If you believe in psychic powers and/or future forecasting, you ignore Cassandra at your peril.
1) Mario Draghi, head of the ECB, will never allow "Club Med", etc. debt to be monetized. If you haven't already, buy credit default swaps on eurozone sovereign bonds. Even Merkel wouldn't dare prevent all holders from qualifying and collecting.
2) Facebook pre-IPO stock at artificially bargain-basement prices has already been allocated in the secondary market (or through some other opaque mechanism). Short it for a month after the IPO.
Showing posts with label ECB. Show all posts
Showing posts with label ECB. Show all posts
Saturday, December 10, 2011
Tuesday, November 15, 2011
The ECB Puts the Screws On the Italian People
From the beginning, the European Central Bank (ECB) made its choice: Euro banks get unlimited liquidity while sovereign nations must institute painful austerity programs in exchange for bailout crumbs. GDP growth is declining in general but in “good” countries like Ireland, which did everything the Troika asked for, unemployment increased exponentially and the misery index went vertical.
Italy is now the focus. Investors are demanding ever higher yields on Italian debt, which leads to dropping asset prices and collateral calls, and then Italy has to pay even higher yields until it can no longer cover the cost of running its government. If Italy goes, there goes the eurozone.
Italy is now the focus. Investors are demanding ever higher yields on Italian debt, which leads to dropping asset prices and collateral calls, and then Italy has to pay even higher yields until it can no longer cover the cost of running its government. If Italy goes, there goes the eurozone.
Even with Berlusconi gone, replaced by Prime Minister-designate Mario Monti who cut his teeth at Goldman Sachs, on Monday Italy had to pay almost 100 basis points more (6.29%) than it did a month ago for a 5-year bond (5.32%). Its 10-year bond yields at 6.77% increased to more than three times that of the 10-year German bonds.
Popular sentiment is that the southern euro countries are getting what they deserve for profligate spending and widespread corruption. But Italy has been a solvent nation with the economic resources to service its 1.9 trillion euro ($2.6 trillion) debt. Italians save at a higher percentage of income than Americans. As events escalate, facts fall by the wayside and investor fear and distrust take over.
The Federal Reserve in the U.S. acts as lender of last resort if necessary and puts the full faith and credit of the United States behind its massive IOUs. Buyers still flock to the perceived safety of Treasury bonds despite its recent ratings downgrade from AAA to AA. The 10-year U.S. Treasury bond yield is 2%. The ECB emphatically refuses to expand its single mandate, fighting inflation, to include issuing Eurobonds, which would lower bond yields for suffering nation-states. It fights fiercely to dispel the impression that it might backstop the debt of a country whose bankruptcy could drag other countries down with it. French banks, for instance, have large holdings of Italian sovereign bonds.
The ECB is not above manipulating markets to achieve the results it wants.
There are memos indicating that it held back on purchasing Italian bonds in order to force out Berlusconi. The ECB could float the perception that it would backstop accelerating debt. That might be enough to calm investor fears and drive down bond yields. Since last year it bought 187 billion euros’ worth ($256 billion) of sovereign bonds on the open market. That’s a drop in the bucket.
The ECB is not above manipulating markets to achieve the results it wants.
There are memos indicating that it held back on purchasing Italian bonds in order to force out Berlusconi. The ECB could float the perception that it would backstop accelerating debt. That might be enough to calm investor fears and drive down bond yields. Since last year it bought 187 billion euros’ worth ($256 billion) of sovereign bonds on the open market. That’s a drop in the bucket.
The financial-industrial complex is firmly in place. The Troika has already installed their own people as overseers to police the austerity program. Mario Monti, economic technocrat, has already
outlined plans to upend the Italian system:
In Italy, Prime Minister-designate Mario Monti began talks to create a new government of non-political experts as a letter has appeared outlining Italy’s plans for austerity including plans to cut 300,000 public-sector jobs by 2014, raise the pension age and cap the amount of debt local governments can carry.
