Eurozone Worries Rising?

There are more news sightings that point to heightened worry about Eurozone sovereign debt/bank woes. A spate from Bloomberg this AM. Normally, when I can come close to doing one-stop shopping on relevant topics on Bloomberg, it’s a sign of anxiety.

The first is “EU Bows to German Call for Permanent Debt Mechanism.” This piece describes how the Germans are successfully pressing for a program to make the Euro-rescue program, which was scheduled to expier in 2013, permanent. This might normally sound like prudent planning, but it comex in the context of widening bond spreads on the countries perceived to be at risk. But some elements that were leaked about the German plan sound less than enticing to bond investors:

Germany’s demands come as bond yields in deficit-strapped Ireland and Portugal inch higher, threatening to reignite concerns about government finances that brought the 16-nation euro to the brink of breaking up six months ago.

EU President Herman Van Rompuy said there was no discussion of a debt-rescheduling facility, leaving the European Commission to propose a structure for the crisis mechanism by December….

“The absence of a crisis mechanism almost brought down the euro,” Van Rompuy said. With the currency up 16 percent against the dollar from June’s four-year low, he said “we won the immediate battle of the euro, but the problems are not completely over yet.” The European currency bought $1.3872 at 9:12 a.m. Brussels time, down 0.4 percent on the day.

Irish bonds declined this week, pushing the extra yield that investors demand to hold the nation’s 10-year debt instead of benchmark German bunds to within two basis points of a euro- era record yesterday. The so-called spread widened 20 basis points in the week to 425 basis points. The Portuguese 10-year spread over bunds widened to as much as 355 basis points yesterday from 339 basis points at the end of last week…

Merkel’s crisis-resolution plan foresees an extension of debt maturities, suspension of interest payments and a waiver on creditors’ claims, Handelsblatt newspaper reported yesterday, citing an unidentified government official.

Next is “Irish, Spanish Banks Failing to Kick ECB Habit: Euro Credit“:

Greek, Irish and Spanish banks are falling behind their counterparts across Europe in reducing their dependence on emergency central bank funding because they can’t find investors willing to buy their bonds.

Lenders from those three nations took 61 percent of the loans supplied by the European Central Bank at the end of September, up from 51 percent the previous month, data from their respective central banks show. Overall, the region’s banks cut their funding to 514.1 billion euros ($716 billion), the least since Lehman Brothers Holdings Inc.’s collapse in September 2008, according to ECB figures.

Deutsche Bank AG, HSBC Holdings Plc and Societe Generale SA have sold new debt since regulators stress-tested 91 of the region’s lenders in a bid to rebuild confidence in their creditworthiness. By contrast, bonds of all lenders in Portugal, Ireland and Greece are trading as though junk rated, as are a third of banks in Spain, according to data compiled by Bank of America Corp. Their struggle to sell debt will make it harder for the ECB to curb loans to banks on Europe’s periphery.

So much for the clean bills of health issued in the recent stress tests.

The next headline is a bit of a headfake: “Greek-German Bond Yield Spread Rises to Highest Since Oct. 1 ” Highest this month? So? But the increase since October 22 has been sharp: from 622 basis points to just over 800.

Now the counter indicator is that the Financial Times, which European readers like to grumble jumps a bit too enthusiastically on the eurozone worrywart bandwagon, has been pretty quiet on this topic. But it has also been devoting a lot of effort to covering the UK budget and the US elections. So its commentators may be a tad distracted. And Ambrose Evans-Pritchard, who is also accused of being unduly alarmist, seems to regard QE2 as the biggest danger on the horizon.

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  1. Maju

    Germany is launching a no-no proposal to get countries unable to meet the draconian constraints imposed by EU-IMF lose the right to vote. It’s maybe just a maneuver to get the rest of the package approved but it tells a lot of the “internal colonialism” policy that Germany and camarilla want to apply to EU. When they “joked” about getting Corfu as reward they were not exactly joking, you know.

    With that attitude and a too high euro, which is the real problem (together with excessive leniency towards Big Capital and excess compromise with global markets without a purpose), the Eurozone and maybe EU itself will collapse soon. There must be another more constructive and solidarious attitude or there is no Europe.

    Europe has a lot of potential but it’s being wasted by subservience to big corporations. Each day it gets worse. States and by extension EU exist to make sure that society works properly and that its needs are met within reason, not to fatten a bunch of parasitic oligarchs.

