“The short-sale ban really smacks of desperation,” said Kenneth S. Rogoff, a professor of economics at Harvard. “That’s their plan for solving the euro debt crisis? I mean, this isn’t going to buy them much time.”
The crisis in Europe, Mr. Rogoff said, goes far beyond falling stock prices and has more to do with the state of banks there, including banks in Italy and France. He said the sovereign debt problems were an extension of the stress on the system created by the banking crisis.
Bank of America would have us believe the goodwill by itself was more valuable than what the market says the entire company is now worth. Investors don’t buy that. They see a company that needs to raise fresh capital, judging by the discount to book value, in spite of the company’s claims it doesn’t need to. The more the stock price falls, the more shares Bank of America would need to issue to appease the markets, leading to fears of even more share dilution.
The same story is playing out in Europe, driven by the sovereign-debt crisis. The 32 companies in the Euro Stoxx Banks Index yesterday had a stock-market value of 313.2 billion euros ($444 billion) and a combined book value of 620.5 billion euros. France’s Credit Agricole SA (ACA), the index’s third-largest bank by assets, trades for just 34 percent of book.
If the experience of previous ECB interventions is anything to go by it is only a matter of time until we see larger-scale ECB operations, potentially accompanied by a European Financial Stability Facility (and later European Stability Mechanism) bailout. This is how it happened in the cases of Ireland and Portugal. ECB measures have always been announced as ways to prevent further, more costly rescue packages. The strategy never worked because in the end we got both. It won’t work this time, either.
It is remarkable how far the ECB has now moved from its initial Bundesbank-like philosophy of independence and monetary stability. These were not just soap-box oratories but supposedly law. The EU Treaty defines the ECB’s role very clearly: “The primary objective of the European System of Central Banks [the ECB and eurozone central banks] shall be to maintain price stability.” And the ECB “shall be independent in the exercise of its powers and in the management of its finances. Union institutions, bodies, offices and agencies and the governments of the Member States shall respect that independence.” If only!
Maybe the ECB somehow manages to conform to the letter of the law. It certainly doesn’t to its spirit….
No amount of jaw-jawing from the ECB (or from the G-7, which yesterday put out an odd statement calling the rise in euro-zone bond yields not “warranted”) can make investors buy Italian debt. Mr. Trichet continues to act as if the markets are having an attack of the vapors, from which they’ll recover presently. But no rational person or institution is going to start buying sovereign debt from heavily indebted, stagnant, deficit-running countries as if the past 15 months had never happened. The lamp has been rubbed, the genie has escaped, and no amount of un-rubbing will put him back in the lamp.
A half-hearted approach by the EBC will achieve little. Even full-blown “shock and awe” will only buy time. That’s because the real instability stems from fears euro-zone governments will impose losses on those holding individual country bonds if debts prove unsustainable. Those fears are mounting as the growth outlook deteriorates. Italy’s announcement of new austerity measures Friday may help address concerns over the deficit but could actually worsen the short-term challenge of growth.
That’s why the second part of the crisis resolution requires a vast expansion of the euro zone’s bailout facilities and most likely a move by European countries to guarantee European Financial Stability Facility’s bonds, effectively turning them into genuine euro-zone bonds.
China, Europe, America, Japan: each of in its own way is moving toward comprehensive bankruptcy: financial, spiritual, social. Recent tremors in world financial markets are a warning from the invisible hand that we are skirting dangerously close to that final frontier, but we will miss the point if we do nothing more than put our financial affairs in slightly better order.
The great crime of Belshazzar and his cronies was to become disconnected from real values and real events. They used the sacred vessels of the Temple for an unholy palace banquet; at a time of great danger to the realm they distracted themselves with good food and good wine. They ignored the great source of meaning that enlightens and guides the world to focus their attention on shiny objects: gold, silver, brass.
All this and more describes our global leadership today.
