Opinion

The Great Debate

from Breakingviews:

Europe slides towards the next Minsky Moment

By Neil Unmack

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

There’s little doubt that markets think the euro crisis is over. Bond yields have fallen below pre-crisis levels for most of the countries formerly known as peripherals; the grab for southern European assets is a crowded trade. Could this be the prelude to the next Minsky moment?

The last crisis fit perfectly the pattern described by the American economist Hyman Minsky. Investors’ exaggerated belief in stability leads them to price assets for perfection - for example no defaults by euro zone sovereigns. Then some imperfection arrives - a serious possibility of default - and there is a violent outbreak of instability - the euro crisis.

The excessive euro-confidence lasted for about a decade, from 1998 to 2008, although the crisis took a further two years to properly get going. During most of that time, investors demanded a mere 0.2 percentage points higher interest rate on Portuguese than on comparable German debt, down from over 5 percentage points in 1995. At the height of the crisis in 2012, the spread was 15 percentage points.

Confidence is certainly returning. Investors now demand a smaller premium to hold bonds sold by companies in the periphery over those in the northern European “core” than they did before the 2008 financial crisis, according to Credit Suisse. Banks in Spain are trading at a bigger premium to book value than their U.S. peers, according to Starmine. And the interest rates paid by the formerly problem case governments of Spain, Portugal and Italy are at record lows.

Why isn’t the euro falling even further?

If the euro really is on the verge of collapse, as many pundits are now proclaiming, how come it is still so highly valued against other currencies, including the U.S. dollar?

That may sound like a crazy question, given the euro’s much-publicized decline over the past couple of weeks. It has been dropping as the possibility grows that Greece may seek to pull out of the 17-nation currency union following parliamentary elections there in mid-June. That scenario of a “Grexit” has spooked financial markets and pushed governments and business around Europe to draw up contingency plans.

Yet looked at from a longer perspective than last week, the euro is in fact still pretty expensive. On foreign exchange markets, one euro today buys about $1.25. That’s more than 6 percent above the $1.17 rate in January 1999, when the euro was first introduced as an accounting currency. Back then, it got off to a weaker start even than Facebook’s IPO and quickly fell below parity to the dollar. On Jan. 1, 2002, when euro notes and coins were introduced into general circulation, one euro bought just 90 U.S. cents. It then dropped to a low point of 86 cents in March of that year. That’s 30 percent below where it is today. This chart from the ECB website shows the full picture since the euro’s introduction:

The abyss and our last chance

By Carlo De Benedetti
The opinions expressed are his own.


In a magnificent book published a few years ago Cormac McCarthy imagines a man and a child, father and son, pushing a shopping cart containing what little they have left, along a back road somewhere in America. Ten years earlier the world was destroyed by a nameless catastrophe that turned it into a dark, cold place without life.

There is no history and there is no future. But there is an objective: to head south toward the sea. Mythical places, only vaguely perceived, where there might be salvation. The father is getting older and is ever more weary. But he has the child with him. And he has his objective. He wants to take him southward to the sea. Toward a future that may still be possible.

Today, is the western economy, in particular the Italian economy, that world destroyed by an Apocalypse? Are we pushing that cart, containing the few things we have left, toward a mythical sea of which we know nothing, or even what it is like or where it is?

from James Saft:

Pension savers get the boot

From Dublin to Paris to Budapest to inside those brown UPS trucks delivering holiday packages, it has been a tough few weeks for savers and retirees.

Moves by the Irish, French and Hungarian governments, and by the famous delivery company, showed that in the post-crisis world retirees, present and future, will be paying much of the price and taking on more of the risk.

This goes beyond merely cutting back on pension benefits, rising to actual appropriation of supposedly long-term retirement assets to help fund short term emergencies.

Of banks and euro zone default taboo

If ever you doubted that the euro zone bailout was in fact a bailout of banks, French and German banks in particular, look no further than the latest report from the Bank for International Settlements.

