Thursday, May 31, 2012

Hyperbolic Selloff Coming? IMF Discusses Spanish Contingency Plans; Madrid Denies Plans; Hispabonos Dropped From Cabinet Discussion

The latest word of the day is the already approved, then denied, then tabled plan to implement hispabonos was dropped from discussion at Friday's cabinet meeting according to La Vangauardia.
The approval of so-called hispabonos, which will allow the autonomous communities in the markets financed through the state with a lower cost, will be delayed at least a week after the Government has decided not to take it to the Council Ministers tomorrow.

According to government sources, this issue will not be among the topics to be discussed Friday by the Council, although it had considered that possibility.

The Prime Minister, Mariano Rajoy, guaranteed to last Friday CiU spokesman in Congress, Josep Antoni Duran Lleida, the instrument chosen to help the regions would be launched "soon", while government sources explained being worked on the model chosen.
Mish Translation

Prime minister Mariano Rajoy has no idea what to do.

Without hispabonos (central bank guarantees of regional debt) the regional governments are going to have an exceptionally difficult time financing new debt or rolling over existing debt. Yet with guarantees, Spain faces more debt downgrades and higher yields overall.

When you don't know what to do, the default choice is to table the discussion and pray for a miracle.

IMF Discusses Contingency Plans

The Wall Street Journal reports IMF Begins Talk On Spain Contingency Plans
The European department of the International Monetary Fund has started discussing contingency plans for a rescue loan to Spain in the event that the country fails to find the funds needed to bailout its third-largest bank by assets, Bankia SA, BKIA.MC +0.19% people involved in the handling of the Spanish crisis said Thursday.

Both the EU and IMF want to avoid having to bailout Spain at all costs, the people said, but initial planning is under way given that the country is struggling to raise a EUR10 billion shortfall in funds to bail out Bankia. The stakes are extremely high because a three-year rescue loan for Spain could be as much as EUR300 billion, one person said, although any bailout could involve smaller, shorter-term loans.

"A better picture will emerge after the IMF review of the Spanish economy starting June 4," one of the people said. "But thoughts are already being discussed (within the European department)".

"Some say a Spanish bailout is inconceivable, but it's equally inconceivable that preparations are not being made for such an eventuality," the person added.
Spain's Economy Minster Says IMF Rescue Plan is Nonsense

Economy minister Luis de Guindos calls the rescue plan "nonsense" stating IMF report sees 70% of Spanish banks as healthy
Economy minister, Luis de Guindos, has described as "nonsense" that the IMF is preparing a plan if Spain fails to rescue Bankia funding. Moreover, says the institution will publish a report saying that 70% of Spanish banks is healthy.

The economy minister has also advanced to the June 11 will be released a first report of the International Monetary Fund concluded that 70% of Spanish banks is "perfectly" healthy and the remaining 30%, which is Bankia, would have "more difficult" to overcome the stress test posed by this organism.

However, De Guindos has stated that the IMF's stress test provides a hypothetical decline in GDP of 4% this year and 2% for next year, prospects "unreal," said.

"The report goes on to say that 70% of Spanish banks can overcome the situation without capital," he underlined Guindos, in an attempt to instill confidence in the situation of Spanish banks.
Anyone who thinks Spain's banks other than Bankia are "perfectly healthy" is a liar or insane.

Hyperbolic Selloff Coming?

The Telegraph reports Spain faces 'total emergency' as fear grips markets
Markets are on tenterhooks as Spanish yields test levels that forced the European Central Bank to respond last November with its €1 trillion liquidity blitz. “Nobody is short Spanish debt right now because they are expecting ECB intervention,” said Andrew Roberts, credit chief at RBS. “If it doesn’t come -- if we take out 6.8pc -- we’re going to see a hyberbolic sell-off,” he said.

Brussels floated the idea on Wednesday for a eurozone “bank union” and use of the European Stability Mechanism -- which has not yet been ratified by most states -- to rescue banks and sever the dangerous nexus between crippled lenders and crippled states.

The proposals were shot down instantly by Berlin. Such plans amount to debt-mutualization, a form of back-door eurobonds. German opposition is “well known”, said the Kanzleramt.

LSE Professor Paul De Grauwe accused the ECB of cherry-picking treaty clauses to justify inaction and failing to carry out its crucial mandate of financial stability. “They should buy Spanish and Italian bonds to cap yields at 300 basis points over Bunds, and let the lawyers argue about it for the next ten years,” he said.

Eurozone data released on Wednesday show that private credit and all key measures of the money supply contracted in April, suggesting that ECB’s €1 trillion liquidity blitz over the winter has failed to gain traction.

Guy Mandy, credit strategist at Nomura, said the ECB has lost sight of the big picture and risks losing the euro altogether if if fails to restore basic confidence. “They need to weigh up events on a grander scale, stop worrying about moral hazard, and do the job of a central bank,” he said.
Academic Wonderland and a Lesson on Moral Hazzard

LSE professor Paul De Grauwe is a complete fool trapped in academic wonderland.

If the market thinks the yield of Spanish and Italian debt should be greater than a 300 basis point spread to German bunds, then the ECB would soon be the proud owner of 100% of Spanish and Italian debt.

It is rather amazing that a professor cannot figure out that simple truism.

Economic fools like De Grauwe are part of the problem. They brainwash students into believing total and complete nonsense.

As for "doing the job of a central bank and stop worrying about moral hazard" I can say the same thing about Guy Mandy.

Neither cares one iota that the German constitution does not allow what they propose. Neither bothered to figure out this mess has gotten bigger every step of the way because central banks ignored moral hazard.

Indeed, central banks are by their very existence the epitome of moral hazard.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Stupid Times: NBA Star Puts ATM in Kitchen; Peak Sport Salaries?

As a prime example of the extreme disparities between the haves and the have-nots as well as how stupid things have gotten in general, please consider DeShawn Stevenson Installs ATM In Kitchen
For the sports star who has everything there remains one tiresome problem – how do you get hold of your millions without having to leave the house?

Stevenson, 31, who has earned more than $26 million so far in a 12-year playing career in the NBA, was so proud of his latest unique accessory that he posed for a photograph with it.



It was not clear whether his free-standing cash machine will charge Stevenson and his friends a fee each time they use it.

Stevenson was arrested last year for public intoxication in Texas.
Peak Sport Salaries?

A friend writes: "Mish this is proof positive sports salaries have peaked or are about to peak."

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

GDP, Real GDP, and Shadowstats "Theater of the Absurd" GDP

Every month Doug Short at Advisor Perspective writes an excellent report on GDP. With today's release of the Q1 GDP Second Estimate, Doug Short has a new column worth a good look: Will the "Real" GDP Please Stand Up? (The Deflator Makes Big a Difference).
How do you get from Nominal GDP to Real GDP? You subtract inflation. The Bureau of Economic Analysis (BEA) uses its own GDP deflator for this purpose, which is somewhat different from the BEA's deflator for Personal Consumption Expenditures and quite a bit different from the better-known Bureau of Labor Statistics' inflation gauge, the Consumer Price Index.

The Lower the Deflator, the Higher the GDP

I have a note at the bottom showing the real GDP calculation method. Suffice to say that the higher the increase in compounded annual percentage change in the deflator, the lower the real GDP. Conversely the lower the increase (or if there is a decrease), the higher the real GDP.
GDP Four Ways

Doug Short calculates the GDP using four different deflators.

  1. GDP deflator (official number) : GDP +1.86, 10-Yr Moving Average +1.7
  2. PCE deflator (personal consumption expenditures) : GDP +1.13, 10-Yr Moving Average +1.6
  3. CPI deflator (consumer price index) : GDP +1.05, 10-Yr Moving Average +1.4
  4. Using John Williams' Shadowstat measure of inflation  : GDP -10.50, 10-Yr Moving Average -5.1

The first three charts are all similar looking but charts 2 or 3 seems more reasonable than the official numbers. Here are two of the charts.

Real GDP Using PCE



click on chart for sharper image

Shadowstats GDP



click on chart for sharper image

Doug Short Writes ...

I find this "alternate Real" GDP to be interesting (in a bizarre sort of way), but I personally see no credibility in the hyper-negative GDP it produces. On the contrary, I see this chart as further evidence that the alternate CPI, despite its popular among many critics of government data, is a misguided concept.
Alternate Nonsense

Bizarre is a polite way of putting things. I would call it total nonsense. For Williams to be correct one would have to believe the economy was in a recession the vast majority of the time for the last 25 years.

