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Monday, June 20, 2011

The Euro Club

I have spent the morning reading through European newspapers in about five different languages. Between the linguistic confusion and the bizarre nature of this whole deal, I think I now may have trouble conveying my impressions in one language.

1) The Germans are essentially refusing to ante up on their guarantee deal. They will not take a step that exposes them to serious loss on those guarantees. The French appear to be quietly backing the German refusal, although no one's coming out and saying it. The new, new plan is essentially the same as the old, new plan - private creditors have to step up and volunteer to accept new Greek bonds in exchange for their old Greek bonds for the Europeans to create an additional near term funding package for Greece. In order to get the July payment in the old package, the Greek government has to deliver on further financial measures. In a lot of ways the new, new Greek plan is close to what the Irish government wants to do with its debts, which is going to become entertaining when Europe tries to scream about the Irish government's intentions.

2) Even the Germans are becoming perturbed about the unrest in Greece.

3) Since the Greek plan and the Irish plan are converging, I think we are about at the end of the Era of Debt Pretense in Europe. The bottom line is this:
The key plank of a second aid package would be a pledge by banks, insurance companies and asset managers to buy new Greek bonds to replace maturing ones, instead of European governments stepping in with taxpayers money.

In their statement, the ministers said the unlocking of fresh aid depends on working out “voluntary private sector involvement in the form of informal and voluntary rollovers of existing Greek debt at maturity.”
This will be "voluntary", if you ignore the fact that these private interests will have to accept default if they don't. (French article, pegging the second plan at 100 billion Euros). This demand emanates from the Bundesbank which has been screaming non-stop ever since the original guarantee deal was reached. The Bundesbank feels that incurring the danger of ever having to make good on those guarantees is too fiscally risky. The Bundesbank and the ECB duked this out and the Bundesbank has won.

4) This brings us to the ECB. The original plan to force private creditors to step up and incur the risk was scotched by the screaming of the ECB, hardly surprising since ECB is one of the creditors now exposed to the Greek bonds in a hefty way. Trichet's term ends this year, and this spring an agreement had been reached for Draghi of Italy to be the next ECB head. I imagine everyone felt this to be safe because Italy is next on the firing line.

But this deal is now hinging on Smaghi (no, I am not making this up), who holds the current ECB Italian seat. He is expected to resign so that France can take that seat, and Smaghi is going around quoting the pope on Sir Thomas More (no, I am not making this up). Smaghi doesn't want to resign and the reference to More involves More's defiance of civil authority, his execution and his subsequent designation as a saint by the Vatican. Thus the duel between fiscal saints and sinners evolves. Sarkozy will apparently not wait for Smaghi's term to expire in 2013. Berlusconi is supposed to have told Smaghi to resign, but so far, no dice.

5) The position of the Austrian credit unions and smaller banks, which are heavily involved in the Eastern European EU bloc now becomes a bit more difficult. The Swiss franc has responded to risk by rising, just as the US Treasuries are rising on risk. Unfortunately the Swiss franc is one of the currencies that was used in foreign currency loans, so
Raiffeisen & Erste Bank and those dudes is now worsened to some extent. Currently Germany's expansion is strong enough that it is holding up most of eastern Europe, but money is tight on the ground in some of these countries. Hungary is still weakening. The Polish zloty is falling hard against the franc but maintaining against the Euro. The Czech koruna has been fluctuating but has fallen against the franc this year. The Romanians are getting whacked also. The Turkish lira is in travail against quite a few currencies! The Czechs should be okay this year, because their economy is very much chained to Germany's economy - if Germany is doing well it is almost impossible for the Czechs to do badly. Otherwise, results will be mixed in eastern European and Baltic countries. I do not know what to make of the Polish economy and I am not alone.

Too many variables too know exactly how this turns out
for Europe. The only sure thing is the working class
will lose wealth and social mobility. Not a good time
to be a joe sixpack anywhere in the world .

"Not a good time to be a joe sixpack anywhere in the world"

Truer words were never written....

The cost of food is still going up.
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