Mish's Global Economic Trend Analysis

Spain Bailout Terms: 100 Billion Euros for 15 Years at 3% Interest, No Payment for 5 Years; How to Pay it Back? Hike VAT on Consumers
German Vote on ESM Fails; Still Not Ratified by Germany, Austria, Belgium, Estonia, Slovakia, Netherlands; Political Football Over Financial Transaction Tax
Italian Paradox: Italy is Borrowing money at 4-5% to Lend to Spain at 3%; Official Denials From Italy That Italy is Next
Greece Withdrawals Up Again Due to "Uncertainty"; Situation Not Under Control; US vs. Greece

Spain Bailout Terms: 100 Billion Euros for 15 Years at 3% Interest, No Payment for 5 Years; How to Pay it Back? Hike VAT on Consumers

Posted: 13 Jun 2012 10:41 PM PDT

According to a Google Translate from Libre Mercado, Spain will receive €100 billion for 15 years at 3% interest with no payment due for 5 years.

How will Spain pay for this?
By sticking it to taxpayers, that's how.

Pressure on Spain from Brussels to hike the VAT is intensifying according to a second article on Libre Mercado.

Don't worry, tax hikes will be done "very carefully so that social needs are met". Expect an announcement by June 30.

Can someone tell me why taxpayers are responsible for banks making stupid loans?

Other than platitudes like "socialize the losses, privatize the gains" there is no answer or excuse.

Yet it happens nearly every time (until voters finally tell bankers to go to hell). Hopefully that is the message this Sunday in Greece.

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

German Vote on ESM Fails; Still Not Ratified by Germany, Austria, Belgium, Estonia, Slovakia, Netherlands; Political Football Over Financial Transaction Tax

Posted: 13 Jun 2012 04:20 PM PDT

The Wall Street Journal reports European Economics Commissioner Olli Rehn expressed concern Monday that Germany, Austria, Belgium, Estonia, Slovakia, and the Netherlands were dragging their feet in ratifying the ESM.

In the meantime, the Journal reports Spain May Tap EFSF.

The article states "Power broker Germany has yet to complete the process but is expected to do so soon."

That is a distinct downplay of what is really happening.

Political Football Over ESM

In Germany, Chancellor Merkel does not have the votes to ratify the ESM. She needs help from opposition parties. Those opposition parties want a financial transaction tax before they will sign.

Last Sunday German opposition fumed before fiscal pact talks

A media report that German Chancellor Angela Merkel is not serious about implementing a European financial transaction tax threatens to undermine an initial deal struck last week with the opposition over the EU's planned fiscal pact.

Der Spiegel weekly reported on Sunday that Merkel's Chief of Staff, Ronald Pofalla, had said such a tax would not get passed in the current legislative period so the centre-right coalition could support the idea in principle knowing it would not have to act on it any time soon.

Last week, the government and opposition parties agreed on the outlines of a transaction tax proposal. On Monday, further talks between senior party members are due to take place and Merkel wants these to form a basis for a final deal when party chiefs meet on Wednesday.

Of course, Merkel responded she was really serious about financial transaction taxes as per this headline on Monday: Merkel strongly backs financial market tax

My take is a financial transaction tax is a very poor idea, and given political blackmail, it is hard to tell just how committed Merkel would be to such silliness.

ESM Passage Takes 90% of EMU Voting Rights

Bear in mind the ESM does not require 100% passage, but rather 90% of the percentage votes. Germany, France, Italy, and Spain each have veto power. Of that group all but Germany have signed.

Austria, Belgium, and the Netherlands combined could block it. So could a combined Belgium, Netherlands, and Slovakia.

If common sense prevails (theoretically possible but highly unlikely in practice), the ESM will not pass.

German Vote on ESM Fails

The Chicago Tribune reports German parties fail to resolve row over fiscal pact

Germany's government and opposition parties failed on Wednesday to resolve a row holding up parliamentary ratification of both the EU's new fiscal treaty and the euro zone's permanent rescue fund, and will resume talks next week.

The delay is potentially embarrassing for Chancellor Angela Merkel because she has insisted that Germany's European partners sign up to the tougher budget rules enshrined in the compact.