Williams has a huge following, mainly by the hyperinflationist crowd. Williams himself has been predicting hyperinflation for some time.


All of the hyperinflation calls have been missed by a mile. The dollar is strengthening, consumer credit is once again sinking, and treasury yields just made 60-year lows.

This is what happens when you fail to take into consideration:

  • Credit conditions Global economic conditions 
  • Printing by other central banks especially China 
  • Currency instability in Europe 
  • Untenable situation in Japan

Williams makes all of those mistakes, being far too US-centric in his analysis, and compounds the errors by methodology that produces the absurd results shown above and also by confusing unfunded liabilities with debt.

$1.06 Trillion of Consumer Debt is Currently Delinquent

Note that according to the latest HOUSEHOLD DEBT AND CREDIT report by the Fed, consumer credit other than student debt is contracting. Also note that $1.06 trillion of consumer debt is currently delinquent, with $796 billion seriously delinquent.

Think that will be paid back? I don't. And Hyperinflationists fail to understand the ramifications.

I happen to agree that the US has a day-of-reckoning coming, but the entire fiat global financial system fueled by insane levels of fractional reserve lending will come crashing down at the same time.

That is precisely why this deflationist (unlike others) happens to like gold as a safe haven.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

New Confusion Over Hispanbonos and Regional Debt: Spanish Regional Government Accounting Postponed, Press Conference by Montoro is Postponed; Regional Government Debt Issuance Method Unclear

My friend Bran who lives in Spain writes ...
Hello Mish

There is new confusion over hispabonos and regional accounting. Spanish regional government accounting has been delayed, a press conference by Montoro is delayed, and the joint government/regional government debt issuance method is still not completely clear.

Bran
Hispabonos are central government guarantees of regional debt. The regional governments want central guarantees because without them, interest rates will skyrocket.

Presentation of Accounting Postponed

Courtesy of Google Translate from El Economista: The Government postponed the presentation of the accounts of the CCAA's first quarter
The Ministry of Finance has decided to postpone the press conference that he would publish the budget execution of the regions for the first quarter of the year in the National Accounts. Montoro endorse autonomy and park each issue of 'hispanobonos.

The hearing, scheduled for 17:00 am today, was postponed because Cristobal Montoro "presented tomorrow to the Council of Ministers a report on the evolution of these data," the statement sent by the Department.

Financing

Predictably, Montoro will also benefit the Council of Ministers to discuss a new system of funding helps communities, claimed in a while.

Autonomy asked directly the implementation of hispanobonos, although the executive has never been convinced of this option by the risk that the cost encareciera Treasury issues and weaken the 'rating' of Spain.

The most reasonable for the Department led by Montoro endorse passes through debt issues of the autonomous communities individually and provided they meet the deficit target and the corresponding recovery plan.

This would be a personal guarantee, conditional and voluntary, which should be specifically requested by a community and to be granted for specific purposes on condition that the community complies with the deficit.
Regional Governments Press for Hispanbonos

The clear gist is regional governments are in severe trouble, probably much worse than reported.

Delays are needed to present the facts to the Spanish central government which is now pressed by regional authorities once again to guarantee regional debt.

Hispanbonos Already a Done Deal?

Interestingly RTE News reported yesterday in Debt premium on Spanish bonds hits euro-era high that hispanbonos were already a done deal.
Spain's government said it would approve the issuing of joint bonds -- "hispanobonos" -- by the 17 regional governments next Friday, so as to make it cheaper for them to finance their debts.

"The goal is to reduce the pressure on the regions, which is often greater than the pressure on the state in general, with some regions not able to borrow on the market," a spokeswoman for the Economy Ministry said.

Spain's 17 regional governments have suffered a plunge in tax revenues and soaring debt since the collapse of a decade-long property boom in 2008, and they are struggling to pay suppliers.

Bankia's board on Friday asked the state to inject €19 billion to help it abide by more stringent capital rules, in addition to €4.465 billion invested by the state earlier this month.

Spanish media said other troubled banks could need yet another €30 billion.

Providing a grim backdrop, the Bank of Spain issued a report predicting Spain's recession, which began in the last quarter of 2011, would continue at least until mid-2012.

Official data also showed retail sales plummeted 9.8% in April, the steepest monthly drop in since the statistical series began in 2003.

Despite the downturn, Spain's government says it is determined to press ahead with an austerity programme to slash the deficit to 3.0% of economic output by 2013 from 8.9% last year.
Hispanbonos may (and should) trigger additional debt downgrades of Spanish sovereign debt and send yields higher. However, without guarantees, regional governments are going to have an exceptionally difficult time financing new debt and rolling over existing debt as well.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Capital Flight Intensifies to Record Levels in Spain; Outflows Make Spanish Banks Increasingly Reliant on ELA Funding

Here is a note regarding capital flight in Spain and Greece that I received via email.

Capital flight has intensified to record levels in Spain but interestingly leveled off in Greece. Capital flight from Greece is expected to resume when next reported given statements by the Greek president.

The original source of this information appears to be Credit Suisse AG.
Spanish private Sector Deposit numbers dropping at a faster rate

The Spanish bond markets continue to be viewed with both suspicion and concern by would be investors, with the shocking size of the Bankia bailout send clear warning signs of what else might yet emerge from the Spanish banking sector. Investors were also unimpressed by what appears to have been a very poorly thought out strategy for recapitalising Bankia, with the ECB indicating that they were not consulted by the Spaniard’s before the bonds-for-repo strategy was announced. The Spanish government has lost further credibility because of its handling of this issue, and has since announced that it will indeed have to raise cash from the markets and use the proceeds to recapitalise Bankia.

The ECB published the latest aggregated balance sheet of the euro area MFI’s on Wednesday, which contained the usual array of interesting and relevant data. The Spanish numbers were obviously in focus given the markets current attention to the Iberian peninsula. The data showed that the run up in bank buying of Spanish Government bonds came to an end in April, with a net reduction of €3.3bn in holdings being recorded at month end.

The private sector deposit numbers were also closely looked at, with April seeing a huge €31.5bn reduction in deposits being placed by households and non-financial corporates. This was close to the all time record outflow posted back in January 2010, though that number was driven by year end reporting factors. The April 2012 number appears to be much more significant, and is likely to be repeated in May. Over the last 7 months the net reduction in Spanish Private Sector Deposits has now totalled €92.2bn. These outflows make the Spanish banks increasingly reliant on ELA funding via the Bank of Spain.

Interestingly the ECB data showed that the recent deposit flight reported in Greece appears to have levelled off, with the amount of private sector deposits actually increasing by €400mn in April. This was the second consecutive monthly increase, after two large outflows were reported in January and February. Given the commentary from the Greek President earlier this month we would expect to see a sharp increase in outflows when the May numbers are reported at the end of next month.

At an aggregate level it remains quite clear that most of the deposit outflows from the peripheral nations are being recycled to other parts of the euro-zone. Germany and Holland in particular have seen large inflows of deposits in the months where the peripheral nations have seen outflows. These balances are effectively getting recycled back to the home country each day, via the ECB’s TARGET 2 cash management system. As the inflows get larger so too does the TARGET 2 imbalance, causing even greater cross border systemic risk. The Bundesbank in particular has been awake to this issue for some time, noting that the risk of losses is high if a debtor nation does decide to suddenly leave the euro-zone.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Eurozone Retail Sales Crash: Record Declines in France and Italy, Overall Revenues Drop at Near Record Pace

Retail sales in France, Italy, and the eurozone as a whole hit the skids according to Markit. Retail sales in Germany were positive, but barely.

Steepest Decline in French History

Further sharp fall in French retail sales during May
Key points:

  • Month-on-month decline in sales matches April’s survey-record
  • Steepest year-on-year decline in series history
  • Purchase price inflation eases to near-stagnation




Sales fell on an annual basis at the steepest pace recorded since the inception of the survey in January 2004. Margins continued to be squeezed amid an intense competitive environment, despite purchase price inflation easing to near-stagnation.

The headline Retail PMI® registered 41.4 in May, matching April’s survey-record low. French retailers indicated that actual sales came in well below previously set targets during May. The degree of undershoot was the greatest since February 2010.
Record Declines in Italy

Record year-on-year decrease in Italian retail sales in May
Key points:

  • High street spending down sharply, albeit at weaker monthly rate
  • Job shedding steepest in series history
  • Discounting and cost inflation reduce profitability



Summary:

The Italian retail sector remained in contraction during May, with sales again falling sharply in spite of widespread discounting. Cost pressures meanwhile grew from April’s recent low on the back of rising transport costs, thereby adding more pressure to margins. Consequently, firms shed staff at a marked and accelerated rate that was the steepest since data were first compiled in January 2004.

