Archive

from Breakingviews:

Summit silence on Greece is best option for now

By Pierre Briançon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

For once euro zone leaders did the right thing, the very thing they have been unable to do throughout the euro crisis: shut up. Their nine-line communiqué to say nothing on the subject was the only sensible option after their informal dinner Wednesday night. The other alternatives would only have made things worse. And whatever the pundits’ or markets’ expectations may be, it’s better for the euro summiteers to keep mum than to pretend having the answer which only the Greeks can provide.

Greece’s euro partners would like the second Parliamentary election, to be held on June 17, to become a de facto referendum on membership of the single currency. But they can’t insist too much without appearing to interfere in the Greek electoral process. The zone’s leaders are most probably ready to offer some concessions on the bailout programme to show that the euro is not just about pain and punishment. But they can’t reveal their hands before the election, because the radical parties rejecting austerity might feel emboldened and demand more concessions ahead of the vote.

Meanwhile, euro zone leaders and the European Central Bank must brace for the worst-case scenario of a Greek chaotic euro exit. But they can’t publicly admit that they’re planning for it, because it could amount to a self-fulfilling prophecy, and because markets turn south every time a European official simply mentions the possibility of Greece leaving the monetary union.

So what’s to do? Keep calm and carry on planning for the day after the Greek election - which, as it happens, will be the first day of the G20 leaders’ summit in Mexico. That may be difficult in a 17-country glass house and a 24-hour news cycle. But euro zone leaders must prepare plans for either dropping Greece, or supporting it with a plan to boost growth in an aggressive way. Strains in Spain, or Italy, might force them to the podium. But silence, in the next three weeks, will be golden.

from MacroScope:

Shifting euro zone sands

A telling moment. Before pretty much every showdown EU summit since the debt crisis exploded into life, the leaders of France and Germany have got together beforehand to agree a common strategy. It is a truism that the European motor only works efficiently when its two biggest powers are in accord.

This time, following the election of Francois Hollande as French president, there has been no such meeting. Instead he will talk with Spanish premier Mariano Rajoy in Paris before they head to the Brussels summit. There, Hollande will press for the currency bloc to start issuing joint euro zone bonds and will run into implacable German opposition that will squash the plan for now. But the plates are shifting and German Chancellor Angela Merkel looks somewhat isolated.

On euro bonds, Hollande can call on the support of Italy’s Mario Monti and the European Commission among others. Nonetheless, Angela holds the purse strings so while we will see some modest pro-growth measures agreed (and no doubt trumpeted), there will be no pump-priming that requires extra deficit spending, certainly no mutualising of debt and probably no hint that the likes of Greece and Spain will be given longer to make the cuts demanded of them (though that policy's time could soon come, depending on how the June 17 Greek elections go).

Greek contagion aside, Spain remains the bloc’s biggest headache largely because of the weight of bad debts dragging its banking sector down. One idea is to allow the euro zone’s rescue funds to lend to banks direct, thereby removing the stigma of a government having to ask for aid. But Berlin is not keen on this one either.

Less controversial are plans to boost the capital of the European Investment Bank, use “project bonds” backed by the EU budget to invest in infrastructure and recalibrate some EU structural funds which has been used to help poorer EU members so that it is spent in other areas which might yield a quick growth dividend. None of that can hurt. But peashooters and elephants come to mind.

The golden rule of this crisis is that red lines have and will be crossed, most notably by Germany and the ECB, if the bloc is teetering right on the edge. The first ones to give this time may be on relaxing debt-cutting timeframes and allowing the bailout funds to help banks direct. Euro zone bonds remain a long way off (probably only when all member countries have got their deficits sustainably below 3 percent of GDP) and talk of a bloc-wide bank deposit guarantee fund isn’t anywhere near, though the pace of events could change that. Much hangs on how Greeks vote on June 17.

