weekend commentary - All Roads in Europe Lead to Gold !
for what it's worth ...
'Timely' interview between Chris Martensen and Alisdair MacLeod ... from
(snip)"Alasdair Macleod: All Roads In Europe Lead To Gold
This week we bring back Alasdair Macleod, publisher of Finance and economics.org, because, as he puts it "every horror that we discussed last time we spoke is coming about". Especially scary since our previous conversation with him was less than three weeks ago...
Today's interview continues building on his excellent synopsis from last month that detailed the origins of the Eurozone crisis. The fundamental shortcomings warned of at the Euro's creation in 1997, combined with the excessive sovereign debts run up since then, have finally expressed themselves at a scale too large to be contained any longer.
Today, Alasdair details in-depth the huge and serious challenges facing Greece and the major Eurozone countries, and the likely impacts of the fast-dwindling options left remaining.
He sees no happy ending to this story, no outcome in which serious pain and permanent behavior change can be avoided. And for those looking for shelter from the unfolding economic storm, he sees few options besides the precious metals (which he believes are severely under priced at the moment):
Greece
The Greek situation is entirely predictable: when you force enormous pressures on an economy and try and raise taxes from the private sector -- a private sector which isn’t used to paying taxes because usually they find away around it -- you start cutting pensions, you start cutting this, cutting that, and the people revolt. They haven’t a clue what they are doing, but we get the revolt nonetheless. It looks like nobody there can form a government; and it looks like there will be another election probably in June. That won’t resolve anything unless by some miracle, some sense gets knocked into people’s heads.
The other thing, which nobody has mentioned, is that there are about 90 billion dollars in derivative contracts involved in the Greek economy. This is not just government, but also local governments and towns and cities and all the rest of it. The counterparties to this $90 billion must be getting a bit worried about that, I would think because that looks as if it will default.
The people who have been most active in getting these derivative contracts going over time have been people like Deutsche Bank, Goldman Sachs and I suppose JP Morgan -- so you can see the problems aren’t just limited to the government and some unfortunate Greek citizens who are caught in the middle of this.
We are looking at potentially up to ninety billion dollars worth of derivatives which one side of those transactions is going to default. One side: it is not a balanced figure is it? I don’t know that it is necessarily as bad as that, but it is a problem that needs to be dealt with, addressed and contained. I think what they have to do as much as possible, is to try to work for a sensible outcome in this, which probably will involve Greece leaving the Eurozone, but maybe obtaining help from the ECB to set up a currency board. The reason I say that is that I think for Greece to return to the drachma would be complete destruction. You would have a situation where people who owe money in Euros would still owe money in Euros. If the Greek government tried to change that by law, for starts, that could only apply to loans taken out in Euros in Greece; whereas a lot of these have been taken out in Euros elsewhere in the European Union. In any event, I think if they tried to do a law on this, it would be a retroactive, which would be open to legal challenge.
Meanwhile, if you have deposits in a Greek bank, you can be sure the Greek government would say we are going to re-designate those into New Drachmas, which would impoverish the depositors. When it comes to trade, I think everybody would just stay well clear. To go back to a New Drachma, I think is the most destructive path Greece can have. Now, they could do that on the basis that, if the European Union wanted to make an example of Greece, then this is a way in which they could just let them go hang. The importance of that would be that the situation for Greece should be so bad that no other member of the Eurozone would contemplate leaving the Eurozone. That is a possibility. But I think that is less likely than coming to terms in such a way to give Greece an exit. But if they do get an exit, again, they’ve got to have an exit in such a way that it hurts enough and anybody else who wants to take that exit would see, well it is actually probably more painful than staying where we are. It is a very difficult balance to achieve.
The people who will do this, I don’t believe are the politicians. It would have to be the sensible people in the ECB and perhaps some of the more backroom boys who could put together some sort of face-saving mechanism without this becoming too much of a political hot potato. It is very, very tricky, it really is, and quite honestly, the way political governance has been going in Europe, the chances of them getting some sort of orderly withdraw in the interest of continuing relationships, et cetera, I think are actually probably slim. That is what we are up against: this is not easy. There is no precedence for this at all and I know that lots and lots of people are saying it has got to return to the Drachma; I just think that a New Drachma would collapse almost immediately. I think that a currency board in the Euro is actually a more sensible result given where we are.
France
France is a mess. They have outstanding debt of 1.3 Trillion Euros, something like that. Their debt/GDP is around about 85-90% going on a hundred quite rapidly. That is a very liquid and nasty situation. Unemployment is running close to ten percent.
It is almost impossible to employ anyone in France because the taxes are so high. Do you know the total tax that you pay as an employer, more than doubles the salary that you pay an individual? This is absolute craziness, but it is been like that in France forever and a day. The result is an awful lot of the market is black market.
Spain & Italy
Spain is a worse situation. Government debt alone is just under a trillion. A trillion dollars equivalent, I should say, and that is a lot of money. That is a lot of money. Italy is over two trillion dollars. That really is a very, very big one, so this contagion must not be allowed to happen.
