Mish's Global Economic Trend Analysis

Voters in Bankrupt San Bernardino Sweep Pro-Union Guard from Office; Hard Line on CalPERS Coming
Latest EU Proposal: Let's Pretend for Another 50 Years! Why Now?
Questions of "Fairness"
Brazil, Russia Cancel Debt Auctions; Head-in-Sand Move Won't Work
"Situation Impossible"

Voters in Bankrupt San Bernardino Sweep Pro-Union Guard from Office; Hard Line on CalPERS Coming

Posted: 05 Feb 2014 06:27 PM PST

The inevitable shape-of-things-to-come has finally arrived in a major California city. I am pleased to report Voters in bankrupt San Bernardino sweep old guard from power.

Residents of bankrupt San Bernardino, California on Tuesday voted to complete a rout of the city's pro-union old guard, electing business-friendly pragmatists who have pledged to try to reduce pension costs and take on vested interests.

As San Bernardino enters into a fourth month of mediation with its creditors, the biggest of which is Calpers, California's giant retirement system, voters on Tuesday elected Carey Davis as the crisis-hit city's new mayor.

Davis, a businessman and political novice, ran in part on a campaign to reduce the city's pension obligations. In an interview in November, when he became one of two mayoral candidates, he said the city had to cut spending on police and fire departments, currently more than 70 percent of the budget.

"You have to roll the pensions back," Davis said in November. Davis did not return calls on Wednesday.

Davis will play a big role in how the city approaches negotiations with its creditors. He will be part of a small team of elected officials who represent the city as the debtor in the bankruptcy.

Along with Detroit, the biggest U.S. city to seek Chapter 9 protection, San Bernardino is likely to set precedent on whether retirees or Wall Street bondholders suffer the most when a city goes broke.

Davis defeated a San Bernardino political veteran, Wendy McCammack. She ran for mayor despite having been ousted by voters from her own council seat in a recall election in November.

Also on Tuesday, another political novice, Henry Nickel, became a new council member, saying he wanted to take on special interests. Nickel's biggest challenger was Randy Wilson, a police sergeant endorsed by the police union, the only candidate for that seat who did not support pension reform efforts.

Tuesday's results follow elections in November, when the balance of power in San Bernardino's seven-member council shifted dramatically away from an old guard reluctant to take on unions and reduce pension obligations.

After Tuesday night, six of seven council members are now on record as saying they want to explore reducing San Bernardino's pensions, along with Davis, the new mayor, and a new city attorney, Gary Saenz.

Expect a Hard Line On CalPERS

This kind of broad sweep eventually it had to happen. I am not sure why it took so long, but even Taxifornia is finally fed up with public unions and the damage they cause. One bankrupt city after another will go this route.

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

Latest EU Proposal: Let's Pretend for Another 50 Years! Why Now?

Posted: 05 Feb 2014 03:26 PM PST

What cannot be paid back won't, but that never stops officials from pretending it will. Please consider EU Said to Weigh Extending Greek Loans to 50 Years.

The next handout to Greece may include extending the maturity on rescue loans to 50 years and cutting the interest rate on some previous aid by 50 basis points, according to two officials with knowledge of discussions being held by European authorities.

The plan, which will be considered by policy makers by May or June, may also include a loan for a package worth between 13 billion euros ($17.6 billion) and 15 billion euros, another official said. Greece, which got 240 billion euros in two bailouts, has previously had its terms eased by the euro zone and International Monetary Fund amid a six-year recession.

New money would help Greece fill a financing gap that has vexed European Union and IMF authorities working to make sure the rescue programs stay on schedule. European Union President Herman Van Rompuy said last month that Greece must continue to tighten its belt even as "the people of Greece are still suffering from the consequences of the painful but nevertheless needed reforms that are taking place."

Under the eased terms, all the bailout-loan repayments would be extended from about 30 years and rates would be cut by 50 basis points on funds from the 80 billion-euro Greek Loan Facility, which was created for Greece's first bailout in 2010, said the officials, who requested anonymity because talks are still in preliminary stages.

Why Now?

Inquiring minds might be wondering why these concessions come now. Here is the answer: Greek leftist seeks negotiated debt write-off.

Greece would seek to negotiate an international write-off of about one-third of its debt if the leftist Syriza opposition party won a general election, its leader said on Tuesday.

