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Wednesday, April 28, 2010

Let The Games Begin!!

I don't know if any of you have been following the Euro debacle, but it started as a debt slide and is turning into a debt avalanche. Every day the news gets worse. Bloomberg:
Europe’s worsening debt crisis is intensifying pressure on policy makers to widen a bailout package beyond Greece after a cut in the nation’s rating to junk drove up borrowing costs from Italy to Portugal and Ireland. ...

The danger for European officials is that the fiscal turmoil which started six months ago with fudged Greek budget data will spin out of their control. As Greece waits for its euro-region partners to disburse funds, the European Union has announced no concrete plans to help other nations should aid be needed.
What is really happening here is that all the risks are correlating. I don't have too much to say about this. European banks are becoming more risky by the moment. The truth is that the concerns over debt of various European nations are well founded. Yields for Greek mid-term bonds have gone to junk levels. But any bailout that doesn't clear quite a bit of Greece's debt is probably going to fail; the effect of cutting so much from government spending and raising taxes will put Greece in a longer, deeper slump, which will cut tax receipts, which will make it harder to balance their government budget.

Germany is looking like the bad guy here, but is that fair? If the real problem is the sovereign debt in multiple nations, Germany cannot bail them all out.

The panic and rising swap rates for various banks is correlated with new worries about Italy:
Italy sold EUR9.5 billion in six-month Treasury bills Tuesday. But the Treasury received only EUR9.78 billion in bids, offering a razor-thin margin compared with previous debt sales. Moreover, the average yield jumped to 0.814%, much higher than analysts expected and far above the 0.567% yield offered at last month's auction of the same paper.

Italy's coming auction of up to EUR8 billion in three types of government bonds Thursday will now be closely scrutinized for further signs of contagion.

While paling next to the dramatic yield swings in Greece or Portugal, both of which had their ratings downgraded late Tuesday, the shift in mood is undeniable.
I wouldn't call this "mood". I'd call it the dawning recognition of reality. Compare to Germany's six-month yields, currently around 0.33%, or those of the US, which have been averaging 0.24% this month.

The reason is Italy's public debt. When your government debt/GDP ratio is above 100%, any increase in financing costs is pretty catastrophic. And Italy is the lynch pin here; Portugal, Ireland and Spain are too small to really matter. But Italy does matter, and Italy is going to have to work on its own debt now.

Germany certainly can't bail out Italy, and I suspect mobs would hit the streets in Germany if they tried. Germany's ex-Euro exports will be assisted by a weaker Euro, but Germany's intra-Euro exports are likely to be hurt by a wave of government austerity hitting several European nations. And then there is the banking issue, because no one knows how the banks will ride this out.

As for the US, we should take heed and change course while we still can. Europe is in the first stage of a major banking and government finance crisis, and in the end services to its own citizens will be deeply impacted. Neither Republicans nor Democrats have any excuse for ignoring our future if we continue on our present course, and Europe is showing us our future.

PS: Germany's future is impacted by the future of the eastern Soviet escapee bloc, and those countries will be impacted for several years to come, as the Czech move shows.

I note that Bernanke is abruptly stepping up his calls for fiscal soundness. Everyone knows what we are facing.

A note: This roundup of developments and statements is a nice summary. Trying to stem the havoc by announcing that Greek debt won't be "restructured" is pretty clueless; it just means that the governments and the IMF have to give Greece more money. And since the problem isn't just Greece, this amounts to plugging in some air freshener to mask the scent of the dung of the bull elephant thrashing around your living room.

Thank you for an excellent summation of the situation.

I have a question though: You write, "And Italy is the lynch pin here; Portugal, Ireland and Spain are too small to really matter".

Given that the risks clearly correlating, isn't the problem the lenders' vulnerability to haircuts on the marginal Euro originally lent?
Given that European banks are reportedly far more leveraged than American ones, and no one really knows the actual damage their balance sheets have suffered, thanks to mark-to-model liberties, surely the impact of even small haircuts is likely to be severe isn't it?
At these extremes, there is no too small to matter would be my view.
Could you please clarify?
I always thought the EU was a scheme to paper over the financial messes of most of the countries to begin with, not unlike the creation of the Fed in the U.S. Economic reality is kept at bay while the new leverage is exploited, but economic reality inevitably comes back with more ferocity.

I expect the PIGS to go bailout-shopping in the Middle East.
Saloner - an excellent point.

It has been clear since the news about Greece's debt originally hit that Greece would default, but you note that only now is the market reacting. That is probably because the banks intervened to prop things up. To a surprising degree, financial institutions around the world have been living in a bubble of plausible deniability.

It's quite true that no losses are negligible, but Italy is the elephant in the Euro living room forcing recognition of the reality. The European press has been reluctant to even mention Italy's name in conjunction with this whole mess.

Europe as a whole will be forced to adjust their government borrowing habits, and this will force down growth to some extent. Italy can probably pay its debt if it corrects quickly before Euro rates shoot sky high. But if Italy corrects, you can pretty much subtract 100 basis points from most estimates of future Euro growth.

Most immediately, I am expecting some of the banks and a few companies that had prior bailouts to need more because of this. Then I am worried that the Austrian debt will start folding.

Italy has had some very large infrastructure companies which profited hugely off infrastructure development in the newer additions and eastern Germany. I expect lower public spending to hurt those companies.
Charles - it's the PIIGS (Portugal, Italy, Ireland, Greece and Spain), and in fact, European banks are already overexposed in the ME and still taking losses there. I am betting that considerable ME oil money is going to go into propping up some of the worst local problems.

I think the whole jig is up; Act III of this drama will be the inevitable Chinese fireworks.

I have the eerie feeling that we are watching the prologue to WWIII.
Saloner - you might also be interested in this article from FT about the private loan problem in some of the eastern countries.

