Saturday, January 28, 2012

Kein Schwein Ruft Mich An

Episode XVI: Kicking A Can So Big It Cannot Fail

Jack Ewing, in the Paper Of Record, in the wake of Davos and in advance of the meeting of EU Leaders on January 30th:
DAVOS, Switzerland — World leaders turned up the pressure on Europe on Saturday to erect a more formidable wall of money against the sovereign debt crisis, warning that the eurozone continues to pose a severe threat to the global economy.

George Osborne, the chancellor of the Exchequer in Britain, said a bigger firewall was “a key to unlocking further confidence,” while Christine Lagarde, managing director of the International Monetary Fund, said the fund should be big enough to eliminate any doubts about European resolve.

“If it is big enough, it will not get used,” she said on Saturday during a panel discussion at the World Economic Forum here.
The firewall being discussed is the European Stability Mechanism (ESM), a separate fund set up by the EU and the European Central Bank in collusion cooperation with the IMF and the World Bank, holding 500 Billion Euro ($656 Billion USD) as an emergency contingency fund, to provide Eurozone governments with loans when austerity policies fail to reduce sovereign debt.

The 'economic charter', agreed to in principle by all but one of the Eurozone nations in December of last year (Britain opting out rather spectacularly) and still needing ratification by 16 governments, included a promise to complete setting up the ESM and having it ready for operation by July of this year.

These governments are faced with deficits in simply running their governments. They use short-term bond sales to raise cash -- but these auctions don't go well, because the interest rates on the bonds may be high. The governments end up paying more to bondholders than originally projected; an unanticipated addition to their deficits, which the bonds were supposed to help solve. Here, the ESM would step in to provide the government with a loan to ensure 100% on the Euro was repaid, plus interest, to all the bondholders.

The idea's supporters are saying that if the amount of funding in the ESM was huge, gigantic, then "The Market" should understand that it can invest in bonds from Greece and elsewhere with confidence, and interest rates for new short-term bonds should be lower. Maybe. The total ESM fund may have to be much larger than the $500 Billion Euros already suggested.



Obligatory Cute Small Animal Photo In Middle Of Financial Blog Rant.
Today, We Offer Reddy Kilowatt, In Advance Of The Pending Attack On Iran

Angela Merkel and Nicholas Sarkozy have tied the ESM's creation to the EU / Eurozone's acceptance of changes to centralize the Eurozone's economic policies; the ESM is part of that general framework.

Merkel couldn't get a consensus of the full 40-nation membership in the December, 2011 EU meeting to change the Treaty of Lisbon; however, she was able to pull together the Eurozone countries (minus England) to approve a separate 'economic charter' that would initiate a framework for more economic cooperation, but also to enshrine Austerity policies in EU economic regulation.

Austerity is the chosen method to end the cycle of debt in the Eurozone. 'Spendthrift' nations must cut their governments' budgets and reduce their annual deficits. If they don't (so the 'economic charter' lays out), in some cases they can be fined, or lose more autonomy in handling their nations' finances to the EU.

Austerity is an exceptionally bad idea, and many economists have weighed in against it. More Austerity means cutting government budgets because further deficit spending is viewed by the Austerians as an absolute evil. Austerity means (best case) stagnation, and no growth, or (worst case) full Recession.

Eventually, a European economic slide will effect global markets and economies -- and that's what Austerity ultimately means. It will prolong economic hardship for nearly everyone, except the already-wealthy. It will increase social stratification and continue destroying the so-called Middle Class in most Western nations.

For Europe, it means being shoved head-first towards an unknown period of higher unemployment and crime, lowered expectations and standards of living, and the general grit and depressive shabbiness which comes with all of that.

People in Europe understand this on an intellectual level, but many still have yet to experience fewer jobs, buses, streetcars and garbage pickups; reduced public health coverage and increased work loads for remaining employees of corporations who demand higher productivity: There's always someone else who will do your job for less -- so shape up and shut up. People in Greece and Ireland particularly, followed by Spain (where unemployment is nearly 23%) and Portugal, and soon, Italy, are already experiencing it.


One fact about the ESM is that it cannot be made large enough to cover all the potential deficits in national budgets of the 16 participating Eurozone nations. Creating it is more than just a political gesture, but as Felix Salmon noted in December,
... All of Europe’s hopes right now are being placed in ... the European Stability Mechanism ... [which] is going to have to be constructed with the ability to put out fires of any conceivable size. And as such, it’s going to have to be able to borrow enormous amounts of money, and lend them on to countries which have found themselves in trouble.

But that would make the ESM, essentially, a bank. And the European leaders seem determined, today, to prevent the ESM from operating as a bank at all. Which means it will never get the firepower it needs to be taken seriously... the ESM seems set to be capped at a mere €500 billion euros ... compare [that] to Italy’s total debt of roughly €2 trillion. And that isn’t even counting Spain, or Portugal, or Ireland, or whatever money Greece might yet still need.
Many Europeans already are beginning to understand that Austerity will not be experienced equally.
Some countries within the EU which don't have as high a GDP-to-debt ratio (specifically, Germany and France) will not experience as rapid a rate of change, or as steep a drop, in their living standards as the 'spendthrift' nations of the Eurozone. And with that will come political tensions between EU countries, and between political parties in those nations where the bite of Austerity is felt most strongly.

Some EU politicians agree with this; some don't -- and the disagreement is over both making Austerity The economic policy, and giving up some control of their country's economies (including their banks) to a larger EU organization. The British voted 'No' to that, and other EU politicians are worried that support for the Eisen Kanzellerin and her 'policy of Less' might hurt them politically --
because not everyone in Europe Hearts Little Angela.
Eurozone leaders are more focused on dealing with what they see as the more immediate danger of a Greek default, and less on testing their taxpayers’ patience by increasing the size of the firewall...

“I’ve never been as scared as now about the world,” said Donald Tsang, chief executive of Hong Kong... “We do not know how deep this hole would be when the whole thing implodes on us,” he said...

Nouriel Roubini, a professor of economics at New York University known for his pessimistic views, forecast Saturday that Greece would have to leave the eurozone this year, and said that there was at least a 50 percent chance that the eurozone would break up within three to five years.

“The euro zone is a slow-motion train wreck,” Mr. Roubini said during a separate panel discussion.

...Speakers on Saturday did not say how big they thought the European firewall should be. But, again echoing American officials, they agreed it should be so enormous that no investor would question its integrity.
In other words, it should be made "Too Big To Fail".



MEHR: The Independent UK (courtesy of The Great Curmudgeon) reports:
Europe's leaders remained locked in dispute yesterday over the size of the eurozone bailout funds, as it emerged Germany is pushing for Greece to be stripped of powers to control its budgets.

The move to make Greece hand over control of budgetary policy as the price for agreeing a €130bn rescue package
[this tied to an approaching deadline to redeem short-term Greek government bonds, plus interest; see above] would represent a humiliating blow to Greece's hopes of controlling its own destiny but could offer a means of staving off financial ruin.

The proposal was made by Germany as the euro group considered how extra finance should be offered to countries such as Greece which need support but are "continuously off-track" with their budgets...
[that] European institutions already operating in Greece should be given "certain decision-making powers" over fiscal policy.
Hey -- Austerity forced on 'spendthrift' governments, as determined by Angela's model! Now that's an idea that will have broad, popular support among Greeks! Huh? You think? Well, okay; maybe not...
Details of the proposal emerged as finance ministers met at the World Economic Forum in Davos where France and Germany publicly disagreed over the size of the "firewall" needed to protect European economies.
Also, too, Bloomberg reports that new 30-year Greek bonds may well carry a cap on interest rates.


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