Mish's Global Economic Trend Analysis

Spotlight on Slovenia as Debt Pressures Mount
Chicago Natural Resources Expo April 26
Eurozone Math; One Size Fits Germany; Door Number Two
Eurointelligence Founder Wolfgang Münchau, Once a Staunch Euro Supporter, Now Welcomes the Anti-Euro Party "Alternative for Germany"

Spotlight on Slovenia as Debt Pressures Mount

Posted: 11 Apr 2013 04:03 PM PDT

Inquiring minds are watching economic activity in Slovenia following an official denial regarding bailout possibilities. For denial details, please see Slovenia Rules Out Bailout; Translation: "Slovenia Bailout Coming Right Up"

Slovenia Unemployment and Youth Unemployment

Slovenia Unemployment Rate data by YCharts

Debt Pressures Mount

Bloomberg reports Slovenia Set to Test Debt Appetite as Financing Pressure Mounts.

Slovenia's government failed to raise 100 million euros ($131 million) at a debt sale this week. Now it's shooting for five times that amount next week.

With bond yields approaching levels that prompted bailouts of other euro nations, the government will offer 500 million euros of 18-month Treasury bills on April 17. The International Monetary Fund estimates Slovenia will need to borrow about 3 billion euros this year to repay maturing debt, aid banks and finance the budget.

The debt sale will test the willingness of investors abroad to finance Slovenia's economy as a banking crisis strains the budget, government bonds plunge and soaring default risk threatens to make the country the euro region's sixth bailout recipient after Cyprus last month. The largest local lenders are state owned and are struggling with rising bad debt.

"Unless we see strong non-resident participation, this will be an orchestrated Pyrrhic victory, increasing pressure on Slovenia and thereby raising its chances to lose the international market access," Andraz Grahek, a partner at Capital Genetics in Ljubljana, said by phone yesterday. "This would expedite an application for some kind of support."

Slovenia, whose 35 billion-euro economy is the fourth smallest in the euro area, fell into the crossfire after European creditors and the IMF forced losses on bank depositors in a 10 billion-euro aid package for Cyprus.

The cost of protecting Slovenian debt against non-payment using credit-default swaps rose to a six-month high of 370 points yesterday, according to data compiled by Bloomberg.

The yield on Slovenia's dollar-denominated benchmark bond maturing in 2022 is hovering close to record levels after the Finance Ministry missed its target in this week's auction of Treasury bills by almost half as borrowing costs rose. The 2022 bond's yield stood at 6.17 percent yesterday, approaching the record 6.38 percent reached on March 27.

While Slovenia is less reliant on banking than the Cypriot economy, default risk jumped after the Alpine country missed its target at the April 9 debt offering, reigniting concern it may follow Greece, Ireland, Portugal, Spain and Cyprus in seeking an international bailout.

The situation is "serious" and it's up to the government to "give very clear signals" to avoid a bailout, Banka Slovenije Governor Marko Kranjec, who's also a member of the European Central Bank's Governing Council, said yesterday in Dublin, according to Market News International.

As I said, a bailout is on the way. Only the timing and details are in question.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Chicago Natural Resources Expo April 26

Posted: 11 Apr 2013 12:53 PM PDT

Those in the greater Chicago area should plan on attending the Chicago Natural Resources Expo on April 26 for a discussion about gold, silver, hard assets, inflation, currencies (or whatever else is on your mind). You also have the opportunity to meet with various natural resource company executives.

Venue change: Previously this was a Friday evening-Saturday Afternoon event. This year, the event is Noon-11:00 PM Friday only.

Once again, I am pleased to announce the magic words: "It's free".

Originally known as the Chicago Natural Resource Conference and Exhibition, this is one of the oldest natural resource conferences in the United States. The conference is a semi-annual event and offers opportunities to learn about new and undervalued companies in the natural resource industry.

The event is directed by Rich Radez, who started the conference back in 1977. Rich, and his son Eric, created the unique format which focuses on resource companies and provides maximum exposure to both investors and sponsors.

There is no cost for those who pre-register to attend the conference. The Expo is held at the Rolling Meadows Holiday Inn and Convention Center in Rolling Meadows, IL. The Holiday Inn is located at 3405 Algonquin Road, Rolling Meadows, IL 60008. The hotel can be contacted at 847-259-5000.