High street spending across Italy contracted sharply on the month during May, albeit at a slightly slower rate than that registered during April. This was signalled by the seasonally adjusted Italian Retail PMI® posting at 35.8, up from 32.8. Sales fell for the fifteenth month straight, and panellists continued to highlight low consumer confidence and falling disposable incomes as the main factors behind the decline.
German Sales Show Slight Growth

German retail sales return to growth in May
Key points:

  • Retail PMI points to marginal month-on-month rise in sales
  • Like-for-like sales higher than one year earlier
  • Wholesale price inflation eases markedly



The seasonally adjusted Germany Retail PMI rose from 47.4 in April to 50.7 in May, to indicate a marginal increase in sales on a month-on-month basis. That said, the rate of expansion was lower than those seen throughout the first quarter of 2012. Companies that reported a rise in sales since April generally noted that more favourable weather conditions had resulted in higher customer footfall.

Survey respondents indicated that actual sales fell short of initial targets for the second month running in May.
Sharp Drop in Overall Sales, Revenues Decline at Near Record Pace

Eurozone retail sales continue to fall sharply in May
Key points: 

  • Retail PMI improves to 43.3, but still signals steep monthly drop in sales 
  • Near-record annual fall in sales 
  • Wholesale price inflation slows sharply



Summary of May findings:

The Eurozone retail sector remained firmly in contraction in May, according to PMI® data from Markit. Sales fell sharply on a month-on-month basis, and revenues compared with a year ago were down at a near-record rate. There were signs of easing pressure on retailer’s purchasing costs, however, as the rate of purchase price inflation slowed sharply to a 19-month low.
This should bury the notion the eurozone recession will be short and shallow.

 Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Wednesday, May 30, 2012

10-Year Treasury Yield Lowest Level in 60-Years; Spain 10-Year at 6.66%, Italy 10-Year 5.93%

Curve Watchers Anonymous is noting a record low yield on 10-Year US Treasury Notes.



click on chart for sharper image
The above chart shows the monthly close except for the current month. 

$IRX 3-month discount rate : Brown
$FVX 5-year treasury yield : Blue
$TNX 10-year treasury yield : Orange
$TYX 30-year treasury yield : Green


CNBC reports US 10-Year Treasury Yield Hits Record Low of 1.62%
The benchmark U.S. Treasury yield fell to its lowest level in at least 60 years on Wednesday as worries of contagion from Spain's ailing banks raised bids for low-risk investments.

Yields on 10-year notes sank to a record low of 1.62 percent, down sharply from 1.73 percent in late U.S trading on Tuesday.

The 30-year bond yield fell to 2.71 percent, its lowest level since October, and down from a yield of 2.84 percent in late U.S. trade on Tuesday.
Spain Record High Spread to Germany

Spain 10-year bond yield hit 6.7%, a record spread vs. Germany, before settling at 6.66%.

Italy 10-year bond yield hit 6.01% then settled at 5.93%.

Yield on the 10-year German bond hit a record low of 1.27%.

 Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List


Good News in Wisconsin: Governor Walker Leads Barrett 52%-45% in Recall Poll; Union-Busting is a "Godsend"

I have good news to report in Wisconsin. 

The recall election for Republican governor Scott Walker will take place on June 5. Polls show Walker Leads Barrett 52%-45%.
Wisconsin Republican Governor Scott Walker leads Democratic Milwaukee Mayor Tom Barrett by 7 percentage points in the state’s June 5 recall election.

Walker widened his edge over Barrett, 52 percent to 45 percent, in a replay of the 2010 governor’s race, according to the poll released today by Milwaukee’s Marquette Law School. The school’s May 16 survey had Walker up 50 percent to 44 percent.

Walker, whose curbs on public-employee collective bargaining last year provoked the recall campaign, received a 51 percent approval rating while 46 percent disapproved. Next week’s vote is only the third ouster election of a state chief executive in U.S. history.
Union-Busting is a "Godsend"

I commend governor Walker for killing collective bargaining of some public union workers in Wisconsin. Here are the results of Walker's efforts:

  • Taxpayers are better off.
  • School kids are better off
  • Class sizes are down
  • Struggling school districts now have a budget surplus

For details, please see Union-Busting is a "Godsend"; Elimination of Collective Bargaining is the Single Best Thing one Can do for School Kids

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

EU Throws Spain Two Deathlines; Spanish 10-Year Yield Tops 6.7%; ECB Rejects Madrid Ponzi Refinancing Scheme

ECB Rejects Madrid Ponzi Refinancing Scheme

The markets are reeling in the wake of rejection of Spain's Ponzi Recapitalization Scheme by the ECB according to the Financial Times.
A Spanish plan to recapitalise Bankia, the troubled lender, by indirectly tapping the European Central Bank for cash, was bluntly rejected as unacceptable by the ECB, European officials said.

Madrid had floated the unorthodox idea over the weekend of recapitalising Bankia by injecting €19bn of sovereign bonds into its parent company, which could then be swapped for cash at the ECB’s three-month refinancing window, avoiding the need to raise the money on bond markets.

The ECB told Madrid that a proper capital injection was needed for Bankia and its plans were in danger of breaching an EU ban on “monetary financing,” or central bank funding of governments, according to two European officials.

The ECB’s rebuff appeared to toughen Madrid’s insistence that the only solution to a crisis that is pushing its borrowing costs close to unsustainable levels is for the ECB to become a government lender of last resort.

Senior government officials in Madrid argue that bailouts in Portugal, Greece and Ireland have been catastrophic and Spain will not compromise on its refusal to accept a similar form of intervention.
Lifeline or Deathline?

Reuters reports EU throws Spain two potential lifelines
The European Commission threw Spain, the latest frontline in Europe's debt war, two potential lifelines on Wednesday, offering more time to reduce its budget deficit and direct aid from a euro zone rescue fund to recapitalize distressed banks.

EU Economic and Monetary Affairs Commissioner Olli Rehn said Brussels was ready to give Spain an extra year until 2014 to bring its deficit down to the EU limit of 3 percent of gross domestic product if Madrid presents a solid two-year budget plan for 2013-14, something it has committed to do.

Commission President Jose Manuel Barroso said tighter euro zone integration could include a joint bank deposit guarantee scheme to prevent a bank run and euro area financial supervision, saying the mood had changed since member states unanimously rejected a joint deposit guarantee fund only months ago.

"In the same vein, to sever the link between banks and the sovereigns, direct recapitalization by the ESM (European Stability Mechanism) might be envisaged," the report said.

Permitting the ESM to lend directly to banks would require a change to a treaty in the midst of ratification by member states that might come too late for Spain's needs. Spanish premier Mariano Rajoy backs the idea but Rehn appeared cool to it.

"Direct disbursements to banks are not foreseen as such in the treaty, and therefore this is not an available option ... in terms of direct recapitalization," Rehn told reporters.
I have no clue how Reuters came up with the title of lifelines. One proposal is impossible because it involves treaty changes. The other proposal, higher taxes and more austerity measures, looks like a deathline.

Spanish unemployment is at 24.1% and rising and youth unemployment is 51%. Spain's Revised Budget Deficit is 8.9% and rising not shrinking.

To go from 9% to 3% how many more jobs will have to go? What will happen to tax receipts? What will happen to prime minister Rajoy if he puts such a program in place?

Rajoy knows he cannot implement such an offer, and the ECB cannot or will not do what Spain wants.

The bond market reflects this shift. Yield on the 10-year Spanish government bond is up 21 basis points today to 6.65%, having touched the record high of 6.7%.

The only solution to this mess is Spain leaving the Eurozone. Please see Spexit Before Grexit? Six Reasons Spain Will Leave the Euro First for further discussion.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Spexit Before Grexit? Six Reasons Spain Will Leave the Euro First

Interest rates on the 10-Year Spanish bond touched 6.7% today after the ECB shot down prime Minister Mariano Rajoy's Ponzi plan to recapitalize banks.

The Spanish banking condition is in such precarious shape that Matthew Lynn of Strategy Economics proposed 'Spexit' Will Come Before a 'Grexit'.
“The euro debt crisis, like any really spectacular geo-economic event, is spawning its own special vocabulary” said Matthew Lynn of Strategy Economics on Wednesday.

