from Ian Bremmer:
Europe’s necessary creative destruction
By Ian Bremmer The opinions expressed are his own.
What we’re seeing in Europe -- in rising Italian borrowing costs and the felling of two prime ministers -- is the growing impatience of the markets for a resolution to the euro zone crisis. To put a finer point on it, the hive mind of the markets has decided it is not going to give Europe enough time to get its act together. The big institutions that drive the world’s economies are sitting on huge amounts of cash -- enough to solve many of these problems overnight. But they have lost confidence in the ability of the European political system to deliver solutions that will work.
In a G-Zero world, where there is no strong global leader to direct the course of events, no one is interested in taking a flier on helping the Europeans get out of their mess. As the abortive G-20 conference showed last week, there is no backstop for any country or institution that makes an error in today’s environment, whether it’s tiny MF Global or the Chinese sovereign debt fund. In the postwar era, the Marshall Plan was the very definition of global security -- it was a huge commitment by the U.S. to rebuild Europe into the economic force (and not incidentally, trading partner) that the world needed. Today, there is no Marshall plan for Europe, from within or without.
That’s the high-level view of the Europe situation. The question everyone wants answered is this: what happens next? Start with Greece: the best possible outcome for that country has happened with Papandreou’s resignation and the selection of economist Lucas Papademos as Prime Minister of an emergency government. Papademos is committed to remaining in the euro and accepting the terms of the Greek bailout package. Despite the roller coaster ride Papandreou took his country and the euro zone on, Greece has now moved closer to the Spanish and Portuguese models for avoiding the debt crisis drama. In Greece, a resolution is starting to be reached. It’s not the beginning of the end, but maybe this is the end of the beginning.
The same can’t be said for Italy as the situation changes by the day. The decisive Senate approval of a package of austerity measures (by a margin of 156 to 12) was one small step for Italy in the eyes of the markets— and a big step toward Silvio Berlusconi resigning his mandate. It’s a wonder that Berlusconi held on to power for so long; he burned up his political capital years ago with scandals of all stripes. His stepping down is good news for Italy in the long run, but the handover of power to likely frontrunner Mario Monti is a delicate process that will have to be handled with tremendous care. Unfortunately for Italy, political drama has insured it will face a higher and longer level of scrutiny.
Markets will continue to demand extensive and enforceable changes in spending levels throughout the peripheral states. When Italy and Greece look more like Spain and Portugal, the bond markets will treat them more like Spain and Portugal. But that alone won’t solve the problem: investors are going to demand to know what happens next time any euro zone periphery country is on the brink of collapse. Euro zone institutions and politics have to be reshaped to prevent this type of crisis from ever happening again. Until this risk is mitigated, lending costs will stay high for a long time to come.
Case in point: I talked with about 200 international financial executives at a conference two weeks ago. 92 percent thought a “Lehman event” could easily happen once again somewhere in the world. Because we all thought the economy had been getting better over the last few years, we took our eye off the ball when it came to shoring up the global financial system and making the necessary structural fixes. In the U.S., President Obama took up health care. A weak Dodd-Frank bill passed. In the global financial system, Basel III has gone nowhere. And so every time the markets are rattled, we stare down the financial abyss, again and again.
from Jeremy Gaunt:
The rule of three
It is beginning to look like financial markets cannot handle more than three risks. First we have, as MacroScope reported earlier, Barclays Wealth worrying about U.S. consumers, euro zone debt and Asian overheating.
Now comes Jim O'Neill and his economic team at Goldman Sachs, with three slightly different notions about risks in the second half, this time in the form of questions. To whit:
1) How deep will the U.S. economic slowdown be and what will the policy response be? (That's two questions, actually, but let's not nitpick).
2) How much decoupling is possible between the U.S. economy and others, notably China?
3) Will sovereign and systemic risks intensify again or settle?