The trillion-dollar package of loans, backstops and emergency measures announced by the European Union, International Monetary Fund and European Central Bank in May was advertised on the basis that it would create breathing room for ailing southern European nations to impose fiscal discipline and establish a credible path to stability.

In the case of Greece, it is hard to see how it could dig its way out of its hole courtesy of a policy of austerity which was going to kick off a swingeing and long-lasting recession.

Euro corporates face sovereign risks

For European corporate borrowers, having their own houses in order may prove little help as sovereign credit-worthiness deteriorates.

European nations need to fund more than a trillion euros in debt in the coming year to finance shortfalls caused by falling tax receipts, countercyclical stimulative spending, and plain old bad management.

As we have seen in Greece, at the worst this funding is not available from the market, but even relatively stronger nations like France have substantial funding needs stretching out as far as the eye can see.

Euro woes increase risk of trade wars

Europe won’t just be exporting deflation to the rest of the world, it will export serious trade tensions as well: first between the United States and China, and, possibly, eventually between Europe and the United States.

The austerity required to get Greece and other weak euro zone nations’ budgets in shape will exert a powerful deflationary force, as many countries which formerly imported more than they exported will be forced to cut back.

As well, the euro has dropped very sharply. Germany’s quixotic campaign against speculators — banning naked short selling against government debt and government credit default swaps — gave the euro its latest shove downward, but the trend has been strong for months. The euro is now about 15 percent below where it started the year against the dollar, making U.S. exports less competitive and adding to pressure on the United States to be the world’s foie gras goose: being force-fed everyone else’s exports while its own unemployment rate remains high.

Euro zone medicine not working on banks

Fear of lending to banks is rising again in Europe, as even a 750 billion euro zone rescue package proves not enough to stem fears that the banking system will prove the weak link when southern European nations can’t meet their obligations.

Strikingly many European and British banks are now being forced to pay more to borrow money in the interbank markets than before the joint European Union, International Monetary Fund and European Central Bank package was announced two weekends ago.

That deal, which should insulate highly indebted countries such as Greece, Spain and Portugal from funding pressure for the next two years or so, was effective in driving down the extra interest those countries had to pay to borrow as compared to Germany. Tellingly, it was less effective, even counter-productive, in restoring calm to the markets in which banks fund their short-term borrowing needs.

Europe shambles as Greek fire spreads

Europe desperately needs to get out in front of its solvency problem, Greek edition; not because it is right, not even because it will work in the long term, but to stem rapid and costly contagion through financial markets to other weak links in the euro zone, not least to banks.

Whether euro zone institutions will have the agility and resolve to quickly put in place out-sized measures for Greece is doubtful.

That Greece on Wednesday was paying more than 20 percent, or about double the rate of Hugo Chavez’s Venezuela, to borrow money for two years showed that investors were expecting either a default or very large burden sharing by existing creditors, and possibly a, by definition, disorderly exit from the euro by Greece. Spain joined the list of sovereign downgrades, as Standard & Poor’s cut its rating a notch to AA, a day after the debt rating agency slashed Greece to junk status and cut Portugal to AA.

Be careful what you wish for on currencies

The rancorous argument about global payment imbalances and the yuan’s valuation is exposing a surprising and dangerous economic illiteracy among policymakers and commentators.

Before pressing China to allow a maxi-revaluation of the yuan, western commentators need to think through the consequences carefully. The idea that devaluing the dollar (and by extension euro and yen) will cause payment imbalances to disappear and boost employment in the West with little or no impact on inflation and living standards is a pipe dream.

MAXI-DEVALUATION
First some notes about terminology. Proponents generally phrase their argument in terms of an appreciation of the yuan (which keeps the focus on the alleged currency manipulators in China). But it could just as easily be recast as a depreciation of the dollar (which is a much more controversial formulation, highlighting the fact that the exchange rate problem reflects U.S. weakness as much as China’s strength).

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