Germany
Their economy is performing reasonably well, but it is not performing well because they are doing well for Europe; they are doing well because they are selling the most cars, machine tools and everything else to China, to Brazil, to Russia. Africa’s a great growth area. Europe, as far as Germany is concerned is dead. Which of course brings us on another question; that is why should Germany continue to support all these bust Europeans? There is a sort of conscience if you like about the last two world wars, but there is going to come a point where that wears pretty thin I would have thought. The trouble is that it is all very well, everyone turning around and saying, Germany has to help. Actually, what they are saying is that Germany’s citizens should give up their savings, their hard won savings to rescue a project, which is obviously dead or deceased. I think Germany really should bust out as soon as possible and I am sure that there are an increasing number of businessmen and bankers in Germany who are beginning to feel that way.
On Gold
People who have gold or silver, I think actually had a very rough ride over the last couple of months. A lot of them are wondering what on Earth is going on because every time you get good news, gold seems to rally along with equities, but every time there’s bad news and gold actually should be giving you some protection, it goes down the swanny.
I think the problem there is that the whole system is run by people who went to college and were taught keynesian economics. In my day, when I first went into the stock market and I enjoyed that first bull market in gold when it went from thirty-five bucks to eight-fifty, the traders and investment managers were all practical people. They all cut their teeth, all learned their trade the hard way. Some of them had degrees in college, but generally it would have been something like classics or history or something like that. If they got a degree in economics, they probably would have left because they never would have understood it in those days. But now it has changed. Everybody who is employed has a degree and if they are anything to do with investment strategy, or the investment business, it is all economics degrees. So they have been brainwashed in the keynesian thing. This sort of neoclassical approach where gold is yesterday’s story, paper money is the future. They really do believe it and it is the opinions of these people who drive the markets in the short term.
The result is that gold and silver have become very, very seriously mispriced. I don’t think I have seen a stretch like this as I can remember; by stretch, the difference between perhaps where it should be. We must be careful not to tell the market what the price should be, but it is so underpriced at a time of enormous systemic stress, that I think when gold and silver snap back into a more sensible, logical valuation relationship with the markets, the move actually could be very, very sharp and quite large. If gold ran up through the $2,000 level very quickly, which I think is a very strong possibility, because it is been held down so much, that could bring other problems. The central banks, who might have sold gold and not told us about it will find that they are embarrassed. I think also the bullion banks in London who operate a fractional reserve system with gold, exactly the same way as to do with any paper currency, will be hurt very, very badly on the run. Any shorts in the futures market equally could be hurt very, very badly. We have a situation, where there is a potential for a huge run in gold and I personally wouldn’t be surprised to see it."(snip)
Re: weekend commentary - All Roads in Europe Lead to Gold !
more or less backed up by this 'translation' of today's G8 announcement ... from
(snip)"Rewriting the Camp David Declaration
– or what they couldn’t say and why they said what they did
Preamble
1. We, the Leaders of the Group of Eight, met at Camp David on May 18 and 19, 2012 to address major global economic and political challenges (and to get out of our countries for a few days where things are getting downright oppressive).
The Global Economy
2. Our imperative is to promote growth and jobs, but we are failing miserably and do not have a clue what to do…
3. The global economic recovery shows few signs of promise, significant headwinds persist and we have not agreements on key areas of need. Each day the ECB gets more overextended and is without a plan. Below we offer up some nice sounding verbiage that won’t do a thing…
4. Against this background, we commit to take all necessary steps to strengthen and reinvigorate our economies and combat financial stresses, recognizing that the right measures are not the same for each of us and that each of us is likely to fail do exactly what is needed. Germany is more likely to be too austere; Greece is more likely to be too slow to implement any meaningful reforms. Political impasse in Greece continues to point a loaded gun at the head of the euro-or would do so if the euro had a head. Instead the gun is pointed at its financial groin.
5. We welcome the ongoing discussion in Europe on how to generate growth, while maintaining a firm commitment to implement fiscal consolidation to be assessed on a structural basis. This phrasing means nothing to everybody in Europe (or something different to everyone)! We agree on the importance of a strong and cohesive Eurozone for global stability and recovery, and we affirm our interest in Greece remaining in the Eurozone while respecting its commitments. This statement is 180 degrees at odds with where Greece seems to be politically at the moment, but the G-8 can agree on it and it sounds good. It does not reflect any new or existing consensus in Greece, unfortunately. We all have an interest in the success of specific measures to strengthen the resilience of the Eurozone and growth in Europe. But, again, we haven’t the foggiest idea how to do get it. We support Euro Area Leaders’ resolve to address the strains in the Eurozone in a credible and timely manner and in a manner that fosters confidence, stability and growth, but we cannot agree on what these things are, so don’t hold your breath waiting for results.
6. We agree that all of our governments need to take actions to boost confidence and nurture recovery including reforms to raise productivity, growth (this is the German part of the statement) and demand (this is the Greek and French and Italian/Spanish/Portuguese part of the statement) within a sustainable, credible and non-inflationary macroeconomic framework (this is the fanciful part of the statement). We commit to fiscal responsibility and, in this context, we support sound and sustainable fiscal consolidation policies that take into account countries’ evolving economic conditions and underpin confidence and economic recovery (This is the totally oxymoron part of the statement; a bit like the line in the old Blood Sweat and Tears song...’you can help yourself but don’t take too much’).