We can now add Spexit to a list which includes Merkozy and Grexit, and Lynn believes the chances of Spain leaving the euro are now higher than those of Greece leaving.

“The Spanish are a lot more likely to pull out of the euro than the Greeks, or indeed any of the peripheral countries” said Lynn.

“They are too big to rescue, they have no political hang-ups about rupturing their relations with the European Union, they are already fed up with austerity, and there is a bigger Spanish-speaking world for them to grow into,” said Lynn.

“One in four Spanish households now have no bread-winner. Retail sales are falling 10 percent year-on-year. Yet the prescription from Brussels and Berlin is precisely the same as it has been for every other country struggling with the euro. Endure a deep recession. Let unemployment rise. Allow wages to fall until you claw back competitiveness," he said.
6 Reasons Spain Will Leave the Euro First

On MarketWatch Matthew Lynn gives 6 Reasons Spain Will Leave the Euro First.
The Grexit, short for Greece finally giving up on the single currency, has been trending for the last few weeks. And coming up next: the Spexit.

In Greece, people have just about put up with it — until now. So have the Irish, the Portuguese, and the Italians. The Spanish won’t. Here’s why.

One: Spain is too big to rescue.

Two: Spain has tired of austerity already. Remember, the protests against cuts began in Madrid a year ago with the “indignados” movement, which started sit-ins across major cities in 2011. The protests spread from there to Greece, and other euro-zone countries. The austerity had hardly even begun, yet already it has provoked strong opposition.

Three: Spain has a real economy. The Greeks understandably feel nervous about life outside the euro zone. They don’t really make anything. Spain is a successful economy with a perfectly respectable industrial base – its export to GDP ratio is 26%, similar to the U.K., France or Italy. Only last week the Japanese car-maker Nissan announced a major new investment there.

Four: Spain is politically secure. For many countries, euro membership is more about politics than economics. The Greeks stay in because it locks them into Europe (rather than being part of the Turkish sphere of influence). Latvia wanted in because it made it part of the EU rather than being dominated by Russia. For the Irish, it is about separating themselves from Britain. The Germans stick with the euro because the EU still represents a break with its troubled past.

Five: Spain has bigger horizons. The Spanish economy looks partly to Europe. But it looks just as much to the booming Spanish-speaking economies of Latin America (and indeed the huge Hispanic market in the U.S.). Rather like the U.K., Spanish business has always looked to the global rather than the European market. Why tie yourself to a failing project when there are much bigger opportunities out there?

Six: The debate has already started. There is already a serious discussion underway in Spain about the future of the currency. Plenty of mainstream economists and pundits are arguing that the real problem is the euro, and Spain will only recover once it gets the peseta back. The taboo has been broken. That isn’t true in Greece, where even the far-left Syriza party still clings to the idea that it should stay in the euro.
Debate in Spain

Proving point number six above, El Economista picked up on the story in Comes Spexit: Spain's Euro exit before Greece?

If prime minister Rajoy refuses a bailout by the Troika, what other options does Spain have? Is another puppet government like we saw in Greece and Italy coming up?

The sooner Spain sees the light and gets out of the euro that is strangling it, the better off Spain will be.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Tuesday, May 29, 2012

Stubborn Stupidity, Fantasyland Thinking, Hopeless Bluffs

The Financial Times says Madrid in ‘game of chicken’ with EU.

I disagree. I think Spain's prime minister Mariano Rajoy is a stubborn fool engaged in Fantasyland thinking, unable to think straight.

The issue regards a proposed Ponzi financing scheme to recapitalize Spanish banks.

For details of the scheme, please see Spain's Plans to Recapitalize Bankia Will Put Germany, ECB at Risk; When Does the Ponzi Scheme Collapse?

Fantasyland Thinking or Failed Bluff?

If Spain was playing a game of chicken, the ECB just ended it by rejecting the Ponzi financing scheme of Rajoy.

Please consider ECB rejects Madrid plan to boost Bankia
A Spanish plan to recapitalise Bankia, the troubled lender, by indirectly tapping the European Central Bank for cash, was bluntly rejected as unacceptable by the ECB, European officials said.

News of the rejection came as Spain faces elevated borrowing costs in the bond markets, tries to persuade investors it can contain problems in a banking sector weighed down by €180bn of bad property loans and, on Tuesday, saw its central bank governor stand down early.

Madrid had floated the unorthodox idea over the weekend of recapitalising Bankia by injecting €19bn of sovereign bonds into its parent company, which could then be swapped for cash at the ECB’s three-month refinancing window, avoiding the need to raise the money on bond markets.

The ECB told Madrid that a proper capital injection was needed for Bankia and its plans were in danger of breaching an EU ban on “monetary financing,” or central bank funding of governments, according to two European officials.

Senior government officials in Madrid argue that bailouts in Portugal, Greece and Ireland have been catastrophic and Spain will not compromise on its refusal to accept a similar form of intervention.

They said the country had implemented reforms requested by Brussels and must now be granted relief by the ECB, or the future of the single currency will be threatened. The government would like to see the ECB restart its government bond-buying programme and wants the nascent European Stability Mechanism to be retooled as a bank bailout fund.

“This is like a game of poker now,” one government adviser said, “and I don’t think Spain is bluffing”.
ECB Had No Choice

If this was a bluff by Rajoy, it was a very poorly conceived one. The ECB had no choice but to call it, given its disastrous position of Greek garbage on its balance sheet.

The ECB simply cannot afford to load up on Spanish garbage for fear Spain will do as Greece threatens to do: default.

Irish Turn

The Financial Times says Spain must avoid an Irish turn
“We are not going to let . . . any bank fall . . . if that happens the country will fall,” Mr Rajoy said on Monday. That is the message Ireland’s government insisted on as it piled private banks’ debts on to its puny sovereign shoulders. By the end of 2010 markets had lost faith in Dublin’s ability to repay and it was strong-armed into a eurozone rescue loan.

Ireland’s folly made clear that the interdependence of sovereigns and national banks is at the heart of the monetary union’s present dysfunction. But to judge from Mr Rajoy’s words, Madrid will tighten this deadly embrace instead of loosening it – even as its sovereign bond spreads hit euro-era records.

Losses at Bankia – spawned of a shotgun marriage between savings banks – has made Madrid promise a bailout of €19bn on top of what the state has already provided. It may reportedly place sovereign bonds directly with Bankia so as to give the bank collateral for European Central Bank liquidity while avoiding market borrowing at current punishing yields. This trick would not change the key fact of Spain increasing a debt burden it already struggles to refinance.

Promising that no bank will fall is what truly brings a country down.
Can someone please explain the absurd line of thinking that says banks and bondholders cannot take losses?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Bailout Scam: Collecting Non-Interest on Non-Loans; "Because We’re Europe"

The absurdity of the Greek "bailout" setup is in the news once again. The New York Times reports Athens No Longer Sees Most of Its Bailout Aid
In an elaborate payment system that began after the May 6 election that brought down the Greek government, and is meant to ensure that the Greeks do not touch the cash, the big three creditors are now wiring bailout payments to an escrow account in Greece. There the money sits for two or three days — before much of it is sent back to the troika as interest payment on the Greek bonds that Europe accepted under terms of the bailout deal struck in February.

“Greece will not default on the troika because the troika is paying themselves,” said Thomas Mayer, a senior advisor at Deutsche Bank in Frankfurt. “Why are we doing it like this?” Mr. Mayer said. “Because we’re Europe.”

A Greek government advisor who spoke anonymously, for fear of alienating the European lenders, said of the troika: “They made sure that the sum for domestic spending is kept small enough to force Greece to dramatically raise its own revenues.”

On its face, the situation seems absurd. The European authorities are effectively lending Greece money so Greece can repay the money it borrowed from them.

“You send the money, you call it a ‘loan’ — you get it back and call it an ‘interest rate,”’ said Stephane Deo, global head of asset allocation in London for UBS.

Since May 2010, Greece has been sent €141.7 billion in European taxpayer money to keep the country afloat and ward off a bigger meltdown that might threaten the entire currency union. Of that amount, a full two-thirds has gone to pay off bondholders and the troika.

Only a third has been earmarked to finance government operations, with only a tiny sliver spent on stimulus projects for the anemic economy.

Greek bonds are a profitable investment for the E.C.B. as long as Greece continues to make interest payments. The E.C.B. exempted itself from the debt restructuring deal. And Greek bonds were already trading at a big discount when the E.C.B. started buying them. As a result, the central bank is earning an effective interest rate of 10 percent or so.
Non-Interest on Non-Loans

If the money never gets to the borrower, then it's not a loan. Scam is a more appropriate word. Of the €141.7 billion bailout, only €47.2 can be construed as a loan all of which nearly all went to government operations, none to the average Greek citizen.

