EU to Defend the Euro

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The only moderate reduction in market havoc on Friday has all eyes on the European officialdom. Will they mount a credible enough plan over the weekend to buy them a bit of breathing room so they can come up a better salvage operation for the euro experiment? The odds are against both steps in the process (calling off the hounds of the market and then patching up eurozone arrangements), but as the wags remind us, it isn’t over till the fat lady sings.

The EU is at least moving decisively to defend the euro. That may not be as nutty as it sounds, particularly if other countries (the US, Japan, and China, none of whom would benefit from a weak euro) join in the intervention. While single country efforts to prop up currencies usually end in tears (by the time the country under attack resorts to intervention, it is typically low on FX reserves and hence lacks firepower and credibiltiy), multi country intervention like the Plaza Accord and the Louvre accord have been effective. Bloomberg has reported that the short interest against the euro is at an all time high; a concerted short squeeze could produce an impressive reversal.

The details on the plans thus far from Bloomberg:

…leaders of the 16 euro countries said the workings of the financial backstop will be hammered out before the markets open on May 10.

“We will defend the euro, whatever it takes,” European Commission President Jose Barroso told reporters early today after the leaders met in Brussels.

Europe’s failure to contain Greece’s fiscal crisis triggered a 4.3 percent drop in the euro this week and led the U.S. and Asia to rally around in a bid to prevent a global sovereign-debt crisis from pitching the world back into a recession.

European officials declined to disclose the size of the stabilization fund, to be made up of money borrowed by the European Union’s central authorities with guarantees by national governments. Finance ministers will meet at 4 p.m. tomorrow in Brussels to flesh out the details.

“When the markets re-open Monday, we will have in place a mechanism to defend the euro,” French President Nicolas Sarkozy said. “If you don’t think that’s significant, you haven’t been to many EU summits.”

Yves here. Although a little punishment of speculators might make for an engrossing spectacle, the question is whether this action is sufficient. Relieving pressure on the euro does not do much for the member states. From the same story:

The extra yield that investors demand to hold Greek, Portuguese and Spanish debt instead of safer German bonds rose to euro-era highs yesterday. The premium on 10-year government bonds jumped as high as 973 basis points for Greece, 354 basis points for Portugal and 173 basis points for Spain.

Some readers have suggested that banning cash settlement of CDS (as in requiring investors to present the bonds to collect on CDS) would make a considerable difference. Note that CDS originally worked that way, that requirement was reworked on the fly in the Delphi bankruptcy when ISDA was faced with CDS of roughly 8X the notional value of outstanding bonds. They decided that the market would lose credibility if, quelle horreur, investors were required to adhere to contract terms and somehow find bonds if they were to collect on their CDS wagers. With the benefit of hindsight, this was a hugely destructive decision. But would the involved governments have the will to issue this sort of prohibition on sovereign CDS? It certainly does not appear to be on the table.

The other wee fly in the ointment is that Eurobanks are seeing their CDS spreads blow out, which again translates pretty pronto into higher funding costs (there is already stress in short term funding markets) And the ECB, unlike the Fed, does not appear willing to pull out all stops to calm markets (mind you, I’m not praising the Fed here; it’s one thing to engage in emergency operations, quite another to write a miscreant banking industry blank checks on a regular basis). From the Financial Times:

Europe’s banks on Friday made a desperate appeal for the European Central Bank to buy the bonds of crisis-hit eurozone members, as a fresh day of turmoil in markets battered share prices around the globe.

Fears that a debt default by Greece could paralyse the world’s financial system – just as the collapse of Lehman Brothers did two years ago – sparked another wave of heavy selling in Asian, European and US stock markets…

Worried bankers from 47 European groups urged the ECB to become a “buyer of last resort” of eurozone government bonds to steady markets.

There was speculation that the central bank could be preparing a €600bn ($762bn) loan facility for one-year loans at 1 per cent to help more than 1,000 banks in their funding.

But as European leaders met in Brussels to give their formal approval to a three-year €110bn rescue plan for Greece, there was no sign of imminent ECB action.

Yyes here. The conundrum is that if the pressure on the Eurobanks is merely a liquidity crunch, then the ECB ought to, per Bagehot’s rule, lend freely against good collateral, at penalty rates. Buying bonds does not fit that picture. And are the banks solvent? Ah, in many cases, that becomes a bit circular. Can the EU contain the mess to Greece, come up with credible plans for Portugal and Spain? If so, it might not be so nutty for the ECB to LEND against non-Greek sovereign debt. But right now, that would look like a leap of faith.

And we still have the second leg of the equation: how will the EU move forward? Right now, it looks to have an unworkable mix of national autonomy and EU level fiscal strictures. The public responses in Germany and Greece to the sacrifices required to make the current budgetary arrangements work send the message loudly and clearly that national identities and national prerogatives still have the upper hand. Moreover, any approach within the current framework would probably serve to attenuate the process of meeting fiscal targets. The problem is that any program to meet the goal of reducing fiscal deficits when the private sector is also deleveraging is certain to be deflationary and thus self defeating (Ireland will be the case example).

The market timetables seem much too compressed to go back to the drawing board and rework the eurozone arrangements. But the process of working out how to allow current members to exit, which would be the other end game, would also be a very protracted affair. Perhaps someone more clever can figure out a way to cut these Gordian knots, but there is no obvious surgical resolution, and the markets appear unwilling to tolerate much more ambiguity.

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63 comments

  1. Abhishek

    There are too many cooks and the broth is already spoiled. The mess that Europe is in can’t be resolved in a day or a week or a month. Plus I don’t really think that a common monetary policy is sustainable with different fiscal policies of the individual members.Either the Europeans need to accelerate their integration process or they need to retreat.Once the plot has been spoiled and the mess has been exposed , I can’t see how Europe and Euro will regain their credibility again.

