Ilargi: Here’s why Germany is wise to refuse using the ECB to buy up anything not nailed down in Europe.
All economic forecasts for countries in the periphery -which itself grows as we go along- are based on unrealistically positive numbers. And that means that soon they’ll come calling again for bail-outs.
Austerity measures quite simply mean less consumption, and that in turn means a lower GDP. In the US, private consumption is some 70% of GDP; it may be somewhat less in other countries, but not that much.
Basically, you have a handful of countries that have borrowed their way into prosperity over the past few decades, and that now find borrowing has become much harder. Italy and Spain need to pay around 7% on sovereign debt, and Greece has already been effectively shut out of the markets.
On the sovereign front, borrowing becomes prohibitively expensive, which leads to budget cuts, which lead to austerity, which leads to wage cuts and increased unemployment, but the 2012 predictions all mention the need for economic growth. But what growth?
On the business and private front, it also becomes much harder to finance anything with credit. All Eurozone periphery countries have banks that are already teetering on the brink of collapse. What will they do to drag themselves away from the edge? Increase lending? Obviously not.
The only option -seemingly- available is to increase gambling. Double or nothing; everything on red. Buy credit default swaps, of course. Which may offer no protection whatsoever; if Greece’s 50% “voluntary writedown” doesn’t trigger a credit event (a CDS payout), then what does?
The outcome is clear: periphery banks (and not just them) will have to come back to the ECB, or the Fed, or the EFSF, but the latter has already pretty much been written off as a failure even now.
There’s no way left to turn. But nobody seems ready to accept that. Even if it’s been obvious for a long time that it inevitably had to come to this. And that has nothing to do with indecisiveness, by the way, that’s just a media ruse.
The ECB, read: Germany, doesn’t have the means and wherewithal to save the entire Eurozone. It could opt to put itself on the hook for $2-3 trillion, just to keep up appearances for another year or so -if that long-, but after that, countries and banks would be trick-and/or-treating at the doorsteps in Berlin and Frankfurt anyway.
That wouldn’t be a solution. There is no solution other than to let the bankrupt countries and financial institutions go, well, bankrupt. Mark to market. Restore confidence, albeit in a much smaller market. But the world’s political and financial “leaders” won’t allow it to happen, at least not in real time.
Letting it happen in apparent slow-motion has an added benefit: it allows for technocratic, non-elected governments to take over for a while, and make sure countries are bled dry before handing them over to a proper electoral process again.
Ironically, there is no more pivotal moment than this one for the people of the embattled nations, but they still allow for these broad daylight stealth takeovers to take place. Papademos and Monti even enjoy “broad support”, while they should be tarred and feathered and told never to return or else.
Let’s turn to the specifics. Greek Finance minister Venizelos says Greece will “only” have a 5,4% deficit in 2012, and no new cuts or measures are necessary. A large part of that “assessment”, mind you is based on the 50% “voluntary” write-off by private investors, something that won’t be available to other nations.
But it doesn’t stop there: Greece is in a deep recession, something the negotiators of all the bailout deals and austerity plans have not -or at least not fully- implemented in their calculations. And it’ll come back to haunt them (sometimes you’d suspect they aim for just that). Not that it seems to matter much today: all anyone is looking for are numbers that are palatable in the short term. Let 2012 take care of 2012.
The new Greek government has submitted its plans for next year’s budget, promising to almost halve the deficit. [..]
If the economy performs worse than expected, as it did in 2011, there are concerns that Greece may again fail to cut its deficit significantly.
Greece predicted Friday that its budget deficit will fall sharply next year and insisted that no fresh austerity measures will be needed to plug a hole in this year’s finances.[..]
Venizelos, who kept his job in the new interim coalition government formed last week and led by technocrat Lucas Papademos, said the new debt deal will make the country’s national debt “totally sustainable.”
The deal includes provisions for banks and other private holders of Greek bonds to write off 50% of their Greek debt holdings[..] But the details have not yet been worked out, and negotiations have only just begun.[..]
“The entire process is voluntary,” Venizelos said of the bond writedown. [..]
Gripped by a vicious financial crisis since last year, the Greek government has imposed a series of harsh austerity measures, including salary and pension cuts and increased taxes. But the measures have led to a deep recession, with the economy projected to contract by 5.5 per cent of GDP this year
Ilargi: Italy, too, is in a recession, and well on its way toward a depression. So Mario Monti should be sent straight back to the drawing board (he won’t be, for now). Here’s the main takeaway from Monti as reported by Frances D’Emilio and Colleen Barry for AP:
“We must convince the markets we have started going down the road of a lasting reduction in the ratio of public debt to GDP. And to reach this objective we have three fundamentals: budgetary rigour, growth and fairness,” Monti said.
