Mish's Global Economic Trend Analysis

Italy "Gasping Like Beached Whale"; Berlusconi Reiterates Euro Exit "Not Blasphemy"; Beppe Grillo Discusses "Taboo of the Euro"
Laugh of the Day: Stress Tests Show Spanish Banks Only Need €16bn and €62bn in New Capital; ECB to Accept ABCP Collateral One Step Above Junk as Collateral
German Supreme Court Delays ESM; Another Setback for Merkel; Creeping Bailouts; Reflections on German Expectations

Italy "Gasping Like Beached Whale"; Berlusconi Reiterates Euro Exit "Not Blasphemy"; Beppe Grillo Discusses "Taboo of the Euro"

Posted: 22 Jun 2012 02:17 PM PDT

On June 1, former Italian Prime Minister Silvio Berlusconi said "Italy should dump the euro unless the European Central Bank agreed to inject more cash into the economy". One day later Berlusconi said the idea Italy should dump euro was a "joke".

It was not a joke, except perhaps as quoted. On June 20, Berlusconi says Italy euro exit "not blasphemy"

Italy should consider leaving the euro unless Germany agrees to the European Central Bank acting as a guarantor for sovereign debt and printing money to reflate the economy, former Prime Minister Silvio Berlusconi said on Wednesday.

"Leaving the euro is not a blasphemy," he wrote on his Facebook page.

If Germany does not agree to a new role for the ECB then it should consider leaving the euro itself, Berlusconi said. "I have spoken to some German experts who would be in favor," said Berlusconi, leader of one of two main parties backing pro-European Prime Minister Mario Monti.

The 75-year-old media magnate, whose People of Freedom party (PDL) lost heavily in local elections last month and has been shedding supporters steadily over the last year, is increasingly targeting the euro in a bid to regain popularity.

With less than a year before the next general election, Italy faces the prospect of at least two large parties running on an anti-euro ticket.

The Five Star Movement led by comedian Beppe Grillo, who urges an exit from the euro, has overtaken the PDL according to recent polls to become Italy's second largest party, with more than 20 percent of voter support.

The pro-devolution Northern League also often expresses skepticism or hostility about the single currency.

The Taboo of the Euro

Please consider The Taboo of the Euro on Beppe Grillo's Blog.

When the Euro is put under the spotlight, the indignant reaction is a chorus of "We cannot leave the Euro", as though Europe is identified with the Euro. It's possible to serenely remain in the EU without having to do without one's own currency. Of the 27 States making up the EU, ten have kept their currency, including Great Britain, Sweden, Poland, the Czech Republic and Denmark who are not risking any default. Another trick is the repetitive use of the term "single currency". There's is absolutely no single European currency. The Euro is limited to 17 States and those who are outside are taking good care not to enter the Euro zone. Who in Europe, is today in crisis? Right at the top are those countries with so-called "weak" economies that adopted the Euro.

To remain in the Euro we are starving the country, strangling the companies, transferring the private wealth to cover the interest payments on the public debt that is (unfortunately) in Euro. If it were in lira we could resolve the problem of the debt with the devaluation of our currency.

Italy is gasping like a beached whale. If to remain in the Euro and pay the interest on the debt to the banks, mainly German and French, we have to kill the economy of our Country, perhaps it's appropriate to stop and reflect. Especially if the public debt and the spread are increasing anyway while we are being strangled. The Euro must not be a taboo.

Five Star Movement

Outside Italy, very little attention has been given to Beppe Grillo and his Five Star Movement. Yet the Five Star Party is now the second largest party in Italy.

PDL, is now the third largest party and Berlusconi is now anti-euro, as is the Northern League. These are very significant events.

For more details, please see Six Reasons Why Italy May Exit the Euro Before Spain; Ultimate Occupy Movement.

Also note Monti Begs Germany to Stabilize Interest Rates; Merkel Pours Cold Water On "Theoretical Discussions"; Italy Official Denial #1; Why Monti's Days Are Numbered.

"See you in the next Parliament" Beppe Grillo said after the local elections in May. I repeat my position: Let's hope so.

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

Laugh of the Day: Stress Tests Show Spanish Banks Only Need €16bn and €62bn in New Capital; ECB to Accept ABCP Collateral One Step Above Junk as Collateral

Posted: 22 Jun 2012 07:51 AM PDT

The yield on 10-year Spanish bonds has fallen for the second day in a row, and now sit at 6.4% according to Bloomberg.

