Mish's Global Economic Trend Analysis

Merkel Denies Need for EFSF to be AAA Rated; German CEOs Ponder Dumping the Euro for a "North-Euro" or Deutschmark; Schaeuble Rejects ECB as Lender of Last Resort
Japan's Prime Minister Seeks Doubling National Sales Tax; S&P Downgrade of Japan Likely; No Winning Play for Japan
"Let the Euro Die" Candidate Trails Sarkozy by Slight 2 Percentage Points; Will Sarkozy Survive the First Round Vote? Eurozone About to Become Unglued

Merkel Denies Need for EFSF to be AAA Rated; German CEOs Ponder Dumping the Euro for a "North-Euro" or Deutschmark; Schaeuble Rejects ECB as Lender of Last Resort

Posted: 15 Jan 2012 04:17 PM PST

With every passing day, there is increased chipping away of support for the Euro. Please consider Linde CEO says Germany should mull euro exit

Germany should consider leaving the euro if efforts to impose fiscal discipline upon indebted euro zone countries fail, the head of industrial gases firm Linde told German weekly paper Der Spiegel.

"If we do not succeed in disciplining crisis countries, Germany needs to exit," said Reitzle who was previously a board member at carmaker BMW and head of Jaguar and Land Rover.

Asking Germans to pay more than 50 percent taxes to help fund other euro zone countries will erode the will of the German electorate to support rescue measures, Reitzle said.

Of course it would lead the new currency - Deutschmark, North-euro or whatever it is called - to appreciate in value. But it would be by a lesser amount than feared," Reitzle said.

"In the medium term Greece needs to exit. And the writedowns on Greek debt will not be between 50 to 70 percent, but in the end will be written down by 100 percent," Reitzle said.

Merkel Denies Need for EFSF to be AAA Rated

Following the rating agency downgrades of numerous European countries especially France and Austria (please see S&P Says Eurozone Policies Fall Short , France at Risk of Further Downgrades for details), close to 75 percent of the burden to ensure the euro bailout fund EFSF retained its AAA rating is on the back of Germany. Prior to the downgrade, German backing was 40%.

True to political form, Merkel downplayed the significance of the downgrade with a statement "I was never of the opinion that the EFSF necessarily has to be AAA".

Well it certainly doesn't "have to be" but what interest rates does one want, and how much German backstop does one want? Those are the critical questions.

Pressure Mounts on Merkel

As a result of the downgrades, pressure on Merkel mounts in numerous ways.

Der Spiegel discusses the situation in France Downgrade Creates Pressure for Merkel

Following the decision by rating agency Standard & Poor's to downgrade the ratings for nine euro-zone countries, pressure is likely to increase on Germany, the country long viewed as a model during the crisis, but also the one that holds much of the money that is needed to solve it.

In its decision on Friday, S&P stated that Germany's rating is in excellent condition, but experts in the country fear that Berlin's contributions to the euro bailout will have to be considerably greater than initially planned. And Chancellor Angela Merkel of the conservative Christian Democratic Union (CDU) said the downgrade of the nine countries will increase pressure for all the euro-zone countries to solve their budget and debt problems.

Frank Schäffler, the finance policy spokesman for the Free Democratic Party (FDP), Merkel's junior coalition partner, said he felt his criticism of Germany's participation in the European Financial Stability Facility (EFSF), the current euro bailout fund, had been indirectly confirmed by S&P. He said the downgrading was likely to have direct consequences for Berlin. The downgraded rating for Austria alone, he told the financial daily Handelsblatt, would mean that "Germany would no longer just have to carry 40 percent, but close to 75 percent (of the burden) to ensure the euro bailout fund EFSF retained its AAA rating."

He said the current German guarantee of €211 billion would no longer be sufficient in order to achieve the volume of aid that had been originally planned. "Over time, that will also impose a burden on the German rating," the FDP politician warned, saying that the "socialization of losses" through the bailout fund could not go on forever.

But during her press conference on Saturday, Merkel sought to downplay worries about the ratings loss. "I was never of the opinion that the EFSF necessarily has to be AAA," Merkel said. "AA+ is also not a bad rating." She added that the "work of the EFSF will not be torpedoed" by the downgrade.