A demonstration of just how bent out of shape the euro zone is will be provided by today’s German 2-year debt auction. Yielding about 0.07 percent on the secondary market, that means Berlin has set a zero coupon for this sale and will pay no more to borrow this money over two years, yet investors are still expected to snap it up, such is the desperation for something secure. The debt agency says it is not planning to start offering negative coupons.

from MacroScope:

Greek political poll tracker

Greece faces another election on June 17.  Although they reject the austerity required by the bailout, most Greeks want their country to stay in the euro. However Frankfurt and Brussels say it is impossible for Greece to have one without the other: no bailout means no euro and a return to the drachma. Whether the Greek people believe these warnings could have a big impact on the election result.

First place comes with an automatic bonus of 50 seats, meaning even the slightest edge could be pivotal in determining the makeup of the next government.

Click here for an interactive chart showing the latest polls:

from Stories I’d like to see:

Drachma redux, Hoffa’s killers, besting JPMorgan

1. Printing drachmas?

What actually will happen if Greece leaves the euro zone and goes back to its own currency? How would that work? Is there a printing press somewhere busily churning out drachmas just in case? Or did they keep the old ones in storage? How will Greeks get new drachmas? Will they exchange their euros for them? How will the exchange rates be determined? How will all the software for cash registers and credit card and e-commerce transactions be reprogrammed?

2. Searching for Jimmy Hoffa’s assassins:

We’re approaching, in two months, the 37th anniversary of the disappearance of Teamsters Union leader Jimmy Hoffa. I wrote a book about the union three years after his disappearance that pinpointed how he was murdered and who did it. Although the FBI spelled out in an internal memo and in various affidavits seeking search warrants pretty much the same scenario and suspects that I reported, the feds were never able to make a case because no one would talk and Hoffa’s body was never found. (It was probably incinerated in a mob-connected sanitation plant near Detroit.)

However, the case is still officially open. In fact, I’m told there is at least one FBI agent still assigned to it. With almost all of the people involved in taking out Hoffa now dead, what does that agent do all day? A great story commemorating the anniversary would not only spend a few days with that agent but also check in on Hoffa’s son, James, who is now the Teamsters president. Portrayed in my book as a completely clean lawyer who did some union-related legal work, James took over his father’s old job in 1999. When I spent time with him in the years just after his father’s murder he was seethingly bitter about how the mob element that controlled the union in partnership with his father had turned on the elder Hoffa. But he was also understandably afraid to say much about it publicly. What’s he got to say all these years later?

3. Are gift cards the new currency?

Last month’s mammoth takedown in the New York Times of Wal-Mart’s alleged cover-up of allegations of corporate bribery in Mexico reported that one alleged method of spreading payments to local Mexican officials was by giving them Wal-Mart gift cards. That got me wondering how that kind of accounting was handled.

from MacroScope:

All eyes on Wednesday EU summit

After last week’s hefty losses, European stock gained yesterday and are up up again this morning, denoting some optimism about the Wednesday supper summit of EU leaders, which might well be unrealistic.

The European growth measures that we know are in the works – boosting the paid-in capital of the European Investment Bank and plans for 'project bonds' underwritten by the EU budget to finance infrastructure – might help a little but will fall a long way short of turning the euro zone economy around, so unless we get something more, on either the growth or the building defences fronts, there’s scope for investor disappointment.

Europe’s international partners continue to demand more dramatic crisis action. After the G8 summit, President Obama was out last night with four demands: - firewalls to protect countries from Greek contagion (are the ESM and IMF funds now viewed as insufficient?), - recapitalization of banks that need it (Spain to the fore here presumably), - A growth strategy to run alongside tight fiscal measures (easier said than done), - easy monetary policy to help the likes of Italy and Spain keep cutting debt (the ECB thinks its 1 percent rate is very loose and is unlikely to cut soon with inflation above target and will only flood the system with more liquidity in utter extremis)

Nothing new there but it keeps up the drumbeat of pressure ahead of the EU get-together. We know French President Francois Hollande, with the backing of others, will press the case for common euro zone bonds at the summit and also know that German opposition will not weaken one jot on that score. Spain’s Rajoy is pressing for more ECB involvement, presumably by reviving its bond-buying programme. Given internal opposition to that within the ECB that is probably the least likely measure to be reactivated, yet anyway.