For what it is worth, Goldman reckons none of the three should be too damaging:
"Our own forecasts envisage a period of some muddiness in the near-term that ultimately resolves towards a more positive global view. But given the fragilities in the system, we will be watching our various proprietary tooks ... and trying to stay open-minded."
from The Great Debate UK:
Not much stress, not much test
-Laurence Copeland is professor of finance at Cardiff University Business School. The opinions expressed are his own.-
Back in the 1950’s, when most women stayed at home while their menfolk went out to work, a favourite trick of life insurance salesmen was to walk into the prospect’s home at dinner time and ask the wife:
“Mrs Smith, have you ever thought what would happen if your husband keeled over and had a heart attack right now?”
Imagine the effect of this question on the poor guy sitting there eating his meat and two veg. It must often have been enough to make him choke on his roast potato there and then – maybe even die on the spot.
Not being in the business of selling life insurance, the European bank regulators were unwilling to take any chances with the client’s cardio-vascular system, so they have restricted themselves to asking the question:
“What would happen if the client had the flu and needed a couple of weeks off work?”
from The Great Debate UK:
A history lesson for lenders
-Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own.-
Anyone looking for a broader perspective on the events of the last three years could hardly do better than choose for bedtime reading “This Time is Different” by Carmen Reinhart and Kenneth Rogoff.
It is nothing less than a history of financial crises through the ages, starting in late medieval England and continuing via 15th and 16th century Spain and its New World colonies on to the teething problems of Britain’s banks in the industrial revolution and the upheavals of the 20th century, ending in 2008 with the bankruptcy of Lehman Brothers.
The emphasis throughout is on sovereign default. For many politicians, bankers and economists, it ought to read not just as a lesson, but as a severe rebuke, because its basic message is that there is nothing new under the sun and that financial history reads like a long catalogue of facts we have chosen to forget.
So, as the authors show, no country’s history is free of bank collapses, sovereign defaults and currency debasement in one form or another.
Many countries have been serial defaulters, and – surprise, surprise! – the recidivists include some of today’s shakiest sovereigns, notably Greece (which went bust several times in the first decade or two after it gained its independence in 1821, and has never in its history merited a good credit rating) and Spain, which after many defaults in the pre-industrial era seemed until relatively recently to have reformed.
Watch banks for clues on Greece
– James Saft is a Reuters columnist. The opinions expressed are his own. –
As odd as it sounds, concerns about the effects of a euro zone sovereign crisis on Europe’s still poorly capitalized banks may prove to be the tipping point that leads to a swifter bailout of Greece.
While discussion of contagion may seem very 2008, the problems with Greece, which faces a huge fiscal deficit, are becoming tougher for euro zone authorities to leave uninsured.
That’s not just because worries about Greece spread markedly in the past week to Portugal, Ireland, and Spain, all of which saw their financing costs rise.
While Greece is, in the scheme of things, pretty small beer, though crucial as test of the euro project, the combined size of all four countries is large enough to pose a substantial threat to banks across Europe.
According to Bank for International Settlements data compiled by BNP Paribas, foreign bank exposure to Greece is just about 300 billion euros – a big, ugly number surely, but not the end of the world.
Lump in Portugal and Spain and you quickly get up to 1.75 trillion euros. That figure may not include all of the 400 billion euros of Spanish structured financings, most of which are tied to the ailing real estate sector.
Remember how the Euro-elites would look down their noses at the ‘Anglo-American economic model’? Well, so much for the European ‘social model’. These guys are bankrupt and won’t admit it. No Marshall Plan this time, fellas.
Icelandic, Greek sagas show sovereign risks
– James Saft is a Reuters columnist. The opinions expressed are his own. –
Developments in cash-strapped Iceland and Greece nicely illustrate two themes for 2010: sovereign risk and financial balkanization.
Iceland is balking at crushing terms demanded as part of its making whole overseas depositors in its ruined banking system, while Greece is involved in a game of chicken with the euro zone authorities over how, when and with whose assistance it heals its fiscal difficulties.
Like so many of us paying bills in January we ran up last year, they face a depressing prospect and no easy way out.