  2. Vinny

    “And we still have the second leg of the equation: how will the EU move forward? Right now, it looks to have an unworkable mix of national autonomy and EU level fiscal strictures. The public responses in Germany and Greece to the sacrifices required to make the current budgetary arrangements work send the message loudly and clearly that national identities and national prerogatives still have the upper hand.”

    Sounds like the best course of action this weekend may be a total surrender of national autonomy of the EU to Germany. Angela Merkel will then be able to pat herself on the back for pulling a real coup for Deutschland… and this even without a “toothbrush mustache” (a.k.a. “Hitlerstache”)… although some claim her cleavage more than makes up for that… :)

    The Euro will finally be safe then… for 1000 years… :)

    Vinny

    1. ndk

      The states of Europe, debtors in a currency that they do not control, with another state that is only too happy to become their creditor. This is a perspective of this particular bailout that is utterly critical and too often forgotten.

      Thanks for pointing it out again. Control of a fiat currency imbues one with way more power than control of a hard currency does, and not only to inflate. I keep forgetting this.

      Scary.

      1. Vinny

        It is scary indeed. Personally, I’ll try to convert more of my Euros to gold asap. At least, if things really hit bottom, we won’t be starving.

        I will always remember the stories my mother used to tell me about when she was a kid during World War II. She was saying that who had some gold or silver did well, but who did not (with Zimbabwe style inflation going full steam) was always on the brink of starvation.

        Vinny

        1. Jerry

          Gold is tooooo high and my parents said even those with money who lived in the city were not able to find enough food on the shelves….I am going to the grocery store…

    2. Swedish Lex

      Vinny,

      I believe that your analsis probably is correct at some level; Germans thinking that if only all European States were or were becoming like Germany, all would be fine.

      That is however not going to happen, so the Germans are inasmuch deluding themselves.

      Progress will continue to be out of reach for as long as this lasts. The Germany economy would suffer tremendously should the euro implode, which right now looks more likely than not.

      This is not the last scene in the movie, though. And in Europe, there is always a sequel.

      1. Vinny

        Lex,

        “This is not the last scene in the movie, though. And in Europe, there is always a sequel.”

        Indeed. And that is a bit scary to me. Let’s hope things won’t get out of hand too badly. Personally, I like Southern Europe, and I’d hate it to have to go back to the US again, should things become too unstable around here.

        Vinny

  3. attempter

    Note that CDS originally worked that way, that requirement was reworked on the fly in the Delphi bankruptcy when ISDA was faced with CDS of roughly 8X the notional value of outstanding bonds. They decided that the market would lose credibility if, quelle horreur, investors were required to adhere to contract terms and somehow find bonds if they were to collect on their CDS wagers. With the benefit of hindsight, this was a hugely destructive decision. But would the involved governments have the will to issue this sort of prohibition on sovereign CDS? It certainly does not appear to be on the table.

    It would be good for a laugh to hear someone try to explain how the attacks on civilization by speculators are any different in method or destructiveness from those of similar criminals who receive the name “terrorists”.

    From the point of view of the non-rich, what’s the non-arbitrary difference?

    Oh, I can think of one – those called terrorists are sometimes motivated by idealism, while these financial terrorists and their snivelling little supporters among the non-rich are never motivated by anything the most ugly, paltry, mean gutter greed.

    The public responses in Germany and Greece to the sacrifices required to make the current budgetary arrangements work send the message loudly and clearly that national identities and national prerogatives still have the upper hand.

    Sacrifice, especially in a case like this, implies everyone undertakes a shared relinquishment of a shared benefit for the common good.

    But in spite of lurid MSM accounts, from what I’ve read only a fraction of the non-rich of Greece, Germany, and elsewhere received a relatively meager portion of the debt bonanza. Looking at it from the POV of the big picture, the story in each country was the same as everywhere else – the rich ran up big public debts while looting on a private basis, and now that the bill’s coming due and it’s time to “sacrifice”, now’s the time for socialism – of the debt only, and of the sacrifice.

    For a concept like sacrifice to have any coherence, to not be a non-Orwellian term, those who benefitted from the bubble would now pay all the debt. That would be their sacrifice. So is sacrifice being demanded of these looters?

    This fact speaks for itself – the Greek “government” has willfully allowed over $30 billion a year in taxes owed by the rich to go uncollected. Who knows how much was foregone already. But to start collecting it even now would make a big difference. So what does this government propose? They’ll try to collect $1.6 billion.

    That’s just one example.

    That says it all. No one is asking for any legitimate sacrifice from anyone. The austerity assault is simply another monumental crime, another looting expedition.

    As for the implied parochiality of “national identities and national prerogatives”, that too is a top-down construct. As is well known, after decades of education socialists failed to convence the workers of Europe of their class interests. They were unable to effectively compete with the nationalistic opium of the masses, and the way kings and robbers used it for astroturfing and to divide and conquer.

    And yet today, after centuries of brainwashing, when the national opium is suddenly inconvenient for the gangsters, when it’s suddenly a potential basis for resistance against stateless alien criminals, it’s suddenly to be considered the hick pathology of the workers? That’s rich. It’s just heads-I-win-tails-you-lose no matter where we turn these days, isn’t it?

    Technical constructs like “Greece” and “Germany” don’t make much sense nowadays, and are primarily weapons in the hands of their respective parasite gangs. But the EU is completely fraudulent and worthless from any point of view other than the gangster interest. I hope the people of a country come to realize that the only thing which legitimately exists at all, economically or socially, are peoples themselves, and that only a true people can be the basis for renewed freedom and prosperity, while all of today’s technical structures are purely parasitic, criminal appendages that need to be lopped off.

    That wouldn’t even be a sacrifice, but a liberation.

