Opinion

James Saft

Europe ignores credit dynamics

Dec 13, 2011 21:01 UTC

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.

Waiting for deus ex ECB

Nov 10, 2011 20:36 UTC

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.

Europe’s three simple problems

Nov 3, 2011 15:40 UTC

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

The plan to rescue the euro zone faces only three hurdles; democracy, reality, and supply and demand.If they can overcome those, it is going to work perfectly, and, amazingly, they just might.

Democracy reared its rather large head when the Greek government decided suddenly that it wanted a sign-off from its voters and moved to put the plan to a plebiscite.

While it is hard to argue with the idea of a people getting a chance to vote directly on a plan that will mean tough times for the better part of the next decade, the move jeopardizes not only the confidence on which the entire rescue relies but also the next infusion of much-needed cash Greece is slated to get in November.

Switzerland ties itself to euro mast

Sep 8, 2011 20:44 UTC
James Saft is a Reuters columnist. The opinions expressed are his own.

HUNTSVILLE, Ala. – It is clear we are living in a strange world when Switzerland, that most euro-skeptic of nations, has tied its fortunes to the success, in its current fragile form, of the euro zone common currency.

The Swiss National Bank on Tuesday shocked the markets when it announced it was imposing, unilaterally and with immediate effect, a cap on the value of its currency against the euro, seeking to shield its economic competitiveness from the massive flows seeking safe haven amid doubts over the euro zone.

This amounts to an extreme expression of confidence in the euro zone’s ability to sort itself out, because if it cannot this policy will fail expensively. It may even fail if the euro does not but if worries about it generate enough of a flow of cash that the SNB turns and flees.

As politics fails, will central banks step back

Aug 18, 2011 21:50 UTC
James Saft is a Reuters columnist. The opinions expressed are his own.

HUNTSVILLE, Ala,  – We’ve grown accustomed to central banks swooping to the rescue when events overtake governments’ ability to address economic and market fractures.

There are good reasons to wonder if that era may be coming to an end.

In the past week both the Federal Reserve and European Central Bank have come under intense pressure to act; the Fed from a slowing economy and steep market sell-off and the ECB from a buyers strike on Italian and other euro zone bonds.

Both chose to intervene. The Fed moved to keep interest rates at virtually zero until 2013, while the ECB, in a change in its recent tactics, once again waded into bond markets to buy up and support peripheral euro zone government debt.

ECB set for an error for the ages

Mar 29, 2011 11:45 UTC

In a field of endeavor with a long and glorious history of folly, the European Central Bank is preparing to commit an error for the ages: hike interest rates into the face of a crisis of existence for the euro zone.

There is an increasing likelihood that when the ECB meets  on April 7 they will respond to surging energy costs and 2.4 percent annual inflation – the highest since 2008 – by raising interest rates, probably by a quarter of a percent.

“Inflation rates … are now durably above the common definition of price stability in the euro zone,” ECB President Jean-Claude Trichet told an audience in Paris on Monday.

Good luck hedging against inflation

Feb 3, 2011 13:42 UTC

Looking to hedge against a spike in inflation? Equities may not be much help.

Neither, for that matter, will you do all that well over the longer haul with bonds, cash or even commodities, at least on the historical evidence. In short, when it comes to investing, inflation is a real drag.

It’s impossible to know if, much less when, the current very stimulative monetary policy in the developed world will spur inflation, but increasingly indicators are raising concerns. Emerging market economies show signs of overheating, while prices of food and many other commodities are surging.

The traditional view has been that equities are an effective hedge against inflation, in least over the long term, because companies will, all things being equal, eventually pass on inflation to their clients as higher prices.

Waiting for Europe’s QE to sail

Dec 2, 2010 15:17 UTC

The good news is that the European Central Bank will probably start a massive additional round of quantitative easing to fight the break-up of the euro zone.

The bad news is that they will, as ever, only choose the right policy, as Winston Churchill said of the Americans, after exhausting all of the alternatives.

Global share markets rallied furiously on Wednesday, fed by hopes that the ECB would increase its bond-buying efforts, a possibility raised by its chief Jean-Claude Trichet in an appearance before the European Parliament. Trichet faces stern opposition inside the ECB from fellow central bankers, notably German Axel Weber, who believe that policy should be normalized rather than loosened.

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