"Parking lot, Chicago"
Ilargi: When everyone's talking about the same thing, you go and talk about something else, right? Right. Well, a little then:
I kid you not: there were actually well-paid journalists reporting today that US stocks went up on the news that the IMF revamped a credit line, the Precautionary Credit Line, into a whole new shape, the [drumroll..] Precautionary and Liquidity Line (brandnew, see how it shines?!), targeted at countries (re: Europe) in financial trouble. Brilliant, lovely!
The Bloomberg headline tells all: "IMF Revamps Credit Lines to Lure Nations".
How long is it ago that I said Germany would tell Obama they want, nay, insist, the IMF, not the ECB or EFSF, be the rich white knight for the Eurozone?! A few weeks max. And here we are. Americans will now pay for the global Euro rescue, failed before it's even started. The US pays far more than anyone else into the IMF, 17.72% to be precise.
The fund will attach killer provisions to any provisional loans, so the international banking system can buy up Spanish, Greek, Italian etc. assets for pennies on the dollar, but Main Street Americans will never see a penny of the loot (enter Captain Jack Sparrow).
What's even more ironic, Americans will do so against the backdrop of a strong downward revision of US Q3 GDP. Have less, pay more! The new normal! You got to fight for your right to party alright!
If the IMF fund is up to anything real, looks like it'll have more customers than a poledancer on Boxing Day.
Here's just a sampling of today's headlines:
- Spain Pays More to Borrow Than Greece,
- UK's debts 'biggest in the world',
- Britain needs 10 years of austerity,
- Germany's Finances Not as Sound as Believed,
- Moody's warns on French rating outlook,
- Hungary calls for IMF assistance,
- Moody's downbeat on Irish banks,
- Germany: "We don’t have any new bazooka to pull out of the bag",
- Tests Mount for Argentine Economy.
Also, Belgium 10-year yields topped 5%, with France's at 3.6%. And rising. Look at a map of Europe and fill in the missing pieces. This thing is going to come down so hard it's nothing to look forward to no matter how right we've been in predicting it.
And so that’s who you're going to be funding, Americans, if the IMF plan is pushed through. Brilliant, don't you think? Being as broke as you already are, hundreds of billions more of your money go to bail out Italy and Spain ... I mean, they have much better food than you have ever had in your life, so you might as well have another cheese whip , because how would you ever even find out before it's too late? What do you know about how the IMF is funded? Or for that matter, about what’ll happen stateside with a failed debt/deficit reduction super committee?
Anyway, we're going to do something different and more constructive today at TAE. Still got to do a lot with money, just not with making, but instead saving it. Any takers? Saving money on your energy bill will be a hot item going forward, whether it is because energy prices rise -which we don’t think is such a hot issue-, or whether people's incomes will fall so much, present or even lower prices (yes, sirree!) become prohibitively expensive for many if not most -which we do think is red-hot-.
Ashvin has another entry in our Diamonds in the Rough series. And don't worry, we’ll be back in time to see the financial behemoths topple.
Ashvin Pandurangi: The global financial crisis has reached another major juncture in which the key words remain "credit deflation"; a process that acts broadly and swiftly across nearly all asset classes around the world.
During these volatile times, it's often easy to forget how such major dislocations will affect our daily lives, and how there are even broader environmental/energy issues looming in the background. Fortunately, The Automatic Earth and its community provide us all with the ability to keep these issues in mind and "front-run" their devastating effects.
It's also very easy to get overwhelmed by the complexity and expense of making one's family and home "self-sufficient" and resilient to the shocks of skyrocketing energy prices. The research, patience, effort and up-front capital required for purchasing and installing sources of renewable energy may range from extremely frustrating for some to downright impossible for others.
Typically, it's much better to start with strategies which are relatively simple, quick and inexpensive, but which will also make significant progress towards energy resilience.
That's exactly what Peter Marciano provides us with today when exploring the concept of "green buildings". Whether one is constructing a new home or building, or renovating an existing one, there are several critical ways to drastically reduce future energy consumption, and many of them are simple and affordable as well. So we will delve into Peter's ideas shortly, but first I would like to once again mention the clever runner-up ideas from this batch (in order of votes received - highest to lowest).
1. Food Urbanism - Coming in at second place with 46% of the total votes, this Diamond will be explored in a full-length article at a future date.
2. Modifying Home Owners' Associations, by "MB" - [Detailed Explanation of the Diamond]
3. Tool Lending Libraries, by Ruben Anderson - [Example of Diamond at Oakland Public Library], [Wikipedia Description] Summary of Diamond
And now here is Peter with his extremely informative and useful piece on reducing energy costs through the development of green buildings.
Our History of Wasteful Buildings
As readers of The Automatic Earth, we are all aware of the systemic collapse that rapidly approaches on the horizon. How we preserve our resources and prepare for what’s ahead has to be the priority for us all. Before we can consider alternative energy generation or sustainable living, we need to focus on our homes and how they can be built, or rebuilt, to perform in a truly energy efficient manner. Take care of shelter first, and all other things will follow.
The “green building movement” has been compromised and rendered largely counter-productive, since it feigns the illusion of “progress” when no progress is made. The market has been flooded with ideas and products that are unproven and building rating systems that are untested. The sad truth is that buildings we’ve built in the last few years have not proved to be any better at conserving energy, or to be less costly to operate than the buildings we built decades ago.
“Building energy use is probably the largest field of human endeavor in which almost nobody measures anything”
As consumers, we lust for products and gadgets. We want solar panels, we want windmills, and we want green roofs. Too many of us have been seduced by government tax credits, product advertising or unknowing building professionals who tell us that being green needs to be complex and costly, or that, by simply “throwing up some solar panels” or installing a green roof, we can solve our problems.
Nothing could be further from the truth, though. Focusing on true cost-saving energy performance should be our most important consideration.
The photos above and below are of an “energy efficient” heating system in a newly renovated single family home. This system was incredibly costly and complex to design and install and is very expensive to run. We have to consider that in the future it may not be possible to find parts to repair and maintain systems like this, and, most importantly, we have to realize that generating enough off-grid electricity to run these overly complex systems will be next to impossible.
For a fraction of the cost, the owner could have insulated and air sealed the building enclosure, thereby eliminating, or greatly reducing a lifetime of maintenance and energy costs. We need to replace complicated, costly and untested systems with simple, proven materials and methods that make up the most basic, yet the most important, foundation of energy conservation in all buildings and shelters - the building envelope.
The Critical Building Envelope
The majority of our energy consumption in this country is expended on heating, cooling, lighting and ventilating our buildings. Energy use in transportation, including automobiles, and industrial production does not even come close to the amount of energy our buildings consume to provide heat, AC and lighting. Our focus should be on how we can reduce that level of energy consumption, while also producing a durable and comfortable built environment.
Our understanding of buildings, i.e. how they are assembled and how they perform, needs to be challenged and revolutionized. We have built homes, offices, schools and businesses from entirely the wrong perspective for decades. Investing in the building envelope by air sealing and insulation is the basis of all sustainable, comfortable and durable design.
We need to follow the common sense, proven principles of thermal and air management in order to substantially reduce the heating and cooling demands of our buildings. Then, and only then, can we drastically reduce the size of our heating and cooling plants or perhaps eliminate them altogether.
If we want to make self-generated energy sources such as wind, solar electric and solar hot water start to make any financial and practical sense at all, we need to eliminate complex, costly and over-sized heating and air conditioning plants. Keeping down the costs of installing these alternative energy systems is a critical means of ensuring their viability.
The building envelope is the key to understanding a building’s efficiency and, in a way, it is also the key to our ability to survive the upcoming financial and industrial crises. Proper insulation, air sealing and ventilation are not new concepts; the Germans perfected the idea with their “Passive House” system over 20 years ago. Passive House buildings are based on proven building physics with stringent air tightness levels and honest insulation values that deliver buildings which use, on average, 80 to 90 percent less heating and cooling energy.
A true passive home would be one that has its heating demand so reduced that all the heat requirements of the building are met by passive solar gains (from direct sunlight) and internal heat gains (from the occupants and appliances) which get distributed through the building by a simple Energy Recovery Ventilator (ERV) system. In some cases, no additional heat source is ever needed.
In an ERV, the warm exhaust air heats the incoming cold air through a heat exchanger (high efficiency ERV units are now available here in the US). The Passive House requirement for their certified buildings is to have an air barrier so tight that there are only 0.6 air changes per hour at a 50 pascal pressure difference (about a 25 MPH outdoor wind). Compare that to most buildings in the United States - those that I have tested have varied from 7 to 14 air changes per hour!
This essentially means that every hour the entire cubic volume of air inside your house is potentially being replaced with outside air up to 14 times! You are heating this air only to have it escape to the outside almost immediately. Needless to say, this rate at which we lose conditioned air from our buildings is absolutely alarming and tremendously wasteful. We, and the planet, are paying dearly to heat and cool the vast outdoors (where it benefits no one) and, all the while, we are still not maintaining a comfortable interior environment for ourselves.
How many of our buildings are over heated in the winter and over cooled in the summer to simply compensate for leaky construction? My experience tells me that this is almost always what is happening. One solution could be that we build and renovate to the Passive House standard, or at least close to their standard. However, I am not suggesting that we make such a large-scale effort now, but rather we must look to smaller and more practical bottom-up changes.
Adopting and Applying What Works
In fact, it may be too late for us to adapt and apply the German model on any significant scale before life as we know it comes apart at the seams. What I am suggesting, instead, are several simple, cost effective steps that we can implement immediately to make our collective futures comfortable, much less costly and more prone to surviving and thriving. In order to accomplish these goals, we must take ideas from Passive House and other proven scientific building methods and incorporate them into our homes and buildings. Below are some of the basics we must learn:
1. Insulation - The material that does all of the heavy lifting, in total silence and without any operating costs or maintenance. In most cases the ideal location of the insulation is on the outside of the structure (think: we have built everything inside out) and it could be made from rigid materials. such as polyisocyanurate or extruded polystyrene sheets.
These types of insulation are readily available and can even be sourced used. It can be installed by an unskilled workforce with minimal tools and supervision. By placing the insulation on the outside of the structure there are two obvious benefits:(1) The building structure is kept warm in the winter which allows it to retain the heat up and radiate it back to the inside.
(2) The building structure is kept cool in the summer thereby preventing unwanted heat gains from entering the building’s interior.
We can reduce our building energy loads substantially by relocating the insulation to the outside in a continuous plane. Exterior insulation keeps the structure at a constant temperature, limiting extreme temperature swings. Possibly the most important benefit is the level of comfort you will experience inside your home. If the insulation is installed correctly, you will have never have to worry, even without a central heat source, that the temperatures inside will drop so low you will freeze, or rise so much that you will be uncomfortably hot. This is also an extremely valuable psychological benefit.
2. Install an Air Barrier - How we handle air transmission through our exterior wall and roof assemblies is critical to both the building envelope performance and to energy savings. There are many inexpensive ways to control air movement, and even though each situation is different, the basics remain the same. Stop the rapid and wasteful cycling of air through the walls and roofs of our conditioned buildings and you stop the rapid loss of energy.
