Mish's Global Economic Trend Analysis

Greece Flunks Troika Report, Financial Reforms at Standstill; 5th Payment on Hold? Expect IMF "Nose Job"
Ron Paul on Debt Ceiling: Boehner Will Cave
German Finance Minister Seeks 7-Year Greek Extension in Clash with Trichet; Fitch Says Proposal Constitutes a Default; Spain the "Big Kahuna"
Ceridian-UCLA PCI Fuel Index Shows Recovery Stalled

Greece Flunks Troika Report, Financial Reforms at Standstill; 5th Payment on Hold? Expect IMF "Nose Job"

Posted: 08 Jun 2011 09:51 PM PDT

On May 28 Greek Finance Minister George Papaconstantinou went into a temper tantrum over an article in Der Spiegel that stated Greece missed its financial targets.

Papaconstantinou noted the report was not even out yet adding, "I have every reason to believe they will end positively for our country and that we will receive the fifth tranche."

He may be correct about the tranche, however, the report is now out and Greece flunked.

Financial Reforms at Standstill

The Irish Times reports Troika insists reforms in Greece at a standstill

GREEK EFFORTS to stabilise public finances and push through reforms have ground to a halt in the last quarter, according to officials from the IMF, the ECB and the European Commission.

The latest so-called "Troika" report, seen by The Irish Times yesterday, made a grim impression when presented to German MPs in Berlin yesterday evening.

At a crunch parliamentary party meeting, members of the ruling Christian Democrats (CDU) and Free Democrats (FDP) heard that Greece will require fresh aid from euro zone members because of the "prohibitive" cost of the alternative: returning to financial markets.

"The financing strategy needs to be revised," said the report's authors.

"Given the remoteness of Greece returning to the funding markets in 2012, the adjustment programme is now underfinanced. The next disbursement cannot take place before this underfunding is resolved."

"After a strong start in the summer of 2010, reform implementation came to a standstill in recent quarters," said the report. Citing "clear political risks" in implementing the EU-IMF reform programme, the authors warned that "a reinvigoration is necessary to prevent the fiscal deficit getting entrenched at unsustainable levels".

At macro level, the troika said the Greek recession is "somewhat deeper and longer than initially projected" – with 4.5 per cent economic shrinkage last year and a further 3.8 per cent contraction forecast this year – but that "the quarters of deepest contraction may have already been passed".

Additional Details from Athens News

Athens News reports Troika report on Greece unveiled

"Tax collection continues to underperform compared to plans, even after the downward revision agreed in previous reviews. Although part if this underperformance results from the severity of the recession and liquidity constraints faced by taxpayers, the several measures to fight tax evasion implemented by the government have not been fully effective yet."

"The previous review mission (February 2011) identified that, without additional measures, the fiscal target for 2011 would be missed by at least three quarters of a percentage point of GDP. In the meantime, the gap between fiscal projections and the deficit ceiling has widened substantially. If no action was taken, the government deficit in 2011 would remain close to the 2010 level, above 10 percent of GDP."

Next Trance In Question?

Please consider Next aid payment not a done deal

Troika says 5th payment to Greece may have to wait; recession proves deeper, longer than expected

The European Union, European Central Bank and International Monetary Fund mission to Greece said in a report on Wednesday that the next disbursement of Greek aid could not take place until it corrected the underfinancing in its adjustment program.

"The financing strategy needs to be revised. Given the remoteness of Greece returning to funding markets in 2012, the adjustment program is now underfinanced," it said. "The next disbursement cannot take place before this underfinancing is resolved."

The fifth bailout payment was due to be made in June.

News of a possible hitch in the next disbursement of aid to Greece came as Germany's finance minister said private creditors must share the burden of more financial help for Athens in any deal to prevent the country from defaulting on its debts.

In a letter sent to Jean-Claude Trichet, president of the ECB, the IMF's acting managing director John Lipsky and other top finance officials, Wolfgang Schaeuble proposed a bond swap that would extend debt repayments by seven years, giving Athens more time to reform its economy and overcome the debt crisis.

Such a move has previously been strongly opposed by the ECB on the grounds it could spread turmoil through the continent's financial system, while rating agencies have warned it could be considered a default.

Expect IMF Nose Job

The report was so bad it is hard to say what the key point is, but near-term this is arguably the key quote:

"Given the remoteness of Greece returning to the funding markets in 2012, the adjustment programme is now underfinanced. The next disbursement cannot take place before this underfunding is resolved."

However, the market does not seem to be reacting to those statements. That means the IMF and EU will hold their noses and pony up, most likely with still more ridiculously optimistic targets about what Greece can achieve in the next two years.

Summation of Troika Report Badness

Greek reforms at a standstill
Recession deeper than expected at -4.5%
Clear political risks
Reinvigoration is necessary to prevent the fiscal deficit getting entrenched at unsustainable levels
Financing strategy needs to be revised
Tax collection continues to underperform compared to plans, even after the downward revision agreed in previous reviews
Gap between fiscal projections and the deficit ceiling has widened substantially
If no action is taken, the government deficit in 2011 would remain above 10 percent of GDP

There is additional bad news elsewhere.