Despite money flowing out of Greek banks, and at least the threat of it spreading more widely if Greece bombed out of the euro zone, there is no hint yet of any planning for any scheme to underwrite bank deposits across the bloc, probably because the ECB and Germany will not countenance underwriting it. The golden rule of this crisis is that red lines have and will be crossed when it reaches breaking point. We’re not there yet.

With so much focus on Greece and Spain, Portugal has been somewhat overlooked in recent weeks but it will quite likely need a second bailout at some stage and if Greece prompts a wave of contagion, it will be firmly and instantly in the firing line.

from MacroScope:

Merkel under pressure … but unbending

Some interesting events to  ponder over the weekend, though not many of them came from the G8 summit which, as is customary, was strong on rhetoric but bare of any specific policy measures to tackle the euro zone crisis. However, markets seems to have tired of their panicky last few sessions. German Bund futures have opened lower as investors took profits rather than seizing on any positive news. European stocks have edged up.

It does appear that with the ascension of France's Francois Hollande, the G8 firmament turned into G7 (or maybe 5 since we didn’t hear much from Japan and Russia) versus 1 (Germany) but as things stand we’re still heading for a fairly anaemic “growth strategy” unless euro zone leaders coalesce behind the notion of giving Spain and Greece longer to make the cuts demanded of them. Spain has moved the goalposts further in the wrong direction, revising its 2011 deficit up to 8.9 percent from 8.5 and blaming the overspending regions. That means its already loosened target of 5.3 percent for this year is now even harder to achieve.

Hollande is talking up the case for common euro zone bonds but that will not wash with Berlin for a long time yet. Sources said Monti used the G8 forum to promote a pan-European bank deposit guarantee fund. Good idea but that too will only be conceivable if the European financial sector is on the point of toppling. And who will underwrite it? There is talk too of allowing the EFSF to lend direct to banks to ease the Spanish government’s reluctance to ask for help. That may have a slightly better chance of success but Berlin doesn’t like this idea either. Look no further than the German Chancellor’s take on the summit – it was all a great success, she said. Everyone agreed that we need both growth and fiscal consolidation.

Angela Merkel is one the one with her hand on the purse strings and she knows the markets will only allow so much fiscal loosening. However, the hefty 4.3 percent pay rise secured by Germany’s most powerful union, IG Metall could be a sign that Berlin is starting to loosen the edges of its anti-inflation culture in order to foster a bit of domestic demand. Any profound return to euro zone growth is going to require some internal imbalancing – and that means Germany buying more from its partners to allow them to export more.

No one can accuse Merkel of being disengaged. Despite denials from Berlin, it seems she may have suggested to the Greek president that a referendum on euro membership should be held in parallel with the June 17 elections, a pretty astonishing intervention in another country’s democratic process.

It is certainly true that the mainstream, pro-bailout Greek parties’ only chance of doing better this time is to turn the election into a “euro in or out” poll by explaining why abandoning the bailout will open the exit door. But they have a lot of work to do to regain credibility. Of a series of opinion polls over the weekend, two put the anti-bailout SYRIZA ahead and another gave pro-bailout New Democracy the lead. Since the party who comes in first gets an extra 50 parliamentary seats, the tightness of the race is going to have markets on tenterhooks for the next four weeks. We had a nicely timed interview with SYRIZA leader Alexis Tsipras which ran overnight. He meets French leftist Melenchon today and is talking about building relationships and forging negotiations so Greece can stay in the euro. However, he will not be meeting government officials in France and said the terms of Greece’s 130 billion euros bailout were now a “dead letter” and noted what he saw as the changing dynamics at the G8.

In the meantime, Greeks continue to withdraw their money from the banks, a trend which if it reaches critical mass, could force a European policy response even before the election. If that starts taking root elsewhere, the whole system will be creaking. Spanish banks’ bad loans have hit their highest in 18 years and, with so much tied into a bankrupt property market, no one is quite sure how much worse it is going to get. Late on Friday, clearing house LCH.Clearnet raised the cost of using Spanish bonds to raise funds.

from Unstructured Finance:

UF Weekend Reads

The latest offerings by our Sam Forgione include a little Bridgewater, PIMCO and Jamie.

From National Journal:

Jim Tankersley airs Nick Hanauer's championing of the middle class after Hanauer's TED Talk was pulled.