Alexis Tsipras, who is leading a Communist-backed pan-European leftist list in European Parliament elections in May, said his country's problems could not be solved by more loans, which just went to service past debts and shore up the banks.

"The solution isn't more loans. The solution is fewer loans and less debt," Tsipras, whose party leads Prime Minister Antonis Samaras' conservative New Democracy in opinion polls, told the Europresse association on a visit to Paris.

Greece, which has already been bailed out twice with 240 billion euros ($324.44 billion) in euro zone and IMF funds, is due to hold its next general election in 2016, but voting may be brought forward if Samaras' fragile right-left coalition were to lose its narrow parliamentary majority.

The Debt-Slave Masters in Brussels are very fearful of a collapse in Antonis Samaras' conservative New Democracy which would lead to new Greek elections which undoubtedly Syriza would win. The New Democracy coalition hangs by a thread with a 2-seat majority in Greek parliament.

Hoping to stave off a parliamentary collapse, the EU is prepared to let Greece pay back 30-year commitments in 50 years. That in and of itself is nothing more than a form of default. It is also willing to commit another 15 billion euros to the debacle.

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

Questions of "Fairness"

Posted: 05 Feb 2014 11:17 AM PST

In response to Controversy in Detroit: What's a Fair Settlement of Bondholder and Pension Obligation Claims? reader Ken suggests my proposal to have Detroit bondholders and pensioners be treated with the same percentage haircuts is not fair.

Ken asked "Which of the two would suffer more: pensioners or bondholders?"

The answer is irrelevant. By definition, "fair" implies equal treatment and equal opportunity, whether black or white, rich or poor.

Is it "fair" the poor have to pay the same for a loaf of bread as the rich? Heck on a percentage-of-wage basis, the poor pay thousands of percent more. Should Bill Gates have to pay $1,000 for a loaf of bread as an act of "fairness"?

I suggest, it's clearly "fair" for everyone who walks into a grocery store to pay the same price for a loaf of bread. Imagine having to prove how much you make and be charged accordingly every time you bought something.

In cases where bargaining happens (auto sales for instance), everyone gets the same chance to bargain, not just the poor or the rich. Some people bargain better than others, but the chance to bargain does not discriminate.

Equal Protection

Equal treatment is fair. There is no other way.

By the way, the "equal protection clause" of the 14th amendment reads:

"No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws."

Does "equal protection" sound "fair" to you? It does to me.

Are the rights of Detroit pensioners higher than the rights of bondholders? Clearly not, given both are unsecured creditors. Whether or not pensioners would suffer more than bondholders is irrelevant.

"Screw the Bondholders" has a nice "Robin Hood" ring to it, but it is blatantly unfair, as well as unconstitutional.

Addendum

Reader John offered an interesting as well as accurate assessment. Paraphrasing John ... Detroit bonds are assets in the retirement plans of other. Ken essentially argues it's fair if Detroit pensioners' retirement prospects are enhanced at the expense of others' retirement plans.

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

Brazil, Russia Cancel Debt Auctions; Head-in-Sand Move Won't Work

Posted: 05 Feb 2014 09:55 AM PST

Russia and Brazil don't like escalating interest rates. Their "solution"? Cancel government debt auctions.

Russia Cancels Debt Auctions Second Week

Yesterday, Reuters reported Russia cancels domestic bond auction citing market conditions

Russia's finance ministry cancelled its weekly domestic bond auctions for the second week in a row on Tuesday, saying in a statement the decision was "based on an analysis of current market conditions".

Yields on so-called OFZ bonds have risen by 70-80 basis points since the start of the year. A new ministry sale could have potentially pushed the rates higher, analysts said.

Brazil Cancels Debt Auctions

Today, Bloomberg reports Brazil Government Yields Fall After Auctions Canceled.

Brazilian government bond yields extended their drop from a four-year high after the Treasury canceled auctions of fixed-rate and zero-coupon bonds amid a selloff in emerging-market assets.

Yields on local bonds maturing in 2017 declined 18 basis points, or 0.18 percentage point, to 12.80 percent at 3:20 p.m. in Sao Paulo after increasing Feb. 3 to 13.14 percent, the highest since January 2010.

The Treasury cited market conditions for its decision and said the last time it canceled auctions to sell zero-coupon LTNs and fixed-rate NTN-Fs was in July. The government had planned to sell zero-coupon bonds maturing in 2014, 2016 and 2018 and fixed-rate bonds maturing in 2021 and 2025.