The bailout fund, the European Stability Mechanism (ESM), which may be used to provide help for Spain's ailing banks, is meant to start working from July 1 but cannot do so without the approval of Germany, the euro zone's biggest economy.

Merkel wants parliament to approve the two items at the same time, but needs opposition support for the fiscal treaty. The opposition Social Democrats (SPD) and Greens are pressing for a financial transaction tax as well as more steps to generate European growth and jobs in exchange for their support.

"The (next) meeting on June 21 will take the whole day," said conservative lawmaker Volker Kauder, a close ally of Merkel, noting that the parties had managed to agree on many points but some were still open.

Some in the SPD have previously threatened to delay the bill until the autumn. Countries have until the end of the year to ratify the fiscal compact.

How Politics Works

The universal sad state of affairs in politics is that passing something stupid (such as the ESM), requires the passing of something else that is also stupid (in this case the Financial Transaction Tax).

In the end, stupidity is inevitably compounded.

Financial Transaction Tax is Bad Idea

Please see Why the Tobin Tax is a Bad Idea; Sweden's Experience With the Tax for my reasons on why the tax is a bad idea.

No, it would not directly affect me much, if at all, should it pass in the US. Rather, I am concerned about indirect effects as noted in the above link.

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

Italian Paradox: Italy is Borrowing money at 4-5% to Lend to Spain at 3%; Official Denials From Italy That Italy is Next

Posted: 13 Jun 2012 10:10 AM PDT

Sovereign bond yields in Spain and Italy have been climbing across the board, not just the longer durations. Please consider Italy pays dearly to issue one-year debt.

Italy sold €6.5bn of one-year debt at the highest cost since December, underscoring how one of the world's biggest bond markets has been dragged back into Europe's debt crisis.

The 364-day bills were priced to yield 3.972 per cent, but the bid-to-cover ratio fell to 1.73 from 1.79. At the last auction of similarly dated debt Rome's Treasury only paid 2.34 per cent, according to Bloomberg.

Official Denials

Italy's prime minister Mario Monti "forcefully denied" Italy would be next in line to seek a eurozone bailout.

Monti said comments by Austria's finance minister that Italy was at risk of needing a rescue were "inappropriate".

Corrado Passera, the Italian industry minister, also dismissed the idea that Rome might need external help.

Italy 2-Year Government Bonds

Chart from Bloomberg

Yield charts from Bloomberg seldom if ever match the posted yield. In this case, at the time of capture, Bloomberg show a yield of 4.72%, up 19 basis points.

I have pointed out this discrepancy to Bloomberg on numerous occasions.

Presumably the yields from Bloomberg are correct, while the chart is delayed by some unknown amount.

Spain 2-Year Government Bonds

Chart from Bloomberg

Germany 2-Year Government Bonds

Chart from Bloomberg

Italian Paradox

Italy 1-Year Debt Yield is 3.97%
Italy 2-Year Debt Yield is 4.72%
Italy 10-Year Debt Yield is 6.21%

Italy is Borrowing money at 4-5% to Lend to Spain at 3% (assuming borrowing is at short end of the curve)

Who is Backstopping Whom?

Chart from European Financial Stability Facility (EFSF) Publication.

Supposedly Spain is 12.75% responsible to bailout itself.
Italy is 19.18% responsible to bailout Spain.

Does this work?

In retrospect the word "paradox" is wrong. Ponzi scheme is more like it, and the scheme is ultimately backstopped by Germany.

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

Greece Withdrawals Up Again Due to "Uncertainty"; Situation Not Under Control; US vs. Greece

Posted: 13 Jun 2012 02:02 AM PDT

Here is an interesting headline from the Greek website Ekathimerini: Withdrawals up again due to uncertainty.

The political polarization and uncertainty regarding Greece's position in the eurozone generated a fresh spike in bank withdrawals last week.

In the last few days, withdrawals have increased again as bank clients convert their money into foreign bonds (mostly German) or opt for various alternative investments based on the US dollar in mutual funds.