There's plenty not said. Some of the eastern currencies have tended to rise during the crisis, which eased the problem of foreign currency loans. But it's all still there.

Raiffeisen Int. is merging with Raiffeisen Zentralbank and probably will sell much of its far eastern banking interests to bolster capital. AIB (Ireland) is looking to sell much of its stake in a Polish bank. Polish unemployment went to 13% in March, I think. It's not expected to fall this year.

We're going to see a long run of forcible disclosures.
"As for the US, we should take heed and change course while we still can."


We can hope and pray so -- but -- has this Administration shown ANY inclination to acknowledge fiscal reality?

As far as I can tell, they're too damn busy increasing the scope and intrusiveness of government to pay any attention to anything beyond our borders.

If our nation survives whatever-is-coming, we need to put some of this administration's IDIOTS (and that's the generous view, I could also call them TREASONOUS B@ST@RDS based on the same evidence) on trial for ignoring their oath of office. (Who wrote those multi-thousand page bills? Probably not the congressmen who are certain they know what the bill entails, who pass the bill unread, and who are shocked -SHOCKED!- when they find it has "totally unexpected" consequences. So in essence, our legislature consists of a group of default signatures willing to legalize whatever some shadow entity puts in front of their noses.)

If it was up to me, I'd be sure that death-by-firing-squad was on the list of possible punishments for what these people have done. Yes, I'm an angry American...!!!
We have our own PIIGS: CINN (California, Illinois, New York, New Jersey) as mentioned in the comments here

And, in shamelessly, utterly unrelated news, I'm Famous!
Bob - Okay, your moment of fame made me break down in helpless laughter. Bob-The terrifying Jewish Threat To The ADL. (cue Psycho music) And yeah, this administration sure isn't any friend to Israel.

One thing I love about the States is that they prove the total futility of trying to stereotype people.

As to treason - regarding your and A_Nonny_Mouse's comments - I think it's just stupidity and complacency. DC is probably the worst place in the country to get a feel for what is happening.

I think we will have to throw a ton of Congressional incumbents out before we can even get Congress to listen to us. I do realize why people use the word "treason" - it's as if these fools believe they can repeal the law of gravity. But really, it's just stupidity.

And Bob - don't forget a wood stove and a splitting maul to go with your guns, ammo and canned goods.
A_Nonny_Mouse - I think we all know who wrote most of those bills. The lobbyists did.

And I am not going to forgive the incumbents of either party for that 98-0 Senate vote which gave away a bunch of taxpayer money to most benefit the companies (homebuilders, AIG, etc) who benefited the most from the party leading to our current recession. Both parties in Congress are rotten to the core.

Unless we stop feeding the pigs, we are all going to end up being pig food.

I have the eerie feeling that we are watching the prologue to WWIII.

Ack! You are the first person I've heard say this who really has her ear to the ground. Care to elaborate? Where is the locus of conflict?

The first-order prerequisite for a deflation-induced world war is a surplus of young men with no productive place in society. (Germany, Japan, and the U.S. met this criteria in the 1930's.) I can see an argument for China bustin' out due to the effects of the One Child policy (few boys, but even fewer jobs and wives). The Arab nations did meet this criteria, but I'm not sure about their status going forward, what with oil prices stabilizing at a higher level. Iran meets the criteria now, but a demographic collapse is imminent. Much depends on whether Washington can achieve some Mid-East balance of power in the next 5 years or so.

Forget Russia and Europe. India is a maybe, as is Indonesia. Japan is in demographic collapse. So Siberian Russia and Japan make tempting targets in that region.

So is the locus of the conflict-to-be in East Asia, with China, India, and Indonesia fighting over the resources of Russia and the wealth of Japan, with the U.S. playing spoiler as usual?

Your WW III comment reminded me of this from Niall Ferguson:

"We have the fiscal policy of a world war without a war."
"You stare into the Abyss, and the Abyss stares back." There's a reason I took a big step to the sidelines early this year; I think we are indeed starting the second act of the financial crisis.

Thank you for the clarification and the link to the FT article.
John - I received a sort of desperate phone call from SuperDoc this morning about his home computer. The old one died, and I helped him set up the new one last Friday over the phone. Anyway, this morning he just HAD to get on a site and his internet settings weren't right.

So I walked him through the whole shebang, installed Java, and it turned out he had to go online to his brokerage because he was selling all his stocks.

I hope this isn't an indicator, but I think people are wary at this point.
Neil - I think it will be split between Asia and the ME, with nations fighting over African resources. The wave of isolationism which is going to swell in Europe and the US will leave a power vacuum.

Really, WWII started with Japan's invasion of China.

I think China doesn't want war particularly, but the course they are on is a difficult one and they need resources. They will find it hard to deal with the next decade.

I hope this doesn't happen, but India has been worried about China for some time, in part because of activity on their northern border.
Thanks for elaborating on that, M_O_M. A new "Race for Africa", huh? Unfortunately, I doubt it would turn out any better for the Africans this time around. You're right about Manchuria--WW2 started with a demographically boisterous Japan attempting to pick the bones of a collapsing empire. I'm worried about Siberia, in our case. Alternately, we might have a collapsing China, again.

It's really too soon to predict anything I guess. Except I can safely predict extreme chaos in about 10 years from now.
As to treason - regarding your and A_Nonny_Mouse's comments - I think it's just stupidity and complacency.

I have to disagree. The pandering to the illegals and their supporters is intentional - they plan to grant these millions of aliens voting rights, making invaders a decisive voting block. The fact that the invasion was furtive doesn't change that - and that is Treason.

On a separate note, did you know that cool domain names like AmnestyIsTreason.com, AmnestyIsTreason.net, and AmnestyIsTreason.org were still available? Until last Friday, that is.
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