Professor Willem Buiter, Citigroup’s chief economist, said the apparent ECB action was pointless. “The warped logic of intervening in two countries that don’t need it is as strange as it gets.”
Mr Buiter said Europe risks a disastrous chain of events and the worst financial collapse since the onset of the Great Depression unless Europe’s central bank steps in with sufficient muscle to back-stop the system.
“The ECB has yet so show it understands that it is the only institution that can save Italy and Spain from fundamentally unwarranted defaults. Everybody is afraid and real money investors are dumping their holdings. The ECB must step in to cap the yields at 6pc or 6.5pc and put a floor under the market,” he said.
Mohamed El-Erian, chief executive of the bond giant Pimco, said investors were selling risky assets like stocks “globally prompted by concerns about the weakening economic outlook, spreading contagion in Europe and insufficient policy responses.”
With Thursday’s dive, the three major American indexes had erased all of the gains made so far in 2011, with the S.&P. and Nasdaq markedly below the start of the year.
Read it all and take a look at this graph picture which says it all.
Debt-laden Italy is likely to default, but Spain might just avoid it, according to the British think tank, the Centre for Economics and Business Research.
With the countries weighed down by debt, the think tank modelled “good” and “bad” economic scenarios for both.
It found that Italy will not avoid default unless it sees an unlikely big jump in economic growth.
…another type of contagion is causing concern: the risk of problems spreading to big banks, especially in Italy and Spain.
The growing vulnerability of the giant banks in these two countries is spurring investor fears that Europe’s latest bid to get a handle on its festering debt crisis, adopted just a few weeks ago, has come up short.
The banks own so many bonds issued by their home countries that they are being weakened as the value of those bonds falls, amid concerns that the cost of government borrowing could become too expensive for Italy and Spain to bear.
Now there are signs that these concerns are, in turn, making it harder and costlier for the banks to borrow money to finance their day-to-day operations, a troubling trend that, at the worst, could lead to liquidity problems.
Investors continued to flee Italian and Spanish bonds Tuesday amid renewed concerns about the ability of Rome and Madrid to regain control of their finances in the face of sluggish growth and weakened administrations.
The Italian economy minister, Giulio Tremonti, called a meeting of the country’s financial authorities Tuesday to discuss the recent market turmoil, Reuters reported, citing an unidentified official. The Italian Treasury did not respond to calls seeking comment.
In Madrid, meanwhile, Prime Minister José Luis RodrÃguez Zapatero delayed the start of a planned vacation to the southern region of Andalucia. Reuters quoted the secretary of state for communications as saying the prime minister wanted to “more closely monitor the evolution of the economic indicators.”
America’s debt debate seems still more kabuki-like. Its fiscal problem is not now””it should be spending to boost recovery””but in the medium term. Its absurdly complicated tax system raises very little, and the ageing of its baby-boomers will push its vast entitlement programmes towards bankruptcy. Mr Obama set up a commission to examine this issue and until recently completely ignored its sensible conclusions. The president also stuck too long to the fiction that the deficit can be plugged by taxing the rich more: he even wasted part of a national broadcast this week bashing the wealthy, though the Democrats had already withdrawn proposals for such rises….
In both Europe and America electorates seem to be turning inward. There is the same division between “ins” and “outs” that has plagued Japan. In Europe one set of middle-class workers is desperate to hang on to protections and privileges: millions of others are stuck in unprotected temporary jobs or are unemployed. In both Europe and America well-connected public-sector unions obstruct progress. And then there is the greatest (and also the least sustainable) division of all: between the old, clinging tightly to entitlements they claim to have earned, and the young who will somehow have to pay for all this.
Sometimes crises beget bold leadership. Not, unfortunately, now….
No European country can succeed on its own – but the political determination to deal with the populations’ fears and concerns is still lacking. Europe needs radical internal reform led by committed and courageous political leaders. Such leaders must begin by declaring, repeating and teaching that Europe has changed, that it has a new face. New priorities, even though unpopular on the short run, must be established in order to hope for success in the long term.