7. To raise productivity and growth potential in our economies, we support structural reforms, and investments in education and in modern infrastructure, as appropriate (note, not as inappropriate…). Investment initiatives can be financed using a range of mechanisms, including leveraging the private sector (where it is not already dead or too busy avoiding paying taxes). Sound financial measures, to which we are committed, should build stronger systems over time while not choking off near-term credit growth. (…unless, of course, we actually implement them in which case growth of all sorts is likely to be choked off even more. But for now we can stand agreeing that we are ‘committed to them’ as long as we do not have to DO anything). We commit to promote investment to underpin demand, including support for small businesses and public-private partnerships. (?? Is this US language with a commitment to help small business? What the heck is this??)
8. Robust international trade, investment and market integration are key drivers of strong sustainable and balanced growth (This is a sop to traditional neoclassical economics). We underscore the importance of open markets and a fair, strong, rules-based trading system- even though we do not have one and have not had one for 20- to 30-years. We will honor our commitment to refrain from protectionist measures, protect investments and pursue bilateral, plurilateral, and multilateral efforts, consistent with and supportive of the WTO framework, to reduce barriers to trade and investment and maintain open markets. We do this even though WTO does not work and even though the WTO has major hole in its structure by having no clause insisting that currencies trade freely and coalesce around true equilibrium values. We call on the broader international community to do likewise- even though it makes no sense. Recognizing that unnecessary differences and overly burdensome regulatory standards serve as significant barriers to trade, we support efforts towards regulatory coherence and better alignment of standards to further promote trade and growth (perhaps some statement about abolishing graft and bribery especially though the public sector would be helpful here too? Or was that too controversial? Does this mean that the regulatory encroachment in the US is going into reverse? Uh, oh, never mind…).
9. Given the importance of intellectual property rights (IPR) to stimulating job and economic growth, we affirm the significance of high standards for IPR protection and enforcement, including through international legal instruments and mutual assistance agreements, as well as through government procurement processes, private-sector voluntary codes of best practices, and enhanced customs cooperation, while promoting the free flow of information. (This is basically the G-8’s anti-China statement) To protect public health and consumer safety, we also commit to exchange information on rogue internet pharmacy sites in accordance with national law and share best practices on combating counterfeit medical products. (This clause is to make America safe for Viagra use since it’s about the only recreational activity many Americans can afford these days) "(snip)
Re: weekend commentary - All Roads in Europe Lead to Gold !
CAMP DAVID, Md. — Leaders of the world’s richest countries banded together on Saturday to press Germany to back more pro-growth policies to halt the deepening debt crisis in Europe, as President Obama for the first time gained widespread support for his argument that Europe, and the United States by extension, cannot afford Chancellor Angela Merkel’s one-size-fits-all approach emphasizing austerity.
http://www.nytimes.com/2012/05/20/wo...ef=todayspaper
Re: weekend commentary - All Roads in Europe Lead to Gold !
^^^ which essentially translates into 'forget about tax increases and gov't spending cuts in order to actually pay down gov't debts ... instead, print, spend and inflate your debts away !!! This is of course the underlying reason for my original pundit's call that gold prices are getting ready for another significant upward leg.
Of course, on the 'other side' of this are the thrifty non-indebted Germans, the Chinese, the Saudis etc. who all stand to 'lose money' if continued printing, spending and inflation reduce the future value of the debt repayment euros. Germany has been there before, which is why there is major opposition to printing, spending, and inflating. Russia also chose 'not to go there' in more ways than one, based on their de-facto boycotting of the G8 meeting.
And, much like other attempts at 'economic democracy', when people who HAVE money are outnumbered by people who don't but who would like to vote themselves more of someone else's money, things usually get 'ugly'.
Re: weekend commentary - All Roads in Europe Lead to Gold !
You didn't really think it would go any other way..... Did you?
Re: weekend commentary - All Roads in Europe Lead to Gold !
actually, there was a good chance that things could have 'gone the other way' ... based on earlier German / French calls for a 'federal' EU 'fiscal union' treaty which could have over-ridden the Greek 'state' politicians and voters to assure that taxation and gov't spending policies were altered in order for Greece to meet it's previously agreed financial commitments. But with Sarkozy out and Hollande in, apparently that won't happen with a 'pen'. Also, an active 'attack' appears to be underway over Wolfgang Schauble, the probable next leader of this 'federal' EU.
(snip)"They’d wanted to “blockupy” Frankfurt, Germany’s money capital, for four days to protest against capitalism, the power of banks, and the wave of austerity policies, and they’d wanted to shut down the financial center with concerts, marches, and speeches. But the city government issued a blanket prohibition—highly controversial in an otherwise democratic country. Blockupy appealed, but the court rejected the appeal on a technicality.
Wednesday, Thursday, and Friday, about 5,000 police officers turned the financial center into a fortress, shut down two subway and commuter rail stations, and installed checkpoints. The ECB building was sealed off. As soon as a few people got together and someone started playing a guitar, police descended upon them and scattered them like roaches. And so it accomplished, ironically, what Blockupy had failed to accomplish: blocking the financial center and shutting down life within it.