I will be on a panel Friday evening taking questions taken from the audience on gold, silver, Europe, inflation, or any aspect of the global economy that is on your mind..

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Eurozone Math; One Size Fits Germany; Door Number Two

Posted: 11 Apr 2013 10:33 AM PDT

Reader "JB" thinks I am blaming Germany for what is happening. That's not exactly correct, but let's take a look at what "JB" has to say via email.

Hi Mish,

I read your blog daily. We are generally on the same page. We even agree that in all probability the eurozone will break up. However, You cannot blame the Germany, the German government, or the German people for doing the right thing. Germans can accept austerity. The phrase "tightening the belt" is an axiom in the German language. ....
JB

Hello JB, I think you misunderstand my message. I am not biased against Germany, and I am in favor of "austerity".

By "austerity" I mean shrinkage of public sector jobs and pensions, and liberalization of work rules.

I am against tax hikes, especially those imposed on Spain, Greece, and Portugal by the nannycrats in Brussels. What the nannycrats call "austerity" is nothing more than devastating tax hikes coupled with minimal, if any work rule reforms.

My message is primarily a function of math.

Eurozone Math

Germany was the primary beneficiary of the ECB's "one size fits Germany" interest rate policy.
It is mathematically impossible for every country to be an exporter like Germany
It is mathematically impossible for one interest rate to work when there is a multitude of fiscal policies
It is mathematically impossible for the euro to survive without a transfer mechanism of some sort from Germany to peripheral Europe, and Germany will not allow any transfer mechanisms
It is mathematically impossible within the realm of the euro for Spain to be more like Germany, unless Germany is less like Germany
Germany has ruled out everything that could possibly make the eurozone work.

Euro Architects and Politicians to Blame

I do not blame Germany. I blame all the architects of the euro. I also blame all the politicians making matters worse by trying to force their will on the markets. In that sense, I do blame Merkel, but I also blame Hollande, Sarkozy, Trichet, Draghi, and everyone else involved in this mess, past or present.

One Size Fits Germany (Until it Doesn't)

The math of the matter is Germany benefited from the Euro and from the ECB's "one size fits Germany" interest rate policy more than any other country.

As a direct result of the unstable eurozone treaty, sovereign interest rate imbalances, Target II imbalance, and trade imbalances are out of control. Germany and the other European creditor countries are owed money that cannot be paid back.

Door Number Two

The eurozone cannot work as is, and Germany is going to pay the price in one of two ways.

Germany Forgives Loans to European Debtor Nations
The debtor nations exit the eurozone and default

German taxpayers do not want to bail out the rest of Europe. And if I was a German taxpayer I would have the same stance. Without assigning blame to Germany, the math is what it is: unsustainable.

Pick your poison. Is it door number one or door number two? Odds overwhelmingly favor door number two.

Even diehard supporters of the eurozone now see it cannot work. For example, please see Eurointelligence Founder Wolfgang Münchau, Once a Staunch Euro Supporter, Now Welcomes the Anti-Euro Party "Alternative for Germany".

Soros On Board

George Soros is still a eurozone supporter, but he understands it cannot work without eurobonds. I do not believe the eurozone can work with eurobonds as I expect tensions will be high. Soros' second-best alternative is for Germany to exit the eurozone.

That has been my #1 idea for a long time. I explained it recently in Illusions of Stabilization.

Failed Experiment

The Eurozone is a failed experiment. Structural flaws were too great initially, and they have increased over the years. No currency union in history has ever survived unless there was also a fiscal union. Current politics says it cannot happen, on meaningful terms.

Breakup Inevitable, But How?

A breakup is inevitable, just as it has been from the beginning. The key is to manage a breakup in the least destructive manner.

Breakup Options

Option 1: If Germany (and the northern states) left the eurozone, the Deutschmark (and respective currencies) would immediately be credible. The downside to Germany (and the northern states) is debts to German banks would not be paid back in Deutschmarks but rather deflated (but not worthless) Euros.

Option 2: The second option is a piecemeal, destructive breakup. Should Greece and Spain leave first, those countries might experience a complete loss of faith in currency resulting in hyperinflation. The Northern states would be paid back in worthless notes, if they were paid back at all.

Germany Suffers Regardless

Note that Germany and the Northern creditor nations suffer regardless. Either they keep ponying up bailout money, there is a managed breakup, or a piecemeal destructive breakup. It would be best for all involved if Germany left the eurozone and went back to the Deutschmark.