  2. Jim Haygood

    Forcing bondholders to accept haircuts as part of the EC’s ‘Chapter 11 for countries’ mechanism is a prudent and necessary reform. But of course, it implies that this year’s bailout was structurally flawed, so Europe’s southern-tier bonds are naturally selling off.

    Plenty of qualified observers have flatly stated that Greece must restructure; it’s only a matter of time. The current misconceived bailout only served to postpone the inevitable.

    As for Ambrose E-P’s condemnation of QE2, it seems tame if anything.

    Remember when Mad Al Greenspan advocated in 2004 that home buyers could save a ton of interest by taking out ARM mortgages — with Fed Funds at 1%, and having nowhere to go but up? In a forum I said he was a fool, but I wish I’d rented an illuminated billboard on the West Side Highway to go on the record big-time about Magoo’s myopia.

    Bernanke’s reckless QE2 plan is a far bigger cock-up than Greenspan’s goofball mumblings, one which richly merits the appellation ‘Economic Screw-up of the Century.’ (Remember, Time magazine named Bernanke ‘Person of the Year’ in 2009, so his flaming demise is already baked in the cake.)

    In a crass, feckless essay, Pimpco’s Bill Gross admits that QE2 is a scandalous, demented Ponzi scheme — yet goes on to give it his qualified approval, saying that he and his customers are gonna make money from it. ‘I’m all right, Jack; shame about you whimpering lot.’

    But anyone who wants to establish a public reputation for being early and right on economic policy should savage QE2 with a large-caliber rhetorical Gatling gun, and demand the outright abolition of the Federal Reserve as a failed institution, to boot.

    Our bubble-blasted planet is littered with failed institutions. Benedict is the last Catholic pope; Bernanke’s the last central-banker dope. Good riddance, y’all! See ya in hell with your backs broke.

  3. Farrar

    Only three solutions for the Europeans:
    1. Give up the Euro,
    2. Give up national economic and financial sovereignty, or
    3. Ratchet up the pressure on the masses (present policy).

    1. Rodger Mitchell

      Farrar, you are correct, to a point.

      Most of the EU nations already have given up financial sovereignty, which is why they hover over bankruptcy. They don’t need to give up the euro, if the European Central Bank will create and distribute a free flow of euros to the nations that need them — something similar to what the U.S. federal government could do if it chose to. See: The End Of The Euro

      Rodger Malcolm Mitchell

      1. Maju

        Exactly. That’s why EU must act as a state or destroy itself (painfully). It should not be so much worried about deficit (easily solved raising taxes properly and devaluating the euro, what anyhow is much needed) but about fair play between the different members (the states and peoples, not the bankers!) Right now Germany (and other smaller countries, like the Netherlands) is abusing the system in a colonialist manner and that is simply unbearable.

    2. Jim Haygood

      Excerpts from Mitchell’s linked essay ‘The End of the Euro’:

      ‘Nothing says the asset in a Standard must be a physical substance. The only necessary attribute is some degree of scarcity. … This restriction is the key to any Standard.

      ‘With the elimination of the gold Standard, the U.S. government demonstrated it is able to service any size debt, while creating unlimited money to fund economic growth.’


      The first and second paragraphs are wildly, schizophrenically contradictory. Restriction (as in the global gold supply, which typically rises only 1 or 2% annually) and ‘unlimited money’ (as in Bernanke doubling the monetary base in a few months) are opposing, irreconciliable propositions.

      ‘Unlimited money’ violates the most basic principle of economics: there’s no such thing as a free lunch. Unlimited money leads to unlimited inflation — end of story. In real terms, not only is there no gain, there’s a tragic loss from the expropriation of creditors, the muddling of price signals, and the extermination of productive investment.

  4. Grace Styles

    Could be wronf cosndiering so much is going on but as it stands cant see much in the way of euro continuing to appreciate over next few months — sovereign debt matters could become rather more serious in the interim for sure. If it keeps appreciating, watch out northern Europe and deflation here we come. The whole thing is such a mess, does anyone think Greece will ever win back market cobnfidence on sustainable basis anytime soon? Sooner or later its going to be a matter of drastic measures for the whole flawed euro project. Ongoing saga convinces me more and more that Stiglitz and others who argue, as here
    , that Germany might well have to exit euro are right, let the troubled ones sort it out amongst themselves,.