Yesterday's news was ECB to relax loan rules for Spanish banks

Benoît Cœuré, an ECB executive board member, told the Financial Times in an interview this week: "We certainly have to make sure that sound counterparties have the means to access our liquidity, including in terms of collateral availability."

He warned that collateral buffers had "become more strained in some places" and added: "There is an ongoing reflection on how to alleviate these tensions."

However, the debate is sensitive within the ECB council, with many of its members worried about the risks involved and the dangers of substituting actions by governments to strengthen public finances.

The decision on the use of asset-backed securities – bonds backed by loans – was taken separately from the wider review of collateral rules and appears designed to buttress efforts by eurozone authorities to strengthen Spain's banks. Under the new rules, such securities will be eligible for use as collateral providing they have a credit rating of at least BBB (minus), according to eurozone officials. Previously, the minimum requirement was for at least an A rating.

In his FT interview, Mr Cœuré warned that changes to the ECB's collateral rules would "have to come with strict risk control, in particular with haircuts".

Lie of the Day

It's more like lie of the day than laugh of the day as Madrid moves to ease bailout fears

Spain has sought to ease investors' fears that it needs a full-scale international bailout of its economy by publishing two "stress tests" showing that Spanish banks need between €16bn and €62bn in new capital.

The estimates of how much extra capital its banks might need fall well within the sum of up to €100bn that Spain requested for its financial system from its eurozone partners this month.

Fernando Restoy, deputy governor of the Bank of Spain, said the numbers were "a long way from the maximum that the eurogroup agreed to make available to Spain".
"The three biggest groups in the country don't need assistance in the form of new capital, even in the stressed scenario," he said in a reference to Santander, BBVA and Caixabank.

Got That?

Allegedly the three largest banks, created by mergers of smaller insolvent banks do not need any capital at all even though Spain asked for €100 billion and Citigroup thinks the banks need €350 billion.

For the past few days, yields in Spain have plunged from 7.28% down to 6.4% on a packet of lies and junk. It won't last, not that 6.4% is remotely sustainable in the first place.

Credit Risk

Meanwhile, yield on the 10-year German bond is creeping up.

Why shouldn't yields on German bonds rise? Every step by the ECB to add leverage or accept lower rated securities as collateral puts more credit risk on Germany.

For a discussion of credit risk, please see ...

The only realistic way yields can fall in Italy and Spain is if they rise in Germany.

Meanwhile, please recall that on Tuesday we saw this announcement Spanish Banking Audits Delayed Until September, Another €50 Billion Likely Needed.

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

German Supreme Court Delays ESM; Another Setback for Merkel; Creeping Bailouts; Reflections on German Expectations

Posted: 21 Jun 2012 11:12 PM PDT

Reader "Bert" from Germany writes ...

Hello Mish

The German Supreme Court asked the president to delay signing the ESM. This is unprecedented. The court needs more time to study the proposal, they say.

So no ESM yet! I was waiting and hoping for this kind of action.

Kind regards and please keep going on with your very interesting mail service, I never skip a day.

Bert

Another Setback for Merkel

Bert sent this link from Faz: Gauck unterzeichnet Fiskalpakt vorerst nicht.

The Google translation was so bad I won't even post it.

Instead, please consider the Spiegel Online English version report Germany Faces Delay in Ratifying Euro Rescue Fund

Germany's highest court asked the country's president on Thursday to delay ratification of the permanent euro bailout fund, the European Stability Mechanism, and the fiscal pact into law next week. If he complies, the move could delay the implementation of the ESM by several weeks in the latest setback for Chancellor Angela Merkel.

The Constitutional Court, anticipating challenges to the legislation, wanted more time to review documents. German President Joachim Gauck, hardly three months in office, was already faced with an important decision. If he complied with the request from Karlsruhe, at least one piece of legislation proposed by Chancellor Merkel and her coalition government -- the permanent bailout fund known as the European Stability Mechanism (ESM) -- would undoubtedly be delayed. The ESM was originally scheduled to come into force on July 1, 2012.