In France, the euro-zone's second-largest economy, the opposition has taken the downgrade as an opportunity -- coming as it does three months before the French go to the polls to elect their next president -- to sharply attack President Nicolas Sarkozy. Francois Hollande, the Socialist Party's (PS) candidate for president, accused the government of failure. "Nicolas Sarkozy declared the triple-A rating to be the goal of his politics and also a condition for his government," the politician said during a press conference in Paris.

S&P now considers the outlook to be negative for 14 countries, even if some managed to escape a downgrade this time. Besides Germany, Slovakia is the only other country in the euro zone with a stable outlook, according to S&P.

Schaeuble Rejects ECB as Lender of Last Resort

Bloomberg reports Schaeuble Rejects ECB as Lender of Last Resort.

German Finance Minister Wolfgang Schaeuble renewed his rejection of joint euro region bond sales and said giving the European Central Bank the role of lender of last resort wouldn't calm markets permanently.

"If the central bank finances government debt, it's a modern form of the old bad habit that if the government doesn't have enough money, it prints money," Schaeuble said today in Berlin. "If we start doing this, markets will calm down for some time. But then they realize that the European currency is not a stable currency" in the long run.

Selling government bonds jointly in the euro region isn't a solution to the euro region's debt crisis because it would mean that governments "can pile up debt without being liable for it," Schaeuble also said in Berlin after attending the screening of a documentary on the region's woes.

"We wouldn't solve the problem," Schaeuble said, referring to joint bond sales and relying on the central bank to finance state debt. "The countries must reduce their debts. We can talk about the speed at which this has to be achieved."

Joke of the Day

While I certainly agree with Schaeuble regarding Eurobonds. I also agree that "giving the European Central Bank the role of lender of last resort wouldn't calm markets permanently".

However, Schaeuble comments are tantamount to the "joke of the day. The ECB is without a doubt already the lender of last resort if not the lender of "only" resort.

Were it not for the 3-year LTRO with the ECB accepting dodgy collateral for cash, interest rates in Spain and Italy would be soaring. Instead, Germany is on the hook.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Japan's Prime Minister Seeks Doubling National Sales Tax; S&P Downgrade of Japan Likely; No Winning Play for Japan

Posted: 15 Jan 2012 10:18 AM PST

In an effort to halt expansion of Japan's massive public debt, Japan's Prime Minister Seeks Doubling National Sales Tax.

Prime Minister Yoshihiko Noda said containing Japan's public debt load, the world's largest, is critical after Standard & Poor's downgraded credit ratings on France, Austria and seven other European nations.

Europe's fiscal situation "isn't a house burning on the other side of the river," Noda said on TV Tokyo Holdings Corp.'s program on Jan. 14. "We must have a great sense of crisis."

Noda reshuffled his cabinet last week, aiming to win support for doubling Japan's 5 percent national sales tax by 2015 to trim the soaring debt. S&P said in November Noda's administration hadn't made progress in tackling the public debt burden, an indication the credit-rating company may be preparing to lower the nation's sovereign grade.

Japan's government, which has enjoyed borrowing costs that are around 1 percent, wouldn't be able to manage its finances if bond yields surged to 3 percent, Noda said last week. The country risks seeing a spike in government bond yields unless it controls a debt load set to approach 230 percent of gross domestic product in 2013, the Organization for Economic Cooperation and Development said on Nov. 28.

'Worse and Worse'

Japan's finances are "getting worse and worse every day, every second," Takahira Ogawa, Singapore-based director of sovereign ratings at S&P, said in an interview on Nov. 24. Asked if this means he's closer to lowering Japan's credit rating, he said it "may be right in saying that we're closer to a downgrade."

S&P rates Japan AA- and has had a negative outlook on the rating since April. Ogawa said Japan needs a "comprehensive approach" to containing its debt burden, which the government has projected will exceed 1 quadrillion yen ($13 trillion) in the year through March as the nation pays for reconstruction costs from March's record earthquake.

The International Monetary Fund has said a gradual increase of Japan's sales tax to 15 percent "could provide roughly half of the fiscal adjustment needed to put the public-debt ratio on a downward path."

No Winning Play for Japan

If Japan hikes taxes and reduces spending, the Yen will strengthen, and Japanese exports sink.