  5. Grace Styles

    Could be wrong considering so much is going on but as it stands can’t see much in the way of euro continuing to appreciate over next few months — sovereign debt matters could become rather more serious in the interim for sure. If it keeps appreciating, watch out northern europe and deflation here we come. The whol thing is such a mess, does anyone think Greece will ever win back amrket confidence on
    sustainable basis anyime soon? Sooner or later its going to be a matter of drastic measures for the whole flawed euro project. Ongoing saga convinces me more and more that Stiglitz and others who argues, as here,
    that Germany might well have to exit euro are right, let the troubled ones sort it out amongst themselves

    1. Maju

      Germany abandoning the euro would be a blessing. But won’t happen: the euro is mirrored on the old Deutsche mark and Germany is the greatest beneficiary of its strength, which allows it to use and abuse peripheral European countries as markets for its products.

      You have no idea the kind of actual (not nominal, not official) inflation that the euro (and related measures as tax harmonization, anti-tobacco laws…) has caused in countries like Spain. Things are ten times more expensive now than in 1998 but salaries are at best 10% higher.

      It is the impossible cost of life what makes southern European working classes not competitive. While Spaniards have to get into for-life mortgages (if they are lucky) in order to get a home, Germans have public housing and many other welfare benefits that Spaniards do not have. Their working class is being subsidized by the state.

      I have no problem (the opposite in fact) with that but should be the same for all. Otherwise, Germany (etc.) is abusing the system.

      Let the Germans do what they must but this system will not work, is not working, for most of EU. If they have to leave, so be it. If they lose (exhausted?) markets, so be it.

  6. Brick

    Germany will not be complaining that loudly about a decline in the Euro and bond yield spreads are not as important as auction results. The key is that certain auction results without technical support mechanism have not been going well.
    I expect Ireland may well drop the Euro and adopt Sterling over the next few years, while eventually Greece will restructure( but not until structural cultural changes have been implemented). I think Germany is keen on europe adopting the other half of keynesian policy, namely that you have to save during the good years.
    Ambrose’s take down of QE II is rather mild and if you really want to understand what damage it can do then see the pragmatic capitalism post covering the levy institute report on why QE failed in the UK. It is rather scathing of central banks in general.

    1. Maju

      The problem in Greece is not so much cultural: it is a problem of tax evasion by the rich that is not being addressed. Greek workers work more, get much lower salaries and benefits and pay much more for commodities than Germans, however they are still being unjustly said to be uncompetitive.

      That is not the case: what is uncompetitive is a state that allows the rich, the banks, the businessmen, etc. to get away without paying their taxes. That’s a huge problem: a cancer that is not being addressed at all and that will therefore spread to all EU.

      IMO, what Greek needs is a truly socialist government and a good bankruptcy, sending the problem to France, Italy, Germany and Britain, which are the major creditors. In the current situation remaining in the Eurozone is not better than being out of it. And if the pressure on Spain (surely even less fair than the one on Greece) continues to build up, Spain will have the same choice: getting out of the euro and maybe even EU.

      Iceland is doing the wise thing and the model to follow, not Latvia or Greece, who are now deprived of their sovereignty by imperialist forces, which are applying “remedies” that do not work, except for robbing the people even farther. We do not have states to get taxed by them and our living resources being gifted to Big Capital. If there has to be Capitalism, Capital has to serve the public and sweat its profits, not just getting them gifted from public money by corrupt politicians, as it’s happening now, not just in Greece, etc. but even in Britain!

      1. Paul Repstock

        OT…sort of..

        When I read the synopsis of Mr. Webber’s statement, I had to laugh. If they think any investor will buy bonds, be they Greek or German, with that type of overhanging risk, they are crazy. The premiums demanded for lending governments money on that basis would be astronomic. On top of that a bond purchaser would need to buy insurance against government malfesance or plain stupidity..Wow, I wonder what rate Lloyds would set to insure against that..LOL
        If they manage to write that into law Euro bonds will get really cheap, really fast.

        One interesting aspect is that it would give a few Northern countries a lock/monopoly on Euro financing. Nobody else would dare touch the stuff. MMMM..:) Tasty Greek bonds with a 24% premium…only available to Germans and Swiss…?

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