Mish's Global Economic Trend Analysis

Irish Prime Minister Begs EU for Debt Relief in Disgraceful Performance
Eventually, Will Come a Time When ....
Video: German Failed Bond Auction, 6 Billion Offered, 3.6 Billion Takers; Contagion Spreads From Periphery to Outer Core, Then from Outer Core to Inner Core
Understanding the Problem, Understanding the Solution, and Understanding Who is to Blame are Three Different Things
Banks Make Plans for Euro-Zone Split
2-Year Italian Bond Yield Hits 7.27%, Yield Curve Inverts; Italy, Belgium, Spanish Bonds Smacked

Irish Prime Minister Begs EU for Debt Relief in Disgraceful Performance

Posted: 23 Nov 2011 08:11 PM PST

Ambrose Evans-Pritchard is back on track with Ireland demands debt relief, warns on EU treaties

The Irish government has suddenly complicated the picture by requesting debt relief from as a reward for upholding the integrity of the EU financial system after the Lehman crisis, though there is no explicit linkage between the two issues.

"We carried an undue burden for protecting the European banking system from contagion," said finance minister Michael Noonan.

"We are looking at ways to reduce the debt. We would like to see our European colleagues address this in a positive manner. Wherever there is a reckless borrower, there is also a reckless lender," he said, alluding to German, French, British and Dutch banks.

Mr Noonan hinted that Dublin is asking for some of interested relief on a €31bn EU promissory noted linked to the Anglo Irish fiasco, among other matters.

Mr Noonan said Ireland's public mood has turned very sour.

"We have indicated to Europe's authorities that it will be difficult to get the Irish public to pass a referendum on treaty change," he said.

Mr Noonan said the country will stay the course with unbending austerity, even though nominal gross national product (GNP) has already contracted by 22pc. Public wages have fallen 12pc on average under Ireland's "internal devaluation" policy to regain competitiveness within EMU. There are likely to be further wage cuts in the December budget.

"We have to face reality. There is no painless way, no soft option: we're going to cut spending drastically, but with social cohesion. We don't want situation we see in Greece with people on streets and the foundations of state under threat. We're not going that route."

Will, Not May

Pritchard summed up the entire situation quite nicely in his opening lead "Europe's plans for treaty changes to enforce fiscal discipline in the eurozone may fall foul of popular anger in Ireland unless the EU creditor states agree to share more of the pain."

My one quibble is with the word "may". The correct word is will.

I am quite disappointed that it took Ireland this long. Voters smashed the Fianna Fail (FF) party to smithereens in February (see Massive Rout in Irish Elections; Collision Course with the EU; Default the Best Option for Ireland), to teary-eyed outgoing politicians, only to see incoming party Fine Gael, led by incoming prime minister Enda Kenny, do the exact same thing FF would have done: bail out German and French banks at the expense of Irish taxpayers.

Quite frankly this is maddening. What the hell good are elections if the only choice by either party is to bail out the banks? Worse yet, in Ireland's situation, it is foreign banks that are bailed out.

Enda Kenny "Pleads" for Help

Actually, Kenny did not "demand" debt relief, he begged for it. Moreover he is willing to kiss ass to get it.

The Wall Street Journal reports Irish PM Kenny: Must Meet Targets To Win Back Economic Sovereignty

Ireland will have to meet the austerity budget targets set by its bailout lenders if the country is to get its economic sovereignty back, Irish Prime Minister Enda Kenny said Tuesday.

He told the Irish parliament that looming budget measures will be as fair as possible to balance the requirements of its European Union and International Monetary Fund lenders while protecting the most vulnerable in Irish society.

"Clearly, if we are to have our economic sovereignty back we can't go on as we were," Kenny said.

If Kenny had any backbone at all he would have told the IMF and EU to "go to hell" just as Icelandic voters did and more importantly, just as Irish voters expected. Instead, Kenny wimped-out to the exact same demands from the IMF and EU that Fianna Fail would have done.

Public Mood Turns Sour

Mr Noonan, Ireland's finance minister said "Ireland's public mood has turned very sour".

Of course it has. Wimps like Kenny and Noonan have caved into every EU and IMF demand, at the expense of Irish taxpayers, in spite of an overwhelming election to do something different!

I repeat what I said earlier today in Eventually, Will Come a Time When ....

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.