Saturday, the one day when demonstrations were allowed, 20,000 people, according to the police, marched through the center—peacefully for the most part. It was an eclectic group of all ages from all over, including topless women with their torsos painted in the glorious blue and yellow of the EU. There were Spaniards, Italians, and lots of French. Two thirds were estimated to be over 30. But there was a common denominator: they accused the political elite of trying to satisfy the financial markets at the expense of the people.
That was the background. In the foreground was the G-8 at Camp David where the leaders of the US, Japan, Germany, France, Britain, Italy, Canada, and Russia—but ironically not China, the second largest economy—hobnobbed overnight, though any harmony was soon trampled by President Obama’s reelection campaign, the Eurozone debt crisis, and the dire situation in Greece.
French President François Hollande and President Obama, now best buddies, had their first meeting even before Camp David, and their target was German Chancellor Angela Merkel. Obama had been pushing long and hard for a gigantic debt-funded spending package in Europe. He wanted all the money spigots opened all the way everywhere to give the US economy a short-term boost so that he might survive what shapes up to be a tough reelection campaign, made even tougher by a tottering US economy. A big burst of government spending in Europe, regardless of costs in the future, would briefly filter into the US economy—and thus into the ballot box. “If a company is forced to cut back in Paris or Madrid, that might mean less business for workers in Pittsburgh or Milwaukee,” Obama said after the meeting, fearing that those workers might then not vote for him.
Hollande brought his own agenda. He demanded the introduction of Eurobonds and came out swinging against the nomination of German Finance Minister Wolfgang Schäuble to the post of Euro Group President. Back home, his Prime Minister Jean-Marc Ayrault demanded that the ECB fund debt sinner countries, such as Greece, directly to monetize their deficits without the awkward detour via the capital markets. It was a three-pronged approach on their war path against Germany; and Hollande tried to rope in Obama as an ally, after having already roped in Italian Prime Minister Mario Monti and others.
Merkel downplayed the attacks ... and her isolation. She is trying to get Eurozone countries to live within their means—an experience that is apparently too painful to contemplate for the others at Camp David. She rejected debt-financed growth programs. Growth would have to come through structural reforms and “investments in the future” such as research and infrastructure. She’d already softened her opposition to Eurobonds, which would shift additional risks and potential losses from other countries to the beleaguered German taxpayer. But she wouldn’t even consider them until after all Eurozone countries had gotten their budget deficits under control, and until after the fiscal union treaty had been ratified—both of which Hollande vigorously opposes. In the end, despite relentless pressure from Obama, Hollande, and others, she won a mini victory by being allowed to say that all had agreed that there had to be a combination of budget discipline and growth policies."(snip)
from
Too many echoes of 1938 for my taste ... with the only two strong major economies remaining in Europe again being Germany and Russia, and with German 'taxpayers' again being forced to hand over a significant portion of the fruits of their own labors in order to subsidize those in other European countries.
Re: weekend commentary - All Roads in Europe Lead to Gold !
Quote:
Originally Posted by
Melonie
actually, there was a good chance that things could have 'gone the other way' ... based on earlier German / French calls for a 'federal' EU 'fiscal union' treaty which could have over-ridden the Greek 'state' politicians and voters to assure that taxation and gov't spending policies were altered in order for Greece to meet it's previously agreed financial commitments. But with Sarkozy out and Hollande in, apparently that won't happen with a 'pen'. Also, an active 'attack' appears to be underway over Wolfgang Schauble, the probable next leader of this 'federal' EU.
There may have been a chance..... But I don't think it was a good chance..... Bankers must be bailed out...... And pols can't take the heat from voters...... "We have met the enemy and he is us."
Re: weekend commentary - All Roads in Europe Lead to Gold !
^^^ probably the unavoidable reality of the situation. Also unavoidable will be massive new money printing both in the EU and the USA to fund another 'stealth' bailout via the IMF ... with associated inflationary consequences including Euro and US$ devaluation thus upward pressure on precious metals prices.
Re: weekend commentary - All Roads in Europe Lead to Gold !
I'm not so sure. Merkel also has her own domestic headaches to deal with. Germany is quite annoyed with countries like Greece. The Germans say, rightfully, that "we did everything the right way. We worked hard. We saved. We didn't borrow too much. We didn't print too much money , etc.etc. " Why should we risk inflation to bail out a bunch of spendthrifts who REFUSE to get their fiscal houses in order ? "
I have a question : Everyone is waiting to see if Greece decides to stay in the EU. Why isn't the EU deciding whether or not Greece gets to stay ? My understanding is that everyone is terrified that Spain will follow Greece out of the EU. Why not let them ? Why not create an "elite" EU ? Germany, France, the Benelux countries , Denmark , Norway, Sweden, Finland, Austria etc. OR let the Greeks really have conniptions and take over their budget ?
Also I would not overrate the Russian economy. It is RELATIVELY strong based on oil , gas and other mineral wealth. But its manufacturing base is weak. Nobody is lining up to buy Russian cars and their aircraft is an even bigger joke. Their population is declining faster than any other European state. Alcoholism is still a huge problem along with a number of other negative social pathologies. Not to mention the enormous corruption.
Re: weekend commentary - All Roads in Europe Lead to Gold !