Using rigid insulation and taping the seams is one way to regulate air transmission, but there are also air barrier paints and house wraps that can be applied on the structure. Air sealing can also be done by installing sealants on the interior studs at the same time you install the drywall, “gluing the drywall” to the stud. Interior plaster (not stucco or joint compound) can also serve as a good air barrier.
Defects in these barriers can obviously create air leaks. I am not spending time on the physics of green buildings here, but it’s important to understand that heated air contains moisture vapor and that will cause defects in the air barrier. So it should be held to a minimum to prevent that moisture-laden air from reaching the outer, colder surface of the building structure. Air sealing will require more supervision and skilled labor than insulation to install successfully.
The photo above shows a fantastic example of an energy efficient historic renovation. There are “peel and stick” air and water barriers in place under the roof shingles. Insulation has been placed on the exterior walls with all joints taped and sealed, and all flashing was done correctly with pre-painted wood strapping ready for the pre-painted wood siding. It was a renovation project that was durable, sensible and efficient.
3. Proper Ventilation - Our buildings, especially our larger apartment buildings, offices and homes, are over-ventilated. Large mechanical ventilation systems are very wasteful. They are costly to install and maintain and use excessive amounts of electricity to operate. In addition to their inefficiency, the ventilation systems are constantly removing the heated or cooled air from the building.
The old myths about making “airtight” buildings has always been that it’s “unhealthy”. That is not true for several reasons. The first is that we have never accomplished building airtight buildings, and the second is that we have over-ventilated them to a point that they circulate unhealthy stale air throughout our apartments and homes. If we do focus on air sealing, then ventilation becomes easier to manage.
An ERV (energy recovery ventilator) or HRV (heat recovery ventilator) can provide 100 percent fresh, filtered air to your home while extracting the stale air at a specific rate. These systems are not complicated. They are healthier for the occupants and are inexpensive to purchase and operate. In addition to eliminating the loss of air through over-ventilating, the HRV captures the heat from the exhaust air and tempers the incoming air, thereby acting as a heat distribution source.
4. Windows and doors - Look for what is sensible and forget about using double hung windows or sliding windows and doors because they leak too much air. Look for a more airtight casement or awning window with the best possible rating on the double glazing. Remember the glazing and frame of the window is a part of your continuous air barrier. Connecting the air barrier to the window frame is critical. A properly air sealed, double glazed, American made, casement window will outperform even the most expensive triple glazed European windows that are not properly installed.
To summarize, there are essentially five inter-related things that must be considered when constructing or renovating a building:
Henry: A Leader in Building Envelope Systems(1) Water/rain barrier - The function of a rain barrier is to keep liquid water from entering the building enclosure. Combined with flashing and other materials, the rain barrier ensures that there is a shingled assembly to direct liquid water to the exterior. A single material can function as the air barrier, vapor barrier (non-permeable air barrier), and water barrier.
(2) Insulation barrier (example of one product that can be used) - PERMAX™ by Henry is an advanced spray polyurethane foam (SPF) technology offering design professionals, building owners, property managers and OEM (Original Equipment Manufacturers) significant benefits including Increased thermal performance of roofs and walls, applicability to a variety of OEM applications, sustainability of the building envelope, waterproofing, non CFC, non-ozone depleting technology.
(3) Air barrier - An air barrier must first and foremost resist air leakage. Air leakage loads are significantly greater than most designers and architects realize. In the past, many materials were considered suitable air barriers, including building felt, concrete block, building wraps,and gypsum wallboard. A more enlightened understanding of the physics of air movement demands a more aggressive solution.
(4) Vapor barrier - Vapor barriers limit the amount of water vapor diffusing through the wall as a result of different vapor pressures. With the advent of modern building science, it has been found that air leakage – and not vapor diffusion – is the real problem. In fact, air leakage accounts for over 200 times the amount of moisture transmitted by diffusion.
(4) Ventilation - Highly efficient ERVs and HRVs can be purchased at low cost and replace the wasteful mechanical ventilation systems that many buildings currently use.
These are the bare minimums that even poor quality, code compliant construction dictates. You are not adding anything new to the mix. When building and renovating, you will be paying for and installing some type of insulation, water and drainage barriers, air barriers and ventilation anyway. Having an understanding of just where these various elements should be placed and how they should be installed will dictate how well your building performs from an energy standpoint.
Reducing Energy Costs While Building Communities
Large apartment buildings that have one central heat source are, for the most part, more energy efficient than single family dwellings. Higher density occupancy uses less energy and incurs less energy costs per square foot than people scattered throughout suburbia struggling to heat their homes and McMansions and fuel their SUV’s. Our large apartment buildings are all in cities, close to public transport and what’s left of the employment market in this country.
The survivability in the city will change if there is a systemic collapse of the financial, energy and transportation systems. There will be no funds available to support the infrastructure that makes cities livable, but we should still explore medium to higher density urban living by rebuilding communities that are all but abandoned along rivers and those canal systems which still exist.
Places like Troy and Utica, NY come to mind, because the housing stock and the structures are there even if the community may not be. The idea of “community” housing has all but been ignored in the United States. It conjures up images of poor people, shared kitchens, bathrooms, hippies and bedbugs. But, in reality, community based living is exactly what our large apartment buildings are made to be.
Consumers and real estate developers find it beneficial to call them condominiums or co-operative apartments, but, regardless of the specific label, we are all breathing the same air under the same roof. Buildings that house multiple families reduce operating and energy costs, nurture relationships and can foster a sense of community. Sharing the expense as well as our collective expertise in building shelter is just one more way to move forward in a period of rapidly contracting wealth.
Cluster housing or “co-housing” would allow individual family housing units to be built while creating common facilities that are shared by all. Co-housing is a great way to promote and energize our sense of community, since it will be developed around the common idea of shelter as a bonding experience. Co-housing could also be built on shared land and must be highly compact in design, leaving the majority of the land open for farming or work.
The compact designs would focus on simplicity, highly energy efficiency and would incorporate one foundation, one heating source and one water supply to service multiple family units. Co-housing clusters would share common elements like workshops, some living and community space, barns, tools and even automobiles and machinery.
A more large-scale and popular initiative is captured by the concept of "net-zero" homes and buildings. For example, California's Energy Commission has developed a program to transition buildings towards zero net energy use, through both energy efficiency strategies and the use of on-site renewable power. The goals of these initiatives are a bit "pie in the sky", especially with regards to renewable power and at large scales, but they still offer important information and avenues to help people and businesses reduce their energy costs.
Achieving Energy Savings in California Buildings"Achieving ZNE begins with an efficient building energy design. A building design that factors in environmental characteristics and building features to maximize passive opportunities to reduce energy needed for heating and cooling is arguably the most cost-effective strategy for improving building performance and a logical first step toward making ZNE building a reality.
Design concepts that consider climatic characteristics of a region such as weather and seasonal temperature variations, and site-specific optimization, including orientation, daylight, shade, and prevailing wind, can significantly minimize building energy demand."
It’s time to start putting together a team that can form your future community. Right now, each of us is surrounded by people who have ideas, knowledge and skills that can be shared. Builders, mechanics, bakers, farmers, herbalists, welders, fisherman, engineers, acupuncturists, solar panel system designers, doctors, electricians, equipment operators and veterinarians, to name but a few, are existing all around us and ready to work together with us in productive ways.
Everything that I have touched upon here is based on using tested and proven methods and ideas to simplify and develop functional, comfortable buildings. Anyone can use this information in a variety of ways in order to get the same essential results - safe, comfortable and energy-efficient “green” buildings that will form the basis of future living arrangements within many of our communities.
Debtors Prisons In America 2011
by Jessica Silver-greenberg - Wall Street Journal
The top state law-enforcement official in Illinois said she plans to fight the use of arrest warrants by debt collectors pursuing money they are owed on credit cards, auto loans and other bills. Illinois Attorney General Lisa Madigan, in an interview, vowed to push state-court judges to quash arrest-warrant requests by lawyers representing the fast-growing debt-collection industry.
Ms. Madigan also said she will file enforcement actions against companies that "abuse" their power to seek arrest warrants under Illinois law. "We can no longer allow debt collectors to pervert the courts," said Ms. Madigan, a Democrat who took office in 2003.
More than one-third of U.S. states allow borrowers who can't or won't pay to be jailed. Nationwide statistics aren't known because many courts don't keep track of warrants by alleged offense, but a tally by The Wall Street Journal earlier this year of court filings in nine counties across the U.S. showed that judges signed off on more than 5,000 such warrants since the start of 2010. In Illinois, the practice is "flourishing statewide," Ms. Madigan said, though exact numbers aren't available.
A debt-related arrest warrant is typically issued when a borrower who was sued for payments on an outstanding debt doesn't show up in court or fails to make payments ordered by a judge. Debt collectors say the threat of jail is used only as a last resort. "Debt collectors aren't advocating for debtors' arrests," said Mark Schiffman, a spokesman for ACA International, the industry's main trade group.
Some judges have criticized the use of such warrants, comparing them to a modern-day version of debtors' prison. Ms. Madigan said she has grown increasingly concerned that borrowers sometimes are being thrown into jail without even knowing they were sued, a problem she blames on sloppy, incomplete or false paperwork submitted to courts.
Other defendants avoid showing up in court because they can't afford to pay and fear they will be sentenced to jail, a "perverse Catch-22," she said. A March article in the Journal about the use of arrest warrants in debt-collection lawsuits "helped shed light on a practice we need to address," she added in the interview.
In September, Vivian Joy, 53 years old, was handcuffed and taken to a jail in Champaign, Ill., after being stopped for driving with a broken taillight. A public-records search by the police had shown an outstanding arrest warrant because Ms. Joy didn't appear in court following a default judgment against her over $2,200 owed to Champaign Heights Finance Corp., based in Peoria, Ill.
"They cuffed me in front of my kids. That was terrifying," said Ms. Joy, who claims she didn't know about the lawsuit or judge's order until her arrest. She said she owes the money but can't afford to pay because she has no job. Ms. Joy was released after she posted a $120 bond. The finance company and police officials couldn't be reached for comment about the arrest warrant.
Ms. Madigan can't force judges to stop signing off on debt-related arrest warrants. Still, she predicted that many Illinois judges will agree with her once they fully understand the practice. The Illinois Department of Financial and Professional Regulation, a state agency that licenses lenders and debt collectors, said it plans to introduce a bill early next year that would ban debt collectors from seeking arrest warrants.
IMF Revamps Credit Lines to Lure Nations
by Sandrine Rastello - Bloomberg
The International Monetary Fund revamped its credit line program to encourage countries facing outside shocks to turn to the fund with few conditions attached as European leaders fail to end their debt turmoil.
The Washington-based IMF today said the new instrument, the Precautionary and Liquidity Line, can be tapped by countries with strong economies currently facing short-term liquidity needs. Countries with potential needs can also apply, as they did in the past under the Precautionary Credit Line that the new instrument replaces.
