James Saft

James Saft is a Reuters columnist. The opinions expressed are his own.

Europe‘s rule-based approach to fiscal reform will fall short because it effectively ignores the dynamics of credit markets, which laid the tracks along which this train wreck traveled.

Europe moved last week to impose some discipline on its member states’ fiscal houses, choosing a rule-based fudge rather than the fiscal union that a common currency probably ultimately needs. It will thus take discretion away from member states, pre-committing them to austerity measures during tough times, while doing very little to address the malfunctions in the banking system which create destructive credit bubbles in the first place.

Reforming Europe‘s fiscal framework without addressing the financial system which created all of the credit is like having alcoholics take ever more severe pledges of sobriety and penalties but still allowing them to own cocktail lounges.

To be sure, some sort of reform is welcome. The past decade has provided ample evidence that the previous framework was easy to game for states without sufficient discipline.

That said, while the shambolic arrangements of the euro zone have hamstrung attempts to react to the crisis, the means by which euro zone states got themselves into trouble are varied.

James Saft is a Reuters columnist. The opinions expressed are his own.

How do you save an economy during a debt bust without mass defaults or a lost decade?

From the evidence thus far the answer is: you don’t.

Both Europe and the U.S. have bent over backwards in trying to deal with excess private and public debts without default, hoping to keep the circus floating along for long enough so that they can be rescued by growth and inflation.

In the U.S. that has meant rescuing the banks while using various types of new leverage to try to keep housing and securities prices above the level where banks carry them. In Europe, quixotically, this has included both cutting back on public expenditure while at the same time refusing to recognize a 50 percent writedown on Greek debt. It has also meant keeping banks and countries on life support via loans or debt purchases from the European Central Bank.

James Saft is a Reuters columnist. The opinions expressed are his own.

Call it the Merkozy Plan – there shall be no more losses.

German Chancellor Angela Merkel and French President Nicolas Sarkozy unveiled on Monday yet another final plan to save the euro, this time calling for new treaty provisions to ensure members maintain fiscal discipline as well as an all-too-predictable move to hold monthly meetings of EU heads, seemingly an attempt to revive Europe by providing business for its caterers.

Perhaps most importantly, the two agreed to scrap a previous agreement to make private sector creditors share in the losses in all future bailouts. Bondholders still face a 50 percent write-down on their holdings of Greek debt, but that’s it, from here on out it’s all going to come out of the hide of taxpayers.

Of course there is the (slim) possibility that future bailouts will include burden sharing by banks and others who hold European government bonds, but given how poorly it was received this time it is best not to hold your breath. The policy U-turn is wise, reckless and deeply depressing all at the same time.

James Saft is a Reuters columnist. The opinions expressed are his own.

To judge by equity markets, central banks have all the credibility in the world, but their reputation just may exceed their actual power.

Markets rallied furiously on Wednesday after six leading central banks acted to give banks access to easy money, a coordinated bid to unblock funding markets which threatened to seize up due to fears over European debts.

The group — the Federal Reserve, the European Central Bank and the central banks of Japan, Britain, Canada and Switzerland — agreed to offer dollar swap lines at a half a percent less interest than previously and pledged to keep these lines in place until early 2013.

James Saft is a Reuters columnist. The opinions expressed are his own.

Could Japan be the next victim of the crisis of faith in government bonds?

Despite carrying public debt more than twice the size of its economy and suffering from poor growth and an aging population, Japan’s government can still borrow money for 10 years at just over 1 percent.

The big story in global markets, perhaps even in global economics, in 2011 has been the transformation of government debt markets, which are now being driven by the realization that sovereigns can and sometimes do default.

So far that has actually been good for borrowing rates for big economies blessed with their own central banks, such as the U.S., Britain and Japan. There is a growing chance that in 2012 the wolves, having picked off Italy and others in the euro zone, move on to target the hindmost of the rest of the pack, which, given its poor medium-term fundamentals, may well be Japan.

James Saft is a Reuters columnist. The opinions expressed are his own.

A sharp cut back in lending by euro zone banks in their scramble to raise capital will prove an important channel spreading pain from the vulnerable single currency area to the rest of the world.

Though the euro-induced credit crunch will be less important than the outright effects of the euro zone recession, in some areas, like trade finance, and in some regions, such as emerging Europe, the impact will be felt far more quickly.

“European banks have huge exposures outside Europe itself,” said Srinivas Thiruvadanthai, an economist at the Jerome Levy Forecasting Center.

James Saft is a Reuters columnist. The opinions expressed are his own.

Four years, several failed banks and at least one global recession later, Britain has finally discovered what its young people need: 19-1 leverage.

Britain has announced a new housing initiative, the centerpiece of which is a plan to entice first-time buyers into buying newly-built properties with as little as 5 percent down.

Under the plan both builders and the government would contribute funds to partially indemnify lenders against what I am betting are the inevitable losses. Borrowers, who are almost by definition younger and less well off, will still bear all losses, but will be rewarded with the chance to take out the kind of loan which has proven time and again to be a bad idea.

James Saft is a Reuters columnist. The opinions expressed are his own.

Now it is Spain.

The message from markets is not so much that Italy is too big to fail but that Greece will fail and in doing so ensnare others.

The prospect of two new avowedly technocratic governments and fresh pledges and plans for austerity proved not enough to stem contagion in the euro zone, as the financing drought spread beyond Greece and Italy to Spain. Spanish 10-year bond yields climbed above 6 percent for the first time since early August when the European Central Bank waded into bond markets in Spain’s support.

Perhaps that is because the contagion isn’t coming from Athens or Rome but from governments in Berlin, Paris and the ECB in Frankfurt, all of which seem unwilling to take the needed steps to save the euro.

James Saft is a Reuters columnist. The opinions expressed are his own.

It looks as if we will need to see some kind of miracle intervention from the European Central Bank — a Deus ex ECB — or the euro zone is heading for a nasty divorce.

Either the ECB comes across with a mandate-busting rescue, probably involving direct lending to Italy and rolling the currency printing presses, or the forces aligned against currency union will roll over Italy and into France.

Italian political chaos and a move by some clearing houses to demand more margin on Italian debt helped to drive 10-year yields of the troubled sovereign borrower to a euro-era record of 7.5 percent on Wednesday. The market appears to doubt that the EFSF rescue fund will be big enough and operative enough to back Italy effectively.

James Saft is a Reuters columnist. The opinions expressed are his own.

The early returns on the euro rescue are as straightforward as the plan was vague: it probably isn’t going to work.Two numbers tell the tale: the 177 basis points over German debt the supposedly AAA-rated euro rescue fund was forced to pay to borrow on Monday; and 6.67 percent, the 14-year record amount Italy had to pony up to borrow for 10 years.

Neither of those numbers fit in well with the plan announced last week to recapitalize banks, bail out Greece, erect a firewall around the larger weak economies and produce credible plans for fiscal and economic reform.

Put simply, these numbers are telling us that the market and debt investors do not believe the plan will work in its current form. And little wonder, it is now just days later and Greece’s government has fallen, Italy‘s Berlusconi is under siege and the much hoped-for support from outsiders like China has failed to materialize.