On your first question regarding Merkel's domestic headaches ... that could break either way ! From
(snip)"The debate about right-wing extremism in eastern Germany has been reignited following the success of the far-right National Democratic Party (NPD) in Sunday's elections in Mecklenburg-Western Pomerania. The NPD won 7.3 percent of the vote, giving it six of the 71 seats in the eastern German state's legislature.
Gideon Botsch from the Moses Mendelssohn Center for European-Jewish Studies at the University of Potsdam said the election results were to be expected.
"We had feared it would happen, so we weren't surprised," said Botsch, an expert on right-wing extremism.
The "nice Nazi from next door"
According to Botsch, the results were in part due to the party's strategy. For one, the NPD had the help of neo-Nazi comradeships.
The NPD campaigned in every corner of Mecklenburg-Western Pomerania -- with success
"The NPD is allied with these groups, who, for example, systematically apply intimidation tactics at events of the major democratic parties," Botsch said. In addition, the NPD took on a very civic appearance."(snip)
Put another way, if 'right wing' German politicians promise German taxpayers that their life savings will not be devalued, that their tax money will not be diverted to subsidize PIIG country citizens, etc. it's a definite possibility that their recent gains in representation are just the proverbial tip of the iceberg. And, unlike the USA, a new national election can be called within a matter of weeks if the 'party in power' loses popular support. This leaves the door open for rapid changes ( in either direction )
I would also point out that the 'far right' enjoyed even greater voter support in France, Holland etc.
In regard to your second question, the EU 'bigs' want Greece to stay with the Euro because A. their banks are the ones who are on the hook for billions of dollars worth of existing sovereign Greek loans ... which would turn into 50%-80%- 90% losses if redenominated in devalued Drachma. Also B. the EU 'bigs' are also major exporters, and exports to Greece and any other PIIG country leaving the Euro would evaporate as the exchange rate = 'purchasing power' of Drachma or Lira or Escudos are cut by a factor of 2 or 5 or 10. Also C. the EU 'bigs' do not want to have to deal with a torrent of 'economic refugees' fleeing Greece or Italy or Spain, who lack useful skills, who would increase the burden on taxpayers via social welfare benefit costs, who would potentially foment social unrest etc.
As to the option of letting the Greeks have coniptions about a 'federal' EU taking over their national budget i.e. setting tax rates, social welfare benefit levels, gov't employee pay levels etc., those with the money would much prefer this option. It could happen too, via a crisis of social unrest needing EU 'Blue Helmets' ( with or without lightning bolt insignia ) to restore order.
If nothing else, the European 'middle' seems to be disappearing in favor of the 'far right' or the 'far left'. Economically speaking, this leads to a huge division in potential economic policy, and huge potential for volatility ( economic and otherwise ).
Regarding your comments about the Russian economy, despite 'internal' negatives the fact remains that the country is relatively free of sovereign debt, that the country has a positive balance of trade driven by oil / gas / ( potential ) food / mineral exports, and that the country still has a strong military.
Re: weekend commentary - All Roads in Europe Lead to Gold !
So then Germany leaves the Euro Zone...... or goes along to get along...... A strong German currency is not something they want.
Re: weekend commentary - All Roads in Europe Lead to Gold !
^^^ that's another option. Agreed that German exports would be hurt by a strong DeutscheMark. However, a strong currency would offer other advantages i.e. increasing the standard of living of all Germans in the short term at least as the DMark denominated price of oil / gas / food / raw materials would drop accordingly.
Re: weekend commentary - All Roads in Europe Lead to Gold !
more details on the German options from Jeffries ... from
(snip)"No ELA, No Euros! The End!
So lets "run" through the mechanics of a Greek bank run. As the Greek people begin to smell a Greek exit and a conversion of their hard earned Euro deposits back to Drachmas, they will withdraw Euros from Greek banks. So the Greek banks will head to the BoG with some dubious collateral to beg for Euros to pay depositors. The BoG takes the collateral, gives it a minuscule haircut, and draws Euros via the ELA. This of course creates an increase in BoG Target2 liabilities. The BoG then sends the Euros to the Greek bank and the Greek bank then gives the Euros to the hard working Greek depositor standing in line waiting to empty the account.
Importantly, Greek banks ONLY run out of Euros if the ECB can justify a shut down in funding to the BoG ELA facility or the Greek banks directly. Now, as we heard last week, the ECB has already stopped OMOs with 4 Greek banks (which one could safely assume are the big ones). So the ONLY thing standing between a Greek depositor and his/her Euros is the ELA. No ELA, no Euros!! And, as mentioned above, the ECB has once before threatened to turn off NCB access to Euros via the ELA in the case of Ireland. So there is a precedent for this to happen again!
Now we have to look at the conditions under which the ELA could be turned off by the ECB. Looking back to the Irish case, it was the potential for a default on senior bank debt that triggered the ECB threats to the central bank of Ireland. As the rules stand, ELA lending can only be done to "sound" institutions. So the ECB in theory can shut down all lending, including ELA, if the NCB is failing to abide by the rules. And clearly, Irish banks that default on senior debt are easily proven NOT sound!