Without an ECB nod in the direction of Eurobonds or operating as the lender of last resort, a psychologically-driven endgame can lead to countries falling like dominos into bankruptcy. But the Germans are in charge. Their people are vociferously opposed to any accommodations for its southern neighbors even if they bring themselves down in the interim. They fear inflation. Historically, it’s hurt them badly. Most economists dismiss that result as the entire eurozone, impacted by overwhelming debt and austerity programs head into double-dip recessions, higher unemployment, higher taxes, spending cuts and lack of demand. However, without the consent of Germany, the strongest economy in the euro area, there doesn’t seem to be a force strong enough to prevent Ferraris from driving straight into a brick wall.
Saturday, November 12, 2011
Standard & Poor's shoots France in the head, then says it's sorry. Time for a duel.
In the midst of the Eurozone/Euro mess, as the troika (the European Commission [EC], the European Central Bank [ECB] and the International Monetary Fund [IMF]) work furiously to contain (didn't Bernarke claim “containment” re: subprime disaster in 2007?) the contagion of investor panic and debt yields rising to unsustainable levels, Standard & Poor’s “accidentally”sent out an "erroneous" email on Thursday suggesting that it lowered France's triple-A rating. Not that it was planning to lower it, but that it already had.
Hmmm. Can it be a coincidence that the EC is planning to issue new rules on credit ratings agencies in a few days?
In the U.S. we've already seen the damage wrought by the three Stooges, Standard & Poor's, Moody's and Fitch's. They plastered triple-A ratings all over toxic waste mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs--which entail pooling MBSs and slicing them up). As the true nature of these putrid instruments revealed itself, the credit ratings agencies downgraded the obtuse structured financial vehicles to junk bond status, sometimes dropping them several notches within a week.
Because the issuers of the "debt" pay the agencies to rate them, the conflict of interest was (and still is) evident. The agencies have strong incentive to lie upwards and they did to a fantastic degree. Unfortunately, the damage was done. Pension funds and other fixed income cash cows were caught holding the bag.
In the U.S. the credit ratings agencies hide behind the First Amendment. Their legal argument is that they cannot be held accountable because they are merely issuing "opinions". It's your tough luck if you take them seriously. You rock the financial world, not them.
The European regulators are trying to put protections in. A draft released earlier this week made that clear:
Standard & Poor's errant email went out on Thursday just before 4pm Paris time when the European markets were still open. Its "opinion" thrust a knife into "containment". The yield for France's 10-year bond jumped 25 basis points to 3.48% and the spread between 10-year French and German bonds hit 1.7%, a euro-era record. S&P waited 2 hours to issue a correction, after the European markets had closed.
A shot across the bow, eh? A bit of nasty extortion.
Hmmm. Can it be a coincidence that the EC is planning to issue new rules on credit ratings agencies in a few days?
In the U.S. we've already seen the damage wrought by the three Stooges, Standard & Poor's, Moody's and Fitch's. They plastered triple-A ratings all over toxic waste mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs--which entail pooling MBSs and slicing them up). As the true nature of these putrid instruments revealed itself, the credit ratings agencies downgraded the obtuse structured financial vehicles to junk bond status, sometimes dropping them several notches within a week.
Because the issuers of the "debt" pay the agencies to rate them, the conflict of interest was (and still is) evident. The agencies have strong incentive to lie upwards and they did to a fantastic degree. Unfortunately, the damage was done. Pension funds and other fixed income cash cows were caught holding the bag.
In the U.S. the credit ratings agencies hide behind the First Amendment. Their legal argument is that they cannot be held accountable because they are merely issuing "opinions". It's your tough luck if you take them seriously. You rock the financial world, not them.
The European regulators are trying to put protections in. A draft released earlier this week made that clear:
European supervisory authorities would be able to temporarily prevent the issuing of ratings on countries in "a crisis situation."
Investors would also gain a framework to take legal action against agencies "if they infringe intentionally or with gross negligence" on their obligations. A ratings agency would also have to disclose information about is rating methodologies.
Standard & Poor's errant email went out on Thursday just before 4pm Paris time when the European markets were still open. Its "opinion" thrust a knife into "containment". The yield for France's 10-year bond jumped 25 basis points to 3.48% and the spread between 10-year French and German bonds hit 1.7%, a euro-era record. S&P waited 2 hours to issue a correction, after the European markets had closed.
A shot across the bow, eh? A bit of nasty extortion.