    1. Roderick Beck

      Really? Perhaps you need to review the last 100 years of European history. Integration has allowed Europe to enjoy a peace lasting from the end of the Second World War to the present together with the Cold War Victory.

      It also promoted trade through the Common Market, eliminated the ridiculous border controls through the Schengen Zone, and promoted economic growth by eliminating currency rate fluctuations.

      Similarly you can’t deal with problems at the national level of over-exploitation of natural resources and pollution.

      There is a reason why so many countries want to join the EU. It makes it much easier to reform their societies. It provides a carrot in form of European membership and access to a common market, a common currency, absence of border controls, and European development funds.

      1. attempter

        What Cold War victory? What happened to that “peace dividend” we were promised?

        On the contrary, the West removed all doubt about the Cold War ratio of its aggression vs. self-defense when it rushed to plunder Russia and eastern Europe, and when in general it stepped up the neoliberal assault all around the globe.

        Irving Kristol openly said the end of the Cold War meant the West should increase military spending and step up its aggression, now that the main counterforce was gone and there was no one standing in the way of total exploitation of the weak.

        I’m reminded of Arendt’s observation that a core trait of totalitarianism is how it steps up its aggression and terror after the war is won, when the “enemy” is now helpless.

        That’s how the neoliberal West viewed the world’s people after winning the Cold War, and that’s how it has treated them every chance it’s had.

        And now that same feudalizing assault is coming home in earnest to the Western countries themselves.

      2. /L

        Euro growth have been weak, the system haven’t at all delivered as promised. To not have a nonsensical monetary system doesn’t exclude that countries cooperate and abolish trade barriers. The Nordic countries have since long have a common labor market and free movement for the citizens and so on without a common currency or super state.

        As it seems in many cases the idea that cross border issues is better addressed in the EU super state than nationally is not always so, the absolute quest for conformity hamper creative diversity in Europe, if something is good it will spread. I believe that politicians around Europe don’t want Europe to be polluted and that they have to be forced by the EU super state to not pollute. Plenty of common standards have been growing and implemented in Europe without nonsensical currency and EU super state.

        Irrelevance of colonial Europe as global powers and their new role as US vassals and last but not least cold war nuke parachute created peace among the big European states. The peace and love organization EU was anesthetized when dealing with the Yugoslavia crisis, it rather made thing worse by the actions of individual members that abolished the common line, EU didn’t impress at all.

  4. Paul Repstock

    Yes it is scary Vinny. Ever since they all ratified the Treaty of Lisbon, requiring all of them to act in concert. That is quite a power block. I would be surprized if they let Greece leave, That would be like giving up territory. As much has been said several times by people like Trichet. ‘Nobody leaves’. The financial meltdown has left them with a bit of a problem but they will print some Euros for the external portion of the debt, and tell Europeans that they will have to wait for payment.

    A much bigger problem for the E Zone is probably the UK. Their debt is much bigger than Greece’s and the debt to GDP is not much different. Another big difference is that the UK is already on a different ‘deflatable’ currency. They can do this without leaving the common market.

  5. Doctor Stock

    I wonder if the Euro will actually be able to sustain the pressure… after all, governments are not always in control of the financial markets. How can they be? More often than not, their not in control of their own wallet… so how can they control ours?

  6. ndk

    Bagehot’s rule is waaaay out the window. Anyone who has been watching the past 3 years can’t claim to believe that we have just a liquidity crisis on our hands.

    We have a contagious solvency crisis. Bailouts are not the cure; they are one of the vectors of transmission. They don’t reduce the amount of credit in the system; if anything, they increase it, as good credit is thrown after bad.

    We wouldn’t have to rescue governments to this extent if they hadn’t indebted themselves so deeply in trying to save their financial sectors.

    I wonder how much longer we’re going to keep walking this same stupid treadmill. Do we have to wait for the belt to snap?

    We have to have to HAVE to start getting rid of excess credit. We cannot keep cranking up total credit to nominal GDP, and nominal GDP is not going to miraculously rise. Total credit has only grown throughout this crisis, and our only recipe for economic recovery is pumping up asset valuation and letting good vibes do the rest.

    Stop wasting time, and enact the Mellon solution. This has gone from tragedy to farce to monotony.

    1. Roderick Beck

      Actually, your position is clueless. If net worth drops and creates a credit crisis, like during the Great Depression, the only intelligent response is for governments to offset the decline in aggregate demand.

      If that means borrowing, so be it. And that is exactly pulled the US out of the Great Depression. Massive borrowing. And it did not have the terrible long term consequences that you claim.

      The reality is that there is plenty of cash out there to finance national deficits.

      The real issue is not Keynesian stimulus, but that the fact that governments have used deficits to finance consumption spending in form of excessive social entitlements.

      There is also a redistribution of income issue. The reason that Americans have become so dependent on debt is that virtually all the gains in income are going to the upper 40% of households. The other 60% is trying to maintain their standard living despite stagnating wages.

      1. ndk

        Robert Barro’s analysis casts a lot of doubt on the one historical precedent that Keynesian stimulus can hoist up and demonstrate as a success. There are a lot of others that I can hoist up as failures.

        I happen to think that the obliteration of vast amounts of productive capacity during WWII is what broke the liquidity trap and the excess of supply over demand. But I’m not advocating any policy based on that, because I don’t have any real proof that that was the case. i’d like to see Keynesian true believers at least have some humility and intellectual honesty.

        Yes, there is plenty of cash out there, and yes, the distribution of that cash is a problem. But plenty of cash is not always a good thing, since it definitionally means plenty of debt.

        And the distribution of that debt is and will be unequal. Most of the interventions thus far have been aimed at preserving or exacerbating that inequality.