"The reform enhances the Fund’s ability to provide financing for crisis prevention and resolution," IMF Managing Director Christine Lagarde said in an e-mailed statement. "This is another step toward creating an effective global financial safety net to deal with increased global interconnectedness."
The changes, which enable countries that pre-qualify to request IMF funds without having to make as many policy changes as with traditional loans, come as Europe’s crisis threatens to spread to Spain and France. The IMF is co-financing bailouts in Greece, Portugal and Ireland and is preparing to send a team to Italy for an unprecedented audit of the country’s efforts to cut its debt.
European policy makers have yet to implement a package agreed to last month that includes a scale up of their rescue funds, proposed guarantees of sovereign debt and a bid to attract more international loans. Germany today rejected calls from allies and investors to do more to counter the turmoil as Spain’s financing costs surged and pressure mounted on Greek political leaders to submit written commitments to austerity measures.
The revamping of lending instruments is the second in 15 months as the IMF tries to get countries to request funding before crises develop. The fund will continue to offer its Flexible Credit Line, which comes with no conditions for nations whose economies are fundamentally sound and is used by Mexico, Poland and Colombia.
Funding available with the new PLL will be capped. One option is to request it for six months for as much as five times a country’s contribution to the IMF, known as its quota. A country can also request a Precautionary and Liquidity Line for up to 24 months for as much as 10 times quotas. The IMF today also said it is merging existing lending instruments for emergency assistance in cases of natural disasters and post-conflict situations into the so-called Rapid Financing Instrument.
US GDP growth estimate cut sharply to 2.0%
by Paul Handley - AFP
The US economy grew more slowly than originally thought in the third quarter as businesses slashed inventory spending, official data showed Tuesday.
The Commerce Department cut its growth rate to 2.0 percent from the first 2.5 percent estimate of a month ago, surprising many economists who had expected the revision to be unchanged. "Growth during the summer was more sluggish than initially thought as the GDP numbers were revised downward," said Joel Naroff, an economic analyst. "But the details were not that bad."
Underpinning the slower growth rate for the July-September period was a contraction in overall business investment, which shrank at an annual pace of 0.1 percent, due to the inventory rundown. The other key weight on growth was tighter spending by authorities at all levels. At the state and local level spending continued to contract as authorities strained to balance budgets.
The 2.0 percent pace of growth was still strong enough to quell fears that the world's largest economy had fallen back to recession after a near-stall in the first half, when the growth rate was lower than one percent. And economists said that the need for businesses to restock could give a solid boost to fourth quarter growth.
The first revision of the GDP data -- another revision will come in one month -- also confirmed some of the strengths seen earlier. Personal consumption grew at an annual pace of 1.6 percent, compared to just 0.5 percent in the second quarter, when fears mounted of the country returning to recession as consumers shut their wallets.
And businesses' fixed investments -- those into equipment and facilities -- picked up to a 1.5 percent rate, the fastest pace since the second quarter of 2010 when the country was emerging from its deepest recession in some eight decades.
Another strong point was the growing boost from trade, as for the second straight quarter the export sector grew faster than imports -- which reduce GDP. The slower growth rate put a damper on optimists hoping for confirmation of a sharp rebound from the first half.
Even so, economists said the upside of the inventory contraction was that businesses will likely have to restock in the fourth quarter, meaning that overall growth should be picking up. "Despite the downward revision to third quarter GDP, the recent US data seem to indicate that the glass is still half full," said economist Nariman Behravesh at IHS Global Insight.
"The downward revision to inventories has positive (albeit temporary) implications for future growth, since leaner inventory stocks point to the need for more production growth," he said, forecasting a 2.5-3.0 percent pace of expansion in the current quarter.
But with the eurozone in crisis and the US government still deadlocked over how to stimulate growth and trim the deficit, analysts were less optimistic for the beginning of 2012.
On Monday a Congressional panel charged with finding at least $1.2 trillion in deficit cuts over the next 10 years threw in the towel. The Democrat and Republican lawmakers on the deficit supercommitee both said they were hopelessly divided on whether spending cuts or tax increases should generate most of the savings.
That left on the rails two of the government's key stimulus measures, both to expire at year-end: cuts to payroll taxes and extended unemployment benefits. If both programs are allowed to expire in a push to reduce spending, the effect could be much slower growth, with Behravesh warning of a sub-2.0 percent rate in the first half.
"GDP growth should finally remain relatively dynamic in Q4 2011, with still a decent pace of consumption," said Thomas Julien at Natixis. "However, the expiration of the December 2010 fiscal stimulus... should create a drag on growth in 2012."
Germany's Finances Not as Sound as Believed
by Ralf Neukirch and Christian Reiermann - Spiegel
The German government likes to pride itself on its solid finances and claim the country is a safe haven for investors. But Germany's budget management is not nearly as exemplary as it would have people believe, and the national debt is way over the EU's limit. In some respects, Italy's finances are in much better shape.
When it comes to fiscal stability, frugality and responsible economic management, German Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble have only one role model: themselves. The chancellor praises herself and her team for having "a clear compass for reducing debt," and insists: "Getting our finances in order is good for our country."
Her finance minister, a member of Merkel's conservative Christian Democrats, is no less effusive. Germany, says Schäuble, is a "safe haven" for capital from around the world, because "the entire world has great confidence in both the performance and soundness of the fiscal policies of the Federal Republic of Germany."
Developments in the financial markets seem to bear him out. Last week, the suspicions of international investors reached the stable core of the euro zone. Investors embarked on a massive selloff of securities issued by supposedly model countries like Finland and Austria and sought refuge in German government bonds.
Role Model Position at Risk
But it is debatable how much longer Germany can be seen as a refuge of stability and security. In reality, German government finances are not nearly in as good shape as the chancellor and the finance minister would have us believe. The way that certain important indices are developing suggests that Germany may not retain its position as a role model in the long term. Government debt as a percentage of GDP is already at more than 80 percent, which compared to other European Union countries is by no means exemplary, but in fact average at best.
Image: Global Macro Monitor
When it comes to their debt-to-GDP ratios, even ailing countries like Spain are in better shape, with values significantly lower than 80 percent. Critics, irritated by Merkel's and Schäuble's overly confident rhetoric, are beginning to find fault with Europe's self-proclaimed model country. "I think that the level of German debt is troubling," says Luxembourg Prime Minister Jean-Claude Juncker, whose country has a debt-to-GDP ratio of just 20 percent.
Despite the nascent criticism, Merkel and Schäuble will be patting themselves on the back once again at this week's final debate on the 2012 federal budget in the Bundestag, the German parliament. They will point out that Germany is in much better shape than its partners in the euro zone, not to mention the United States. They will also praise conditions in the labor market, rising tax revenues and the declining budget deficit.
It is certainly true that Schäuble expects the German deficit to decline from 1.3 percent of GDP this year to less than 1 percent next year. But it's none of his doing. In fact, he wants to incur more debt next year than in 2011. It is only state and local governments that are slated to borrow less next year, thereby helping to reduce Germany's deficit. In contrast, Schäuble expects €26 billion ($35 billion) in net new borrowing in 2012, an increase of several billion euros over this year.
Flush with Cash
The reason for the embarrassing increase is a noticeable reduction in austerity efforts. Flush with cash, Germany's coalition government of the conservatives and the business-friendly Free Democratic Party (FDP) has rediscovered its taste for spending money. At their most recent meeting, the leaders of the CDU, its Bavarian sister party, the Christian Social Union (CSU), and the FDP approved new spending that will place a significant burden on the federal budget in the future.
For example, Transportation Minister Peter Ramsauer of the CSU will see his funding for 2012 increase by €1 billion over the previously budgeted amount. Ironically, in its most recent assessment the German Federal Audit Office already criticized Ramsauer for not spending the funds allocated to his ministry sensibly.
Some €1.5 billion have been earmarked for a child-care subsidy that the government plans to grant parents who choose not to use public child-care facilities but to look after their pre-school children at home instead. The German government is also reintroducing the full Christmas bonus for civil servants, to the tune of €500 million.
The government will spend €1 billion to fund a planned subsidy for private long-term care insurance, as well as €4 billion on previously announced tax reforms. "Merkel and Schäuble have now abandoned the goal of budget consolidation," says Carsten Schneider, budget affairs spokesman for the opposition Social Democrats (SPD). "The money is being squandered on child-care subsidies and tax cuts." Jens Weidmann, the president of Germany's central bank, the Bundesbank, warns that the tax cuts at least will have to be offset elsewhere in the budget. "Germany mustn't lose any time in balancing its budget," he says.
The mood of generosity has also taken hold at lower levels within the coalition. For instance, the budget committee approved €60 million in additional funding for the government commissioner for culture and the media, Bernd Neumann, whose budget was originally targeted for €15 million in cuts.
Other key figures also suggest that Germany is not doing as well as some believe. Admittedly, the budget deficit continues to shrink. And the federal government budget actually seems to be well on its way to complying with a new "debt ceiling" rule in the German constitution that requires the government to reduce new borrowing to almost zero by 2016.
But a balanced budget alone is not enough to bring the debt ratio, now at more than 80 percent, down to the 60 percent of GDP that is required under the Maastricht Treaty within a reasonable amount of time. In fact, many economists believe that budget surpluses are needed if this goal is to be achieved. They have in mind a figure known as the primary balance, which is the difference between government revenues excluding new debt and government spending excluding debt-service costs (i.e. interest payments).
If this balance is in positive territory, a country can cover its current expenses and meet at least some of its debt service obligations. If it is negative, the country must service all of its old debt with new borrowing, resulting in a rapidly growing mountain of debt.
The primary balance became an important figure in the bailout programs for Greece, Portugal and Ireland. In return for support payments, the donor countries, most notably Germany, expect the recipient countries to generate high primary budget surpluses for years. They argue that this is not only absolutely necessary, but also feasible.
Ironically, Germany has rarely lived up to its own standards in the past. From 2002 to 2006, for example, the country's primary balance was chronically in deficit. By comparison, Italy generated an average primary surplus of 1.3 percent of GDP in the same period. According to projections by the European Commission, Germany will not even be in the same ballpark until next year. In 2013, it is expected to reach a primary surplus of 1.5 percent.
Again by comparison, Italy is projected to achieve a primary surplus of 3.1 percent next year and 4.4 percent in 2013. If the government of new Italian Prime Minister Mario Monti imposes austerity programs, as called for by European Central Bank (ECB) President Mario Draghi and others, the surpluses will likely be even higher.
Germany is still a long way from numbers like these, which makes the goal of stabilizing the debt-to-GDP ratio at 60 percent a distant one indeed. To achieve this target within 10 years, says Christian Breuer, a financial expert with the Munich-based Ifo Institute for Economic Research, "Germany, even under optimistic assumptions, would need a primary surplus of 2 percent."