Europe needs time, but our politicians are caught on the horns of a dilemma. While they need to think beyond the next generation, they are obsessed with winning the next election. Trapped between short-term imperatives and long-term necessity, it might well be that they cannot find a solution.
Citizens and civil society as a whole have no choice but to break the vicious circle – they cannot allow their future be destroyed by a lack of collective confidence and by narrow individual political ambition. It is time to be vocal and constructively critical.
Behind the paralysis in Washington and prevarication in Berlin lies a troubling thought. Political systems in thrall to 24-hour rolling news have lost the capacity to make difficult choices. Globalisation imposes wrenching change and simultaneously saps the ability of governments to adapt. Politicians find it easier to argue about taxing the rich or cutting Medicare and about central bank bond purchases versus default than to confront the consequences for western societies of the profound upheaval in the global economy.
So it is tempting to say all is lost ”“ that a political and economic model built on western primacy is cracking under the strain of the shifting balance of international advantage. The American dream and European welfare state are bending to the competitive winds of globalisation.
Tempting but premature. It is too early to despair. What makes the crises in Washington and Europe so infuriating is the fact that, for all they demand hard decisions, they are susceptible to political solution. The missing ingredient is leadership.
For years now, America has been spending more money than we take in. The result is that we have too much debt on our nation’s credit card ”” debt that will ultimately weaken our economy, lead to higher interest rates for all Americans, and leave us unable to invest in things like education, or protect vital programs like Medicare.
Neither party is blameless for the decisions that led to this debt, but both parties have a responsibility to come together and solve the problem. That’s what the American people expect of us. Every day, families are figuring out how to stretch their paychecks a little further, sacrifice what they can’t afford, and budget only for what’s truly important. It’s time for Washington to do the same.
Three years ago, the collapse of Lehman Brothers, the US investment bank, triggered a domino effect that had calamitous consequences for the world. No one knew how many institutions had lent money to Lehman, or how many might be pulled down with the bank. Fear spiralled through the financial markets and central banks worked overtime to prop dominoes up. The result was a painful recession.
This time, some of the dominoes are nations. Greek debt is about three times the size of that of Lehman Brothers. Around half of it is held by foreign investors, who will be hit if Greece defaults. Add in Spain and Italy, which represent about 28 per cent of eurozone GDP, and the numbers get scary. Add in a leadership vacuum, and investors start asking why they should keep lending to countries such as Italy that are troubled but still solvent…
That Europe has reached its Lehman moment is substantially the fault of its myopic and reckless power elite.
Katerina Sokou, 37, a Greek financial journalist at Kathimerini, a daily newspaper, told me this story: A group of German members of the Bavarian Parliament came to Athens shortly after the economic crisis erupted here and met with some Greek politicians, academics, journalists and lawyers at a taverna to evaluate the Greek economy. Sokou said her impression was that the Germans were trying to figure out whether they should be lending money to Greece for a bailout. It was like one nation interviewing another for a loan. “They were not here as tourists; we were giving data on how many hours we work,” recalled Sokou. “It really felt like we had to persuade them about our values.”
Sokou’s observation reminded me of a point made to me by Dov Seidman, the author of the book “How” and the C.E.O. of LRN, which helps companies build ethical business cultures. The globalization of markets and people has intensified to a new degree in the last five years, with the emergence of social networking, Skype, derivatives, fast wireless connectivity, cheap smartphones and cloud computing. “When the world is bound together this tightly,” argued Seidman, “everyone’s values and behavior matter more than ever, because they impact so many more people than ever. …We’ve gone from connected to interconnected to ethically interdependent.”
As it becomes harder to shield yourself from the other guy’s irresponsible behavior, added Seidman, both he and you had better behave more responsibly ”” or you both will suffer the consequences, whether you did anything wrong or not. This is doubly true when two different countries share the same currency but not the same government….