As for Mayer's statement “Greece will not default on the troika" we will see about that.  Nearly three-quarters of Greece’s debt, or €182 billion, is now effectively owned by the EU the ECB or the IMF, according to estimates by the investment bank UBS.

If Syriza party leader Alexis Tsipras wins the June 17 election, the Troika is going to take a big hit. The ECB's share is estimated to be between €35 billion to €55 billion.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Competition for McJobs Hits Teens: High-School Students with Jobs Hits 20-Year Low

High school and college kids typically get the jobs that are left over, that no one else really wants, such as working at McDonalds.

However, competition for any job is now so intense, that teens cannot find any job that no one else wants.

As a result of that increased competition, Number of high-school students with jobs hits 20-year low
The American job market is no place for students as the number of employed high schoolers has hit its lowest level in more than 20 years, according to new figures from the National Center for Education Statistics.

In 1990, 32 percent of high school students held jobs, versus just 16 percent now. Blame their elders.

“By definition, teenage workers get the jobs that are left over,” said Charles Hirschman, a sociology professor at the University of Washington who has studied and written about student employment. “When you can’t find someone else to bag your groceries or work construction, often teenagers are the labor force you can count on to pick up that slack for a low wage. But now, with the recession, everybody has moved down. Those jobs aren’t going to teenagers.”

Local McDonald’s managers, for example, are no longer forced to accept young workers who can show up after class. They now have the option to hire older employees with more experience and, in many cases, much more education.

“They think, ‘I can hire this old guy instead. He already knows how to work, so we don’t need to teach him,’ ” said Andrew Sum, director of Northeastern University's Center for Labor Market Studies.

The crunch is also hitting college students. In 2000, 52 percent of full-time college students worked. That number has now fallen to 40 percent, the National Center for Education Statistics reports.
Job Demographics

Please consider these thoughts I penned on May 1, 2008 (emphasis in italics added) Demographics of Jobless Claims
Structural Demographics Poor

Structural demographic effects imply that prospects in the full-time labor market will be poor for those over age 50-55 and workers under age 30. Teen and college-age employment could suffer a great deal from (1) a dramatic slowdown in discretionary spending and (2) part-time Boomer reentrants into the low-paying service sector; workers who will be competing with younger workers.

Ironically, older part-time workers remaining in or reentering the labor force will be cheaper to hire in many cases than younger workers. The reason is Boomers 65 and older will be covered by Medicare (as long as it lasts) and will not require as many benefits as will younger workers, especially those with families.

In effect, Boomers will be competing with their children and grandchildren for jobs that in many cases do not pay living wages.

Very few are considering demographics, a change in attitudes by consumers towards spending, a change in attitudes of banks to lend, and the ability of capital impaired banks to lend even if they want to.


A structural shift in consumption to savings or at least reduced consumption, is in store for boomers. Meanwhile job prospects are looking pretty grim for some time to come across the entire economic spectrum.
And so it is. Unfortunately it will stay that way for many years to come. Economists missed the boat on this one and still do even as it plays out as I suggested.

Because of student debt and low paying jobs, kids out of college are putting off raising families and buying homes. Headwinds on home prices are enormous.

Rather than buy cars they cannot afford, many kids tweet and send text messages.

Demographics, student debt, debt in general, and changing attitudes of youth about what is really important are huge deflationary forces that Bernanke is fighting.

Those expecting hyperinflation or even strong inflation out of this mess are simply not thinking clearly.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Monday, May 28, 2012

Ponzi Financing in Greece Continues; Greek Banks Receive €18bn Transfer

Greek banks have been shut off from regular ECB liquidity operations due to lack of sufficient collateral. Today the Banks have that collateral thanks to a disbursement of funds from the EFSF which in turn will be used as collateral for more loans from the ECB.

If this makes little sense to you it is because it should not make any sense to anyone. It is another act of desperation in a long line of desperate acts.

Please consider Greek banks receive €18bn transfer
Greece’s four largest banks received a €18bn transfer on Monday as the first instalment of a recapitalisation plan agreed as part of the country’s second bailout by the EU and the International Monetary Fund.

The funding, in bonds issued by the European Financial Stability Facility, will help banks reduce their dependence on emergency liquidity assistance, a temporary lifeline provided by the Greek central bank after they were excluded from European Central Bank liquidity operations this month.

The four banks are now expected to regain access to the ECB’s liquidity operations, using the bonds as collateral for funding at cheaper rates than under the emergency liquidity arrangement.

Bankers said they hoped the funding would help stem a continuing outflow of deposits since an inconclusive general election on May 6 triggered fears that Greece would soon be forced to leave the eurozone.
Anyone who thinks this will stop outflows has holes in the head. As I see it, it will allow a means of additional outflows.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Spanish 10-Year Bond Yield Hits 6.5%, Spread to Germany Hits Record; Prime Minister Repeats Lie "Spain Does Not Need Bailout"; Backdoor Bailout or Ponzi Scheme? More Questions Than Answers

In the wake of Bankia bailouts to the tune of €19 billion, the second bailout in two weeks, yields of Spanish debt are soaring.



Spread to German Bonds Hits 5.05 Percentage Points

At this rate I expect it will take less than a week before Prime Minister Mariano Rajoy changes his mind about not needing a bailout, but for now please consider another candidate for understatement of the month: Spain funding situation 'very difficult', PM Rajoy says
Spain's prime minister has said it is "very difficult" for the country to get funds.

The premium investors demanded for holding Spain's 10-year bonds over its German equivalent rose to a record 5.05 percentage points.

But Mr Rajoy said the banking system did not need an international bailout.

"There will not be any [European] rescue for the Spanish banking system," he said, but he backed calls for the European rescue fund to be able to lend to banks directly.

Last week Bankia, which was formed from the merger of several struggling regional lenders, requested a 19bn-euro bailout, which was a much bigger amount of help than had been expected.

"We took the bull by the horns because the alternative was collapse," said Prime Minister Mariano Rajoy, adding that Bankia customers' savings were now safer than ever.

Rather than borrowing money on the open markets, potentially at high cost, there are reports that Madrid is considering giving Bankia government bonds. The bank would then use them as collateral for loans from the European Central Bank.

One analyst said this would amount to "an ECB bailout through the back door".

Some are concerned that by doing this, the government is not tackling the problem of the huge amount of bad property loans, estimated at 32bn euros, that Bankia is holding.

"It is not dealing with the problem of bad loans, it is just keeping them going," said Kathleen Brooks, research director at Forex.com. "It risks becoming a zombie bank," she told BBC News.
Backdoor Bailout or Ponzi Scheme?

Is Rajoy's proposal a backdoor bailout or a Ponzi Scheme?

I proposed the latter yesterday morning in Spain's Plans to Recapitalize Bankia Will Put Germany, ECB at Risk; When Does the Ponzi Scheme Collapse?

More Questions Than Answers
 
One thing that will change Rajoy's tune in a hurry is if the ECB says no to the preposterous plan.

Then what?

What kind of interest rate can Spain get on the open market for bonds?

Doesn't the idea of recapitalization with junk bonds seem absurd enough in the first place?

I asked the key question yesterday: When does Germany say it has had enough of these preposterous schemes?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Sunday, May 27, 2012

Spain's Plans to Recapitalize Bankia Will Put Germany, ECB at Risk; When Does the Ponzi Scheme Collapse?

Inquiring minds are interested in the recapitalization plans for the Bankia. Please consider this chain of posts.

ABC News reports Spain's Bankia set for massive bailout.
Spain's fourth-biggest bank Bankia says it is certain of securing the 19 billion euros ($24 billion) in state aid it is seeking in the largest bank bailout in the country's history.

Bankia is considered key to the country's financial system, and a failure would contaminate the entire banking sector.

The plight of Bankia - which holds some 10 per cent of the nation's bank deposits - has added to the concerns over the massive debt crisis gripping Spain and the rest of the eurozone.

Bankia president Jose Ignacio Goirigolzarri has sought to reassure investors and the public about the future of the struggling bank at a press conference called the day after it announced huge losses, and asked for a government rescue.

"I am certain that the Spanish state will obtain the financing so we will receive the 19 billion euros. That's the commitment," said Mr Goirigolzarri, adding that he expected to get the funds in July.
Devil in the Details

Inquiring minds just may be asking "Just where is this money coming from?" That's a good question.