In the case of Greece, in the middle of a bank run, will it be hard to prove that banks are not sound? Hardly! But more importantly, the soundness of the Greek banks is 100 percent dependent on the 65b Euro capital injection coming as a part of the previous government's agreement to the MoU (Memorandum of Understanding, or what Tsipras calls the Memorandum of Barbarity).
That 65b is the ONLY reason why Greek banks have a chance of being deemed sound. Without the 65b, there is no way anyone could claim the BoG is lending to sound institutions and there is no way the ECB could continue to authorize the BoG to lend under ELA.
And that takes us squarely to Mr Tsipras, SYRIZA, the MoU/MoB and the Greek election. It will be very easy for Merkel and company up north to lay out a case for an ELA shut down for the BoG if the MoU is discarded by the Greek voters via a win for Tsipras! In a sense, Merkel's phone call on Friday to the Greek president was just that. It was actually the same call that was made to the Irish president a while back - and of course the Irish balked, caving to the German demands. At that time however there wasn't an Irish presidential vote. This time, with Greece, Merkel's message is really to the Greek people. And what is that message exactly? Vote for Tsipras and I turn off the Euros. Or, in other words, choosing Tsipras means choosing to leave the Eurozone. Of course, Greece could vote for Tsipras, discard the MoU, repudiate the debt (including Target2 debts), still use the Euro and stay in the EU - but they would become Montenegro! The chances of that however are zero. The Greeks will want to print and control their destiny if they get cut off. No ELA will almost surely bring back the Drachma. And doing so would, in Merkel's view, be the choice of the Greek people. At least that's how it will be sold to the rest of Europe.
The problem for Merkel is that the Greeks will understand this and run the banks BEFORE June 17th - it is happening right now. On June 16th why wouldn't every Greek go to the bank with a sack and ask for the cash. Why hold Euros into the 17th? By that logic why not get them out earlier in case they shut the ELA pre-election. From the north's perspective, one could argue that Merkel should shut the ELA right now. Allowing the Greek people to access all their Euros physically, while still holding the option to default on June 17th, is insane. She and the ECB would NOT be acting in the best interest of the Eurozone if they let this happen - there would be 300b in Target2 losses to split up between 16 member NCBs if the Greeks choose to leave after taking out all the Euros. If she gives the directive to shut off the ELA early she will at least keep the Target2 losses to 150b. And she will be telling the Greek people that if they vote for Tsipras, their Euros in the bank will not be available. This is a dangerous game for sure! But this way she can also blame the Greek voters for an exit, and hide behind ECB rules that imply access to funding can only be done to sound institutions. With this strategy she can have the Greeks decide on the 17th to keep the MoU, get the 65b and have access to their 150b Euros OR abandon the MoU, watch their Euros turn to Drachmas and leave the Eurozone. She didn't kick them out, they chose to leave!! Of course the few weeks leading up to the election with ELA turned off and a multi week Greek bank holiday would make for some crazy headlines.
As I said in Friday's piece, deciding what to do with the ELA for the BoG as we head into the Greek election "is the most important decision in the history of EMU". By turning it off, Merkel might scare the Greek people into complying, as she did with the Irish. By leaving it on, she makes it much easier for the Greeks to vote Tsipras and leave the rest of the zone to pay. She also makes it much more likely she will have to cave to Tsipras' demands.
The stakes are high, and while the decision is crucial for Greece, and their creditors, there are even bigger second order issues in play. A Greek run will certainly cause the Spanish and Italian folks to question the access of their respective NCBs to ECB funding and the ELA. It will be VERY hard to argue that Italian banks are sound if 100s of billions in deposits flow to Germany! And why wouldn't every Eurozone resident put their hard earned money in the safest bank possible if we start to see Greek depositors threatened? As soon as retail sniffs that there is a chance of a loss, a full scale Eurozone bank run ensues. If the Germans can turn off the Greeks or the Irish, could they turn off the Italians?"(snip)
Re: weekend commentary - All Roads in Europe Lead to Gold !
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Originally Posted by
Eric Stoner
I have a question : Everyone is waiting to see if Greece decides to stay in the EU. Why isn't the EU deciding whether or not Greece gets to stay ? My understanding is that everyone is terrified that Spain will follow Greece out of the EU. Why not let them ?
The EU technocrats worry that if Greece and perhaps Spain and Portugal leave the Euro, those countries will quickly be better off. Then, other countries might decide to leave. What would be left is Germany, The Netherlands and maybe a few other northern European countries that could really not justify the Euro being a major currency. Nothing more important than the Canadian Dollar for instance. (Canada being a part of NAFTA looks better economically than Germany having a free trade agreement with the Netherlands.)
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Why not create an "elite" EU ? Germany, France, the Benelux countries , Denmark , Norway, Sweden, Finland, Austria etc.
The Swedes and Danes don't want in.
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OR let the Greeks really have conniptions and take over their budget ?
There's that little problem of democracy. The Germans spent 35 years trying to take over Europe by force and couldn't. Now, they seem to be able to have it handed too them and the German people don't seem to want it anymore.
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Also I would not overrate the Russian economy. It is RELATIVELY strong based on oil , gas and other mineral wealth. But its manufacturing base is weak. Nobody is lining up to buy Russian cars and their aircraft is an even bigger joke. Their population is declining faster than any other European state. Alcoholism is still a huge problem along with a number of other negative social pathologies. Not to mention the enormous corruption.