Demographics and balance of trade issues suggest there will still be insufficient buyers of Japanese bonds that need to be rolled over. Raising taxes in a global recession is not a wise thing to do as it will inhibit growth.

On the other hand, if Japan turns to printing, which I believe it eventually will, Japan would likely go into an inflation spiral.

Massive Debt Rollover Problem

Country	2012 Bond, Bill Redemptions ($)	Coupon Payments
Japan	3000 billion	117 billion
U.S.	2783 billion	212 billion
Italy	428 billion	72 billion
France	367 billion	54 billion
Germany	285 billion	45 billion
Canada	221 billion	14 billion
Brazil	169 billion	31 billion
U.K.	165 billion	67 billion
China	121 billion	41 billion
India	57 billion	39 billion
Russia	13 billion	9 billion

For a discussion of the global debt rollover problem, please see World's Biggest Economies Face $7.6T Debt Led by Japan $3 trillion, U.S. $2.8 trillion; Rollover Problems in Japan and Europe

There are no winning plays for Japan, given a debt load set to hit 230 percent of gross domestic product. The US would be advised to pay attention.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

"Let the Euro Die" Candidate Trails Sarkozy by Slight 2 Percentage Points; Will Sarkozy Survive the First Round Vote? Eurozone About to Become Unglued

Posted: 14 Jan 2012 11:41 PM PST

As a refresher course in French politics, presidential elections are a two-stage process. In the first round, voters select from candidates of all the political parties. The second round pits the top two vote getters against each other.

Never before in history has a sitting French president polled so low 100 days before the first round of votes.

Link if video does not play: 100 days to presidential poll

The video is as of January 13. The first round of elections is April 22, 2012. Here is the pertinent snip.

"Sarkozy's ratings compared to previous presidents make grim readings. Sarkozy is not shown leading the first round of voting. We've never seen a president is such a weak position in terms of public opinion. If polls are to believed come May 6, the country will have a new head of state"

"Let the Euro Die" Candidate Trails Sarkozy by Slight 2 Percentage Points

Bloomberg reports Sarkozy Just Ahead of Le Pen in French Presidency Election Poll.

French President Nicolas Sarkozy is just two percentage points ahead of anti-immigration candidate Marine Le Pen less than four months before the presidential election, an Ifop poll for Paris Match showed.

In the first round, to be held April 22, Socialist candidate Francois Hollande would finish first with 27 percent, followed by Sarkozy with 23.5 percent and National Front candidate Le Pen on 21.5 percent, the poll published today showed today.

The top two vote getters then go to a decisive run-off on May 6, in which Hollande would beat Sarkozy 57 percent to 43 percent, according to the poll. Ifop polled 943 voters Jan. 9- 12. No margin of error was given.

Will Sarkozy Survive the First Round Vote?

Bloomberg reporter Gregory Viscusi depicts Le Pen as "anti-immigration". Yes, that is true. However, Viscusi failed to mention Le Pen's main claim to fame.

Le Pen is running on a platform to "Let the Euro Die" as I commented on September 8, 2011.

See link for Le Pen's comments. This is what I said at the time.

German Chancellor Merkel, Spanish Prime Minister Zapatero, Italian Prime Minister Berlusconi, and Greek President George Papandreou will all be gone after the next set of elections.

French President Nicholas Sarkozy may bite the dust as well, and if he does it may be to a vehemently anti-Euro candidate.

All it takes is one government to say "to hell with this" and the whole mess unravels.

The current set of politicians all want to "save the Euro". But what did the Euro buy Greece, Ireland, Spain, or Portugal except misery?

Even German and Finnish voters wonder what it bought them.

Zapatero, Berlusconi, and Papandreou are now gone. You can kiss Merkel and Sarkozy goodbye as well.

Le Pen would not likely win a runoff with Hollande. Socialists dominate French politics. However, Sarkozy will not survive and Hollande has vowed to rework the Merkel-Sarkozy agreement.

Think that is going to fly? In what timeframe?

Eurozone About to Become Unglued

All of the agreements hammed out by two arrogant but tough-as-nails and widely respected leaders of Germany and France will fail. Whoever replaces Merkel and Sarkozy will not have the same respect and both will soon be gone.

Politics suggests that the Eurozone is about to become unglued.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Sunday, January 15, 2012

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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