        1. Roderick Beck

          NDK,

          Does anyone really believe what Bob Barro thinks? He is a guy who defends Neo-Ricardian equivalence. There is no reason to believe that current generations fully incorporate the interests of future generations into their decisions.

          Barro strikes me as an extreme right winger who dresses his work in fancy theoretical models.

          That doesn’t make him right …

          Without government intervention, the US would be facing 15% to 20% unemployment today and probably wrecked financial system. It is worth repeating since people have short memories that in the fall of 2008 companies has large as ATT were forced to rollover their commercial paper every 24 hours. One has to be brain dead to consider the system on the verge of collapse.

          1. Gavshire Hathaway

            On one hand ndk — thinking, logical arguments, interesting perspectives

            On the other hand Roderick — attacking, repeating the textbook Keynesian arguments.

            The future will prove ndk right. And Roderick will forever lament that we simply didn’t spend enough money to fix the system.

    2. MarcoPolo

      “Actually, your position is clueless. If net worth drops and creates a credit crisis, like during the Great Depression, the only intelligent response is for governments to offset the decline in aggregate demand.”

      Total Keynesian claptrap!  This is not your father’s recession. This is a struggle for Keynesian economics and debt created money/wealth.  The period of “full faith and credit” of fiat money is ending.  We’ve lost that faith.   

      The same advances in communication that have enabled a global economy bring forth the forces that undermine it.  We are reaching the point where producers & savers will no longer support the economic Ponzi. 

      If our debt were to be restructured it may be possible to extend the game for a time.  But in the end the FIRE, non-productive sectors of the global economies must be reduced in size to be supported by production.  Unleavened production.  That is to say they must be taken apart with a meat axe.     

  7. M.G. in Progress

    A nice way to defend the EURO is to slap immediately a financial transaction tax particularly on currency trades, bonds and CDS. Can capitals leave the EURO? No, they cannot go anywhere.
    Then some EU banks need to really deleverage taking a haircut and stop their money creation against no assets. Europe interconnected and web debt is actually a Ponzi scheme, creation of money out of thin air. Stopping that is the best way to defend the EURO
    http://mgiannini.blogspot.com/2010/03/money-creation-for-nothing-or-let.html

  8. Paul Repstock

    Hi Attempter; I agree with almost everything you say. But you are so angry you are spitting your p’s..lol
    This may appear a bit off topic but it isn’t. As you read it you will see the connection.

    In support of Evolution

    To the chagrin and horror of the parasitic elite, the human animal may be evolving.

    Al Gore probably regrets and rues the day he “Invented the Internet”, which has now gutted and put to the torch his “Global Warming Ministry”.

    Great advances in the human condition have often come from the most unlikely sources. So it is with the internet, spawned as a means to transmit information to bind together a military control structure, it has become the main research tool and information source for millions of humans. Rather than a method for secret transmission of control and security data, the internet has become the primary source of knowledge dissemination and communication for humans.

    The day of the politician and the bureaucrat are threatened. The interconnectivity between real humans has makes them irrelevant. There is a growing realization that all forms of government are inherently evil. Governments are comprised of those individuals and groups who seek power, for whatever reason and purpose. Even with the noblest of intentions, once an individual or group has achieved a position of governing power, the only goals can be to maintain and enhance the controlling position they enjoy. This position of power/office also is an asset which has measurable value in relation to the exercise and implementation of laws and regulations. Therefore people in office will always be tempted to conflicts of interest.

    In ‘democratic’ nations this problem, originally was to be addressed, by holding periodic elections. However, the entrenchment of the bureaucratic elite in delegated departmental areas, allowed a continuity of programs and ideas to the degree that even electing a ‘new’ government would not change the direction of government policy radically. Therefore, free from the mundane chore of managing the country, a government can devote itself exclusively to enriching it’s members and protecting it’s position. Obviously, this is of little or no benefit to the populace paying the bill. Therefore, sooner or later, the system will break down. We will either have dictatorships, or arrive at some new form of regulatory stewardship.

    In conclusion:
    Our only defense is information and communication. The internet with all it’s warts and failings must be maintained and defended. No matter how short sighted the megalomaniac goals of our opponents are, these entities, be they government or corporate, are still made up of people. These people do not live in a vacuum. These ‘entities’ are not self sustaining. They exist only with our support and by our sufferance. To maintain control, the open nature of the internet, must be ended. The free flow of information and ideas on a global scale is an anathema to any control structure. Divide and conquer, is a tried and true control mechanism. It becomes increasingly difficult to demonize certain groups within society, when there is a flow of communication on the individual level.

    1. Roderick Beck

      Your message is full of errors. First of all, the Internet was not developed to protect military communications. The initial research was financed by the Department of Defense as pure research. There was no specific military goal.

      Moreover, the embryonic Internet connected US supercomputing centers together. It was a research network.

      Second of all, Al Gore won the global warming battle. There is no issue other than obfuscation by a group of right wing extremists.

      And please spare us the unrealistic and extreme rhetoric about evil government. I hate to tell you this, but human beings have a strong penchant for evil.

      1. Siggy

        The internet was made possible by the linkage of research labs engaged in the application of science for military purposes. The vary computer that you use to connect to the internet is dependant on LSI chips that were created for use in multiple warhead atomic missles. Withoput that little beauty you go back to tubes, pucnh cards and spaghetti boards and cobol and fortran.

        The only thing you have right is that people are, indeed, capable of evil acts.

        1. Roderick Beck

          So I am right. It was a research network. :)

          It’s amyth that the Arpanet was designed to withstand nuclear attack.

          By the way, what the author wrote was “So it is with the internet, spawned as a means to transmit information to bind together a military control structure”.

          I didn’t know the the supercomputing centre at Champaign, Illinois was a military command post. I thought it was the University of Southern Illinois.

