Reuters blog archive
from The Great Debate:
Warren Buffett calls the debt ceiling a “nuclear weapon, too horrible to use.” Obama administration official Jason Furman says the consequence of a default on U.S. government debt is “too terrible to think about.” When asked about a default, Wells Fargo strategist James Kochan simply commented, “Holy cripes.”
With this crisis, America is risking financial Armageddon. The default of Lehman Brothers on its $613 billion of debt ignited a chain reaction in the financial system, nearly destroying the U.S. economy. A default by the U.S. government on $17 trillion of debt -- debt that has been considered the safest in the world -- could be far worse.
But at heart, this is not a debt problem. It is an accounting problem. The Treasury Department issues U.S. debt, and lots of it. So you would think that America is deeply indebted to its bondholders. Yet increasingly, it is the U.S. monetary authority, the Federal Reserve, and not private investors, who buys this debt.
So a simple solution to the impasse is as follows: Federal Reserve Chairman Ben Bernanke should simply cancel the Treasury debt that it owns. The government can just forgive the government’s debt.
So euro zone finance ministers conferred about Greece and Germany’s Schaeuble came out to declare significant progress although no deal yet. Eurogroup head Jean-Claude Juncker looked forward to a final settlement at the ministers’ face-to-face meeting on Nov. 12.
But a source with no particular axe to grind was much more downbeat, saying there was no real progress with Germany and the IMF at loggerheads over the need for euro zone governments and the ECB to take a haircut on the Greek bonds they hold in order to make the numbers add up.
The IMF is convinced it is the only way, Germany will not countenance it. So all sides remain far apart and that is without even taking account of a knife-edge parliamentary vote in Athens next week on labour reforms to cut wages and severance payments, which the EU and IMF insist are a key part of a new bailout deal, but which the smallest party in the coalition government has pledged to vote against.
from Global Investing:
British investors are warming up to European equities, with the highest level of positive or rather positive views of the troubled bloc's stocks in a year, an online survey by Baring Asset Management shows:
The biggest rise in sentiment was seen towards European equities, with over half (53%) of respondents saying they were now either ‘quite’ or ‘very’ favourable, up from 42% in the last survey and the most favourable they have been towards the European equity sector for a year.
The euro zone economy may be doing far worse than most economists want to believe. That’s not good news for a central bank trying to rescue the single currency through a hotly-contested bond purchasing programme that has yet to get started.
The latest flash purchasing managers’ indexes, which cover thousands of euro zone companies, suggest the third quarter will mark the euro zone’s worst economic performance since the dark days of early 2009, according to Markit, which compiles them.
from Unstructured Finance:
Yes, Germany and Greece have been in a war of words in the unfolding crisis over the latter's membership in the euro zone, but this afternoon the two nations face off in a different (and far more entertaining) way: they go head-to-head in the European Championship quarterfinal.
As Reuters' Alexander Hudson reports from Poland, the setting of tonight's more-than-just-a-game battle, "When Greece take the football field in the Polish coastal city of Gdansk... the honor of the nation is at stake." Greece, by the way, has never beaten Germany on the soccer pitch.
It’s already been established that economists’ predictions about the euro zone’s future hinge largely on where their employer is based. Euro zone optimists tend to work for euro zone banks and research houses, and euro zone sceptics for companies based outside the currency union.
It somewhat undermined the idea their analyses are based purely on hard-headed economics, and less on national factors.
Central balance sheets across the industrialized world have increased rapidly in response to the financial crisis, as recently noted on this blog. In Europe, the balance sheet of the ECB and the 17 national central banks that share the euro currency has grown to around 3 trillion euros after the ECB injected more than a trillion into the market in 3-year loans and loosened its collateral standards.
At above 30 percent of gross domestic product, the ECB's balance sheet has overtaken that of the Bank of Japan, which has been grappling with deflation for some two decades and started from a much higher level. It is also bigger than that of the U.S. Federal Reserve, which has aggressively responded to two financial crises in five years by tripling the size of its balance sheet to nearly $3 trillion today.
I don’t want to be the idiot who asked “is it all over?” … but is it all over?
Almost certainly not, is the answer. Greece is shored up for now but Portugal will probably need to follow it in seeking a second bailout and Spain, heading back into recession, will have to make deep, deep cuts over the next two years to meet EU deficit targets. Greek and French elections could easily upset the apple cart, the former producing a fractured government with less will to tread the austerity path, the latter a new president who wants to renegotiate the bloc’s new fiscal rules (though neither are guaranteed).
The Greek bailout is done and Spain and the EU have struck a face-saving compromise over what deficit Madrid should aim for this year, so all is well with the world. That certainly seems to be the market mood this morning with safe haven German Bund futures opening sharply lower and European stock futures pointing to further gains.
In fact, the tone is more to do with the Federal Reserve, which sounded somewhat more upbeat about the U.S. economic outlook last night and said most banks (with the exception of Citi!) had passed tough stress tests, though it’s also true that there is nothing on the euro zone horizon today to spoil the party.
Italy comes to market with its latest bond auction. Investors flush with cheap European Central Bank funds are expected to pile in, pushing three-year borrowing costs below 3 percent. Rome is taking advantage of the current benign conditions to try and sell up to six billion euros of debt.
from John Lloyd:
Speak now to an intelligent European politician (having assured him or her that the conversation is off the record) and you will discover a deeply worried representative -- and one who leaves you in a similar state. Whether they are in the European parliament or a national legislature, European politicians are now constrained to contemplate their powerlessness. And ours.
Ordinary members of parliaments often feel like that. But ministers, even of small states, who have been elected to represent, propose, plan and legislate, now feel it too, and more acutely. Especially in the countries that remain devoted to the idea that the state should protect its people from the hardships and, in some cases, the vicissitudes of life, people have been accustomed to expect much more in the way of protection. But politicians must now offer less. For many citizens, that provision, coupled with security, was the point of government. But now, as each week brings little respite, ministers, prime ministers and presidents feel powerless.