Greek industrial production fell 11 percent year-on-year
Greek unemployment is 16.2 per cent, the highest in the euro-zone after Spain
The IMF and EU want more austerity measures and higher taxes

Greek Finance Minister George Papaconstantinou bought Greece a week's time but now looks more than a bit foolish. Der Spiegel has been vindicated. Greece flunked.

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

Ron Paul on Debt Ceiling: Boehner Will Cave

Posted: 08 Jun 2011 11:51 AM PDT

Please consider this interesting interview by Bloomberg columnist Al Hunt with Ron Paul on the debt ceiling, big government, and military spending.

Link if inline video does not play: Ron Paul Interview on Debt Ceiling

Select Interview Highlights

Al Hunt: Do you think Congress will pass an Extension.

Ron Paul: I do. This will go up until the last minute, then they will raise the debt ceiling.

Al Hunt: Your speaker John Boehner says he will absolutely insist on a dollar of spending reduction for every dollar the debt ceiling goes up. Do you take that seriously?

Ron Paul: I don't take that seriously. President Reagan wanted 2 dollars of cuts. The deficit exploded. Do you think the American people will believe that we are going to cut in the future? The only budget that counts is this year. 10-year programs are pie-in-the-sky talking. This year our obligations are 5 trillion dollars.

Al Hunt: The idea of a spending cap that takes place in 10 years does not appeal to you?

Ron Paul: A 10-year spending cap is too little, too late. No one is going to believe it. All governments when they get this far into debt, default. They don't default by not paying the bills. We will always pay the bills. The default comes from the devaluation of the currency.

Al Hunt: On Libya, Afghanistan, it looks like most are taking the John McCain line.

Ron Paul: Politically they are making a big mistake. I have been arguing to bring the troops home. I did not want them to go in the first place. The people now know we cannot pay for this. A lot of conservatives are coming to that direction. I've said over the years that I will win this argument because we will run out of money. That is how all great nations and empires end. They cannot afford it any longer, and that is what is happening right now. I have proposals that are different. As much as I am opposed to all spending, if you want to cut purposely in deliberate fashion, then have priorities. My priorities is cut all all foreign welfare and foreign militarism, and corporate welfare before you go after child healthcare. That sells. You don't have to just address health-care for poor people, rather than looking at atrocious spending overseas.

Al Hunt: You would bring home troops from Afghanistan, Libya, Pakistan?

Ron Paul: Res, I believe in strong national defense and that hurts our defense. I would bring them all home. We have no reason to be there. The soldiers we have in Korea went there when I was in high school. How long are we going to stay there?

Al Hunt: Do you see any other candidate [for president] who is talking about a full audit of the Federal reserve?

Ron Paul: No way. But they won't laugh as much as they did last time. They won't laugh any longer. Just think of the difference no on the attitudes of the people on the Federal reserve.

Al Hunt: Is the Federal Reserve in retreat?

Ron Paul: (laughing) Have you ever anticipated over the years, Bernanke would be holding press conferences defending his position? He can't defend it because it is a failed policy. You can't print money to get yourself out of trouble. Grade school kids know this. We will win when the system comes unglued.

Bernanke's Self-Serving Lies

The Ron Paul interview was recorded June 3. Bernanke poured on the lies yesterday in his US Economic Outlook. Bernanke tried to absolve the Fed of all guilt. Please see Bernanke's Self-Serving Bold-Faced Lies for details.

In regards to spending in general and military spending in particular, Ron Paul is correct. This is "how all great nations and empires end".

A similar sounding statement attributed to Margaret Thatcher goes like this: "The problem with socialism is that eventually you run out of other people's money to spend." The statement is true whether or not Thatcher ever said so explicitly.

Republicans need to stop US militarism and focus on the US economy.

In regards to the debt ceiling, unfortunately I too think Boehner will cave. Please see my video discussion on Yahoo Finance regarding the debt ceiling and the bond market: Debt Ceiling Discussion on Daily Ticker with Mish, Aaron Task, Henry Blodget: Will the Bond Market Eventually Force Congressional Hands?

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

German Finance Minister Seeks 7-Year Greek Extension in Clash with Trichet; Fitch Says Proposal Constitutes a Default; Spain the "Big Kahuna"

Posted: 08 Jun 2011 08:38 AM PDT

ECB president Jean-Claude Trichet is without a doubt having another hissy-fit today as Germany Seeks Extending Greek Maturities

German Finance Minister Wolfgang Schaeuble said bondholders must contribute a "substantial" share of a second aid package for Greece, proposing a swap that credit-rating companies may term a default.

Schaeuble told European Central Bank President Jean-Claude Trichet and fellow euro finance ministers in a June 6 letter that maturities on Greek bonds should be extended seven years to give the debt-wracked nation time to overhaul its economy.

The German position clashes with the stance of European Commission officials and the ECB, which oppose anything beyond a voluntary rollover of debt as they struggle to avert the euro area's first sovereign default. A swap offering investors terms that are "worse" than those of existing securities would constitute a coercive or distressed exchange, and be considered a default, Fitch Ratings said this week.