          The only thing you are write about is that people are evil.

          One out of three.

    2. anon

      Gore didn’t use the word invent, but create. And if you had any real knowledge you’d agree that he played a very important role.

      Not that I like his climate propaganda, tho.

  9. Hugh

    Isn’t it strange that European governments would rather defend the euro than fix it? Well, perhaps not. As attempter points out, this is about keeping the old corrupt system of looting in place, not actually resolving anything. It really looks to me like what happened in this country with the government bailouts of our financial industry. In Europe, it’s a bit more complicated because you have the euro as a kind of stand in for the underlying insolvency of both eurobanks and some of the countries. But the failure of leadership and the propping up of a corrupt and what should be a thoroughly discredited financial system is the same.

    1. ndk

      I have to agree. I can’t see why any European citizen would be in favor of this, essentially a central fiscal authority that can only be used to rescue/gain control over failing sovereigns and banks. It’s more than a little scary to me, and I sit safely on the other side of the Atlantic.

  10. Sundog

    The EU project has thus far been hindered by democracy. Could democracy save it?

    Might Ireland, at least, consider holding a snap referendum on a measure that amounts to devaluation?

  11. Crocodile Chuck

    “They decided that the market would lose credibility if, quelle horreur, investors were required to adhere to contract terms and somehow find bonds if they were to collect on their CDS wagers. With the benefit of hindsight, this was a hugely destructive decision. But would the involved governments have the will to issue this sort of prohibition on sovereign CDS? It certainly does not appear to be on the table.”

    Q: why in God’s name NOT?? Yves invoked the Delphi debacle a few years back. But we’re not in Kansas-this is Europe. Do the elite in Europe have a death wish??

  12. a

    “The EU is at least moving decisively to defend the euro. That may not be as nutty as it sounds, particularly if other countries (the US, Japan, and China, none of whom would benefit from a weak euro) join in the intervention. ”

    When the EU says it will “defend” the euro, it does not mean currency intervention or defending the value of the euro against external currencies. It means that it will defend the euro’s existence. Europe is happy with a weak euro. Well, actually it’s not weak, below 1.15 it’s weak. So there’s still a way’s to go…

    1. RueTheDay

      Exactly what I was going to post.

      I think people are equivocating on the meaning of “defend” here. It has to mean defend in the context of preserving the monetary union as opposed to defend in the context of propping up its value. If anything, the value of the Euro needs to fall more (in an orderly way) to ease the economic distress.

      1. Gerald Muller

        I confirm that “défendre” in French suggest a defensive action as in avoid its disintegration, rather than keep its value up.

      2. Roderick Beck

        Correct. The Euro needs to fall further in order to stimulate the European economy and particularly the PIIGS.

        It serves as the equivalent of cutting the exchange rate.

        However, I don’t know if Greece and Portugal export enough outside the Euro zone to benefit from a Euro decline.

      3. Martin R

        A defended but weak Euro might help internally in Europe but it certainly wouldn’t help the US with our attempted export led recovery. It also would depress growth in China since they export so much to Europe. So further imbalance of the current account in the US and a hit to growth in China who needs growth at all costs…that doesn’t sound like much of a solution to me.

  13. Paul Repstock

    It is all about ‘Them and Us’. “Them” is a Power Elite which I name, The Economic Singularity. Us is ofcourse the unwashed masses who have neither great wealth nor significant political power. The Economic Singularity is comprised of amoungst others, those 800 plus people who have in excess of $1 billion in wealth and the Government represenatives who are powerfull enough to matter to the former group. (nb. for interest: today $1 billion=3000 lb. of gold)

    I’m not a socialist. I don’t believe it can work. But, I have to wonder why we common people have allowed the table to be biased so badly against us. Excesses like this can only lead to abuses. Basic values are simple and common around the world. We don’t even have to think about them, they are a part of our humanity. However, most people have buried them if not rejected out of hand. Measures of wealth now are not in what we have or can create or even good works accompished, but rather a perception of security against nonspecific threats. The monetary wealths collected have even less value than gold would to future generations. This does not seem to matter. The collection itself has become the goal.

    The Economic Singularity if we allow them to continue, will doom Mankind to a relatively short feudal style future. This is certain to regress and leave us living in caves.

    The solution lies in finding and implementing some form of truly representative regulatory management, not an elected, appointed, or declared government.

    We are all servants and we are all masters. The servant part must be required to serve faithfully and the master part must be required to rule justly. People are not created equal but we all have a value which we can offer. The important thing is that no person should be allowed to effectively or physically own other persons.

  14. normansdog

    There will have to be be a euro-tax imposed by the European Union which is collected throughout the EU, like VAT perhaps or even a direct income tax initially for funding a central social fund. This tax will have to be increased steadily over a number of years until the EU is in a position to act like the federal government in the USA. The issue of legitimacy will have to be dealt with in parallel.
    There is no other way.

  15. Reverse Engineer

    In one short Sentence here from the MSM is the Fundamental Reason why all the Bailouts and all the machinations of the Illuminati CANNOT work.

    “Portugal’s Parliament on Friday approved its share of the bailout — just over euro2 billion — for Greece.”

    WTF? Portugal, ITSELF currently underwater is expected to Pony Up $2B or so to Bailout Greece?

    These jokers cannot pay their OWN bills! They are going to pay Greece’s Bills to the tune of $2B? They are BORROWING to meet their own bills, NOW they have to borrow an ADDITIONAL $2B to hand over to Greece!

    Here is the IDEA. You are Broke, and Shitty Bank has cut off your Credit Card. However, your Brother, who ALSO is broke still HAS an operating Credit Card from BoA. So you borrow money on your credit line from BoA at 10% Interest to Loan to your Brother at 0% Interest! This keeps Brother current on his bills, but YOU are paying 10% Interest on the money you borrowed from BoA to loan to him!