Thorsten Polleit, chief economist of Barclays Capital Deutschland, arrives at even higher numbers in an unpublished study. Primary surpluses of 2.7 percent are necessary to bring down the debt level to the 60 percent limit within a decade, says Polleit. He adds that surpluses of 4.7 percent would be needed to achieve the same goal within five years.
So far the German government has based its budget forecasts solely on the presumption of strong economic development. This is not likely to be the case for much longer, especially if the economy continues to cool down and tax revenues decline. Polleit believes that Schäuble's failure to economize during the economic upturn is now coming home to roost.
"As a precautionary measure, the German government should impose a new austerity program," says Polleit, noting that if it does not, Germany will run the risk of being scrutinized more closely by the rating agencies. "Their top rating for German bonds is everything but guaranteed."
Indeed, the goodwill Germany is now enjoying on the bond markets, to the delight of its finance minister, could quickly evaporate. Yields on German government bonds are currently at record lows, with 10-year bonds offering returns of only about 1.8 percent. But if those interest rates were to increase by an average of only 1 percent, the German government budget would face an additional annual burden of €20 billion in the medium term.
Not Ambitious Enough
Nevertheless, Schäuble feels that he is on the safe side. At the moment, he can easily satisfy the constitutional debt-ceiling requirements, which force him to continue reducing the deficit. In each year until 2015, Germany's new borrowing will remain about €10 billion below the imposed upper limit.
This has less to do with Schäuble's willingness to cut spending than with the fact that his estimate of the baseline figure for reducing debt was much too high last year. Thanks to high tax revenues, he is now able to keep new borrowing well within the debt-ceiling requirements.
The FDP feels that Schäuble is too unambitious for its taste. It wants to force the finance minister to consolidate finances more vigorously. The Free Democrats are demanding that Schäuble already achieve the goal of a federal budget that includes almost no new borrowing in 2014, rather than two years later. "By doing that, we would demonstrate how serious we are about sorting out our finances," says FDP budget expert Florian Toncar. "That should be worth every effort on our part."
UK's debts 'biggest in the world'
by Robert Peston - BBC
At the beginning of 2010, I highlighted a fascinating analysis by the consultants McKinsey called Debt and Deleveraging, which showed quite how indebted the economies of the developed west had become.
McKinsey said that the UK had by 2008 become the most indebted of all the big, rich economies, more indebted even than debt-engulfed Japan.
It has now become widely recognised that perhaps the greatest economic policy failure in the UK, US and eurozone during the 16 boom years before the crash of 2008 was the explosion of borrowing by banks, households, businesses and governments - or, to use the jargon, the unprecedented and massive leveraging up of entire economies.
These giant debts triggered the crash of 2008 because creditors refused to roll over short-term loans to banks, and caused the simultaneous recession because banks stopped lending, and have brought about our current economic malaise because our ability to spend and invest is hobbled by the imperative of repaying what we owe.
That is why getting the debt down to prudent levels is the most important economic challenge of our time.
As it happens, how we became so indebted and what to do about it, is what I am examining in a two-part documentary, called The Party's Over, that will be broadcast on BBC Two at 1900 on 4 and 11 December.
But how have we done since 2008? Are we getting the debt down?
Well, McKinsey is updating its 2010 report and has shared its interim findings with me (some of which I wrote about on Friday in my note on why investors are as wary of lending to Spain as to Italy).
These findings are not comforting.
According to the consulting firm, by the end of March this year, the aggregate indebtedness of the UK - that's the sum of household debts, company debts, government debts and bank debts - had risen to 492% of GDP, or almost five times the value of everything we produce in a single year.
That compares with 481% at the end of 2008.
So the UK's total indebtedness has increased, and is still the biggest relative to GDP of any of the big economies. That said, Japanese indebtedness is pretty much the same size - at the end of 2010, as opposed to the end of March 2011, Mckinsey says Japan's debts were also 492% of GDP.
US indebtedness is less, at 282% of GDP by the middle of this year, down from 296% in December 2008.
In the case of America, government debt is on a steeply rising trend, jumping from 61% of GDP to 80% over the past two and a half years.
But household debts have fallen from 98% of GDP to 87% of GDP, as homeowners have handed back the keys of their houses to lenders and reneged on the debts (which is possible in much of the US, but almost impossible in the UK).
So what's going on? Why are UK debts still going up?
Well partly it's to do with a phenomenon I've discussed here many times, that debt has been shuffled from the private sector to the public sector.
When banks stopped lending, and private-sector spending and investing collapsed, governments continued to spend, even though tax revenues were falling. So public-sector borrowing exploded.
To be clear, if governments had not continued to spend, our recession might well have become something much worse, a 1930s-style depression.
But it is fair to say that a consequence of banks, households and businesses trying to repay their debts has been a big increase in government borrowing.
Here are the numbers. From the end of 2008 to the spring of this year - so during the course of a bit more than two years - the debt of British companies fell from 122% of GDP to 109%, and the debt of households fell rather less, from 102% of GDP to 97% of GDP.
Most would say those are positive trends, although the pace of debt repayment by households is pretty sluggish and our personal debts (at close to 100% of GDP) remain substantial (and a worrying burden) by historical standards.
By contrast, government debt has risen from 52% of GDP, which at the time was pretty low by international standards, to 76% of GDP, which is more or less standard for the rich west.
But as you'll know, UK government debt remains on a fairly sharply rising path (the government's deficit is some distance from being closed).
One other slightly surprising and - perhaps - disturbing trend is that the debt of financial institutions has risen, from 205% of GDP to 210% of GDP.
In McKinsey's definition, this financial institution debt excludes bank lending to households and non-financial businesses, to avoid double counting. Its substantial size is a reflection of the size of the UK's financial services industry, the City of London.
McKinsey believes, however, that this increase in financial institutions' debt disguises a positive trend: much of the debt is now of a longer-term nature, so poses less of threat to the stability of the economy (it can't be called in at a moment's notice, to the potential ruin of the borrower).
The point is that if excessive debt is the disease, what we've had since the end of 2008 is analgesic and sticking plaster, rather than cure.
Record low interest rates and the creation of 275bn of new money through the quantitative easing programme have made it possible for us to live with our debts - cheap money has made the debts bearable.
But we haven't as yet found a way to get the debts down so that we can be confident that our economy's foundations are solid and sound again.
What it means is that we must brace ourselves for many years of relatively low growth, perhaps 1% versus the 3% of the 16 boom years before the crash, because we no longer have the fuel of borrowing more and more every year.
Britain needs 10 years of austerity
by Philip Aldrick - Telegraph
Britain needs 10 years of austerity to fix its economic problems, a leading think-tank has warned as it questioned Coalition plans to restore growth by unleashing a building boom and urged George Osborne to stick to his spending cuts.
Painting a bleak picture for the recovery, Reform said that "slow growth is inevitable given the levels of debt in the economy". It added: "Even under the best economic scenario, the programme of austerity should be at least a 10-year project with the first parliamentary term achieving deficit reduction and the second consolidating the gains."
Declaring "austerity is the new normal", the think-tank stressed that the Government "must avoid the temptations of quick fixes and inconsistency" if it is to attract the business investment that will drag the country back to health.
"There is a view that the recovery from the financial crisis should have been largely instantaneous and painless. But this is clearly unrealistic," it said. "An excessive emphasis on quick fixes – prioritising immediate wants while postponing hard decisions – is one reason the UK economy is in the mess it is in. Inconsistency increases uncertainty and uncertainty reduces firms' incentives to invest and expand."
In its paper, The Long Game, Reform argued that there is little the Chancellor can do to stimulate the recovery bar holding a strict line on fiscal discipline, simplifying taxes and regulations, and maintaining consistent policies. Patrick Nolan, chief economist, said: "Mistakes made over the last decade mean that the UK now needs to go through a period of low growth."
The think-tank also raised questions about plans to reschedule £200bn of infrastructure spending, saying that "taking a 'build it and they will come' approach is a dangerous and potentially wasteful stance". The Prime Minister yesterday confirmed that the Chancellor will announce incentives for infrastructure investment in his autumn statement next week.
In an attempt to debunk the perception that British austerity is more severe than elsewhere, Reform pointed out that fiscal tightening in the eurozone amounts to 2.4pc of GDP over 2011 and 2012, compared with 2.2pc in the UK. Changing tack could be dangerous, it added.
"The speed of the increase in Italian government debt yields – up by 150 basis points in just four weeks – shows how vulnerable governments can be to a change in market sentiment."
The think-tank stressed that economic success now depends on "growth and public service reform, both of which are behind schedule". To keep the deficit reduction plan on track, it said: " George Osborne needs further reductions in the NHS and welfare budgets, the least productive areas of government spending." Abolishing the 50p tax rate would also be a positive step, but "this should not be an immediate priority", it added.
Those damn short sellers....
"The only way to quote resolve any problems in Europe is to have massive debt restructuring...
One of the things we've said in our office recently is you know how screwed up Europe is when you have a German pope and an Italian central banker. We have a scenario today in which debt has grown globally in the last nine years from $80 trillion to $210 trillion.
Global credit market debt has grown at 12% a year for the last nine years, while global GDP has grown at 4. We're in a scenario where the PIIGS have sailed into a zone of insolvency. When you sail into the zone of insolvency there is no quote solution for you. The bill is due and you have to pay the pill. What has to happen is it is of our opinion that these debts have to be written down, it's that simple.
Basically you're saying if Germany goes joint and severally liable with the profligate idiots of southern Europe will that quote solve the scenario? Think about this. Let's assume Germany goes to doing a eurobond and Germany takes on these... first of all German constitutional court has already ruled that that's illegal in Germany, but let's assume that they get over that and they go ahead and issue this bond.
What would that do for the profligate members including Greece when Greece says, "OK we're all in, we're good, you're lending us more money, we have a big debt problem and you're lending us some more and now we can borrow a little cheaper," and then Greece keeps spending, and they go back to Germany and say, "OK Germany I need some more money." Germany says, "No, we're going to impose this real austerity on you now." Greece says, "Fine, we'll default."
Every single time from now on Germany is in the exact situation it's in today. We call it in Texas a Mexican Standoff, meaning there's no winner. The profligate members will always have Germany by the short hairs every time this scenario comes up. So I disagree. I don't think that Germany will end up going all in. It would not be to the benefit of Germany to do so in the long run. Let me ask you this question: How many of your relatives would you go joint and severally liable with?
Global economy risks deflationary spiral, warns Turner
by Larry Elliott - Guardian
The head of the City's financial watchdog, Adair Turner, warned that the global economy was at risk of a deflationary spiral as the private sector and governments seek to pay off their debts at the same time.
On a day of fresh jitters on the global markets, the chairman of the Financial Services Authority (FSA) said escaping from a debt crisis caused by excessive lending by the banks was proving tougher than policymakers had ever envisaged.
The budget impasse in Washington and fears of a break-up of the eurozone sent shares tumbling on Monday, with the FTSE 100 index down by more than 140 points to close 2.6% lower at 5222.6. Stock markets in Frankfurt and Paris fell by 3%, while New York's Dow Jones industrial average closed down by almost 250 points, a 2.11% fall to 11547.31.