Russia exists so the Mexicans can say theirs is not the most corrupt and inept government in the world.
Z
Re: weekend commentary - All Roads in Europe Lead to Gold !
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There's that little problem of democracy. The Germans spent 35 years trying to take over Europe by force and couldn't. Now, they seem to be able to have it handed too them and the German people don't seem to want it anymore
The problem here is that ( economic ) democracy doesn't work without a printing press. Broke Greeks and Spaniards ( and Californians and Illinoisans for that matter ) can 'vote' themselves more money, but unless they have their own printing presses their 'vote' is not binding on those who actually HAVE money ( except for their own rich citizens ... who are likely to quickly move elsewhere taking their money with them ). The EU 'federal' monetary authority is essentially controlled by the Germans because they are the ones that actually HAVE money ... but German taxpayers / savers / investors are taking the position that too much of their money has already been put at risk or already lent and spent by financially irresponsible Greeks and Spaniards. And the EU 'federal' monetary authority needs the express permission of EU countries in order to collect taxes ( or the functional equivalent i.e. taxpayer guarantees of loans that will never be repaid ) at the 'federal' level for redistribution to PIIG countries. There are moves underway to change this ( i.e. EuroBonds, treaty renegotiations etc. ), which German taxpayers and taxpayers of other financially responsible EU countries heavily oppose.
The US 'federal' monetary authority is a different story, since unlike the EU the US federal tax system already has the authority to collect federal taxes from the citizens of every US state with or without the permission of the citizens of particular states, and the authority to redistribute that money to financially irresponsible other states. Thus reluctance on the part of citizens of financially responsible states to see their tax money redistributed to subsidize financially irresponsible states is actually of very little importance ( outside of federal election years anyhow ! )
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The EU technocrats worry that if Greece and perhaps Spain and Portugal leave the Euro, those countries will quickly be better off.
This is true on a superficial short term basis. If Greece owes 1 trillion Euros ... if Greece 'officially' returns to the Drachma at a 1:1 exchange rate versus the Euro ... but if the markets revalue the Drachma at a 1 : 10 ratio versus the Euro ... then the Greeks will have essentially 'erased' 90% of the gov't debt they owe. This will allow the Greek gov't to redirect tax revenues now being spent on loan repayments to be spent in other areas ( like social welfare benefits, gov't salaries etc. ). The same would arguably apply to Greek citizens and businesses who are heavily in debt ... reversion to the Drachma would essentially 'erase' 90% of that debt.
But on the flip side, if a particular Greek professional / businessman / worker etc. had saved up 100,000 Euros in retirement funds / investments / bank accounts, their 100,000 Euros would quickly be forcibly converted to 100,000 Drachmas ( quickly = only 10,000 Euros ) ... with only 1 / 10th of the purchasing power !!! This essentially represents a 90% loss in asset valuation for financially responsible Greeks. Fear of this happening is already prompting financially responsible Greeks to move their money out of Greece ... which brings us back to my original post as well as the above post !
In point of fact, Greek banks are broke ... the Greek Central Bank is broke ... and absent additional 'loans' from the EU 'federal' monetary authority there aren't enough Euros available in Greece for the banks to actually 'pay' Greek citizens wishing to withdraw their money from Greek banks. Angela Merkel via the EU 'federal' monetary authority could call for an immediate halt to the transfer of additional Euros into the Greek banking system ... which would indeed lead to a situation where all Greek bank accounts would be 'frozen' pending results of the upcoming election. This would quickly 'drive home' the point that Greeks choosing to vote for an exit from the Euro would be 'forfeiting' any money that they currently have in the bank !!! What's at stake, of course, is whether an additional 150 billion Euros worth of potential losses will be forced on German citizens ( by repayment in devalued Drachma ) or directly laid at the feet of Greek citizens via their private bank accounts.
Re: weekend commentary - All Roads in Europe Lead to Gold !
I understand the drawbacks of letting Greece leave or kicking it out of the EU. All of what has been posted has been covered on CNBC and in the N.Y. Times, among many other places. The other side of the coin is the interminable instability and uncertainty. Without serious fiscal reform, the money sent by the "haves" to Greece is nothing more than good money after bad. The rest of Europe is going to let the problems of 10 million people affect hundreds of millions for how long ? At what cost ?
It is ironic that many in Europe recognize that the fundamental solution is growth. Economic growth. To generate that growth they need to cut taxes and reduce regulation.
Those countries that have done so are experiencing growing economies.
Re: weekend commentary - All Roads in Europe Lead to Gold !
our 'old friend' Dr Doom & Gloom himself - Dr. Marc Faber - just came out with this non-ambiguous statement during a CNBC interview
(snip:"Marc Faber doesnt make 100% calls very often, sure he makes a lot of calls, but when he make a call that he says is 100% chance of occurance its worth making a note of. When you here a fundamental call always pull out the cycles to look for correlation check.
Extract ..."Cramer-stand-in "You're not looking for a recession in the US are you?" Faber, in his calm, thoughtful way responds, "I think we will have a global recession late this year, early next year", to which a stunned Wapner asks for odds (surely 30%, 50%?) of this recession - "100% certainty" comes the reply to leave Wapner throwing in the towel on any positive spin as Faber suggests the only 'investment' in this case is 'Cash USD' and investors must own some gold"...(snip)
from
Dr Faber also did a Bloomberg TV interview ...