He said he would quickly work to lower Italy’s staggering public debt, which now stands 1.9 trillion ($2.6 trillion) — 120 per cent of its GDP. “But we won’t be credible if we don’t start to grow,” Monti added.[..]
Monti said if Italy fails to grow economically and unite behind financial reforms, “the spontaneous evolution of the financial crisis will subject us all, above all the weakest, to far harsher conditions.”
Ilargi: “We won’t be credible if we don’t start to grow”, says he. The sort of growth he’ll tell his countrymen he’s aiming for can only be achieved by loosening regulations for firing people and lowering their wages and pension plans, by raising taxes, and by privatizing public assets (through firesales to international investors). “The spontaneous evolution of the financial crisis” is the kind of thing you need to say out loud five or 10 times, and see what taste it leaves behind on your tongue. You know, as opposed to “planned evolution”.
It’s the sort of plan for which the international finance industry, through the IMF and World Bank, has had blueprints on the shelf for many decades, and which have been finetuned in South America, Southeast Asia and Eastern Europe during that time.
But that’s not the sort of plan that will lead to renewed growth, or at least not for anyone else than the banks that control the IMF and World Bank. For the people on the street, it’s guaranteed misery for many years to come.
Spain has become the new poster child for what ails the EU periphery, with its 10-year bond rate surpassing even Italy’s in a very short timespan. Looking at the details, that shouldn’t be all that surprising. For starters, the BBC’s Robert Peston:
[..] if you add together all debts – government debts, corporate debts, financial institution debts, and household debts – Spain is a much more indebted or leveraged country than Italy.[..]
… the same group of global investors lend to governments, banks and businesses, so if they become worried about a country’s economic prospects they become wary of lending to any of its economic actors. [..]
… the burden of paying debts suppresses economic activity, whether the debtor is a household, a government, or a company.
So here are the numbers – and for Spain they are hair-raising. In 1989, Spain’s ratio of government debt to GDP – the value of what the country produces – was just 39%.
Its ratio of corporate debt to GDP was 49%, the ratio of household debt to GDP was just 31% and financial sector debt was just 14% of GDP. The aggregate ratio of debt to GDP was 133%.
By the middle of this year, the picture was utterly different. The aggregate ratio of debt to GDP had soared to 363% of GDP. And it was really from 2000 onwards, the euro years, that Spain really got the borrowing bug, with the ratio of aggregate debt to GDP rising by a staggering 171 percentage points of GDP.
The biggest increment over the past 20 odd years has been in the ratio of corporate debts to GDP, which has soared to a staggering 134% of GDP. Spanish companies have become addicted to debt.
Ilargi: The 800 billion peseta behemoth in the Spanish room is the real estate sector. The boom has been huge, and so will be the downfall. Spain is a favourite tourist destination, and it was construction for that sector that threw all caution to the wind. Sharon Smyth for Bloomberg has some ugly details:
Spanish banks, under pressure to cut property-backed debt, hold about €30 billion ($41 billion) of real estate that’s “unsellable” [..]
Spanish lenders hold €308 billion of real estate loans, about half of which are “troubled,”[..]
… unfinished residential units will take as long as 40 years to sell [..]
“Around 35 per cent of Spain’s land stock is in the ex-urbs, which means it’s actually worth nothing.”
Spanish home prices have fallen 28% on average from their peak in April 2007, according to a Nov. 2 report by Fotocasa.es, a real-estate website, and the IESE business school.
Land prices dropped by more than 60% in the provinces of Lugo, A Coruna and Murcia, and 74 per cent in Burgos since the peak in 2006, data from the Ministry of Development and Public Works showed. Land values fell 33%nationwide.
“If there were to be a proper mark to market of real estate assets, every Spanish domestic bank would need additional capital [..]
Santander has €9.2 billion of foreclosed assets, followed by Banco Popular SA with €6.05 billion, BBVA with €5.87 billion, Bankia with €5.85 billion, Banco Sabadell SA with €3.6 billion and Banco Espanol de Credito SA with €3.36 billion [..]
Spain’s bank-bailout fund took over three lenders on Sept. 30, valuing them at zero to 12 per cent of book value.
Lending by Spanish banks contracted by 2.64% on the year in September, the sharpest annual decline on record, pointing to a deepening credit crunch in Europe’s fourth-largest economy.