Lord Turner was highly critical of the lax regulation that allowed lenders to extend too much credit during the boom years. Speaking in Frankfurt, he said: "We are far from out of this crisis: it is far deeper and more difficult to escape than many of us initially thought."
He added that the past failure to control adequately either private debt or public debt creation meant that the challenge of reducing debt levels was now so severe that it was likely to require a combination of higher growth, repayments of borrowing, debt writedowns and pumping money into the economy through policies such as quantitative easing.
Turner said there had been a "catalogue of profound errors in the design of our prudential regulation of banks and shadow banks which combined to leave us by 2007 with a massively over-leveraged financial sector free both to extend excessive credit to the real economy, and to create excessive intra-financial system risks."
Banks had been allowed to operate with too little capital and insufficient liquidity on the "erroneous assumption that increased bank leverage delivered social as well as private benefits", Turner said.
Financial markets were left unimpressed by the victory of the centre-right party in the Spanish general election, and were instead unsettled by hints that the credit rating agency, Moody's, might remove France's coveted AAA rating. In Moody's weekly credit outlook, Alexander Kockerbeck, a senior credit officer, said: "Elevated borrowing costs persisting for an extended period would amplify the fiscal challenges the French government faces amid a deteriorating growth outlook, with negative credit implications."
The risk premiums on Spanish, Italian, French and Belgian government bonds rose as investors fled to safe-haven German bunds, while oil prices fell sharply amid concerns that the global economy was losing momentum.
Defending the austerity policies blamed for choking off growth and jobs, Olli Rehn, European economic and monetary affairs commissioner, said: "This crisis is hitting the core of the eurozone. We should have no illusions about this. "One simply cannot build a growth strategy on accumulating more debt, when the capacity to service the current debt is questioned by the markets," Rehn told a Brussels seminar. "One cannot force foreign creditors to lend more money if they don't have the confidence to do it."
Turner said the crisis was the result of over-confidence in free financial markets and structural flaws in monetary union. "And underlying both has been a failure to recognise the central importance to economic and financial stability of debt and leverage levels in general and bank credit creation and leverage in particular."
Arguing that policymakers had allowed banks to become excessively risky, Turner added: "The fundamental problem is that we have too much debt in the system – private and public combined. To create a more stable system we need to deleverage, in private and public sectors, to different degrees in different countries. But once you have excessive leverage, it is very difficult to deleverage without depressing the economy."
He noted that it was hard for the private and the public sector to pay off their debts at the same time without depressing demand, risking a self-reinforcing deflationary spiral. "Given the more limited opportunities for rapid real growth today, and the fact that our current high levels of public debt are now accompanied, as they were not in post-war Britain or America, by high levels of private debt, we have to recognise that the deleveraging challenge today is in some ways more serious than that which we faced at the end of the second world war," he said.
As The World Crumbles: The ECB Spins, FED Smirks, And US Banks Pillage
by Nomi Prins - ZeroHedge
Often, when I troll around websites of entities like the ECB and IMF, I uncover little of startling note. They design it that way. Plus, the pace at which the global financial system can leverage bets, eviscerate capital, and cry for bank bailouts financed through austerity measures far exceeds the reporting timeliness of these bodies.
That’s why, on the center of the ECB’s homepage, there’s a series of last week’s rates – and this relic - an interactive Inflation Game (I kid you not) where in 22 different languages you can play the game of what happens when inflation goes up and down. If you’re feeling more adventurous, there’s also a game called Economia, where you can make up unemployment rates, growth rates and interest rates and see what happens.
What you can’t do is see what happens if you bet trillions of dollars against various countries to see how much you can break them, before the ECB, IMF, or Fed (yes, it'll happen) swoops in to provide "emergency" loans in return for cuts to pension funds, social programs, and national ownership of public assets. You also can’t input real world scenarios, where monetary policy doesn’t mean a thing in the face of tidal waves of derivatives’ flow. You can’t gauge say, what happens if Goldman Sachs bets $20 billion in leveraged credit default swaps against Greece, and offsets them (partially) with JPM Chase which bets $20 billion, and offsets that with Bank of America, and then MF Global (oops) and then…..you see where I’m going with this.
We're doomed if even their board games don’t come close to mimicking the real situation in Europe, or in the US, yet they supply funds to banks torpedoing local populations with impunity. These central entities also don’t bother to examine (or notice) the intermingled effect of leveraged derivatives and debt transactions per country; which is why no amount of funding from the ECB, or any other body, will be able to stay ahead of the hot money racing in and out of various countries.
It’s not about inflation - it’s about the speed, leverage, and daring of capital flow, that has its own power to select winners and losers. It's not the 'inherent' weakness of national economies that a few years ago were doing fine, that's hurting the euro. It's the external bets on their success, failure, or economic capitulation running the show. Similarly, the US economy was doing much better before banks starting leveraging the hell out of our subprime market through a series of toxic, fraudulent, assets.
Elsewhere in my trolling, I came across a gem of a working paper on the IMF website, written by Ashoka Mody and Damiano Sandri, entitled ‘The Eurozone Crisis; How Banks and Sovereigns Came to be Joined at the Hip" (The paper does not 'necessarily represent the views of the IMF or IMF policy’. )
The paper is full of mathematical formulas and statistical jargon, which may be why the media didn't pick up on it, but hey, I got a couple of degrees in Mathematics and Statistics, so I went all out. And it’s fascinating stuff.
Basically, it shows that between the advent of the euro in 1999, and 2007, spreads between the bonds of peripheral countries and core ones in Europe were pretty stable. In other words, the risk of any country defaulting on its debt was fairly equal, and small. But after the 2007 US subprime asset crisis, and more specifically, the advent of Federal Reserve / Treasury Department construed bailout-economics, all hell broke loose – international capital went AWOL daring default scenarios, targeting them for future bailouts, and when money leaves a country faster than it entered, the country tends to falter economically. The cycle is set.
The US subprime crisis wasn’t so much about people defaulting on loans, but the mega-magnified effects of those defaults on a $14 trillion asset pyramid created by the banks. (Those assets were subsequently sold, and used as collateral for other borrowing and esoteric derivatives combinations, to create a global $140 trillion debt binge.) As I detail in It Takes Pillage, the biggest US banks manufactured more than 75% of those $14 trillion of assets. A significant portion was sold in Europe – to local banks, municipalities, and pension funds – as lovely AAA morsels against which more debt, or leverage, could be incurred. And even thought the assets died, the debts remained.
Greek banks bought US-minted AAA assets and leveraged them. Norway did too (through the course of working on a Norwegian documentary, I discovered that 8 tiny towns in Norway bought $200 million of junk assets from Citigroup, borrowed money from local banks to pay for them, and pledged 10 years of power receipts from hydroelectric plants in return. The AAA assets are now worth zero, the power has been curtailed for residents, and the Norwegian banks want their money back--blood from a stone.)
The same kind of thing happened in Italy, Spain, Portugal, Ireland, Holland, France, and even Germany - in different degrees and with specific national issues mixed in. Problem is - when you’ve already used worthless collateral to borrow tons of money you won’t ever be able to repay, and international capital slams you in other ways, and your funding costs rise, and your internal development and lending cease up, you’re screwed - or rather the people in your country are screwed.
In the IMF paper, the authors convincingly make the case that it wasn’t just the US subprime asset meltdown itself that initiated Europe’s implosion, but the fact that our Federal Reserve and Treasury Department adopted a reckless don't-let-em-fail doctrine. Even though Bear Stearns and Lehman Brothers failed, their investors, the huge ones anyway, were protected. The Fed subsidized, and still subsidizes, $29 billion of risk for JPM Chase's acquisition of Bear. The philosophy of saving banks and their practices poisoned Europe, as those same financial firms played euro-roulette in the global derivatives markets, once the subprime betting train slowed down.
The first fatal stop of the US bailout mentaility was the ECB’s 2010 bailout of Anglo Irish bank, which got the lion’s share of the ECB's Irish-bailout: $51 billion euro of ELA (Emergency Loan Assistance) and $100 billion euro of regular lending at the time.
After the international financial community saw the pace and volume of Irish bank bailouts, the game of euro-roulette went turbo, country by country. More 'fiscally conservative' governments are replacing any semblance of population-supportive ones. The practice of extracting ‘fiscal prudency’ from people and providing bank subsidies for bets gone wrong has infected all of Europe. It will continue to do so, because anything less will threathen the entire Euro experiement, plus otherwise, the US banks might be on the hook again for losses, and the Fed and Treasury won’t let that happen. They’ve already demonstrated that. It'd be just sooo catastrophic.
In the wings, the smugness of Treasury Secretary Tim Geithner and Fed Chairman, Ben Bernanke is palpable – ‘hey, we acted heroically and "decisively" to provide a multi-trillion dollar smorgasbord of subsidies for our biggest banks and look how great we (er, they) are doing now? Seriously, Europe – get your act together already, don't do the trickle-bailout game - just dump a boatload of money into the same banks – and a few of your own before they go under – do it for the sake of global economic stability. It’ll really work. Trust us.’
Most of the media goes along with the notion that US banks exposed to the ‘euro-contagion’ will hurt our (nonexistent) recovery. US Banks assure us, they don't have much exposure - it's all hedged. (Like it was all AAA.) The press doesn't tend to question the global harm caused by never having smacked US banks into place, cutting off their money supply, splitting them into commercial and speculative parts ala Glass-Steagall and letting the speculative parts that should have died, die, rather than enjoy public subsidization and the ability to go globe-hopping for more destructive opportunity, alongside some of the mega-global bank partners.
Today, the stock prices of the largest US banks are about as low as they were in the early part of 2009, not because of euro-contagion or Super-committee super-incompetence (a useless distraction anyway) but because of the ongoing transparency void surrouding the biggest banks amidst their central-bank-covered risks, and the political hot potato of how many emergency loans are required to keep them afloat at any given moment.
Because investors don’t know their true exposures, any more than in early 2009. Because US banks catalyzed the global crisis that is currently manifesting itself in Europe. Because there never was a separate US housing crisis and European debt crisis. Instead, there is a worldwide, systemic, unregulated, uncontained, rapacious need for the most powerful banks and financial institutions to leverage whatever could be leveraged in whatever forms it could be leveraged in. So, now we’re just barely in the second quarter of the game of thrones, where the big banks are the kings, the ECB, IMF and the Fed are the money supply, and the populations are the powerless serfs. Yeah, let’s play the ECB inflation game, while the world crumbles.
Spain Pays More to Borrow Than Greece as Rajoy Appeals to Europe
by Angeline Benoit - Bloomberg
Spain paid more than Greece and Portugal to sell three-month bills as the newly elected People’s Party called for a European agreement to "save" the nation’s debt, saying the country can’t afford 7 percent interest rates.