"Either Schaeuble softens his calls or the ECB makes further concessions," said Christopher Rieger, head of fixed- income strategy at Commerzbank AG in Frankfurt.

With a return to capital markets in 2012 "more than unrealistic," Greece needs more aid to avert "the real risk of the first unorderly default within the euro zone," Schaeuble wrote.

While the size of the package can't be assessed until the so-called troika of officials from the International Monetary Fund, ECB and European Commission give a progress report on Greece, it is likely to be "substantial" and must "involve a fair burden sharing between taxpayers and private investors," Schaeuble said.

How Long Can Papandreou Last?

Greek Prime Minister George Papandreou's socialist party holds 156 seats in the 300-seat Parliament. How long can that last?

Irish and Portuguese prime ministers went down in flames over bailout proposals, and the Spanish prime minister bowed out of the next election. It's just a matter of time before Papandreou bites the dust as well.

Please consider Papandreou Faces Growing Backlash as Last EU Bailout Premier

George Papandreou is the last man standing among the euro-area leaders who needed a handout after Jose Socrates's defeat in Portuguese elections yesterday.

For Papandreou and the investors and taxpayers who will share the cost of a beefed-up bailout for Greece, questions are increasing about whether he will complete a term that runs until 2013 and enact the budget reductions and asset sales that his benefactors demand.

The Greek premier, who has won assurances that international lenders will make the next payment of last year's 110 billion-euro ($161 billion) rescue, will aim to quell growing dissent this week within his Socialist party -- known as Pasok -- over deeper austerity measures as voters' patience wears thin and public protests mount.

"The coming week may well test the seams of Pasok in parliament and could prove a challenge too much for Papandreou," said Jens Bastian, a visiting economist at St. Antony's College, Oxford University in England. "It is a make or break situation for his leadership of the party and the government."

"Even if he gets the medium-term economic plan through parliament, the political turmoil is likely to continue as a second bailout will also require a parliamentary vote," said Wolfango Piccoli, a London-based analyst at the Eurasia Group, which monitors political risk. Piccoli said he expected Papandreou to clinch a vote on the fiscal plan as "a no-vote would be suicidal for both Greece and the ruling party."

Demonstrations modeled on the Spanish "Idignants" protests have drawn crowds to the central Syntagma Square in Athens each night since May 25. Shouting "thieves, thieves" at the Parliament building and banging pots and pans, protesters have set up camp in the square and hold "popular assemblies" every evening. One group is collecting signatures for an anti- government referendum.

At least 50,000 people gathered last night, the police estimated, the largest turnout to date. That compares with the 1,500 people who responded to a call by the country's two biggest unions to rally on June 4.

The "Big Kahuna"

All this fuss over Greece is amusing given Spain and Italy are the "Big Kahunas".

I expect the market at any time to lose confidence in Spain. For the time being, yields are consolidating at the upper end of the range as show in the following chart of Spanish 10-year government bond yields.

If you really want to watch a hissy-fit from Trichet, just wait until Spain blows.

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

Ceridian-UCLA PCI Fuel Index Shows Recovery Stalled

Posted: 08 Jun 2011 12:02 AM PDT

The UCLA Anderson School of Management reports the Pulse of Commerce Index Falls 0.9 percent in May.

The Ceridian-UCLA Pulse of Commerce Index™ (PCI), issued today by the UCLA Anderson School of Management and Ceridian Corporation fell 0.9 percent on a seasonally and workday adjusted basis in May, after falling 0.5 percent in April. The index has now declined in four of the first five months of 2011, and in eight of the past twelve months. It is clear that the economy is idling, and growth remains a struggle.

The index is based on real-time fuel consumption data for over the road trucking and serves as an indicator of the current state and possible future direction of the U.S. economy. By tracking the volume and location of diesel fuel being purchased, the index closely monitors the over the road movement of produce, raw materials, goods-in-process and finished goods to U.S. factories, retailers and consumers.

Year-over-Year Growth of PCI

Annotations in red by Mish
Click on chart for sharper image.

On a year over year basis, the PCI was flat in May. This was disappointing in that it ended a string of seventeen straight months of year over year improvement in the index. One glimmer of good news is that May of last year was the strongest month of 2010, and this month's result nearly cleared that hurdle. Nevertheless, the PCI showed no growth, and this is another indication that the economy is stuck in neutral.

Stuck in the Mud

At first glance, May 2010 appears to be a particularly difficult comparison. However, it only looks that was because May of 2009 was particularly pathetic. Note that May of 2010 did not fully recover the declines from a year earlier.

On that basis, should the index stall here, stuck in the mud seems more like the sad state of affairs than does stuck in neutral.

Here is another way of looking at things.

Industrial Production vs. Ceridian PCI

Annotations in red by Mish
Click on chart for sharper image.

Neither Industrial Production nor the Ceridian PCI fully recovered from the recession even though the "recovery" is now 26 months in the making.

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

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Wednesday, June 8, 2011

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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