Kenny did not do what he was elected to do. He should be kicked out of office on his ass and replaced by someone who will.

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

Eventually, Will Come a Time When ....

Posted: 23 Nov 2011 11:46 AM PST

Inquiring minds note that French presidential candidate Le Pen calls for France to quit euro

Marine Le Pen, the leader of France's far-right National Front, has made abandoning the euro one of the pillars of her presidential election campaign, launching a powerful attack on the ailing single currency as she seeks to bolster her already strong showing in the opinion polls.

Presenting her "presidential project", Ms Le Pen said Europe should give up the euro, which had "asphyxiated our economies, killed our industries and choked our jobs" for years, as well as causing France to accumulate "Himalayan" debts. In any case, she added, the country should prepare a planned exit from the currency union. "We need to anticipate the collapse of the euro rather than suffer from the collapse of the euro," she said in a television interview on Sunday.

Le Pen supports misguided policies on trade and numerous other issues. However, protectionists and isolationists will eventually win the way, on one issue and one issue alone.

Last April, in Finland, the "True Finn" party soared from obscurity based on one simple idea: stopping bailouts of euro-zone member states. The rest of the "True Finn" platform was cancerous, yet meaningless. Voters everywhere are fed up with bailouts.

My Point

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.

Le Pen may be too early, and France may not be that country, but the time will come.

Greece, Finland, Germany, Belgium, and even France are possibilities. All it will take, is for one charismatic person, timing social mood correctly, to say precisely one right thing at exactly the right time. It will happen.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Video: German Failed Bond Auction, 6 Billion Offered, 3.6 Billion Takers; Contagion Spreads From Periphery to Outer Core, Then from Outer Core to Inner Core

Posted: 23 Nov 2011 09:17 AM PST

No doubt emergency meets are underway in numerous countries right now following a failed German bond auction. Bond auctions have failed before, but not in Germany (at least by this much), and never at a worse time.

Link if above video does not play: German Bond Auction Disaster

Key Ideas Expressed in Video

"What people are saying is Germany is going to have to pay the bill. ... Just possibly, today is the day people may have decided German bonds are not the safe haven they thought they were. ... It's all about confidence isn't it?"

It's actually about solvency, not liquidity, not confidence. Solvency issues in Greece, Spain, and Portugal have now affected the core.

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

Understanding the Problem, Understanding the Solution, and Understanding Who is to Blame are Three Different Things

Posted: 23 Nov 2011 03:58 AM PST

Ambrose Evans-Pritchard speaks of the Self-serving myths of Europe's neo-Calvinists

In his article he chastises Germany for its role in the Eurozone mess, citing Germany's Wolfgang Schauble and the northern neo-Calvinists. Pritchard also praises a report by Simon Tilford and Philip Whyte on how stricter rules threaten the eurozone.

There is certainly much in the report that I agree with, primarily a description of the problem. Unfortunately, there is even more I disagree with, notably the solution.

Ideas I agree with:

Creditor countries cannot be absolved of all blame.
If the eurozone had been a fully-fledged fiscal union, it would not be in its current predicament. (Mish: It would be a different predicament, likely much worse)
The current crisis is not simply a tale of fiscal irresponsibility and lost competitiveness in the eurozone's geographical periphery. It is also about the unsustainable macroeconomic imbalances to which the launch of the euro contributed (in creditor and debtor countries)
The challenges presented by Greece were always going to be daunting, given the dysfunctional nature of its political economy.
The medicine prescribed to Greece – which was partly motivated by an urge to punish it and to take a stand against moral hazard – was doomed to failure.
A year's worth of punishing austerity and contracting activity has only succeeded in pushing Greece deeper into insolvency.
The eurozone will not emerge from the debt crisis without economic growth.
It is now clear that a currency shared by fiscally sovereign member states is more vulnerable to losses of confidence than a monetary union that is more fully integrated.
A familiar pattern has now set in. Under market duress, leaders hold an emergency summit and announce an agreement designed to restore confidence once and for all.
After an initial bout of euphoria, financial markets digest the contents of the agreement, conclude that it does not resolve the underlying problems, and the cycle starts all over again. Each agreement buys less time and the stakes become larger with every summit.

Hopefully we can all agree on those 10 points. The problem is the Euro was fatally flawed from the beginning.

No in Many Languages

No currency union has ever survived without there being a fiscal union at the same time. Is Germany to blame for this?