Head-in-Sand Move Won't Work

This kind of head-in-the sand move won't work long. In fact, it did not work at all, it only created an illusion of working. Unless underlying conditions change quickly, and favorably (both doubtful), there is a strong likelihood of increased volatility when auctions resume.

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

"Situation Impossible"

Posted: 04 Feb 2014 11:52 PM PST

Greek economist Costas Lapavitsas says "The Euro has Already Failed" and it's "Situation Impossible" for France.

Via translation from La Vanguardia here is the complete interview ....

LV: When I interviewed you for the first time in late 2011, you said that the ECB was not the magic solution to the eurozone crisis. Then in July 2012 Mario Draghi stated "The ECB is ready to do whatever it takes to preserve the euro and believe me, it will be enough." Do you still believe that the ECB is not the solution?

CL: The ECB is not the solution. What happened in 2011 and 2012 is that the peripheral countries accepted the austerity demanded by Berlin and Brussels. They accepted wage cuts and unemployment. Their economies are headed for a recession. Have stabilized public finances and external deficit has stabilized. The fundamental answer is recession.

LV: Is that what the ECB wanted?

CL: The announcement of Mario Draghi pacified the financial markets but only because recession was accepted by the population in the peripheral countries. The ECB did not solve the crisis in the real economy.

LV: Are we far from a stable eurozone crisis solution?

CL: The ECB stabilized the fiscal deficit and the trade deficit and hence financial markets. But the crisis has become a crisis in the real economy. There is foul growth and impoverishment.

LV: Has the crisis moved from the periphery crisis to other countries?

CL: Yes. The euro crisis has moved to the heart of the eurozone. France and Italy are now facing the same problems as the periphery in 2010 and 2011. The crisis is now in France and Italy.

LV: Is there more inequality now than at the beginning of the crisis?

CL: Of course. Here's how the situation has stabilized: recession, austerity without growth, more impoverishment and huge social problems for most of the working class.

LV: Can we forget the idea introduced a couple of years ago regarding a two-speed euro?

CL: I do not think it's going to be a two-speed euro. I think the policy that comes from Berlin and Brussels is the austerity of all European countries. France is now in a situation impossible. The real problem in the eurozone is now France. It has great competitiveness gap with Germany.

LV: Why?

CL: The competitiveness gap that the periphery had in 2010-11 is now in France. Wages in Germany have gone up a bit or frozen, wages in France have grown in line with inflation. This gap makes it difficult for the French economy to grow significantly. If France is moving towards austerity, as the periphery, Europe faces serious problems. Depression. And France is facing huge social and political problems. The eurozone crisis has moved to the heart of the euro.

LV: How does situation look in five years?

CL: It is difficult to say precisely. The eurozone will continue to be unstable as in recent years. It will be even worse than now because of tension between France and Germany. The currency is not sustainable. If the common currency fails, the EU is facing a huge crisis.

LV: Do you think that the euro will fail?

CL: The euro has already failed. It was a project that was supposed to create convergence, growth and solidarity between the peoples of Europe, it was supposed to create a commonality among Europeans. The euro has created divergences, recession, poverty, it is like a straitjacket for Europe, increases the national and the social tensions in Europe. It succeeds now only because it instills fear. I do not think this is sustainable for long.

LV: How is the situation in Greece?

CL: Greece is a mess. In 2010 Greece should have left the euro and put its economy in another direction. The economic and social catastrophe in Greece is worse than what happened in Argentina in the late 90s and early 2000. This is what happens when you're within this monetary structure that is the euro.

LV: This is your first trip to Barcelona. How do you assess issues such as the independence of Catalunya?

CL: The situation in Barcelona is very interesting. I am very surprised by the strength of the independence movement in Catalonia. I'm amazed by the vitality of social movements. Yet, I think the level of understanding of the economic problems of Spain and Catalunya are not as high as they should be.

LV: Why?

CL: I think there should be more understanding of the implications of would happen if there was eventual independence in the Catalan economy. There is a lot of complexity that is not completely understood. Social movements in Catalonia need to further discuss these issues.

Mish Comments

I have little to add other than I agree with Costas Lapavitsas on major points. The euro has already failed. The question is: when will that be politically recognized?

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

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Mish's Global Economic Trend Analysis

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