    Hello. BoA is about to ALSO cut off Portugal’s Credit Line here. Portugal can’t borrow $2B to loan to Greece, its STUPID. At this point anybody who buys Goobermint Bonds KNOWS this is a stupid shell game. The ONLY people who will buy these bonds are the SAME fucking people who issue them in the first place! The ECB will fork over cheap loans to Portugal to buy Bonds from Greece underwritten by the Squid. It’s a Circle Jerk.

    No REAL PEOPLE with any REAL MONEY will touch any of this toxic trash with a 10 foot pole anymore. The only non-funny money moving through the markets now is contained in Pension Funds and Money Market Funds, which all are going to be eviscerated here of any value. The remaining TBTF banks with access to Funny Money buy up all the trash, then eventually need to be Bailed Out because they bought non-performing assets. These folks will soon be trading around notional values in the Trillions, while NOBODY else besides them has ANY money at all. It goes VALUELESS. Call it Deflation or Inflation, it’s the same end result.

    After the Black Thursday 25 Minutes of HELL, the Curtain was drawn back long enough for everyone to really SEE what is going on here. The ECB is going to Backstop all the debt? They CANNOT. The monetary system is a ZOMBIE. Its already dead, just the Illuminati walk the Earth as the Undead. Not for much longer. Soon the Undead will become the TRULY Dead. Coming Soon to a Theatre Near You.

    RE

  16. Bruce Krasting

    Yves, I know you want them to ban naked CDS. Who knows you might get your way. I wold love to see that too. It will insure that their efforts fail. If they did that their funding costs (Germany and France too) would explode.

    If they ban CDS, the euro zone will implode in the next few months.

    1. anonymous

      “If they ban CDS, the euro zone will implode in the next few months.”

      lololololololol

    2. Richard Smith

      Well off target there Bruce. It’s been a while (a year or so?) since Yves last advocated a straightforward ban on naked CDS, having since been persuaded of such a ban’s disruptive effect.

      See ECONned Chapter 10 for the current line, or for that matter, the video that NC linked to on Friday (~around 6:50 in)

      http://tinyurl.com/26gxuz8

  17. anonymous

    Why not just devalue the Euro against the nearly 11,000 tons of gold the ECB reportedly owns (a strategy FOFOA has been postulating will eventually occur)? As FOFOA pointed out, if gold is at $50,000/oz, the Euro region has no debt problems whatsoever.

  18. BTU

    You really can’t blame the banks for this mess. Europe’s problem is that its public sector is too large, too bloated and too expensive. And they had to strong-arm their own banks to buy sovereign debt.

    Curious that this blog never discusses the massive growth of the public sector during the go-go years. The government elites and their public sector unions have looted the treasuries and now nobody wants to pay back the money they borrowed

  19. Siggy

    It seems that Greece is unable to service its external debt; or, the debt it owes to German and French banks etal. The solution it seems is that there needs to be a restructuring of the debt.

    The restructuring should impose hardship upon the Greeks for being profligate and on the lenders for being imprudent. It’s simple, its also painful and there is the possibility that the reach of imprudence reaches to the US.

    As to a bailout, bullocks!

  20. charles

    A view from Europe: El Pais, particularly well-informed this semester since Spain holds the European presidency, also
    reports that the ECB is likely to ‘break the book’ and go into
    buying up to 600 billions euros of European bonds. Imho, a better solution than the other rumour related to the refloating of the European banks. So not a bail-out, more like
    another peculiar twist on QE, though formally forbidden by the remains of the European treaties, maybe lest costly on the
    medium-term

  21. Zephyrum

    Yves, thanks for the thought-provoking post.

    I think it’s becoming clear that the real issue is that most of a the large money transfers that have occurred will never be paid back. All else is fantasy.

    Years ago I lent my brother $10000 when he was buying a rundown house, and he paid me back with interest over several years. I made quite a bit better return than a bank and he got a loan at a discount. Later he bought a nicer house, and of course I was happy to lend to him again. But this time he ran into trouble and could not repay me. I doubled my loan and he started to pay me back, but then he needed a new roof and the payments stopped. Then he lost his job–and felt terribly guilty about not paying me. After some months I consulted with my mother-in-law, who is very wise, on how to resolve it. She told me, “You thought you were making a loan, but actually you were giving him a gift.” It was then I realized my choices had narrowed to making the gift with good grace or ill, so I chose the former and moved on. Now, decades later, he’s still appreciative and is always there if I need anything.

    Successful taxpayer that I am, I have no problem giving a gift to a poor olive-picker in Greece. He’d probably be grateful. But it angers me profoundly to give bailouts so freely to those far better off than myself, and especially the over-compensated greedy bastards in the financial sector.

  22. Allen C

    Bernanke, et al experiment of debt creation madness seems to be coming to an end. I suppose he can go back to Princeton and ponder at how it all went so wrong.

    Complexities aside, we have nations borrowing on credit to live. As in the personal world, when the creditors refuse to lend further, one must reduce spending in line with income.

    The central bankers have the ultimate trick. They can violate the promise of monetary value. When will civilization learn that excess debt creation and currency debasement leads to ruin.

    1. Roderick Beck

      Bernanke saved the US financial system from collapse. In the fall of 2008 the commercial paper markets and the money market markets almost collapsed. AT&T was rolling its commercial paper every twenty four hours. It has no choice.

      He saved them. That is the record.

      This crisis was tailor made for him because his academic work focused on models where declining net worth lead to credit rationing.

      1. psychohistorian

        I think this opinion is utter bullshit. He kicked the can down the road so the coming failure is going to be even bigger.