I say Nein, Non, Ochi, Iie, Nie, Nej, and of course No.

Who is to Blame?

The rules of the Maastricht Treaty were known by everyone at the outset and there were many architects of the Euro idea including Jean-Claude Trichet. In that regard it makes as much sense to blame France as it does Germany.

Moreover, countries could have accepted or rejected the treaty. Every country had a vote (or many votes - as politicians crammed the Euro down their citizens' throats whether they wanted it or not).

The UK chose wisely, other countries did not, including Germany. Every country stupid enough to enter this untenable arrangement can look in the mirror and blame themselves.

The Non-Solutions

Unfortunately, the rest of the report borders on the nonsensical, notably "All eurozone countries should therefore finance debt by issuing bonds which would be jointly guaranteed by all of them."

The authors then proceed to discuss all the inherent problems with the idea including "moral hazards", borrowing targets, etc, stating "A dogmatic target of budgetary balance four years hence, irrespective of a country's position in the economic cycle, would achieve little."

The authors then have to figure out a way around dogmatic targets, proposing "rules should be set with reference to the cyclically-adjusted fiscal position for each member state."

That of course creates another problem as to how to do that, coming to the conclusion that 17 votes is too many, and a creditor-dominated board would not work, but "A board of nine economists, from the big eurozone economies, the European Commission, the European Central Bank (ECB) and the OECD might form a good basis."

Good grief.

Wait, I am not done yet. The authors freely admit "the issuance of eurobonds will not prevent debt crises in the absence of steps to reduce trade imbalances within the eurozone" then attempt to dream up solutions to that problem.

That idea makes as much sense as attempting to solve a trade disparity between California and Indiana.

We are still not done yet. The authors see a need to "set up a jointly-funded, eurozone-wide deposit protection scheme."

Finally, the authors conclude "The ECB's mandate is too restrictive. The central bank must guard against excessive inflation. But its fear of inflation blinds it to the much more serious threats confronting the eurozone economy."

Apparently Europe needs a "mandate" but one that is meaningless, and allows the central bank to print at will.

Conclusion

The authors ramble on about various problems, real and imagined, then conclude with ...

Eurozone leaders now face a choice between two unpalatable alternatives. Either they accept that the eurozone is institutionally flawed and do what is necessary to turn it into a more stable arrangement. This will require some of them to go beyond what their voters seem prepared to allow, and to accept that a certain amount of 'rule-breaking' is necessary in the short term if the eurozone is to survive intact. Or they can stick to the fiction that confidence can be restored by the adoption (and enforcement) of tougher rules. This option will condemn the eurozone to self-defeating policies that hasten defaults, contagion and eventual break-up.

Indeed, Not

Pritchard, cited the above paragraph and finished with "Indeed. Read it all"

I did read it all and nearly threw up at the self-serving myth there are only two options.

Break the rules
Stick to self-defeating policies

There is a third option and Pritchard should know it well: Plan for a breakup of the Eurozone and make banks write down bad investments. Bondholders will take a hit, but they deserve to. It is time to stop bailing out banks at the expense of taxpayers.

The report by Simon Tilford and Philip Whyte with all their convoluted solutions culminating in the creation of a "fiscal nanny-zone" should be enough to convince anyone the Euro is not worth saving.

Countries that disagree can keep the damn thing. If France wants a fiscal nanny-state and unlimited printing by the ECB, fine. Let France have it.

True Solution

The best solution and the one I propose is for Germany to leave the Eurozone. I am quite sure other countries in Northern Europe would follow. The Euro will still survive in my proposal, and France can be king of the nanny-hill if it elects to stay in.

Yes this would be disruptive. However, it would give the Euro-fools what they want and Northern European voters (not politicians) what they want.

Michael Pettis outlined a compelling case why Germany exiting the Eurozone is the best option. Please see Eurozone Breakup Logistics (Never Believe Anything Until It's Officially Denied) for details.

The Euroskeptics Were Right

The Euroskeptics were right, straight from the beginning. Pritchard was among those skeptics. He was right then. He was also correct in a major way when he stated the German supreme court would not allow Eurobonds or ECB printing.

Please see Germany's Top Judge Throws Major Monkey Wrench Into Leveraged EFSF Machinery, Demands New Constitution and Popular Referendum for Further Powers for details.

