wailing and weeping?
Too Big To Save
And here's the real issue. They have no Paulson and Bernanke. Now some of my Austrian-economist friends will say, "Good, they should all be allowed to die;" but that is a very cavalier attitude when you start talking about actually increasing the unemployment rate to something like 20%. I agree that management should be changed (as well as the regulators: 35:1 to 1 - really? What were they thinking?) and shareholders wiped out, but I do not want the system to collapse. And this is a global risk, not just localized to Ireland or Spain or Austria. Sure, the pain might be worse in the local region, but we will all feel it.
The European Central Bank, at least as of now, cannot step in and start saving individual banks. How do you save a Spanish bank and not an Austrian bank? Austria's banks have made large loans to Eastern Europe, in euros and Swiss francs, and are going to have large losses, far more than 3%, which would wipe out their capital. But bank assets in Austria are 4 times GDP. What we have are banks that are too big to save for relatively small Austria. And for Italy, Spain, Greece, et al. More on this below. For now, let's turn our eyes to Switzerland.
Those Wild and Crazy Swiss
We think of Switzerland as a stodgy, by-the-numbers, clockwork type of banking country. I have done business with Swiss private bankers, and they are conservative. But somewhere, somehow, UBS and Credit Suisse ran up a little leverage. Before the crisis, they were over 40:1. And now they're nearly at a nosebleed-high 70!
As an aside, I was in Switzerland about two years ago, meeting with some very well-known Swiss, let's call them dignitaries. In a very off-the-record conversation, they told me UBS was technically bankrupt. As it turns out, there were a lot of banks around the world that were technically bankrupt.
Now, the next graph underscores the problem of "too big to save." Let's say the US will eventually pump $1 trillion into the banking system (in taxpayer losses). That is about 7% of US GDP. We may not like it, but it doesn't stop the game. US bank assets are only twice US GDP. Switzerland and Ireland are over 7 times, the UK is over 5, and the Eurozone is at 4 times. And so it goes.
Eurozone banks are already reeling from losses from US subprime-related problems. They are now getting ready to deal with even deeper losses from their own lending portfolios. If the losses were just 5% of the portfolio (an optimistic assumption), it would be 20% of Eurozone GDP. But each country is responsible for its own banks. While it is thought Germany will be able to handle its problems, the prognostication for Austria and Italy is not so sanguine. Italy is already running a massive deficit, and has no central bank to monetize its debt. The same goes for Portugal, Spain, Greece, and Ireland. 5% loan losses in Ireland would be 40% of GDP, the equivalent for my fellow US citizens of about $5 trillion. Where does Europe find a few trillion dollars?
I was writing in late 2006 that the subprime lending market would end in tears. And I think the European banking crisis that is on the horizon has the potential to be every bit as big a problem as subprime loans. The world depended on Europeans banks for much of the lending that allowed for growth and development. Like their counterparts in the US, they are going to have to reduce their loan portfolios. Deleveraging is not fun.
It takes time to build up a banking infrastructure that can raise the capital necessary to make and process loans. A lot of time. Europe is a big customer of the US and Asia. Their businesses are going to be hit hard by the lack of capital, which is of course no good for employment, etc. We are all connected. What happens in Rome no longer stays in Rome.
Let me reprint a graph from last week. Burn it into your mind. The world is going to need to find $5 trillion to finance government debt issuance. And we need to fund private business and consumer debt. Where is all this money going to come from? "If you lend me $5 trillion today, I will gladly repay you Tuesday
PDF and charts Charts
http://www.frontlinethoughts.com/article.asp?id=mwo071709
2 July 2009
Sweden tells EU: Stimulus is an unaffordable waste
The European Union’s financial sector faces potential losses so large that the bloc’s governments cannot afford the risk of borrowing more money to boost Europe’s economy, Fredrik Reinfeldt, Sweden’s prime minister, said on Tuesday.
In an interview with the Financial Times marking Sweden’s assumption today of the EU’s rotating presidency, Mr Reinfeldt said his government would guide the 27-nation bloc for the next six months on the assumption that Europe’s financial sector was still not out of crisis territory.