Five years ago, I was among those who argued that the probability of a collapse of the eurozone was close to zero. Last year, I wrote it was no longer trivial, but small. The odds have risen steadily since, not because of the crisis itself, but the political response. I now would put the odds of a break-up of the eurozone at 50:50. This is not because I doubt the pledge by the European Council to do whatever it takes to save the euro but because I fear it has left things too late. The council may be willing but it will not be able to deliver. As I argued last week, a eurozone bond is the only solution to the crisis. But this gets progressively more expensive, and politically less realistic, once bond spreads of large countries widen.
[BOB] ABERNETHY: But the common good. This idea of the common good, very important in religious and ethics. How do you define it? And who says what the common good is?
[JIM] WALLIS: Well, this week we’ve organized 5,000 pastors to say let’s look at the real people in our congregations and our communities, what’s going to happen to them as opposed to the Washington, D.C. question, who’s up who’s down, who’s going to be the Speaker of the House next time, who’ll win the next election. The common good is about the real people, the people we have to always take into account. And pastors, I think, I wanted to talk to people whose job it is to have re-read the Bible. To get to, to focus on who the real people are here.
This week the shortcomings of this muddling-through were laid bare… Financial markets turned on Italy, the euro zone’s third-biggest economy, with alarming speed. Yields on ten-year Italian bonds jumped by almost a percentage point in two trading days: on July 12th they breached 6%, their highest since the euro was created. The Milan stockmarket slumped to its lowest in two years. Though bond yields subsequently fell back, the debt crisis has clearly entered a new phase. No longer confined to the small peripheral economies of Greece, Ireland and Portugal, it has hurdled over Spain, supposedly next in line, and reached one of the euro zone’s giants. All its members, but especially Germany, face a stark choice.
Consider the stakes. Italy has the biggest sovereign-debt market in Europe and the third-biggest in the world. It has €1.9 trillion ($2.6 trillion) of sovereign debt outstanding, 120% of its GDP, three times as much as Greece, Ireland and Portugal combined””and far more than the €250 billion or so left in the European Financial Stability Facility (EFSF), the currency club’s rescue kitty. Default would have calamitous consequences for the euro and the world economy. Even if the more likely immediate prospect is sustained stress in the Italian bond market, that will surely prompt investors to flee European assets, making the continent’s recovery ever harder. Meanwhile in the background there is the absurd pantomime of Barack Obama and congressional Republicans feuding over how to raise the federal government’s debt ceiling to stave off an American “default”…. That may have distracted American investors briefly; once they realise how much is at stake in Italy, it will not help.
The European debt crisis has entered “uncharted territory,” rekindling concern it will spread eastward through banking and trade links, according to the European Bank for Reconstruction and Development.
Italy’s Unicredit SpA (UCG) and Intesa Sanpaolo SpA (ISP), two of eastern Europe’s biggest lenders, fell to the lowest in more than two years July 11 as political infighting threatened to delay efforts to cut the budget deficit in the country with Europe’s largest debt burden. European leaders this week failed to agree on a new aid package for Greece.
“We are in uncharted territory,” Erik Berglof, chief economist at the London-based EBRD, which invests in eastern Europe and Central Asia, said in a July 12 interview. “The source of the contagion seems to be in worse shape.”
….Americans are skeptical with good reason and that level of distrust will not go away if all we get is another bipartisan approach to kicking the debt problem down the road. In case you have forgotten, we raised the debt ceiling as recently as February 2010.
When will we gain control of our budget? We routinely hear about trillions in spending cuts, yet we spend more and more each year. Lip service is paid to cutting back, but we all know that spending cuts never, ever happen in Washington DC.
With a slowing economy, the argument is often made that government has to step in and do something. As you can see from the list above, our government has been doing exactly that. Yet, those policies have been ineffective so far.