Spain’s three-month borrowing costs doubled as it sold bills at an average yield of 5.11 percent, more than twice the rate at the previous auction a month ago. The Treasury paid more than the 4.63 percent for 13-week bills sold Nov. 15 by Greece, which received a European Union-led bailout last year. Portugal paid 4.895 percent on three-month bills the following day.
Maria Dolores de Cospedal, the deputy leader of Spain’s People’s Party which ousted the ruling Socialists on Nov. 20, yesterday called for a euro-region accord to "save and guarantee the solvency" of Spain’s 650 billion-euro ($881 billion) debt. Spain can’t afford to "continue financing itself at 7 percent," she said, referring to the yield on 10-year debt that led Greece, Portugal and Ireland to seek EU aid.
Prime Minister-elect Mariano Rajoy told German Chancellor Angela Merkel in a phone call yesterday that "countries that meet their obligations and responsibilities must be helped by European institutions," Cospedal said. The European Commission yesterday said it had no knowledge of any Spanish request for aid or plans to seek it.
Germany dismissed calls for Europe to come to Spain’s assistance. "We don’t have any new bazooka to pull out of the bag," said Michael Meister, finance spokesman in parliament for Merkel’s Christian Democratic bloc.
The yield on Spain’s 10-year benchmark bond rose 5 basis points to 6.6 percent at 11:55 a.m. in Madrid, nearing the euro- era high of 6.78 percent reached on Nov. 17. The gap between Spanish and German 10-year borrowing costs rose 3 basis points to 467 basis points.
"It’s still a question of a liquidity crisis more than a debt sustainability issue," Gianluca Salford, a fixed-income strategist at JP Morgan Chase Bank in London, said in a telephone interview. "Lower prices and higher yields are scaring investors rather than attracting new demand."
Rajoy has been greeted with a surge in borrowing costs since his landslide victory left his People’s Party with the biggest parliamentary majority in almost 30 years. The Socialists, who had ruled since 2004, became the fifth European government to be toppled by fallout from the sovereign-debt crisis. Italy and Greece appointed new prime ministers this month, while voters in Ireland and Portugal fired their leaders earlier this year.
While Rajoy won’t take office until the second half of next month and hasn’t announced his Cabinet, Europe’s other new leaders are rushing to bring order to their nation’s finances and obtain political support in Europe. Greek Prime Minister Lucas Papademos today meets with Jean-Claude Juncker, who chairs meetings of euro-area finance ministers. Italian Prime Minister Mario Monti meets with EU President Herman Van Rompuy in Brussels.
Fitch Ratings said today that Spain’s new government will need to take "additional measures" beyond those announced by the Socialists to meet its deficit targets, and the People’s Party’s election victory provides a "window of opportunity."
Rajoy inherits a stalled economy with a 23 percent jobless rate, a banking system that’s facing a funding squeeze and a deficit of more than twice EU’s limit of 3 percent of gross domestic product. Spain has pledged to reduce the shortfall to 4.4 percent next year from more than 6 percent this year.
Spaniards have "voted for austerity," Rajoy told senior party members yesterday. It is the country’s "national duty to strengthen the euro," he said. The Spanish Treasury today also sold six-month bills at 5.227 percent, up from 3.302 percent last month. The last time Spain sold bonds on Nov. 17 it paid almost 7 percent for securities maturing in January 2022, the most since it joined the euro in 1999.
The yields in today’s auctions were the highest since 2004, while demand for the three-month debt was 2.85 times the amount sold, compared with 3.07 times in October. The bid-to-cover for the six-month paper was 4.92, compared with 2.59 last time. "The demand has been good as always, indicating our robust ability to access the market," said a Treasury official, who declined to be named in line with policy. "Despite tensions, there’s still appetite for Spanish public debt."
Spanish yields spike as crisis exits blocked
by Paul Day and Eva Kuehnen - Reuters
Spain's short-term borrowing costs hit a 14-year high on Tuesday as political uncertainty over a solution to the euro zone's sovereign debt crisis hit another vulnerable southern European economy.
European Union paymaster Germany continues to block the two most widely-touted exit routes from a deepening crisis that is shaking the world economy -- massive European Central Bank intervention to buy government bonds, or joint issuance of euro zone debt.
Influential ECB policymaker Jens Weidmann, head of Germany's Bundesbank, spelled out his rejection of the former in a speech to employers in Berlin.
"(The ECB) would overstretch its mandate and call into question the legitimacy of its independence by accepting a role of lender of last resort for highly indebted member states," Weidmann said. "Whoever believes that the current crisis can be overcome by giving up crucial principles of stability orientation, pushing current legislation aside, is wrong," he said, adding he did not believe either Spain or Italy would need financial rescues.
Average yields on Spanish 3- and 6-month treasury bills soared by around 2 percentage points in an auction seen as a test of investor sentiment after the conservative People's Party won an absolute majority in Sunday's general election.
Prime Minister-elect Mariano Rajoy disappointed investors by refusing to give any clearer indication of his austerity plans or his pick for economy minister until he is sworn in on December 20, leaving the kind of policy vacuum that markets abhor.
Credit ratings agency Fitch said Spain's new government would need to enact additional savings measures to meet its existing fiscal targets and had a window of opportunity to do so with a fresh mandate. "If it is to improve market expectations of its capacity to grow and reduce debt within the confines of the eurozone, it must positively surprise investors with an ambitious and radical fiscal and structural reform programme," a Fitch statement said.
The ECB has been sporadically buying Spanish and Italian government bonds to prevent prices spiking to unaffordable levels, but the limited, stop-go purchases have failed to provide durable relief.
"The yields are a reflection of where their paper trades in the secondary market but if it wasn't for the European Central Bank, there wouldn't be a Spanish or Italian bond market," said Gary Jenkins, head of fixed income at Evolution Securities.
New Italian Prime Minister Mario Monti was in Brussels to outline his reform plans as Italy's two-year bond yields rose back above 10-year yields in a sign of market stress.
Investors Cutting Exposure
In another indicator of how sovereign debt woes have left inter-bank lending markets virtually frozen, euro zone banks' demand for ECB funds surged to a two-year high. The ECB's weekly, limit-free handout of funding underscored the widespread problems with 178 banks requesting a total of 247 billion euros, the highest amount since the peak of the global financial crisis in mid-2009.
Investors in Europe and beyond have been cutting their exposure to euro zone government bonds as the two-year-old debt crisis has spread to even core countries such as France, Austria and the Netherlands.
Jefferies Group Inc became the latest bank to cut its exposure to the debt of Europe's struggling states, saying late on Monday it had reduced gross exposure to debt of Greece, Ireland, Italy, Portugal and Spain by a total of nearly 75 percent since worries first surfaced in early November.
Belgian bond yields spiked on Tuesday after the man widely seen as most likely to finally form a government ending an 18-month political crisis submitted his resignation to King Albert due to a deadlock over the 2012 budget.
Belgium has come under market pressure over its lack of a new government and sovereign debt nearly as big as its GDP, and its cost of borrowing jumped again to 4.93 percent for 10-year bonds after Socialist Elio Di Rupo threw in the towel.
Faced with an accelerating rout on European bond markets, German Chancellor Angela Merkel has insisted the only answer is for states to implement painful austerity measures and structural reforms to make their economies more competitive. She has also pressed for the euro zone's rescue fund to speed up plans to scale up its firepower to provide bond insurance and credit enhancements for foreign investors.
Euro zone finance ministers are due to approve detailed proposals next Monday, but analysts have voiced strong doubts about the prospects of achieving the 1 trillion euros in leverage targeted by EU leaders at a summit last month.
Meanwhile, the executive European Commission will seek more intrusive powers to make sure national budgets in the euro zone do not break commonly agreed EU budget rules, Economic and Monetary Affairs Commissioner Olli Rehn said.
The Commission will call for balanced budget rules to be inscribed into national law, preferably the constitution. It will also propose that budget planning be done on the basis of forecasts by national fiscal councils independent of government. "For euro area countries, we need to make sure that the national budgets are in line with the obligations of the Stability and Growth Pact before they are enacted," Rehn said.
He said a proposal from the German government's panel of independent economic advisers for a euro zone debt redemption fund that would mutualise the bloc's debt stock on stringent conditions was worth further study. Merkel has questioned the legality of the idea and said it would be "impossible to implement in reality.
In Greece, the initial trigger of the euro zone debt crisis, a standoff continued over the main conservative party leader's refusal to sign a written commitment to austerity measures.
Dutch Finance Minister Jan Kees de Jager said euro zone finance ministers would not approve the release of a desperately needed 8 billion euro aid instalment next week unless Antonis Samaras of New Democracy gave a written pledge.
"Saying that words are enough -- we've passed that stage. We want a signature from this Mr Samaras," De Jager told RTL7 tv.
Greek private sector workers meanwhile announced plans for a one-day strike on December 1, the first since technocrat Prime Minister Lucas Papademos took office at the head of a national unity government, to protest against austerity and welfare cuts.
Spain - the fifth victim to fall in Europe’s arc of depression
by Ambrose Evans-Pritchard - Telegraph
Let us all extend our sympathies to the Spanish people. They face the greatest national emergency since the Civil War yet their vote for drastic change is palpably useless, even if democracy has in this case at least been respected. As union leader Javier Dos put it, the EU-imposed austerity plans of the incoming Partido Popular are "nothing more than the continuation of policies leading Europe toward disaster".
The new government of Mariano Rajoy has precious few policy levers at its disposal and cannot alone do anything at this late stage to prevent a death spiral within the strait-jacket of EMU.
The immediate destiny of his country lies entirely in the hands of Germany, the AAA creditor core, the EU authorities, and the European Central Bank, the nexus of policy-making power that together dictates whether Spain will be thrown a lifeline or be pushed further into depression and social catastrophe.
What can the quiet Galician do to stop Spain’s 22.6pc unemployment rate – or 46pc for youth – from ratcheting higher this winter as the combined effects of fiscal austerity and a credit crunch together do their worst? How can he stop real M1 deposits contracting at a 5pc rate. Spain is a disquieting story for northern neo-Calvinists, still clinging their morality tale of what went wrong with monetary union, a belief that feckless Greco-Latins borrowed their way to disaster, and that Teutonic virtue for all is the path to redemption.
Philip Whyte and Simon Tilford argue in a paper for the Centre for European Reform (CER) that this is a "damagingly partial and self-serving" version of events. "It wrongly assigns all the blame for peripheral indebtedness to government profligacy; it makes no mention of the far from innocent role played by creditor countries in the run-up to the crisis. The result was an explosion of current-account imbalances inside the eurozone. As a share of GDP, these imbalances were far bigger than those between the US and China," they said.
More than any other country, Spain exposes the lie behind this German narrative. It did not cheat, like Greece. It did not breach the Maastricht Treaty’s 60pc debt ceiling like Italy (or Germany itself). Its public debt was 36pc of GDP before the Great Recession. It ran a budget surplus of almost 2pc of GDP in 2007 and 2008.