Gauck doesn't want to sign the two laws, at least for now, when they are presented to the two houses of the German legislature -- the federal parliament, the Bundestag, and the upper legislative chamber, the Bundesrat -- for ratification next week. However, laws in Germany are only considered ratified, and therefore binding under international law, when signed by the president. Now it could take another two or three weeks before the court rules on possible emergency appeals.

Declining a request by the Constitutional Court judges, especially on such a delicate matter, would have created a massive conflict and set off a debate on the question of whether a German president in cases of doubt has the power to ignore Karlsruhe. It was a conflict Gauck was anxious to avoid. According to a statement by the president's office, Gauck intended to "comply with the request, in keeping with standard government practice among the constitutional bodies, and out of respect for the Federal Constitutional Court, as soon as the Bundestag and the Bundesrat have adopted the corresponding treaty laws."

Emergency Appeals by the Left Party and a Former Minister

For now, Germany's highest court has the final say. The Left Party and former Justice Minister Herta Däubler-Gmelin, a member of the center-left Social Democratic Party (SPD), have announced their intention to file suits against the ESM and the fiscal pact. They are expected to file emergency appeals against the measures.

Almost no one in Merkel's coalition government of the center-right Christian Democratic Union (CDU) and the pro-business Free Democratic Party (FDP) believes that Karlsruhe will actually stop the fiscal pact and the ESM. And neither does the opposition, which doesn't want to imagine the prospect of both projects failing on Germany's account. "The house is on fire," says a leading member of the Green Party opposition, in a reference to Spain. He is expressing the dilemma that the Constitutional Court also faces as it considers the possibility of legal challenges, namely that the judges are also keeping an eye on the nervous markets.

Reflections on German Expectations

The article notes that "almost no one" believes the supreme court will stop the ESM. However, note that Merkel and others were shocked by this delay in the first place.

Having followed such stories for over a year, the compromise position would be for the court to allow the ESM with various warnings.

And why shouldn't the court warn? More specifically, why shouldn't the court reject the ESM outright?

"Mistake to Pursue United States of Europe"

Flashback December 28, 2011: "It's a Mistake To Pursue a United States of Europe" says German Supreme Court Justice in Spiegel Interview ; Interpretation of Interview from Saxo Bank Chief Economist

Flashback September 26, 2011: Germany's Top Judge Throws Major Monkey Wrench Into Leveraged EFSF Machinery, Demands New Constitution and Popular Referendum for Further Powers

Please read those two articles carefully.

Does Merkel Care About Constitutional Issues?

It is not at all uncommon for politicians (in this case Merkel) to simply not give a damn about constitutional issues.

Moreover, and although I cannot speak for Germany, perhaps it is shocking for the courts to intervene this way. Certainly in the US we do not see laws delayed before they are signed by the president.

Creeping Bailouts

Although Merkel has stayed true to form against Eurobonds and other blatantly obvious transfer mechanisms, I believe the real reason is her fear the German supreme court might demand a referendum.

Even if the court allows the ESM, this is a further warning to Merkel to not stray too far.

Every step of the way, Merkel has caved in to demand for higher bailouts, as well as bailouts upon bailouts, all of which increase German taxpayer risk, as does ever-escalating target2 balances.

For further discussion, please see Discussion of Target2 and the ELA (Emergency Liquidity Assistance) program; Reader From Europe Asks "Can You Please Explain Target2?"

Has the Supreme Court Finally Had Enough?

With creeping bailouts caused by cave-in after cave-in by Merkel, and with Target2 balances skyrocketing out of sight, perhaps the German supreme court has finally had enough.

I doubt it, but let's hope so.

Addendum:

Reader Philipp ads this note about German courts ...

Hi Mish,

A correction to your post about "Germany Supreme Court Delays ESM". The federal constitutional court is not the supreme court of Germany. Actually, there are 5 supreme courts in Germany with different areas of expertise.

The constitutional court is situated above the supreme courts and its only job is the final interpretation of the German Constitution.

The difference to the US system is based on law jurisdictions. The US system is based on the anglo-saxon common law while most of Europe is based on the Roman Law system and the Corpus Juris Civilis of the East Roman Empire with influences of the laws of the Salian Emperors (Holy Roman Empire) and the Code Napoleonique.

Philipp

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

Mish's Global Economic Trend Analysis

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