Sunday, October 2, 2011
Apocalyptic, Unthinkable: How to Prevent a Second Great Depression
Events in the Eurozone are deteriorating at a rapid pace. Greece, which owes something like $500 billion and whose debt is 180% of GDP, is heading to default.
Spain and Italy are looking dicey. The credit ratings of several major French banks have been downgraded. Eurozone authorities have to act decisively now.
Dozens of European banks hold Greek bonds. The banks need to be recapitalized. If Greece defaults, its bonds and those of half dozen Eurozone countries will be worth a fraction of the value at which they are carried on banks’ books.
The problem with the Eurozone is that its currency, the euro, is centralized but each of its 17 member countries issues bonds and deals with their debt separately. If a weaker country (like Greece) cannot devalue the currency it uses, it can’t lower the cost of its debt.
The Eurozone isn’t prepared to deal with an economic crisis of this magnitude because its funding mechanisms are embryonic and each nation’s sovereignty is at stake. That doesn’t prevent the problems of one country from affecting the rest.
In 2008 when Lehman defaulted causing a global credit crunch, the U.S. coordinated rescues through the Federal Reserve and the Treasury Department, immediately lowering interest rates, which made it cheaper to pay off dollar-denominated debts and setting up facilities to provide liquidity to virtually insolvent institutions. However, it missed the boat by not requiring anything in return. Perhaps that’s why a new crisis erupted so quickly on the heels of the last. The collapse of 2008 was never resolved.
Experts are offering detailed solutions. As to whether they’re politically realistic, that remains to be seen. George Soros proposes:
#1: The 17 member countries must agree to a centralized European Union authority of its national economies. They must agree on a treaty to create a common treasury.
A centralized authority could issue Eurobonds to back the debt of its member nations. However, issuing collective Eurobonds requires the pooling of risk. In other words, a bond’s value is as strong as its creditworthiness. For the Eurobond to be financially viable, it must rely heavily on Germany. Germany has the strongest economy and credit rating, giving it the biggest seat at the table.
#2: There are two separate, major Eurozone financial mechanisms that can work together to staunch the bleeding: the European Central Bank (ECB) and the temporary lending facility, the European Financial Stability Facility (EFSF).
Using the most generous estimates, the size of the EFSF fund is a fraction of what is needed. Previous EFSF bailouts for Ireland, Portugal and Greece have reduced the size of the rescue fund (even with Germany’s recent support) to E440bn ($590bn).
#3: There should be a new intergovernmental agency to enable the EFSF to co-operate with the ECB:
The EFSF would guarantee and recapitalize banks. In exchange, the countries involved would have to sign a contract that they will abide by ECB directives, which include maintaining their credit lines and loan portfolios while closely monitoring risks in their own accounts.
Another theory to prevent a bank meltdown and a run on sovereign debt from Peter Siegel of the Financial Times is to have the EFSF inject capital into banks and purchased distressed sovereign bonds on the open market, lowering borrowing costs that way.
Because the fund’s resources are inadequate, there are several ideas about how to stretch its money, mostly by leveraging (in other words, using the money to raise five times as much in debt):
The proponents I quote in this article agree that the only long-term way out of this debt crisis is economic growth, not austerity. When GDP increases, then there is money to make payments. Austerity programs cause massive unemployment, retard growth, diminish tax revenue, and reduce consumer demand. When all countries are on austerity programs at the same time, the recessionary effect is multiplied.
There are no guarantees that the Eurozone authorities can implement these solutions. The resolution of the Euro contradiction requires that each of the 17 member countries submit to a central authority, losing some of their sovereignty. Acting with urgency in the face of looming economic catastrophe can backfire politically. Some citizens are angry about the deep wage cuts, massive layoffs and large tax increases of an austerity program. Others are angry that they were frugal yet have to bail out their profligate neighbors. At any rate, the taxpayers end up footing the bill.
Spain and Italy are looking dicey. The credit ratings of several major French banks have been downgraded. Eurozone authorities have to act decisively now.
Dozens of European banks hold Greek bonds. The banks need to be recapitalized. If Greece defaults, its bonds and those of half dozen Eurozone countries will be worth a fraction of the value at which they are carried on banks’ books.