We can all agree that Spain has been far too slow to dismantle its Franco-era apparatus of labour privileges, or to end the inflation-linked wage rises eating away at intra-EMU competitiveness. But that is just one aspect of the story. "The eurozone crisis is as much a tale of excess bank leverage and poor risk management in the core as of excess consumption and wasteful investment in the periphery," said the CER paper.
Indeed, Spain has been the biggest victim of cheap capital from German, Dutch, and French banks. It was further destabilized by the loose policies of the European Central Bank. Lest it be forgotten, the ECB allowed the eurozone’s M3 money supply to rise at double-digit rates in the middle of the last decade (against a target of 4.5pc) in order to lift Germany out of slump. It tilted policy to German needs, blighting the South.
ECB monetary policy led to real interest rates of minus 2pc for Spain, fuelling a destructive credit bubble despite the heroic efforts of the Bank of Spain to contain the damage. Yes, Spain would have had a crisis anyway. A fast-growing catch-up economy needs a higher interest rate structure, but all Europe seemed to have forgotten that elemental truth on E-day.
This credit excess is the reason why there is now an overhang of 1.5m homes on the market or still being built, according to data from consultants RR de Acuña. Property prices have already dropped 28pc. The firm predicts further falls of 20pc. It is why Spain’s international investment balance has swung wildly negative to over €1 trillion, or 90pc of GDP.
Given that the structure of EMU itself caused the North-South imbalances that lie behind the crisis, the EU authorities and the creditor states surely have a duty of care to the countries now trapped in slump. Instead, we heard last week from Brussels that the Spain must "help itself", and from Germany the usual mantra of reform. "Some of the governments imposing measures ought to apply the same medicine to themselves," said the PP’s finance chief Cristóbal Montoso.
The Rajoy team hopes this will be a replay of 1996 when the party took over a prostrate economy from the socialists, and unemployment was almost as high. It tightened then with Prussian discipline, stunning Europe by meeting the entry terms for EMU. "Spain is going to take the lead in economic stability once again, as we did in the 1990s: the situation is not so different now," said Mr Montoso.
One admires the grit, but this is nothing like the mid-1990s, when the world was growing briskly, and the devalued peseta was super-competitive against the D-Mark. Today the whole of Europe is tipping back into recession and Spain is 30pc less competitive against Germany.
My own view is that Spain is still fundamentally "saveable" within EMU. Spanish exports rebounded from the 2008-2009 crash almost as fast German exports, outperforming Italy and France. But this cannot be achieved as long as fiscal and monetary policy are set on slow grinding slump; nor if the burden of adjustment falls entirely on the weaker states as in the 1930s, forcing these countries to slash themselves into a Grecian vortex of self-feeding recession.
German finance minister Wolfgang Schauble – the most dangerous man in the world – is imposing a reactionary policy of synchronized tightening on the whole eurozone through the EU institutions, invoking a doctrine of "expansionary fiscal contractions" that has no record of success without offsetting monetary and exchange stimulus. What is abject is that EU bodies should acquiesce in this primitive dogma.
"Too much virtue has become a collective vice. The collective outcome of all member-states tightening fiscal policy has proved brutally contractionary for the region as a whole," said the CER paper. "Household and business confidence is crumbling rapidly across the currency union. On current policy trends, a wave of sovereign defaults and bank failures are unavoidable. Much of the currency union faces depression and deflation."
It Germany genuinely wishes to save Spain and Italy, it must allow EMU-wide reflation and mobilize the ECB as a lender of last resort to halt the bond crisis, since the EFSF rescue fund does not exist.
To create a currency without such a backstop is criminally irresponsible. If this role is illegal under EU treaty law – and that is arguable – then EU treaties must be changed immediately. If Germany cannot accept this for understandable reasons of sovereignty or ideology, it should accept the implications and prepare an orderly break-up of monetary union. That is the only honourable course.
In the meantime, one can only watch with grim foreboding as the fifth successive government collapses in Europe’s arc of depression, to be replaced by saviours who can save nothing.
Moody's warns on French rating outlook
by Geert De Clercq - Reuters
A rise in interest rates on French government debt and weaker growth prospects could be negative for the outlook on France's credit rating, Moody's warned in a report on Monday, adding to pressure on European debt markets. Worries that France has the weakest economic fundamentals among the euro's six AAA-rated countries have drawn the euro zone's second largest economy into the firing line in the debt crisis this month.
The rating agency said the deteriorating market climate was a threat to the country's credit outlook, though not at this stage to its actual rating. "Elevated borrowing costs persisting for an extended period would amplify the fiscal challenges the French government faces amid a deteriorating growth outlook, with negative credit implications," Senior Credit Officer Alexander Kockerbeck said in Moody's Weekly Credit Outlook dated November 21.
"As we noted in recent publications, the deterioration in debt metrics and the potential for further liabilities to emerge are exerting pressure on France's creditworthiness and the stable outlook (though not at this stage the level) of the government's Aaa debt rating," the Moody's note read. The yield differential between French and German 10-year government bonds rose above 200 basis points last week, a new euro-era high.
Moody's said that at that spread level, France pays nearly twice as much as Germany for long-term funding, adding that a 100 basis point increase in yields roughly equates to an additional three billion euros in yearly funding costs.
In early Monday trade, the French 10-year spread was up about 20 basis points at 167 bps following publication of Moody's report but remained well short of the 202 bps hit last week. The CAC 40 index, which was down 1.7 percent in opening trade, was down 2.2 percent after an hour of trade. "With the government's forecast for real GDP growth of a mere one percent in 2012, a higher interest burden will make achieving targeted fiscal deficit reduction more difficult," Moody's said.
On October 17, Moody's said it could place France on negative outlook in the next three months if the costs for helping to bail out banks and other euro zone members overstretched its budget. "The French social model cannot be financed if the French economy's potential is not preserved. With further weakening GDP growth the political scope for the government to generate further savings in this case would be tested," Monday's note from Moody's said.
The agency said the management of the euro area debt crisis complicated the government's fiscal consolidation efforts. The stress on banks' balance sheets can lead to further increases of liabilities on the government's balance sheet when further state support to banks is needed, it added.
Hungary calls for IMF assistance
Hungary has officially requested precautionary financial help from the International Monetary Fund and the European Union, confirming a sharp reversal of the government's opposition to working under the international lender's guidance.
Both the IMF and the European Commission said on Monday that they had received a request from Hungarian authorities for possible financial assistance, in line with an announcement made by Hungary last Thursday. They said the Hungarian government was seeking precautionary help.
An ad from Austria's Raiffeissen Bank in Hungary a few years ago
Hungary took investors by surprise last week when it said it planned to seek a new deal with the IMF, after a previous loan expired last year and the centre-right government sought to pursue its own policy ideas on spurring economic growth.
But the eurozone debt crisis, and Hungary's weak economic outlook coupled with the threat of a downgrade to junk debt status prompted the government to make a sudden U-turn.
"The IMF has received a request from the Hungarian authorities for possible financial assistance. The authorities have sent a similar request to the European Commission and indicated that they plan to treat as precautionary any IMF and EC support that could be made available," Christine Lagarde, managing director of the IMF, said in a statement on Monday.
The IMF said its delegation, which is in Budapest for a regular economic review, would now return to Washington for consultations with the IMF's management. "The European Commission today received a request from the Hungarian authorities for possible EU financial assistance. They have also indicated that their intention is to treat any EU support that might be made available as precautionary," the Commission said in separate statement.
The government of Viktor Orban, the Hungarian prime minister – which has pursued unconventional policies since it swept to power in April 2010 -– may face hard talks with lenders if it wants a deal without strict conditions attached, analysts have said.
The forint had firmed sharply to around 303-304 versus the euro on the announcement by Friday, but gave back some of those gains to trade at 306.84 on Monday as markets remained cautious and were eyeing rating agencies' views, primarily Standard and Poor's, which had warned Hungary could be downgraded by the end of this month.
Talks between Hungary and the IMF fell apart in July 2010 amid disagreement over policy when Hungary's previous IMF/EU deal signed in 2008 was still in effect.
Some analysts have said the government may want to avoid a rating downgrade and keep financial markets on its side with the promise of a new deal, following a similar tactic by Turkey which held stop-start negotiations with the IMF for almost two years after its standby deal expired in May 2008.
Others said the government could be able to agree with lenders as next year's budget contained big spending cuts, and targeted a deficit of 2.5 per cent of GDP even though some of its measures such as a bank tax and a controversial mortgage repayment scheme could be sticking points in the talks.
"The IMF is asking nothing which would not be in the interest of the government if it wants to stabilise the economy," said Zoltan Torok, an analyst at Raiffeisen, adding that the government could reach an agreement with lenders.
Mr Torok said he did not believe the government was considering playing the Turkish game of buying time, but did not exclude this possibility either, if external financing conditions improved in the next few months.
Moody's downbeat on Irish banks
Moody’s Investors Service said today the outlook for Ireland’s banking system remains negative, citing the banks’ weak funding and liquidity profiles and a very challenging operating environment. "The substantial weakening in the funding and liquidity profiles of the banking sector is a key driver of the negative banking system outlook," Moody’s said. "The banks continue to rely on short-term central bank funding from the European Central Bank and in some cases from the Central Bank of Ireland."
The negative outlook has been in place since 2008, partly due to the tough operating conditions. Moody's also believes that profitability will remain weak, and said the improved capital positions of Irish banks only partly mitigate these weaknesses. The Government has also weakened its own credit profile through supporting the banks, the agency said, and warned the banks would have to deal with the implications of this as the Government tries to cut the debt burden.
The reduction in Government spending could put "considerable pressure" on the country’s recovery prospects, Moody's said, weakening asset quality and putting pressure on the bank's profitability. "We expect the operating environment for Irish banks to remain very difficult over the outlook period, primarily as a result of Government’s considerable austerity efforts, the continued financial market turmoil in the euro area, and deterioration in the global economic environment," said senior analyst Ross Abercromby.
Major questions remain over whether Irish bailout will work
by Dan O'Brien - IrishTImes
A year ago Ireland was in the eye of the euro zone debt storm, having become the second of its 17 member countries to be bailed out. Now the situation in Europe is very much worse, with the collapse of the entire euro project having gone from an outcome of low probability to one that is not far off 50:50. By that measure, Ireland’s bailout was a failure.
The pre-emptive EU-International Monetary Fund intervention, which took place despite the opposition of the then Irish government, was designed to ring-fence Ireland so its problems would not spill over to the rest of the euro zone. In this it failed – something that has been very clear from the reaction of financial markets to the other peripheral countries from the moment the terms of the bailout were unveiled, along with everything else that has happened since, including the rescue of Portugal in the spring.
But if bailing out Ireland did not contain the wider crisis, from a narrower Irish perspective it could be claimed the EU-IMF programme has helped stabilise the economy. Most notable has been the greatly accelerated progress on dealing with the banking fiasco and – if to a lesser extent – the implementation of a huge budgetary adjustment in 2011, without hurling the economy back into recession. Change to how the problems of the banking system were being addressed was by far the biggest policy shift resulting from the bailout – and the most onerous.