        1. Ali

          Thank you for your comment on Bernanke’s “policy”.
          At this very moment a new housing bubble is being created by speculators in the Real Estate/Bank/Developer cartel
          who are out bidding average citizens for the forclosures they intend to “flip” over and over. It’s business as usual
          and the government fails to regulate this corrosive behavior.
          Greenspan’s low interest rates pushed our country to
          the brink because money+crooks need regulation. I be-
          lieve it was Einstein who stated that repeating oper-
          ations that failed and expecting different results is
          the definition of insanity. In light of this Bernanke
          apparently is the latter. Banks lend money from tax-
          payers for 0 interest after they stole everthing that
          wasn’t nailed down, I see no one imprisoned , Banks use
          depositors accounts to make risky investments and pay
          no interest to depositors who are unemployed, elderly
          etc. and who could really use the money. Then the
          stupid government which has not made any efforts to
          create jobs for average Americans, wonders why no one
          is buying anything. Are these people Psychotic? What
          will we call the next debacle-Bernanke’s folly? Our
          president could care less about us. This is now a feudal
          society. Sorry I believed the lies and played it straight
          all my life.

  23. DGottwald

    Actually, I’ve heard arguments that China may be willing to
    support Euro in the case of an Euro crisis. China could
    achieve several goals. First, it helps stabilize the situation, and win good wills from Europe. Second, EU is a
    big export market for China (215 billion Euro = 275 billion
    US$ in 2009, compared to 296 billion US$ to US), and a weak
    Euro would hurt Chinese export. Last, but not least, it
    offers China an opportunity to diversify a portion of its
    foreign exchange reserve from dollar assets.

    1. JackCheung

      Sounds like a smart move. From the Chinese perspective, it’s probably better than buying lots of treasuries and getting kicked for doing it. What would it mean for the US dollar and the treasury yield?

      1. ndk

        I’m sure China would be more than happy to make that deal. I cannot imagine a circumstance in which Europe would allow it. They’re not going to create that large a debt of money & gratitude to China. Too much pride.

      2. DGottwald

        Well, it’s hypothetical at the moment. And in
        case of an Euro crisis, there should be plenty
        buyers for dollar assets. So the net effect
        should be the stabilization of Euro.

        As for pride, I don’t see any reason why the
        Europeans should have more pride than the
        Americans. And are Americans bothered by that
        feeling called “gratitude” toward China or
        Japan, for the huge amount of treasuries they
        hold?

        1. ndk

          “As for pride, I don’t see any reason why the
          Europeans should have more pride than the
          Americans. And are Americans bothered by that
          feeling called “gratitude” toward China or
          Japan, for the huge amount of treasuries they
          hold?”

          Yes, Americans are deeply troubled by China’s massive holdings of U.S. paper that result from the CNY peg. Perhaps you missed the recent extreme attempts to break the peg in March and April.

          Moreover, an overt capital injection is way different than just investing the proceeds from a CA surplus. One comes about through trade flows(which may or may not be predatory); the other is a simple bailout.

          Finally, it’s not at all clear what good would come out of strengthening the Euro anyway. It would be net harmful for many of the economies of Europe, only really beneficial to a few countries if those Euros they bought were used to buy bad sovereign debt. That would lead to a major haircut on China’s brand new holdings.

          Not gonna happen, for lots of reasons.

    2. Hugh

      Just as France, Germany, and the Benelux’s trade relationships with the PIIGS or the China-US one, the parties are not independent. This is the central flaw in the “German” perspective. The PIIGS aren’t deadbeats. They are partners in a symbiotic relationship. Germany dries up the credit lines. Then there go its exports. Germany demands they engage in austerity? Same result. Same result for us and China. Now maybe we have come to a time where such relationships have become unsustainable in their current form. To me, that would argue that both sides need to adjust and take the hit together. Failure to do so, or the idea that one side can simply walk away, will be far more destructive and wealth destroying to both.

  24. Hugh

    The idea of not banning naked CDS because that would be disruptive is ludicrous and another example of extend and pretend. It’s like finding a cache of unstable nitroglycerin and deciding that it is better to let it blow up on its own than to take any steps to neutralize it or go for a controlled detonaton.

    Banning naked CDS is necessary but it should be part of an overall restructuring of the financial system. Treating it, or other such reforms, as an action to be taken in isolation is merely to raise a cheap strawman. As events over the last 2 /2 years have shown, the world’s financial system has been disrupted repeatedly and massively. In this context, it seems very myopic to say we can’t reform because reform might cause disruption.

  25. steveo77

    Note the shooting star backtest of the PRS 133 channel (minutes before the Thursday Heist)

    I posted “Fractured Fractals” during that retest, and went short 3 futures. In retrospect, wish I had played it bigger. But I have also found in the past, when taking on inordinately large positions (say 10 to 20 futures) that the market goes out it’s way to punish.

    Entire post with charts is found here
    http://oahutrading.blogspot.com/2010/05/thursday-heist-was-telegraphed.html

    It’s hard to “trust” this market in any way. The bottom reversal happened in such proximity to the “limit down” market stopping rules, that it further reeks of manipulation

    http://thetaildoesnotwagthedog.blogspot.com/2010/05/i-lied-i-have-to-post-something-i.html

    Here is the cool part, the “Fractured Fractals” post, right before the debacle.

    Note the comment on the chart: “Backtest of the PRS 133 and breakout to the downside, accelerating fear”, 3 futures stop set right above the PRS lower channel, worked perfectly.

    Below is my first attempt at a “Movie”. This shows the Thursday crash in live action. The yellow line is the PRS 133 lower channel. Note the mini-backtest and then the real backtest. No audio on this one.

    The backtest of the PRS133 channel line is about halfway through the video….then the plunge.