Unfortunately he is wrong now. In more ways than one.

Pritchard is wrong on who to blame
Pritchard is wrong to perpetrate the myth the euro can be saved
Pritchard is wrong about fearing deflation (a natural state of affairs actually, it is only fractional reserve lending and mountains of debt that bring upon such fears. The solution is to get rid of central bankers and end fractional reserve lending)
Pritchard is wrong to not fear inflation in the scenario proposed by Tilford and Whyte.

Eurobond, Unlimited Printing Foolishness

I am not the only one who thinks the eurobond, unlimited printing idea is beyond foolish. John Hussman had an excellent writeup on Monday Why the ECB Won't (and Shouldn't) Just Print

Over the past week, we've heard all sorts of propositions that the European Central Bank (ECB) "must" begin printing money to bail out Italy and other countries, because "there is no other option." There are three basic difficulties with this idea.

The first is that ECB buying might help to address immediate liquidity issues of distressed European countries, but it would not address long-term solvency issues, and would in fact make them worse.

The second is that the ECB, under existing European treaties, has no such authority, and the prohibitions against it are very explicit. Changing that would be far more difficult than many market participants seem to believe, because it would require an explicit and unanimous change in the EU Treaties that AAA rated countries such as Germany and Finland vehemently oppose.

The third difficulty is that even if the ECB was to buy the debt of distressed European countries with printed money, the inflationary effects would likely be far more swift than anything we've seen in the United States. This would not "save" the euro, but would simply destroy it by other means.

Hussman builds an excellent case.

I will conclude the way Pritchard did: "Indeed. Read it all".

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

Banks Make Plans for Euro-Zone Split

Posted: 23 Nov 2011 01:41 AM PST

A few weeks ago many thought a breakup up the eurozone was "unthinkable". Today, "disaster plans" are being made by numerous banks to allow for just that event.

The Wall Street Journal reports Banks Ponder Euro-Zone Split

A key part of the world's foreign-exchange trading infrastructure is bracing itself for the possibility of a breakup of the euro zone, the latest sign investor concerns about the Continent's debt crisis are on the rise.

CLS Bank International, which operates a platform in which banks settle most of their currency trades, is running "stress tests" to prepare for the possible dissolution of the euro, according to people familiar with the situation.

Some of the 63 banks that co-own CLS are making similar plans. "We always plan for contingencies," said a senior executive at one of the largest currency-dealing banks.

New York-based CLS is by far the biggest name in the currency market known to be making preparations for such a scenario. Analysts with Japanese bank Nomura Holdings said Friday that a euro breakup is a "very real risk," while HSBC Holdings analysts told clients on Tuesday that it's "not unimaginable" for countries to leave the euro zone.

This is the kind of discussion and action that is needed because a breakup appears inevitable.

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

2-Year Italian Bond Yield Hits 7.27%, Yield Curve Inverts; Italy, Belgium, Spanish Bonds Smacked

Posted: 23 Nov 2011 12:20 AM PST

Sovereign debt yields and spreads are under renewed pressure today in Italy, Belgium, and Spain.

Sovereign Debt Table 10-Year Bonds

Country	Change	Yield	Spread
Germany	+.02	1.93	0.00
France	+.04	3.57	1.64
Spain	+.01	6.61	4.68
Italy	+.06	6.88	4.95
Portugal	-.02	11.28	9.35
Belgium	+.06	5.14	3.21
Ireland	+.47	8.21	6.28

Sovereign Debt Table 2-Year Bonds

Country	Change	Yield	Spread
Germany	-.01	0.38	0.00
France	+.06	1.78	1.40
Spain	+.08	5.83	5.45
Italy	+.07	7.06	6.68
Portugal	-.35	14.63	14.25
Belgium	+.10	4.39	4.01
Ireland	+.02	8.38	8.00

Note the inverted yield curve for Italy and Belgium.

Italian 2-year bonds were smacked hard today, opening at 7.27% before calming down to 7.06%. The 10-year yield opened at 6.85 and surged to 6.98 before calming down to 6.88%. 2-year Italian bonds are not only above 7%, but also yield more than 10-year bonds.

Note: At 4:13 ET 2-Year Italian bonds are back up to 7.21%, and climbing way faster than 10-Yr bonds at 6.91%

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

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Mish's Global Economic Trend Analysis

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