In May, deposit withdrawals were estimated to have amounted to 5 or 6 billion euros. Bank officials say the situation remains under control, pointing at the completion of the first phase of the recapitalization plan with the disbursement of 18 billion euros to the country's four main commercial banks that has strengthened them considerably.

What about Capital Controls and Border Controls?

Reuters reports Euro zone discussed capital controls if Greek exits euro

EU officials have told Reuters the ideas are part of a range of contingency plans. They emphasized that the discussions were merely about being prepared for any eventuality rather than planning for something they expect to happen - no one Reuters has spoken to expects Greece to leave the single currency area.

But with increased political uncertainty in Greece following the inconclusive election on May 6 and ahead of a second election on June 17, there is now an increased need to have contingencies in place, the EU sources said.

Belgium's finance minister, Steve Vanackere, said at the end of May that it was a function of each euro zone state to be prepared for problems. These discussions have been in that vein, with the specific aim of limiting a bank run or capital flight.

As well as limiting cash withdrawals and imposing capital controls, they have discussed the possibility of suspending the Schengen agreement, which allows for visa-free travel among 26 countries, including most of the European Union.

"Contingency planning is underway for a scenario under which Greece leaves," one of the sources, who has been involved in the conference calls, said. "Limited cash withdrawals from ATMs and limited movement of capital have been considered and analyzed."

Things Uncertain

Who will win the election?
Does it even matter who wins?
Will Greece return to the drachma?
Will Greece or the EU impose capital controls?
Will Greece or the EU impose border controls?

On the surface that seems like one heck of a lot of uncertainty. However, let's look at what is certain.

Things Certain

It is 100% certain the risk of confiscation makes it foolish to leave "excess cash" in Greek banks. By "excess cash" I mean deposits greater than what is immediately needed to pay current bills.
It is 100% certain that no good can possibly come to those who do leave "excess cash" in bank accounts.
It is 100% certain the need for safety overrides the check-writing convenience of keeping "excess cash" in banks.

One can easily argue that "all" deposits, not just "excess" deposits should be in a foreign bank. However, a rational-thinking person might also worry about confiscation by other European banks.

Regardless, it is 100% certain the sensible thing to do is to remove money from Greek banks. That certainty is the true driver of capital flight.

U.S. vs. Greece

Some might argue the US is in the same boat as Greece. After all, what good can leaving money in a US bank do?

Such arguments are misplaced.

In the US, there is not a safer place to keep excess cash, at least up to the FDIC limit. In the US, it is 100% certain the dollar is not on the verge of a forced devaluation to "wollars". Finally, common sense suggests having enough liquid assets in cash for emergencies.

In Greece, the "need" for safety overrides the "desire" for convenience.

No Mad Rush Yet - Why?

In light of the above, inquiring minds might be wondering why the capital flight in Greece has been relatively orderly.

The simple explanation is people cannot or do not think. Those who do carefully consider probabilities long ago decided to yank their money. Others are just now thinking, which explains the continued capital flight.

Those who have not yet yanked their deposits from Greek banks have either not considered the compelling risk-reward setup for immediately pulling out all excess cash or they foolishly believe political promises that Greece will stay on the euro.

What Is Being Rescued?

My friend Pater Tenebrarum comments on the situation in Velvet Glove, Iron Fist

The idea of imposing capital controls and limiting the free movement of people across borders are likewise threats that must make every thinking person wonder what the hell the whole 'rescue operation' is supposed to be 'rescuing'. After all, these are basic tenets of the EU treaties the possible suspension of which the eurocrats are discussing here. This is what the EU was established for in the first place: to enable the free movement of people, goods and capital. If these are suspended, then what is it that is being rescued?

It seems rather obvious to us that when citizens can no longer get their property from the banks and can no longer move their bodies and capital freely within the EU, then what is 'protected' are not they, but the solely the bankers and the political and bureaucratic elite.

Situation Not Under Control

When bank officials feel the need to state "the situation remains under control", rest assured it is 100% certain that things are not under control. Threats of capital controls and restriction of movement prove just that.

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

Home Refinance Calculator

Wednesday, June 13, 2012

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

No comments:

Post a Comment