There are no other options, and no other choices. Meanwhile, imbalances grow and German taxpayers keep funneling tax dollars to the Southern states to keep them afloat.

Merkel Not a Savior

Many Germans view Merkel as a hero for her tough stance on Cyprus.

However, Merkel is neither a savior nor a hero. Her stance is always one of political necessity. Every step of the crisis she has made politically expedient decisions such as caving in to Sarkozy and providing funds for Greece but not for Cyprus.

Sentiment in Germany in favor of holding the eurozone together is strong provided German taxpayers do not have to pony up another dime. The irony is Germany was the main beneficiary of the ECB's "one size fits Germany" interest rate policy that destroyed Spain and peripheral Europe.

Sentiment Does Not Change the Math

Sentiment does not change the eurozone math, but it does impact the way the eurozone breaks apart.

Expect a piecemeal, destructive breakup.

Some will blame Germany. I blame a mathematically unworkable treaty that was flawed from the beginning. I also blame all the politicians who supported the idea even though it was fatally flawed.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Eurointelligence Founder Wolfgang Münchau, Once a Staunch Euro Supporter, Now Welcomes the Anti-Euro Party "Alternative for Germany"

Posted: 10 Apr 2013 11:45 PM PDT

Things have gone full circle. Wolfgang Münchau, a staunch euro supporter now realizes the political hopelessness of it all. In an article in Der Spiegel, Münchau shows he is ready to throw in the towel.

Via Mish-modified Google Translation ...

In her final year as prime minister, Margaret Thatcher concluded that a too close interaction with the newly reunited Germany was out of the question.

Thatcher's Industry Minister Nicholas Ridley said in 1990 in a careless interview in "Spectator" that the planned monetary union was a German conspiracy with the aim of seizing power in Europe. Ridley had reason to resign. Thatcher was deposed shortly thereafter.

I was working as a journalist for the "Times" in London and still remember my outrage at Ridley's anti-German comments. In retrospect, I must admit, however: It's been exactly as predicted by Ridley. Germany has become the central power in Europe.

Thatcher and Ridley concluded that from a purely power-political perspective, a junior partner in such an asymmetric monetary union would not be happy. That is how the Italians, Spanish and French feel today.

On Tuesday, George Soros recommended to SPIEGEL ONLINE that either Germany should accept the Euro-bonds or exit from the euro. Soros says that it would be better for Germany to leaving the euro than Spain or Italy. If the Southern states leave the euro, then there will be chaos.

One can certainly make the necessary adjustment within the monetary union, but that requires an almost total centralization of all economic policies. Eurobonds would be only the beginning. This is not a realistic political opportunity. If we reject this path, you should also be honest and say: this is an end to the monetary union.

I welcome the establishment of the anti-euro party "alternative for Germany". I do not share their position. But the position of AfD is coherent. In contrast, the position of the CDU and FDP, pro-euro but against eurobonds is inherently contradictory.

Margaret Thatcher was also consistent with respect to Europe. She had a sure instinct for both the economic and political power for the future development in the euro zone. For that I pay tribute with respect.

Soros: "If someone leaves the euro, it should be Germany"

Münchau referred to the Spiegel article (translated) Soros: "If someone leaves the euro, it should be Germany". It's an interesting read.

I disagree with Münchau and Soros that the euro is worth saving. However, I agree with Münchau and Soros that a breakup of the eurozone is best accomplished by Germany leaving the eurozone than by a piecemeal breakup. I said the same thing long ago.

I appreciate the fact that Münchau now recognizes the political hopelessness of it all. This was apparent long ago, but it is far easier on me. I did not have to switch sides.

Unfortunately, a piecemeal breakup now appears to be destiny. Every head of state in Europe desperately wants to keep this act together, especially chancellor Angela Merkel. Nonetheless, the politics are also such that eurobonds and transfer mechanisms are out of the question.

It's Just Impossible

The Bundesbank said there should be no banking union until there is a fiscal union.
Angela Merkel said that there should be no fiscal union until there is political union.
François Hollande said that there should be no political union until there is a banking union
Merkel has explicitly ruled out eurobonds on many occasions.

So here we are.

And as I have stated on many occasions ...

Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the "bail out" debt foisted on their country to be null and void. That person will be elected.

One more major crisis is about all it will take.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Thursday, April 11, 2013

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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