(snip)"Faber on whether he still thinks that profit margins will shrink and record profits seen will be no more for U.S. corporations:
"Yes, if you look at the statements by corporations, it is very clear. Earlier on, you had a commentator who said the exports to Europe from the U.S. are irrelevant. I agree with that. What is relevant are the businesses of American corporations in Europe and the earnings they derive from these businesses. That is definitely slowing down. The revenue growth is slowing down and, in my view, you will have more and more corporations that report earnings that are actually good but they do not exceed expectations…The bottom line is I think the market will have difficulty moving up strongly on less we have a massive QE3 and if it moves here and makes the high above 1422, the second half of the year could witness a crash."
"A crash, like in 1987…because the market would become technically very weak. I would expect the market making a new high. If it happens, it would be a new high with very few stocks pushing up and the majority of stocks have already rolled over. The earnings outlook is not particularly good because most economies in the world are slowing down. People focus on Greece but Greece is completely irrelevant. What is relevant are two countries -- China and India -- 2.5 billion people combined. They are a huge market for goods and these economies are slowing down massively at the present time."
On whether more Fed stimulus will put a floor on the S&P 500 this year:
"Yes, I think we had a rally that began March 2009 at 666 on the S&P. We made an orthodox pop a year ago on May 2, 2011 at 1370. Then we made a new high on April 2 of this year. The new high was not confirmed by the majority of shares and many shares are already down 20% or so and every day, there are shares that are breaking down or they no longer go on good news which is a bad sign. I think maybe we have seen the high from the year unless you get a huge QE3. That may not be forthcoming."
On whether the Fed will issue QE3:
"I think that QE3 will come, but it depends on asset markets. If the S&P dropped here another 100-150 points, I think that QE3 will occur. But if the S&P bounces back and we are above 1400, I think the Fed will essentially be waiting to see how the economy develops. The economy in the U.S. consists of different economies, some of it is very strong. I was in southern California and there the economy is doing fine. In other places, it is not doing fine. It is not universally bad. Compared to other countries, it is actually doing relatively well."
On whether Greece will exit the euro:
"There is a very good chance they will exit the euro and it would have been desirable if the euro countries had kicked out Greece three years ago. It would have saved a lot of agony. As a result of the bailout, the problem has become bigger and bigger and bigger."
On whether policymakers can manage the exit properly:
"I think it would be much better for Greece and the entire euro area if Greece were kicked out. Spain kicked out. Italy out and even France should be out. At the end you just have Germany with the euro. The other countries can have their own currencies and still trade and use the euro as an international currency."
"The bureaucrats in Brussels and the media are brainwashing everybody that if Greece exited the euro, it would be a disaster. My view is the best would be to dissolve the whole euro zone and that the countries would go back to their own currencies and still use the euro as an international currency the way you travel through Latin America and with a dollar you can pay anywhere you with. In my view, that would be the best. These countries that have financial difficulties, you will have to write off their debts and make it difficult for them to access the capital market in the future. Just to keep bailing them out will increase the problem. It will not solve the problem."
On how economic catastrophe can be avoided if the euro is dissolved:
"Explain to me why there would be an economic catastrophe. Many countries have pegged currencies have given up the peg to another currency and it was not a catastrophe. The public has been brainwashed that the breakup of the euro would be a complete disaster when in fact, it may be the solution."
On whether there will be a race to the bottom among various countries to devalue their own currencies if the euro is dissolved:
"I do not have a high opinion of the U.S. government, but the bureaucrats in Brussels make the government in the U.S. look like an organization consisting of geniuses. The bureaucrats in Brussels are completely useless functionaries and they want to maintain their power. They always talk about austerity being bad but if you look at the government expenditures of the EU, in 2000, it was 44% of GDP. Since then, it has grown by 76% under the influence of the Keynesian clowns and now it is 49% of GDP. That is the problem of Europe -- too much government spending and lack of fiscal discipline."
On whether it's a mistake to short the euro:
"I want to make this very clear -- the investment markets may move in different directions than the economic reality because if you print money. That's why in the Bloomberg poll, Mr. Bernanke is viewed so favorably because fund managers and analysts and strategists, they are only interested in having stocks up so their earnings increase and their bonus pool increases. But in reality, the economy can go downhill and stocks can go up just because of money printing and in Europe, the ECB has proven now that they are very good money printers."
On where to invest in Europe:
"Actually, usually when socialists come in or there is a crisis such as we have in Greece, it occurs usually near market lows. If someone really wanted to take speculative positions, he should look at quality non- financial stocks in countries like Spain, Italy, France, and Greece. I think rebound is coming. The market on a short-term basis is oversold. But if you look at the market action -- first of all, we made a low on the S&P last October at 1074. We went to 1422. The market is down from 1422 to less than 1360. The whole world is screaming we're in a bear market. This is a minor correction. I think it may become a more serious correction as the technical picture of the market has deteriorated very badly and as the S&P made a new high this year on April 2nd, all the European markets are lower than they were a year ago."(snip)