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Thursday, October 27, 2011

I Don't Know Whether To Laugh Or To Cry

The numbers on the Euro deal sound big and impressive and all that, but look:
Europe’s leaders took the unusual step of summoning the banks’ representative, Managing Director Charles Dallara of the Institute of International Finance, into the summit to break the deadlock over how to cut Greece’s debt to 120 percent of gross domestic product by 2020 from a forecast of about 170 percent next year.
The 50% write down on of the bonds applies only to the private holders, and as protected entities like the ECB and the IMF get a larger and larger percentage of the outstanding bonds, it's clearly not enough to return Greece to paying status. Debt needs to be written down to 80-90% of GDP, because the Greek economy is now so weak it's close to becoming a humanitarian catastrophe. A goal of 120% by 2020 just guarantees further defaults.

You have increasing hunger among the Greek population and a shortage of medicines. This is ridiculous. They cannot pay the debt. No country really could.

The theory behind the trillion Euro stability fund is that current allocations will be levered up. That means that someone has to ante up the money. They are either guaranteed or not. If not guaranteed, those investing will want high returns which will make the fund sort of useless. If guaranteed, the creditworthiness of those nations providing the guarantees will be impacted. I assume that the real plan is to get China to ante up in order to preserve their exports to the Euro area, which China really needs at this point. Thus, the idea is to stiff China by not providing guarantees, which China will theoretically not demand because at this point China is looking at spending money that it cannot regain to support smaller businesses anyway.

At this point, I would think that Italy will have to leave the Euro within a couple of years - they cannot go on as they are for very long - they are close to snowballing. It has to be obvious that this kind of deal is structured to pretend that Italy is just fine, but Italy is not fine and cannot withstand another downturn.

One good feature of the last week's negotiations is that some sort of deal was made to prevent banks from pulling out money from their Eastern bloc subsidiaries. This will lessen the general economic decline.

The nervous collegiality of the EU leadership is now failing very publicly - in particular, the German population appears to recognize that the situation of the Greeks is untenable, but the leadership does not. It is one thing for a country to fail on its own. It is another thing to take control of another country's finances and then let it fail to provide the basics for the people. That sows the seeds of war.

For the first time, I wonder if the EU is doomed.

Comments:
Seems to me the EU leadership is behaving like the classic case of a failing business owner. Faced with red ink, he throws good money after bad, eventually hocking the house and his firstborn. Always thinking he can turn it around.

The first loss is the best loss.
 
The idea of the European Union is strong among the elite. The fact that it is destined to always be a dysfunctional union does not seem to phase them.

If one has ever traveled in the dolomites of Italy and then gone south to Naples or Palermo, you understand where the problems lie. Basically the difference between Mars and Venus. And ne'er the two will meet - at least on financial grounds.

It's somewhat like the difference between New York and Texas. Almost like two different planets. Fortunately, most of our states are supposed to balance their budgets and not get so deeply in hock. Also, most of our states have productive capacities that Greece, Spain, Southern Italy, and Portugal don't have.

Well, they've put a band aid on it and the market is cheering. I'm hopping on that wagon for a while.
 
Agreed Neil, though they have the added benefit of it not being their money. If this somehow works, they win. If not, someone else loses. They're still living very well. I hope they remember to import some cakes for the hungry.
Anon Pa
 
The best way to solve the problem is to start playing old German marching music in all of the mass transit and cable shows in Germany, as well as starting to show the former borders of “Greater Germany” in obvious places. Do that a few months and then gradually start putting forward the idea of trading excess German cash for land, something like “lebensraum”. I am sure that from there the Germans will reach the obvious solution….

Back to reality….the idea that private folks take a 50 percent haircut and the favored banks nothing will likely cause more problems then a lead to a long term solution. No private non-protected entity will lend cash to any of the southern nations in debt; the chance of loss is too big. Now the banks that refused to take a hair cut will have to step in, and in lieu of reform will just dump more cash into the bottomless hole that is southern Europe. Then the inevitable collapse will occur.

Hmmmm…. May be the land for debt idea is not so bad, except the land Germany would want is in the east, not the south…. No solution there either.
 
When Ireland did its restructuring a year or so ago, I remember reading a comment by an Irish economist saying something like, "Ireland is now a wholly owned, non-sovereign subsidiary of German banks." The situation is similar; lots of nice vacation houses in the west of Ireland, where the land isn't good for farming....
 
This is about when I get truly nervous.

What good is a bond purchase program when there are two tiers of purchases?

China has asked for details before committing money.
 
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