The problem with the Eurozone is that its currency, the euro, is centralized but each of its 17 member countries issues bonds and deals with their debt separately. If a weaker country (like Greece) cannot devalue the currency it uses, it can’t lower the cost of its debt.
The Eurozone isn’t prepared to deal with an economic crisis of this magnitude because its funding mechanisms are embryonic and each nation’s sovereignty is at stake. That doesn’t prevent the problems of one country from affecting the rest.
In 2008 when Lehman defaulted causing a global credit crunch, the U.S. coordinated rescues through the Federal Reserve and the Treasury Department, immediately lowering interest rates, which made it cheaper to pay off dollar-denominated debts and setting up facilities to provide liquidity to virtually insolvent institutions. However, it missed the boat by not requiring anything in return. Perhaps that’s why a new crisis erupted so quickly on the heels of the last. The collapse of 2008 was never resolved.
Experts are offering detailed solutions. As to whether they’re politically realistic, that remains to be seen. George Soros proposes:
#1: The 17 member countries must agree to a centralized European Union authority of its national economies. They must agree on a treaty to create a common treasury.
A centralized authority could issue Eurobonds to back the debt of its member nations. However, issuing collective Eurobonds requires the pooling of risk. In other words, a bond’s value is as strong as its creditworthiness. For the Eurobond to be financially viable, it must rely heavily on Germany. Germany has the strongest economy and credit rating, giving it the biggest seat at the table.
#2: There are two separate, major Eurozone financial mechanisms that can work together to staunch the bleeding: the European Central Bank (ECB) and the temporary lending facility, the European Financial Stability Facility (EFSF).
Using the most generous estimates, the size of the EFSF fund is a fraction of what is needed. Previous EFSF bailouts for Ireland, Portugal and Greece have reduced the size of the rescue fund (even with Germany’s recent support) to E440bn ($590bn).
#3: There should be a new intergovernmental agency to enable the EFSF to co-operate with the ECB:
The countries comprising the Eurozone must be put under ECB control in return for temporary guarantee and permanent recapitalization.
The ECB’s guarantees will allow member countries currently paying high interest rates to attract investors at sustainable levels. It could lower its discount rate for the troubled countries to refinance for about 1% during the emergency.
The EFSF would guarantee and recapitalize banks. In exchange, the countries involved would have to sign a contract that they will abide by ECB directives, which include maintaining their credit lines and loan portfolios while closely monitoring risks in their own accounts.
Another theory to prevent a bank meltdown and a run on sovereign debt from Peter Siegel of the Financial Times is to have the EFSF inject capital into banks and purchased distressed sovereign bonds on the open market, lowering borrowing costs that way.
Because the fund’s resources are inadequate, there are several ideas about how to stretch its money, mostly by leveraging (in other words, using the money to raise five times as much in debt):
#1: The EFSF guarantees losses of up to 20% on sovereign bonds rather than buying the bonds outright. This would increase the value of EFSF support 500% with no upfront payments.
#2: Speed up the creation of the EFSF’s replacement, the permanent European Stability Mechanism. ESM capital would come from member countries, which is more easily leveraged in the marketplace.
#3: Rely more on the ECB: turn the EFSF into a bank and allow it unlimited borrowing power. Or have the ECB continue purchasing sovereign debt but have the EFSF guarantee bond purchases, moving potential losses to the fund rather than the ECB.
#4: The EFSF could have creditors take a “voluntary” haircut of 50 cents on the euro. If Greece defaults, they would get far less. Lehman debt discharged in bankruptcy was worth 15 cents on the dollar.
The proponents I quote in this article agree that the only long-term way out of this debt crisis is economic growth, not austerity. When GDP increases, then there is money to make payments. Austerity programs cause massive unemployment, retard growth, diminish tax revenue, and reduce consumer demand. When all countries are on austerity programs at the same time, the recessionary effect is multiplied.
There are no guarantees that the Eurozone authorities can implement these solutions. The resolution of the Euro contradiction requires that each of the 17 member countries submit to a central authority, losing some of their sovereignty. Acting with urgency in the face of looming economic catastrophe can backfire politically. Some citizens are angry about the deep wage cuts, massive layoffs and large tax increases of an austerity program. Others are angry that they were frugal yet have to bail out their profligate neighbors. At any rate, the taxpayers end up footing the bill.
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