First, Iceland, whose president vetoed an agreement with Britain and the Netherlands to pay about $5 billion towards the costs of reimbursing depositors in its failed Icesave bank, saying he would put the bill to a referendum. While British and Dutch officials have mustered up a good show of outrage, President Grimsson’s move should not surprise; he was petitioned by a fifth of the population, each of whom can look forward to helping to pay back their individual $17,000 share of the costs.
Iceland is not refusing to repay the debt, which it acknowledges, but wants repayments tied to gross domestic product through 2024 with the possibility of a renegotiation if the full amount is not repaid by then. It is a brave move, and maybe a foolhardy one, given that the rejection puts in doubt an aid package from the International Monetary Fund and Scandinavia, as well as potentially hurting its bid to join the European Union. Iceland’s debt has already been downgraded to junk status by Fitch Ratings, with similar moves likely.
No one looks good in this saga, certainly not Iceland, which was effectively a hedge fund with a small fishing fleet attached and, you have to say, vastly better controls on overfishing then overlending. The Netherlands and Britain also look silly and incompetent; neither took effective steps to protect their citizens from the menace of Vikings offering higher rates of interest. Last but not least is the credulousness and cupidity of the British and Dutch depositors, including some local governments which not only chased the highest rates of interest but sometimes concentrated the vast majority of their funds with one bank.
So much of this is old news in relation to Greece. The trouble started following the Athens Olympics – the government & the private sector misjudged the lack of demand for products & services when the Olympics ended. Greece, therefore, has been in its current position for years. Its national debt is clearly very high, however it is likely to be in recession for a shorter period than the UK. One of the reasons for this is that income/debt ratio per head is very low ie: each individual or company in Greece has less debt & more income than the average in the UK. From an investment perspective, it can’t get much worse therefore some would argue that investing in Greek companies now is the very best time. Conversely, noone quite knows if we have seen the last of ressecion in the Uk & noone has managed to predict what the future holds – one guess is that a four bedroom terraced house in Chelsea will still set you back £1.2M. Buyers are not stupid – this level is not sustainable going forward & is clearly not value for money. Barclays Bank has a debt equity ratio of nearly 2000% 7 none of the incumbent management seem to have changed at all, SME’s are going bust every day with more to come this year. So Greece has its problems however lets not kick the underdog when they are down when we have not fully recovered. We don’t have anything to gloat about and are not in a position to advise any other country.
Betting on the unthinkable in the euro zone
— James Saft is a Reuters columnist. The opinions expressed are his own –
Some crises bring partners closer together. Some, as investors in the euro zone are likely to discover this year, drive them further apart.
Look for rising tensions about fiscal and monetary policy among the bloc’s 16 member nations, and for a bigger penalty to be imposed on the euro and some euro zone assets against the possibility of a breakup or a secession from the currency group.
The liquidity crisis of last year left smaller members of the euro thanking their lucky stars they were inside a big warm tent with a major currency and critically, a powerful central bank that could help banks and maintain order in financial markets.
Ireland and Greece, to name but two, could look at the disaster in Iceland, which suffered a banking and currency collapse, and see the real tangible benefits of membership.
But now that the crisis has morphed into one in the real economy, with exports plunging and employment hit, things will be less cohesive within the euro zone, with one currency having to do duty for different countries with different economies and levels of competitiveness.
European governments vary widely in their ability to withstand the fiscal squeeze from falling tax receipts, as well as having varying ability to credibly take on programs of stimulative deficit spending. That of course is about all that euro countries have open to them when it comes to unilateral action, being forced as a condition of membership to live with a common currency and interest rate policy.
Saft is right again. The world-export-champ Germany has just published a tax system which is nothing else but a protection of the german car industy.
“Greece: the best possible outcome for that country has happened with Papandreou’s resignation and the selection of economist Lucas Papademos as Prime Minister”
How is more neo-liberalism and more debt a “solution” to anything.
Just like underwater mortgages in the US with no prospect or ever being payable, the time has come for massive write-offs and restructuring the banking system from TBTF to a regulated public utility model.
Enough neoliberal baloney.