From Barron's:

Ray Dalio explains why macro efforts to support the U.S. economy are "beautiful" in Sandra Ward's interview.

From The New York Times:

Alexis Tsipras has much to prove as one of Greece's top politicians.

from Breakingviews:

Greek dilemma might come to head before next poll

By Hugo Dixon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

So the world has to wait until June 17 to find out whether Greece stays in the euro? Not so fast. Things might come to a head even before the next poll if deposit flight accelerates.

Greece’s president said earlier this week that 700 million euros had left the country’s banks on Monday. The pace seems to have accelerated, as savers get more concerned that the political mess will drive Greece out of the single currency. Deposit flight is now running at 1-1.5 billion euros a day according to one senior banker. If it continues at that rate, another 20-30 billion euros could have left before election day.

Such an outflow is probably manageable. After all, Greece’s bank support fund is to inject 18 billion euros of capital into lenders next week. The real problem would be if there was a panic and say half of the system’s remaining 160 billion euros or so of deposits tried to flee.

The European Central Bank has already made 127 billion euros of liquidity available to the Greek banks - both directly through its own refinancing operations and by authorising the Greek central bank to offer emergency liquidity assistance. So it would anyway face massive losses and require recapitalisation in the event of a Greek exit. But if those losses mushroomed in a matter of weeks, the ECB’s credibility would be badly damaged.

But stopping liquidity isn’t attractive either. The Greek government would have to impose capital controls even before the electorate had a chance to vote. That conceivably might concentrate the voters’ minds. But it could also stir up anti-euro feelings in Greece and provoke a panic in other peripheral countries.

from Global Investing:

Three snapshots for Thursday

Fears that Athens is on the brink of crashing out of the euro zone and igniting a renewed financial crisis have rattled global markets and alarmed world leaders, with Greece set to figure high on the agenda at a G8 summit later this week. This chart shows the impact on assets since the Greek election:

Euro zone banks now account for only 8% of total euro zone market value - they were over over 20% of the market in 2007:

Japan's economy rebounded in January-March from a lull in the previous quarter, shaking off the pain of a strong yen and Europe's debt crisis on solid consumer spending and rebuilding from last year's earthquake.

from Breakingviews:

Global sell-off could echo summer of 2011

By Ian Campbell The author is a Reuters Breakingviews columnist. The opinions expressed are his own.Global investors have been sucking money out of risk assets. Credible reassurance that Greece will stay in the euro would see risky bets poured back on. But for now Greece looks headed for the exit door and markets’ trajectory is downwards. The global sell-off in stocks, commodities and many currencies is likely to get worse as the dollar advances.

It might seem Greece is not a big enough to warrant global concern. But a Greek default would impose losses on the rest of Europe . And Greece will be seen as the first domino. Spanish and Italian bonds will be among those selling off, exacerbating financing pressures in southern Europe’s two big economies. A huge European effort would be required to calm fears that they and Portugal will not ultimately go the way of Greece.

A further concern is growth. The euro zone has stalled, China has slowed, the United States is improving, but slowly. There are strong echoes of August 2011 - a global economic “soft patch”. But this time it is coupled with far more intense fears of a meltdown in the world’s second most important currency.

The implications are likely to continue to be felt across asset classes. As the euro and many emerging economy currencies retreat, the safe-haven U.S. dollar is appreciating. That in turn unwinds the previous dollar carry trade, on which commodities, gold and many global assets had prospered.

An important difference from last summer is that the U.S Federal Reserve is not currently embarked on a programme of fresh money printing. For many assets, gold especially, that is a big negative. Gold has thrived on dollar weakness, trading speculatively rather than as a genuine haven. It now looks very vulnerable to further falls.

Unless and until European fears are calmed, the outlook for global stocks seems poor too. The lows of August of 2011 give a guide to the potential downside. They would imply a fall in the U.S. S&P 500 to 1,150, a decline of more than 11 percent on its May 15 close.

Of course, if the Greek omens change, so too will markets. But neither Greece nor investors can keep relying on bailouts. At some point and in some way the euro zone’s fundamental solvency and competitiveness problems must be resolved. Until they are, global risks will be high and markets vulnerable.