Financial markets
Sovereign debt crisis
What rescue?
May 24th 2011, 12:13 by Buttonwood
IMAGINE if, one year after the Tarp scheme was unveiled to bail out the banking sector, bank shares had been even lower than before. But that is the position of European government bond yields in the affected countries. The setting up of a bailout fund in May 2010 was not the "shock and awe" package that the authorities had hoped for. Yields on Greek, Irish and Portuguese debt are all higher, not lower.
In part, that is because the EU has treated this as a liquidity issue, not a solvency one. They have hoped that buying time will create the scope for the government concerned to tackle their deficits and the banks time to protect themselves from default. (Similarly, the US authorities though that, after the rescue of Bear Stearns in the spring of 2008, the market would have braced itself for the failure of Lehman. That turned out to be wrong.) Private sector creditors may also be reasoning that the greater the level of official support, the more subordinated the claims of the private sector will become.
The most worrying element for the authorities is the two countries at the bottom end of this scale; Italy and Spain. They are much larger than the three countries that have already been rescued. But, as you can see, yields have been drifting up; the Spanish cost of debt is at a 10-year high. This can be an awkward spiral; the higher the cost of debt, the more difficult it is for countries to banish their budget; the more difficult it is to balance the budget, the higher the cost of debt. The heavy defeat suffered by the Spanish government in regional elections also indicated that electorates may not be willing to endure the kind of sacrifices demanded by creditors.
If Europe is headed towards a choice between default and fiscal union, we have already seen in Germany and Finland that electorates in creditor nations may not be willing to grant the kind of subsidies that debtors might require.
UPDATE: Meanwhile, on the slowdown front, eurozone industrial orders fell 1.8% in March, and Belgian business confidence declined again (although a small country, Belgium is a useful bellwether, placed between the French and German giants). However the Ifo survey of German business sentiment held up well. One should also note that gold reached a new nominal high in euro terms; the currency bears have switched their attention from the dollar to the euro. Foreign exchange markets remain a battle of the weaklings.
In this blog, our Buttonwood columnist grapples with the ever-changing financial markets and the motley crew who earn their living by attempting to master them. The blog is named after the 1792 agreement that regulated the informal brokerage conducted under a buttonwood tree on Wall Street.
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I recall in 2004 making a grand announcement to a board on which I was the legislative committee chairperson that California would no longer be able to hide its deficit and we should be preparing for austerity. The problem with buying time for elected governments is that they use up every nanosecond.
Next year is the global reserve currency.
Couple of reactions to your post.
1. Feels like the Guns of August, a march to destruction carried along by pig-headed misinterpretation and inability to compromise. At least this time, it won't be actual guns.
2. I think the evidence shows the markets did brace for a fall like Lehman but they were taken unawares. They sensibly had reacted to the Bear failure by preparing defenses against a similar assault, but they were hit from an unexpected quarter. Literally. Even the Fed was taken unawares by the amounts European banks had invested in US money markets - hidden because the money went through London, where reporting was next to nil, so all this had to be teased out by BIS months later. When Lehman failed, the banks' short funding dried up, again literally because Lehman was huge in the money markets, and that led to the great freeze of the banking lockup; banks grabbed whatever they could of dollars, the Fed made an emergency loan of $630B to the ECB, intrabank lending halted for lack of lubricant (i.e., dollars) and all the credit indicators broke. The markets were prepared for a frontal assault and got hit in the rear.
I don't think default will be allowed. Or at least I don't believe that the Euro is going to break-up. But I don't see those countries returning to the private debt market for years.
The EU political and bureaucratic systems have an unparalleled ability to procrastinate and find ways to muddle through whilst ignoring the will of the electorate. The rejection of the EU Constitution is a good example. It was rejected twice, and would have been rejected in the UK and other countries. Despite this, the constitution was implemented legally anyway, minus the flag and anthem. I believe the same sort of thing will happen with a transfer union.
Essentially the private debt will be rolled over during the next decade until all the debt is owned by transnational institutions so that Greece, Ireland and Portugal become essentially wards of the ECB. Various tricks, such as re-profiling will occur so the countries involved can at least pay their police forces. This will leave the Euro with a de-facto transfer union, though an extremely miserly one. Because Germany and the Nordics are viscerally opposed to fiscal transfers it will take ten years to set up a de-jure transfer union. At this stage, with only a handful of international creditors including the ECB, IMF and EFSF, perhaps finally the debt will begin to be written down.
What this means for the citizens of Greece, Ireland and Portugal is a decade of stagnation, deflation and emigration.
In some ways a financial meltdown would be a less painful option. When a house of cards fall down, at least all the cards are on the floor and you can build a new one.
Sorry to be off topic, I'll read and reply later.
I saw this and thought it needs to be filed under,
"Oops I Did It Again!"
On Tuesday May 24, 2011, 7:51 am EDT
(AP) Oil prices inched up closer to $99 a barrel Tuesday after Goldman Sachs raised its crude forecasts on concern the shutdown of Libyan output will drain spare OPEC supplies.
--
They made a similar call last week.
C'mon suckers, buy our contracts!
We need to clear these out before we issue a downgrade.
Regards