Data released Friday by the Bank of Spain showed that some €48.4 billion in credit was removed from the Spanish economy over the past year through September. The decline was the biggest on record in the country since the central bank began to track lending growth in 1962.
Ilargi: And that there’s yet another major factor in play, one that has so far been largely overlooked: capital flight. Make that: Capital Flight.
How can you grow an economy, if that were possible to begin with in view of the other circumstances, if not only there’s no money coming in from abroad, but your own people are talking their money out?
Capital flight is taking place all over Europe, from individuals and businesses alike. rumour has it that Greece is negotiating a deal with Swiss banks to forcibly repatriate €81 billion to banks to Greece. Italy and Spain might want to negotiate similar deals, or for all we know they already are. Things like that never work. They just undermine confidence faith in domestic banking systems.
Nervous investors around the globe are accelerating their exit from the debt of European governments and banks, increasing the risk of a credit squeeze that could set off a downward spiral.
Financial institutions are dumping their vast holdings of European government debt and spurning new bond issues by countries like Spain and Italy. And many have decided not to renew short-term loans to European banks, which are needed to finance day-to-day operations.
If this trend continues, it risks creating a vicious cycle of rising borrowing costs, deeper spending cuts and slowing growth, which is hard to get out of, especially as some European banks are having trouble meeting their financing needs.
The eurozone infection this week moved decisively from the periphery of the continent to its core.
Many investors are no longer just fretting about the possibility of a default here or there. They are now starting to worry about the chances of the euro itself breaking up. Bond markets may be putting as high a probability as 25 per cent on a split, according to Citi analysts.
The dramatic ratcheting up in the seriousness of the crisis could be seen in the eurozone’s triple A countries. France and Austria both saw their spreads over 10-year German Bunds reach records for the euro-era and in Paris’s case top 200 basis points, a level Italy was at just four months ago.
The Netherlands and Finland, previously classed as in the same safe category as Germany, saw their premiums over Berlin rise to their highest levels excepting a few weeks following the collapse of Lehman Brothers.
Government bond investors, a conservative bunch used only to dealing with interest rate risk, are now having to consider default possibilities for every eurozone country save for Germany. “Everything outside Germany trades as a credit,” says Nick Gartside of JPMorgan Asset Management.
Worryingly, however, even Germany is showing some slight signs of being caught up in the burgeoning contagion. Its bond yields tend to move in the opposite direction of Italy’s, a sign of Berlin’s haven status. But, according to Evolution Securities, that has been less true recently.
Between mid-June and the end of August, German yields moved in the opposing direction on 86 per cent of days. But since the start of September that has dropped to 69 per cent. “Things will only change in the bond markets when Germany is truly contaminated. There are small signs that this could be beginning,” says one large French investor.
Ilargi: “Even Germany is showing some slight signs of being caught up in the burgeoning contagion”. And still everyone counts on Germany to step in and bail out everyone else?! Ambrose Evans-Pritchard says for the Telegraph :
Asian investors and central banks have begun to sell German bonds and pull out of the eurozone altogether for the first time since the debt crisis began, deeming EU leaders incapable of agreeing on any coherent policy.
Andrew Roberts, rates chief at Royal Bank of Scotland, said Asia’s exodus marks a dangerous inflexion point in the unfolding drama. “Japanese and Asian investors are for the first time looking at the euro project and saying ‘I don’t like what I see at all’ and fleeing the whole region.
“The question on everybody’s mind in the debt markets is whether it is time to get out of Germany. The European Central Bank has a €2 trillion balance sheet and if the eurozone slides into the abyss, Germany is going to be left holding the baby. We are very close to the point where markets take a close look at this, though we are not there yet,” he said.
Jean-Claude Juncker, Eurogroup chief, fuelled the fire by warning that Germany is no longer a sound credit with debt of 82pc of GDP. “I think the level of German debt is worrying. Germany has higher debts than Spain,” he said.
Ilargi: “Germany has higher debts than Spain”. Need we say more?
Any German who reads that will say, as I did starting off this article, that Germany is wise to refuse using the ECB to buy up anything not nailed down in Europe. That’s where the buck stops. It doesn’t even matter whether Jean-Claude “When it gets serious, you lie” Juncker is correct in that particular assessment. What should be obvious is that Germany is in no position to save the entire periphery.
So let’s get it over with alright. Mark all countries and banks to market. Start anew. The longer we wait, the more we’ll wind up impoverishing the people (the 99%) here. The case is over, closed, cold. It’s checkmate. There are far more holes in the dike than there are -German- fingers to plug the holes. Why would they volunteer to have those fingers chopped off?