Reuters reports Spain may recapitalize Bankia with government debt.
Spain may recapitalize Bankia with Spanish government bonds in return for shares in the bank which last week asked for rescue funding of 19 billion euros ($24 billion), a government source said on Sunday.

Bankia could use the sovereign paper as collateral to get cash from the European Central Bank, forcing the ECB to get involved with restructuring Spain's banking sector, laid low by lending to property developers in a boom that ended in 2008.

ECB policymakers, who have pumped over 1 trillion euros into Europe's financial system in recent months, are resisting pressure to do more to shore up the euro zone.

"The biggest problem here is that the ECB could object. That's a legal issue, but technically it is possible," said Jose Carlos Diez, economist at Intermoney Valores.
Ponzi Financing

Got That? A Spanish government source says the plan is to float what amounts to junk bonds, pawn them off to the ECB and use the proceeds to "recapitalize" Bankia.

Of course the ECB (bankrolled by Germany) is at enormous risk were this preposterous scheme to actually happen.

This is what I want to know: When does Germany say it has had enough of these preposterous schemes?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Greece Public Finances Face Collapse as Money Stuffed in Mattresses; Swiss Eye Capital Controls as Money Pours into Switzerland; Understatement of the Month

Lucas Papademos, the ex-technocrat prime minister of Greece says public finances face collapse.
Greece’s public finances could collapse as early as next month, leaving salaries and pensions unpaid unless a stable government emerges from the June 17 election, according to Lucas Papademos, the technocrat prime minister who left office after this month’s inconclusive vote.

Mr Papademos warned that conditions were deteriorating faster than expected with cash flow likely to turn negative in early June amid a sharp fall in tax revenues and a loosening of spending controls during two back-to-back election campaigns.

Mounting anxiety that Greece is headed for further political instability and a possible exit from the euro has prompted many Greeks to postpone making tax payments, and has also accelerated outflows of deposits from local banks.

Athens bankers estimate that more than €3bn of cash withdrawn since the May 6 election has been stashed in safe-deposit boxes and under mattresses in case the country is forced to readopt the drachma.

The finance ministry has halted repayment of value-added tax to Greek exporters, and slashed public investment spending by more than 20 per cent in the first four months.

Transfers to the health ministry to pay debts owed to hospital suppliers and pharmacies have been temporarily suspended, obliging patients to pay the full cost of prescription drugs for the first time.

The struggling state electricity utility PPC has received a €250m special payment from the budget to help cover a widening deficit. The utility has been hit by a sharp rise in non-payments of household electricity bills after the finance ministry imposed an extra “solidarity tax” last year that was added to the bills.
Understatement of the Month

“The situation is getting out of hand,” said a private sector economist. Really? It seems to me things got out of hand long ago.

Swiss Eye Capital Controls as Money Pours into Switzerland

While some stuff money in mattresses, others pour money into Swiss Francs. In response Swiss eye capital controls.
The Swiss National Bank is considering imposing capital controls on foreign deposits if Greece leaves the euro, as the franc comes under heavy demand from investors seeking a haven in Europe.

The Swiss franc has come under increasing pressure since the Greek elections at the start of the month. Currency traders have reported unusually high levels of franc buying in response to the problems in the eurozone, which has seen the euro slide to its lowest level in nearly two years.

“We’re preparing ourselves for turbulent times,” Mr Thomas Jordan [head of the Swiss central bank] said in an interview with SonntagsZeitung, a Swiss newspaper.

“The situation has become worse in the past few weeks and the outlook has become much more uncertain. We’re seeing a clear upward pressure on the franc,” he told the newspaper. “Investors are looking for a safe haven. For many, that includes the franc.”
I have said this before numerous times but it is worth repeating: If you have money in Greek, Spanish, or Portuguese banks, get it out now.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

April New Home Sales: The Hype vs. The Reality

Check out some of the headlines a few day ago following new home sales reports.

Detroit Free Press: April new-home sales increase 3.3%, pointing to recovery

"Americans bought more new homes last month, the latest evidence that the U.S. housing market could be starting to recover."

Fox Business News: US New-Home Sales Up 3.3% In April; Prices Rise In March

"Sales of newly built homes in the U.S. grew faster than expected in April and home prices posted a solid gain the prior month, adding to the increasing momentum for the long-struggling sector."

New York Times: New-Home Sales Climbed in April, Building Optimism

"The spring home-selling season got off to a strong start in April, the Commerce Department said Wednesday, with rising sales and prices providing evidence that a housing market recovery was gaining some traction."

San Francisco Chronicle: New-home sales rise in April

"Americans bought more new homes last month, the latest evidence that the U.S. housing market could be starting to recover."

The Hype vs. The Reality

After all that hype, let's take a look at the reality. To eliminate seasonal fluctuations, the best comparison is the current month vs. the same month in previous years.

Here is a chart from reader Tim Wallace that shows what I mean.



click on chart for sharper image

Being the ever-optimist, I happen to believe that home sales are in a bottoming process. However, a bottoming process and a "recovery" are not the same thing. A claim that a recovery is underway needs to be backed up with facts, not hype.

There is little evidence of a recovery.

We have heard similar recovery stories (all false), dozens if not hundreds of times. All were based on wishful thinking, gimmicks, temporary fluctuations, and shoddy reporting similar to what you see above.

Supposedly the "recovery gains traction". Pray tell what "recovery" is that?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Saturday, May 26, 2012

Gaffe? What Gaffe? Greek Polls? All Over the Place

I am amused by the Financial Times headline Tsipras shrugs off gaffe about Hollande.
When Evangelos Venizelos, the Greek socialist leader, boarded a 7.30am flight to Paris on Tuesday, only his closest aides knew he was on the way to a hastily arranged meeting with the French president.

The last-minute invitation to meet François Hollande came after Alexis Tsipras, the leader of the radical left coalition Syriza and Greece’s new political star, caused a stir in Paris with a typically blunt put-down of the French leader.

Mr Tsipras, whose Syriza party surged to second place in Greece’s May 6 general election, advised that Mr Hollande stick to moderate policies, or risk being abandoned by voters as “Hollan-dreou”.

The reference to George Papandreou, the Greek socialist premier forced to resign after rowing back on pre-election promises and accepting the harsh bailout terms imposed by international creditors, was “very poorly timed”, said a Greek diplomat, noting that French parliamentary elections are due on June 10.

Syriza denied that the comments constituted a gaffe, and pointed out that members of the French far-left had used the “Hollan-dreou” phrase before Mr Tsipras.

However, the jokey comments at the expense of France’s socialist president may have also clouded the young Greek leader’s visit to Berlin, the next stage of his trip. There, the left-of-centre German politicians who met with Mr Tsipras insisted that Greece must implement reforms agreed under the bailout if it wanted to stay in the eurozone, refusing to countenance Syriza’s demand for a renegotiation of the deal.
Gaffe? What Gaffe?


For his statement to be a gaffe, Tsipras would have to care. Instead, he is laughing all the way to the voting booth. Being snubbed by Merkel and and Hollande plays into his hands as I suggested earlier today.

Some recent polls have shown New Democracy back into the lead but the Financial Times continues with ...
Yet the firebrand leader’s travails abroad did not appear to have dented his popularity at home. While polls suggest that Mr Tsipras is viewed as the politician most responsible for blocking the formation last week of a coalition government – an outcome that more than 60 per cent of Greeks would have preferred to a fresh election – Syriza nevertheless increased its support by two points this week, to 30 per cent.
The Financial Times article is as of May 25, 2012 11:21 pm. So, if Tsipras made a gaffe, pray tell where is it?

Note the irony of Hollande refusing to meet with Tsipras, just as Merkel refused to meet with Hollande until Hollande defeated Sarkozy.

Greek Polls? All Over the Place

Bear in mind there are numerous conflicting polls. Reuters reports Greek pro-bailout conservatives regain lead.
Greece's conservatives have regained an opinion poll lead that would allow the formation of a pro-bailout government committed to keeping the country in the euro zone, a batch of new surveys showed on Saturday.

Greece was forced to call repeat elections for June 17 after a May 6 vote left parliament divided evenly between groups of parties that support and oppose the austerity conditions attached to a 130 billion euro bailout agreed with the European Union and International Monetary Fund in March.

Polls up to Saturday had showed pro- and anti-bailout parties running neck-and-neck ahead of the vote which could determine the country's future in the single currency.