    Testing Video — Below is HTML to Utube and at the bottom is the Utube link directly

    http://www.youtube.com/watch?v=qwvH4jraumc

  26. Reverse Engineer

    Based on Sarkozky’s bluster, ECB rumours of a massive Bailout fund for 1000 Eurobanksters and the associated rumour that Helicopter Ben has reopened Swap Lines with his Eurotrash counterpart Jean-Claude Trash-it, one can be pretty sure right now they are loading the BAZOOKA for Monday morning. Cover your shorts! This could be the Ramp Job of the Millenium before the final OBLITERATION of the monetary system.

    Here is the scenario. Helicopter Ben opens the Transatlantic Money Pipeline Spigot WIDE OPEN to the “Infinite” setting, the same setting they currently have on Faddie and Frennie toxic waste. Trash-it for his part disburses the endless Free Money to his 1000 closest Pigman friends, who then descend on the markets buying up everything in sight, No Price too High! In 25 minutes on Monday Morning, the Algos will trip again and the Dow will ROCKET to the MOON by 2000 points, easily outstripping the 1000 point drop on Thursday last.

    Yes indeed, these guys are about to go on the biggest shopping spree of all time on the Infinite Credit Card of the Fed. They’ll go ahead and buy up every POS Bond offering from Greek Islands to the Sunny Shores of California and every Equity Stock in between.

    Sadly of course, they STILL haven’t figured out how to get any of the soon to be Ballistically fired out Toilet Paper into the hands of J6P to BUY any of the stuff these companies make or pump outta da ground. They are too busy trying to fill up the debt hole with money to keep the banking system operational to bother about distributing out money to anyone else. So meanwhile, Banks in Athens will continue Burning, followed soon by banks in Portugal, followed thereafter by banks in France and Germany.

    OK, back to reality. No I do NOT really think the Dow is gonna rocket up that fast, nor do I think they can BAZOOKA out the money fast enough to cover all the debt that is consuming capital right now at a fantastic pace. There are Political Repercussions with each separate debt problem that have to be hammered out before the Banksters will part with any of their freshly printed Lucre. “Austerity” measures designed to make sure they will get paid their Vigorish BEFORE J6P gets to feed his kids.

    While Helicopter Ben no doubt will be slipping money to Trash-it, the CONgress Critters are antsy enough about local Obamouts already, and if it is too overt they will simply CHOKE on the idea of Obamouting all of Europe. So Helicopter Ben will try to slip out just ENOUGH money to “stabilize” the markets, not ramp them up outrageously. Delicate bizness there, because just how much is “just enough”?

    At the rate things are deteriorating, the $500B or so being talked about here will be consumed in the gaping MAW of Debt in about a quarter. Maybe it gets them through the summer? No idea just how much “stay the course” fortitude Helicopter Ben has here, but after the next $500B is consumed and doesn’t do jack shit to resolve the problem, even he has to Capitulate at some point. If he doesn’t somebody will do it for him, and not in a nice way.

    What this means for the markets next week is of course more Volatility, and it could go either way depending on PERCEPTIONS of whether there is enough or not enough to go up or down here. IMHO, retail Investors are going to try to leave the market in droves either way, its just too risky now. Your retail investors probably head for the relative “safety” of USTs. Which leaves only the Big Banks and the Hedge Funds playing the market, and I’m not sure even Hedge Funds will continue to play. They are composed of money from mega rich Pigmen who themselves are asking for redemptions.

    If I hadn’t already done it, tomorrow I would cash in my 401K and my Money Market account regardless of the hit I took in Taxes on it. The ONLY place your money is “safe” right now is in the Bank of Sealy, where the only thing that will kill its value is Inflation, which will take at least a few months to play out and you’ll be able to see it and spend out your money as fast as you can buying Food, Guns and Ammo. Leave it in the Bank, and TOMORROW you could find your Money Market account FROZEN, or see a 30% drop in your Mutual Fund or whatever.

    The markets right now are just a giant Casino, and all the Slots are rigged in favor of the Squid. It’s a pure guessing game on any given day whether liquidity will POUR down on the market from the Fed spigot, or whether the Fed will turn the spigot OFF and the market turns into a barren DESERT devoid of all liquidity.

    Nobody really knows which way it will go on a given day, not even the Big Players themselves know. There is no PLAN here, its all just REACTION to what happens, and every new initiative is followed by even worse BLOWBACK. Get out NOW while you still can, then hunker down and PRAY. This monetary system is DOOMED. What comes after is anybody’s guess, but whatever it is, it ain’t gonna be pretty. Coming Soon to a Theatre Near You.

    RE

  27. Paul Repstock

    Reverse; you and others are gleefully predicting the crash of this monetary system. Possibly you are correct.

    However, you overlook two things:
    Firstly, It is not ‘money’ itself which is flawed or evil. Money and a monetary system greatly ease all interactions in society. Contrary to the thoughts of a Nevada politician, barter is a cumbersome and inefficient way to do business. The problem with the current monetary system is a lack of accountability and the lack of a standard of value by which we could establish a base rate for any currency. If we could be guaranteed of any value other than the payment of taxes within the issuing country, then currency would be a wonderful invention.

    Secondly; As described above the whole financial crisis is a “cricle jerk”. There are dozens of layers of interlocking debt which have hugely magnified the crisis. If the governments and finacial powers had any incentive to reconcile these interlocking and offsetting debts, the world money supply and thereby the debt, would shrink by 90-95%. However, this enormous debt is both a profitable business and a big stick to wave over the heads of the masses. If we allow the Economic Singularity to determine the course and timing, of the crash of the monetary system, then they will also determine the definition of the new medium of exchange. And guess who will own all of it when the new day dawns. There will be a new medium of exchange. The complexity of the world demands it. One cannot buy a tanker load of oil or an exotic fruit delivered to New York, with a barter system.

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