DJN: *DJ S&P: At Least 50% Chance Of Lowering US L/T Rtg Within 90 Days
*DJ S&P: US S/T Rtg Watch Reflects View Of Significant Uncertainty Of US Creditworthiness
Ugh.
The U.S., rated Aaa since 1917, was put on review for the first time since 1995 on concern the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes even though the risk remains low, Moody’s said. The rating would likely be reduced to the Aa range and there is no assurance that Moody’s would return its top rating even if a default is quickly cured.
“It certainly underscores the importance of passing the debt ceiling and not putting us in default status, and making sure there’s a longer term fiscal plan to contain spending and the deficit we’ve been running up over the last few years,” said Anthony Cronin, a Treasury bond trader at Societe General SA in New York, one of the 20 primary dealers that trade with the Federal Reserve. “Maybe it’s the impetus to say we’ll need more of a concession.”
Free lunchism is ultimately the problem with the no-new-taxes pledge that so many politicians have adopted. A refusal to raise taxes, no matter how principled, cannot take us back to the good old days. It would instead lead to a very different American society. For taxes to remain where they are, Washington would need to end Medicare as we know it, end Social Security as we know it, severely shrink the military ”” or do some combination of the above.
“We cannot repeat the past when it comes to the federal budget,” Douglas Elmendorf, director of the nonpartisan Congressional Budget Office, recently wrote. “The aging of our population and the rising cost of health care have changed the backdrop for federal budget policy in a fundamental way.”
The most important part of the recent Republican budget plan, written by Representative Paul Ryan, was that it acknowledged this reality…
…everyone knows that Italy is on the slow train to ruin. Her public finances have been reasonably well run, but the economic fundamentals are skewed against her. Her poor demographic mean fewer workers ”“ and thus taxpayers and savers ”“ to fund the health and social costs of a greying populous. And, like Portugal and Greece, she is fundamentally uncompetitive, unable to match German levels of productivity and exports.
Il miracolo economico of the 1960s ”“ symbolised by millions of little Fiat 500s pouring out of bustling Turin ”“ was possible because a vast reservoir of underemployed agricultural workers could be lured into the cities. That cannot be repeated.
European Council President Herman Van Rompuy has called an emergency meeting of top officials dealing with the euro zone debt crisis for Monday morning, reflecting concern that the crisis could spread to Italy, the region’s third largest economy.
European Central Bank President Jean-Claude Trichet will attend the meeting along with Jean-Claude Juncker, chairman of the region’s finance ministers, European Commission President Jose Manuel Barroso and Olli Rehn, the economic and monetary affairs commissioner, three official sources told Reuters.
Overall, the proposal would cut Social Security benefits by $112 billion over the next decade, according to the nonpartisan Congressional Budget Office. It would cut government pensions and veterans’ benefits by $24 billion over the same time period if adopted for them.
Reaction from the president’s own party was swift Thursday, raising questions about whether Obama can keep Democrats on board if he agrees to cuts in Social Security. House Democratic leader Nancy Pelosi said her caucus won’t support any package that includes Social Security cuts.
“Do not consider Social Security a piggy bank for giving tax cuts to the wealthiest people in our country,” Pelosi said. “We are not going to balance the budget on the backs of America’s seniors.”
The reason a currency union needs a political union is simple. The centre has to have some way of stopping parts of the union from borrowing too much in the common currency at the common interest rate. If some borrow too much they are free riders on the backs of the more prudent areas.
If they go on borrowing too much they undermine the credit rating of the whole area, and force up the cost of borrowing for the prudent parts. To achieve discipline, the centre also needs to send subsidies and payments to the poorer parts, to compensate them for their inability to devalue to price themselves back into a competitive position.
Today the single currency system is suffering from the double stresses of too much borrowing by countries such as Greece and Portugal, who have spent too much and raised too little in tax, and from the need of countries like Ireland to bail out their overstretched banking systems….