Five polls published in the weekend press showed the conservative New Democracy party, which supports the bailout, with a lead of between 0.5 and 5.7 points over the anti-bailout leftist SYRIZA party - though analysts said the race was still too close to call.
I suspect but cannot prove the poll cited by the Financial Times is more accurate. Reuters continues ...
FRAGILE LEAD

Analysts said New Democracy's lead was precarious. "These polls show that people got scared from SYRIZA's lead in previous surveys," said political analyst John Loulis.

"This is still a very tight race. New Democracy has a small advantage but whoever called them favorites would be dead wrong," he added.

SYRIZA, led by its charismatic 37-year old leader Alexis Tsipras, is doing particularly well among the young who are particularly hit by unemployment, pollster Pulse said.

New Democracy, by contrast, had a big lead among the over-60s, Pulse said.

In a bid to woo anti-bailout voters, conservative leader Samaras said on Saturday Greece should be given more time to comply with a bailout term to generate about 11.5 billion euros in savings over the next two years.

"All new spending cuts ... should take place over four years, not two," he was quoted as saying by Real News.

Greece's bailout deal allows for a possible relaxation of the country's bailout targets if its recession worsens.

Greece's new government will have to act fast. Without new bailout funds, Athens may run out of cash by end of June, newspaper To Vima reported, citing a memo compiled by former Prime Minister Lucas Papademos on May 11.

"From June 20, the government's available cash will cross negative territory to the tune of 1 billion euros," the document said, confirming earlier reports by finance ministry officials that Greece might run out cash by the end of June.
Given the highly inflammatory statements of Lagarde regarding no renegotiation of terms (please see Harsh Language from Lagarde: "IMF Has No Intention of Softening Terms"; From Head of Deutsche Bank: "Greece is a Failed Corrupt State"; Purposely Inflammatory Statements to Force Greece Exit), New Democracy leader Samaras is disingenuous at best in his call to renegotiate the terms of the bailout.

 I believe Greek voters will see through Samaras' lies, preferring the "no bailout" message of Tsipras.

Regardless, intense fear-mongering  by the New Democrats, Pasok, Merkel, and Hollande is likely. Some of that will be counterproductive.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

A Tale of Two Memos to Two President-Elects

Today the Wall Street Journal dedicated more than three-fourths of a page to publishing large excerpts from a 1980 memo to president-elect Ronald Reagan from George Shultz and other economists who had advised Reagan in the presidential campaign. In my view, that memo represents a watershed in the history of economics with great relevance today, and that is why I focused on it in my new book First Principles, where I explain why the economy prospers when policy adheres to the basic principles of economic freedom, but falters when policy deviates from those principles, as it is doing now. That original fifteen page 1980 memo was an important reason why policy veered back to the principles of economic freedom the 1980s and the 1990s. Here is how I describe the memo in First Principles:

Less than two weeks [after the 1980 election], on November 16, 1980, many of the economists who had worked together in the campaign wrote an extraordinary memo to Reagan entitled ‘Economic Strategy for the Reagan Administration.’ It began with a call for action: “Sharp change in present economic policy is an absolute necessity. The problems . . . an almost endless litany of economic ills, large and small, are severe. But they are not intractable. Having been produced by government policy, they can be redressed by a change in policy.”

The memo then outlined a set of reforms for tax policy, regulatory policy, the budget, and monetary policy. There were no temporary tax rebates, short-term public works projects, or other so-called stimulus packages. Rather there were sentences like “The need for a long-term point of view is essential to allow for the time, the coherence and the predictability so necessary for success.”

I believe it is instructive to compare the full 15-page 1980 memo to President-elect Reagan with a similarly-timed fifty-seven page 2008 memo to President-elect Obama. The 2008 memo from Larry Summers was recently posted by Ryan Lizza on the New Yorker web page generating much political and economic debate. Both were written in times of great economic difficulties, but the contrast between the overall approaches to economic policy is striking. Most important, unlike the 1980 memo to Reagan, the 2008 memo focused mainly on short-term interventions and so-called stimulus packages. The recent debate in the press has been over whether the short-term stimulus package should have been larger. In contrast the 1980 memo did not even mention such short term stimulus packages, but rather focused on more permanent long-term strategies and policy predictability.

Harsh Language from Lagarde: "IMF Has No Intention of Softening Terms"; From Head of Deutsche Bank: "Greece is a Failed Corrupt State"; Purposely Inflammatory Statements to Force Greece Exit

Strong messages from the head or the IMF, the head of Deutsche Bank, and the president of the Bundesbank are highly likely to drive Greek voters away from New Democracy and Pasok in the June 17 elections.

The Guardian writes It's payback time: don't expect sympathy – Lagarde to Greeks.
The International Monetary Fund has ratcheted up the pressure on crisis-hit Greece after its managing director, Christine Lagarde, said she has more sympathy for children deprived of decent schooling in sub-Saharan Africa than for many of those facing poverty in Athens.

In an uncompromising interview with the Guardian, Lagarde insists it is payback time for Greece and makes it clear that the IMF has no intention of softening the terms of the country's austerity package.

Asked whether she is able to block out of her mind the mothers unable to get access to midwives or patients unable to obtain life-saving drugs, Lagarde replies: "I think more of the little kids from a school in a little village in Niger who get teaching two hours a day, sharing one chair for three of them, and who are very keen to get an education. I have them in my mind all the time. Because I think they need even more help than the people in Athens."

"I think they should also help themselves collectively." Asked how, she replies: "By all paying their tax."

Asked if she is essentially saying to the Greeks and others in Europe that they have had a nice time and it is now payback time, she responds: "That's right."

Jens Weidmann, president of the Bundesbank, poured cold water on the idea – which is strongly backed by the French president, François Hollande – and also said financial aid to Greece should be cut off if it failed to keep to the bailout deal.

Jürgen Fitschen, joint head of Germany's biggest bank, Deutsche, described Greece as "a failed state … a corrupt state".
Purposely Inflammatory Statements to Benefit Syriza

Those statements are not only inflammatory, but purposely so. Lagarde has to know that her message stating more sympathy to Africa than patients refused life-saving drugs in Greece is bound to incite Greeks.

Recall that Antonis Samaras (the head of New Democracy) and Evangelos Venizelos (the head of Pasok), have promised voters they will renegotiate the terms.

Greek voters just had that promise yanked away in no uncertain terms. IMF and Deutsche Bank statements also make German chancellor Angela Merkel look like a cream-puff with her offer of potential stimulus efforts.

In contrast to the lies of Samaras and Venizelos, Syriza leader Alexis Tsipras says the bailout is null and void, while stating Greece will remain in the euro.

It is had to say with certainty whether his promise to remain in the eurozone is a purposeful lie as opposed to pure fantasy, but given there is no provision to kick any country out of the eurozone, he just might believe it.


Lies and Bluffs

For further discussion please consider

What if Tsipras is Not Bluffing? Who Holds the Upper hand? What is Troika's Biggest Fear? Can Greece Possibly Stay in the Eurozone After Default?

Merkel's 6-Point Plan to Save Europe; Merkel Backed Into Tight Corner: Social Democrats Threaten to Not Ratify Merkozy Treaty Without Growth Measures; Merkel Coalition at Risk

IMF Purposeful Attempt to Incite Greek Exit

The IMF has had enough. It does not want to deal with a coalition of Samaras and Venizelos given falling revenues in Greece and no hint of any true structural reforms. Rather, Lagarde wants to drive Greek voters to Syriza so that Greece can default and the Troika can cut off all funding in "clear conscience"

All funding should be cut now (in fact three years ago), but the IMF hopes to absolve itself of blame.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Friday, May 25, 2012

"ECB Will be Insolvent and Costs May Exceed 1 Trillion Euros" Says IIF Director; If the ECB Prints, Would Germany Exit the Euro?

According to IIF director Charles Dallara in a Bloomberg interview, "ECB will be insolvent if Greece were to exit the euro. Europe would have to first and foremost recapitalize its central bank."

Excuse me for asking but how would they attempt to do that? Print Euros?

Please consider Dallara Says Greek Euro Exit May Exceed 1 Trillion Euros
The cost of Greece exiting the euro would be unmanageable and probably exceed the 1 trillion euros ($1.25 trillion) previously estimated by the Institute of International Finance, the group’s managing director said.

The Washington-based IIF’s projection from earlier this year is “a bit dated now” and “probably on the low side,” Charles Dallara said in an interview in Rome today. “Those who think that Europe, and more broadly the global economy, are really prepared for a Greek exit should think again.”