Mr Reinfeldt’s emphasis on the need to halt and then reverse the rise in EU budget deficits and public debts was broader in its implications than the recent warnings of leaders such as Angela Merkel, Germany’s chancellor, because he specifically mentioned the difficulties facing Europe’s financial sector.
“We are warning that we are not through the financial crisis. There is still a financial crisis affecting the financial sector. We have exactly these discussions – what kind of losses are still out there?” Mr Reinfeldt said.
“That’s another reason for me to say, ‘Don’t push on with more stimulus packages, because you might face additional problems with the financial sector.’ ”
According to estimates released last month by the European Central Bank, banks in the 16-nation eurozone face potential writedowns of $283bn (€202bn, £172bn) between now and the end of 2010, mainly to take account of bad loans.
Meanwhile, the multibillion-euro rescue schemes announced for Europe’s banking system, including recapitalisations, debt guarantees, asset swaps and asset relief, will push eurozone public debt to an estimated 83.8 per cent of gross domestic product next year, up from 66 per cent in 2007.
Mr Reinfeldt said Europe’s financial sector was to some extent protected by emergency legislation put in place after the crisis touched its peak last September and October. “We are better prepared to deal with the fact that we might get further financial turbulence,” he said.
Nevertheless, his words echo the concerns of EU policymakers and financial specialists in Brussels, who say they doubt the capacity of many European banks to absorb future heavy losses stemming from the Continent’s worst recession in almost 80 years.
Mr Reinfeldt said it was all the more important for EU governments to restore order to their public finances in the post-crisis era because it would not be long before demographic changes – more pensioners and fewer of the population in jobs – started to put immense pressure on Europe’s welfare state.
Mr Reinfeldt, promising Sweden would push as hard as possible during its EU presidency for a global deal on fighting climate change at a Copenhagen conference in December, said he would do his best to persuade the US and China to sign up.
“We can never reach the global answers we need unless China and the US take the decision to do much more,” he said.
http://www.ft.com/cms/s/0/4a612352-659e-11de-8e34-00144feabdc0.html
In an interview with the Financial Times marking Sweden’s assumption today of the EU’s rotating presidency, Mr Reinfeldt said his government would guide the 27-nation bloc for the next six months on the assumption that Europe’s financial sector was still not out of crisis territory.
Mr Reinfeldt’s emphasis on the need to halt and then reverse the rise in EU budget deficits and public debts was broader in its implications than the recent warnings of leaders such as Angela Merkel, Germany’s chancellor, because he specifically mentioned the difficulties facing Europe’s financial sector.
“We are warning that we are not through the financial crisis. There is still a financial crisis affecting the financial sector. We have exactly these discussions – what kind of losses are still out there?” Mr Reinfeldt said.
“That’s another reason for me to say, ‘Don’t push on with more stimulus packages, because you might face additional problems with the financial sector.’ ”
According to estimates released last month by the European Central Bank, banks in the 16-nation eurozone face potential writedowns of $283bn (€202bn, £172bn) between now and the end of 2010, mainly to take account of bad loans.
Meanwhile, the multibillion-euro rescue schemes announced for Europe’s banking system, including recapitalisations, debt guarantees, asset swaps and asset relief, will push eurozone public debt to an estimated 83.8 per cent of gross domestic product next year, up from 66 per cent in 2007.
Mr Reinfeldt said Europe’s financial sector was to some extent protected by emergency legislation put in place after the crisis touched its peak last September and October. “We are better prepared to deal with the fact that we might get further financial turbulence,” he said.
Nevertheless, his words echo the concerns of EU policymakers and financial specialists in Brussels, who say they doubt the capacity of many European banks to absorb future heavy losses stemming from the Continent’s worst recession in almost 80 years.
Mr Reinfeldt said it was all the more important for EU governments to restore order to their public finances in the post-crisis era because it would not be long before demographic changes – more pensioners and fewer of the population in jobs – started to put immense pressure on Europe’s welfare state.
Mr Reinfeldt, promising Sweden would push as hard as possible during its EU presidency for a global deal on fighting climate change at a Copenhagen conference in December, said he would do his best to persuade the US and China to sign up.
“We can never reach the global answers we need unless China and the US take the decision to do much more,” he said.
http://www.ft.com/cms/s/0/4a612352-659e-11de-8e34-00144feabdc0.html
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