The European Central Bank’s exposure to Greek liabilities is more than twice as big as the ECB’s capital, said Dallara, who represented banks in their negotiations with the Greek government on its debt restructuring. As a result, he predicted the bank would be unable to provide liquidity and stabilize the euro-area financial sector.

“The ECB will be insolvent” if Greece were to exit the euro, Dallara said. “Europe would have to first and foremost recapitalize its central bank.”

In February, the IIF estimated that Greece’s liabilities, in the event of a euro exit, could be crippling. “It is hard to see how they would not exceed 1 trillion euros,” the group said in an internal Feb. 18 report that hasn’t been made public.

It’s not clear whether Spain will need a bailout as it seeks to help its banks weather the euro crisis, he said.

“The only way to help markets see past that obscurity is to remove the cloud of uncertainties of national fiscal position and move toward unification,” Dallara said.
Suspect Thinking or Purposeful Fear-mongering?

Since it is perfectly clear that Spain is an untenable situation, and since it is equally clear that unification is not going to happen and would not solve numerous problems, one has to wonder about the rest of his analysis as well.

However, Dallara's statements regarding ECB exposure to Greek liabilities rings true, so let's assume the trillion+ euro figure is correct.

Just where is Europe to get that?

Greece Exit Manageable?

One needs to balance Dallara's statements with statements from Germany that a Greece exit is manageable. For example The Telegraph reports Bundesbank says Greek euro exit would be 'manageable'
The impact of a Greek exit from the eurozone would be substantial but "manageable", Germany's Bundesbank said, raising pressure on Athens to keep its painful economic reforms on track.

Echoing German political leaders, the Bundesbank warned against Europe easing the conditions for Greece to access aid.

"Attempting to kick-start the economy in the short term and putting off consolidation efforts in the long term are not conducive to regaining lost confidence."
Counterbluff?

Bloomberg reports Greek Euro Exit ‘Manageable’ for Markets, BdB German Banks Say
A German banking association that represents Deutsche Bank AG (DBK), Commerzbank AG (CBK) and more than 200 other lenders said investors are prepared should Greece leave the euro area.

“It would be manageable for markets,” Andreas Schmitz, president of the BdB Association of German Banks told reporters in Frankfurt yesterday. “The risks have largely been priced in. A Greek exit would bring lower risks than two years ago but is not to be underestimated.”
Priced In? Who is Bluffing Whom?

The question is: who is bluffing whom or do they all believe these contradictory statements?

In response to What if Tsipras is Not Bluffing? Who Holds the Upper hand? What is Troika's Biggest Fear? Can Greece Possibly Stay in the Eurozone After Default? my friend Pater Tenebrarum pinged me via email with this set of statements.

Whether they are or are not right about this, the Germans now believe that the euro area can survive a Greek exit. Tsipras can really threaten them with nothing. It's a miscalculation, he underestimates how desperate the political mood in Germany and elsewhere has become. 

If Tsipras goes through with his threat, Greece will be cut off from ELA and TARGET-2 and that will be that. Check my Catch 22 Revisited post.

The Germans have had enough, and so have many others - primarily Portugal and Ireland, who are furious that the Greeks are threatening to drag them down with them. 

The chances of Greece getting kicked out have risen to 85% in my opinion.

Desperate Political Mood

Perhaps Germany misunderstands the desperate political mood in Greece. More importantly, given the politically charged emotions, does anyone understand anything or is it all a pack of lies and suppositions everywhere?

If the ECB Prints, Would Germany Exit the Euro?

If Tsipras wins the June 17th election (I think it is a 60+% chance) then if the ECB would be made insolvent as Dallara suggests, what would Germany do? What would the ECB to do?

If the ECB prints, would Germany leave?

Thus it is not so simple as to say "Germans have had enough" given that Mario Draghi sits as ECB president. Would Germany exit the euro if Draghi takes a course of action Germany does not agree with?

Those are the questions at hand now. Clearly the questions have escalated in significance.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Spain's Bankrupt Catalonia Region "Running Out of Options" to Refinance €13 Billion; Total Regional Needs are €50.7 Billion; Regions Want "Open Bar" with Central Bank Guarantees

The crisis in Spain is rapidly coming to a head. This crisis has nothing to do with Greek "contagion" as is widely believed. Spain dug this hole by itself. Spain's immediate unsolvable problems are a bankrupt banking system coupled with bankrupt regions that have no way to pay bills. Spain's regional governments need to roll €35.7 billion and there is current deficit of €15 billion.

The president of Spain's Catalonia Region said it faces refinancing needs of €13 billion and is "running out of options refinance its debt".

Catalonia accounts for about one fifth of the Spanish economy.

Moreover, Spain's Valencia region set off alarm bells on a six-month €19 billion bond issue because it may be forced to pay a 7% return, more than two points above what Greece is paying for their junk bonds.

Regions Want "Open Bar" with Central Bank Guarantees

Let's not mince words. Spanish regional governments are clearly and undeniably bankrupt. It should come as no surprise that the regional governments have asked the central government for "an open bar, meaning that the state allows the joint issuance of debt with the guarantee explicit regional treasury, and without demand conditions change, allowing them access to cheaper financing. The matter was discussed again at the Council of Fiscal and Financial Policy last Thursday.

The above story was pieced together with help of Google translate and the following articles:

The rescue of Catalonia and market nerves about Spain

In Guindos wants to keep money in advance to the CCAA

The problem for Spain is if it guarantees regional debt (the term used for this is "Hispabonos") then the credit rating of Spain will drop and all of Spain's borrowing costs will rise.

Bankruptcy, default, and an exit of the eurozone coupled with work-rule and pension reform is the only realistic solution.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Merkel's 6-Point Plan to Save Europe; Merkel Backed Into Tight Corner: Social Democrats Threaten to Not Ratify Merkozy Treaty Without Growth Measures; Merkel Coalition at Risk

It would be quite ironic and rather fitting if Germany and France fail to ratify the Merkozy treaty. 25 Nations have ratified the treaty but France and Germany still have not.

French president Francois Hollande has already threatened non-ratification unless the treaty is revised.

The Leader of the Social Democrat Party (SPD)in Germany, Frank-Walter Steinmeier, is making similar threats for the first time.

Effectively chancellor Merkel is painted into a huge corner with no wiggle room. "I guarantee you, there will only be a fiscal pact if it includes complementary growth elements," Steinmeier said.

Specifically, Steinmeier wants a financial transaction tax, expansion of loan volume to the European Investment Bank, and a nebulous "strengthening of investment power".

Steinmeier also called for the creation of a European debt repayment fund. He said that euro bonds could only be introduced "if they come with strict conditions and we have harmonized European economic and finance policy."

Merkel needs those SPD votes because treaty ratification takes a two-thirds majority in the Bundestag, Germany's parliament.

Merkel's 6-Point Plan to Save Europe

Backed into a corner, Berlin Proposes European Special Economic Zones.
With Europe beginning to look for alternatives to its exclusive focus on austerity, the German government has developed a six-point plan to foster economic growth in Europe, SPIEGEL has learned. Included in the proposal is the creation of special economic zones in struggling euro-zone countries.

The proposal is part of a six-point plan the German government plans to introduce into the discussion on measures to stimulate economic growth taking place in the European Union. The proposal also calls for the countries to set up trusts similar to the Treuhand trust created in Germany at the time of reunification that then sold old off most of former East Germany's state-owned enterprises in order to divest those countries' numerous government-owned companies.

The plan also calls for the countries to adopt Germany's dual education system, which combines a standardized practical education at a vocational school with an apprenticeship in the same field at a company in order to combat high youth unemployment.

The plan recommends that countries with high unemployment also adopt reforms undertaken by Germany, including a loosening of provisions that make it difficult to fire permanent employees and to create employment relationships with lower tax burdens and social security contributions.
Too Little Too Late

Some of those ideas seem quite reasonable. However, haven't they been agreed to before?

How many times has Greece promised work-rule reform only to see nothing happening? Spain has not done much either. Nor has Italy.


Merkel Coalition at Risk

At every juncture, Merkel is increasing backed into a corner - by French President Francois Hollande, by ECB president Mario Draghi who sides with Hollande, by Mario Monti, Prime Minister of Italy, and now by the SPD.

As I see the demands, I fail to see how the 6-point proposal comes close to what SPD wants.

Here is the key question: Will the plan satisfy Social Democrats? If not, Merkel's coalition government itself is at risk. 

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List