The EU-IMF decided money was to be thrown at the problem in quantities beyond those which any Irish decision makers had countenanced, including the Governor of the Central Bank, Patrick Honohan, who was public in his opposition to this imposed policy. The National Pension Reserve Fund was used for this purpose, as was borrowed money.
Making the package even more onerous on taxpayers has been the steadfast unwillingness of the European Central Bank to allow the burning of any senior bank bondholders. From a euro area-wide perspective, the ECB believes the damage from any default to the huge and crucial senior bank bond market would be too great, and thus must be avoided.
There is a strong case to be made for avoiding default on this basis, but for the costs of protecting this euro area market to fall entirely on taxpayers in one small country is grossly unfair. At the very least, bailout funds should have been made available to buy back senior bank bonds in the secondary market. That would have lowered the cost greatly for the Irish taxpayer and avoided the default the ECB fears so much. Ireland’s weak negotiating position and the additional costs for other member states this move would have entailed have thus far prevented this kind of burden-sharing, or any other.
That all of this has happened without a single shred of published documentation setting out the ECB’s reasons for this stance adds insult to injury, and raises even more questions about the transparency and accountability of the Frankfurt institution, in addition to questions surrounding its central role in bouncing Ireland into a pre-emptive bailout last year.
Although everything that has happened subsequently suggests Ireland would have required a bailout by the middle of 2011 at the latest, what is clear now is the scale of the run on the Irish banking system that took place in autumn 2010. Tens of billions of cash on deposit suddenly began to be withdrawn in September 2010, much of it having to be replaced by financial institutions turning to the ECB and the Irish Central Bank for short term lending.
It was this increased exposure that was one of the most alarming developments for the ECB. The bailout did not halt the haemorrhage of deposits. In the months of December and January, depositors were pulling cash out of the system just as rapidly as they had been doing before the bailout. In the first weeks of this year the bailout was looking decidedly unsuccessful.
But then the rate of deposit outflows began to slow, giving some sign the financial system was stabilising, albeit at a much reduced size. Banks collectively lost one third of their entire deposit base, amounting to a massive €300 billion. The most recent signs suggest that despite the deepening of the euro zone crisis during the summer, figures for August and September (the last months for which they are available) showed deposits were actually on the rise for the first time in a year.
Further evidence to support the claim the bailout is working comes from developments in the bond market since the summer. The yields on Irish government bonds fell sharply from late July. In what was as important an indicator of improving confidence, Irish yields diverged from those on Portuguese debt, suggesting Ireland was breaking away from other bailed out countries.
But all that said, huge uncertainties remain. It looks doubtful at this juncture whether the Irish State will be able to begin borrowing normally in the markets at the end of 2012, as the bailout envisages. That raises the question of having to request a second bailout, as Greece has been forced to seek.
But a much bigger question is whether the funds for the current bailout, never mind a second one, will keep flowing. If the euro collapses, chaos will reign. Every country will face unprecedented challenges. Governments may not be able to support their own economies, and this includes those which are providing Ireland’s bailout money. If this happens there is no certainty that bailout funds will still be available.
Germany: "We don’t have any new bazooka to pull out of the bag"
by Brian Parkin and Tony Czuczka - Bloomberg
Germany is standing pat in Europe’s debt crisis, rejecting calls from allies and investors to do more to counter market turmoil, said Michael Meister, a senior lawmaker in Chancellor Angela Merkel’s coalition.
"We don’t have any new bazooka to pull out of the bag," Meister, the Christian Democratic bloc’s finance spokesman and deputy leader in parliament, said in Berlin today. "We see no alternative to the policy we are following," which calls for budget cuts and keeping the European Central Bank from becoming a lender of last resort, he said in a telephone interview.
Germany is signaling resistance to stepping up Europe’s response as the debt crisis that began more than two years ago in Greece threatens France, after snaring Ireland, Portugal, Italy and Spain. While the extra yield investors demand to lend to AAA-rated France reached 200 basis points more than Germany on Nov. 17, the highest risk premium since 1990, Meister said current policies will work if given enough time.
"We need to tell markets very clearly -- and this must be done soon -- that there is no other way forward than the one we’re pursuing," Meister said. Policy makers "must sit tight through the turbulence." The additional yield sought by investors for holding 10- year French bonds instead of benchmark German bunds widened 2 basis points to 157 basis points at 10:57 a.m. in Frankfurt. The euro rose 0.3 percent to $1.3524.
Merkel, who is calling for stronger enforcement of debt and deficit rules underpinning the euro, signaled to Christian Democratic lawmakers at a closed caucus meeting late yesterday that she won’t bend in her refusal to back joint euro-area bonds, according to Volker Kauder, the bloc’s floor leader.
"If markets think that the euro is about to break up, they’re wrong," Meister said. "We must tell markets that we are ready to defend the currency, that it has a great future and will become the strongest currency in the world."
Global partners including the U.S. are urging European governments to stamp out the crisis that’s threatening to pull the 17-nation currency union apart, weighing on stocks and threatening to tip the world back into recession.
Euro leaders must reach "a momentous deal" toward fiscal and political union by mid-January to save the currency bloc, Credit Suisse said yesterday in a note to investors. "In short, the fate of the euro is about to be decided."
Italian and Spanish 10-year bond yields could jump above 9 percent and French yields may exceed 5 percent, said the analysts, led by Jonathan Wilmot, the bank’s London-based chief global fixed-income strategist.
An all-night summit of European leaders in October failed to end the turmoil after producing a pledge to write down Greece’s debt, recapitalize banks and strengthen the region’s rescue fund. Underscoring discord among policy makers, ECB chief Mario Draghi criticized governments on Nov. 18 for failing to implement "long-standing decisions" to stem the crisis.
Germany dismisses eurobond plan ahead of EU commission proposals
by Arthur Beesley and Derek Scally - Irishtimes
The European Commission faces a tough sell in Germany as it advances long-awaited plans for a "eurobond" system for countries in the single currency to issue debt with a common euro zone guarantee. Even before the commission unveils its proposals tomorrow, Berlin’s response to the initiative has been as swift and dismissive as always.
"The chancellor and the federal government do not share the belief of many that eurobonds would be a cure-all for the crisis," said Steffen Seibert, government spokesman. "Rather, they see the danger that such eurobonds would distract from getting to the root of the problem."
With opposition seen across the board in Angela Merkel’s coalition, the initiative reflects concern in Europe that the authorities are running out of options to tame the expanding debt crisis.
The commission’s proposal comes as the emergency worsens rapidly, with the triple-A credit rating of France under pressure, and Italy and Spain in the grip of constant market pressure. It sets out three different models for the introduction of a form of debt it describes as a "stability bond" instead of the "eurobond" which is routinely rejected in Germany.
The first idea is to issue bonds with joint and several guarantees, which means euro zone countries become jointly liable for their share of the guarantee on each others’ debt and the guarantees of other countries.
The second option for a partial common guarantee on member state debt follows a plan from the Bruegel think-tank in Brussels and a panel of German experts. This system would be designed to give an incentive to countries to stay within the 60 per cent of debt/GDP limit in the EU treaty by enabling them to issue eurobonds up to that limit while taking sole responsibility for their own debt issuance above it.
The third option embraces a system in which debt would be backed by several but not joint guarantees. In this scheme, each guaranteeing country would be liable only for its share of liabilities under the bond according to a specific contribution key.
While making it clear that an appreciable toughening of budget oversight would be required to ensure the system works, the commission’s paper says the initiative could "possibly" provide the necessary resources to stem the crisis. "A significant number of political figures, market analysts and academics have promoted the idea of common issuance as a potentially powerful instrument to address liquidity constraints in several euro-area member states," say drafts of its paper.
"Stability bonds would provide all participating member states with secure access to refinancing, preventing a sudden loss of market access due to unwarranted risk aversion and/or herd behaviour among investors. "Accordingly, stability bonds would help to smooth market volatility and reduce or eliminate the need for costly support and rescue measures for member states temporarily excluded from market financing."
To create the conditions for such an initiative, the commission calls for an immediate and decisive advance in the process of economic, financial and political integration within the euro area. Although Germany’s objections are clear, such moves to toughen EU budgetary oversight are seen as an effort to prepare the ground for Berlin to change its attitude.
Still, the tone of objection in the leadership of the Bavarian wing of the German government was particularly strong. " Barroso cannot be allowed [to] become the henchman of countries who can think of nothing else but how they can use eurobonds to get at German taxpayers’ money," said the Christian Social Union.
The pro-business Free Democrats were equally dismissive, though slightly more diplomatic, describing the commission’s proposal as a "retrograde" discussion. "This would lead to rising interest for German [credit], something that cannot be in our interest," said party leader Philip Rösler.
Europe seeks power to place weak states in 'administration'
by Arthur Beesley - Irishtimes
The European Commission wants the Brussels authorities to be given the power to place distressed euro zone countries in a form of EU "administration" as part of a new drive to toughen the fiscal rules behind the single currency.
In a bid to intensify the battle against the worsening sovereign debt crisis, the EU executive will publish plans tomorrow for euro countries to issue debt with a common euro zone guarantee. The initiative, resisted for months by Germany, includes intrusive measures to radically expand the reach of budgetary oversight by the European authorities.
While the objective is to minimise the increased risk that fiscally sound countries would bear in the "eurobond" or "stability bond" system, member states would have to yield significant new powers to Brussels. So that eurobonds are always repaid, the commission suggests mechanisms to ensure the servicing of such debt always takes priority over "any other spending in . . . national budgets".
Drafts seen by The Irish Times say a further option "would be to grant extensive intrusive power at EU level in cases of severe financial distress, including the possibility to put the failing member state under some form of ‘administration’ ".
This implies EU officials would be given power to intervene in the execution and supervision of key national policies. The commission says the system, seen as a potential panacea to the crisis, could only be adopted if euro countries deepened the co-ordination of economic policy.
To achieve that, it suggests the EU bodies be given the power to pre-approve the national budgets of governments with high debt or deficits. It also says the EU authorities should have powers to direct governments to correct any "slippages" during the execution of budgets, in effect reversing budget decisions.
The plan includes some of the most far-reaching proposals seen in the decades-long drive to integrate the economies of Europe and the euro zone. It comes as the debt crisis spreads deeper into core euro zone countries, with the borrowing costs of France and Belgium rising as Italy and Spain endure yet more pressure. "This crisis is hitting the core of the euro zone. We should have no illusions about this," said EU economics commissioner Olli Rehn.
Even before eurobonds are introduced, the commission wants euro countries to quickly synchronise the key steps in their budget process and adopt measures to intensify policy surveillance by Brussels. At the same time, it says countries should be subjected to "enhanced" surveillance if they face severe financial disturbance.
"We need more discipline in the euro area because we know that we are in this situation today . . . because the governments of Europe did not respect their commitments," said commission president José Manuel Barroso. "We believe that in the future it may be appropriate to have some kind of stability bonds provided – and I want to underline provided – there are appropriate mechanisms of discipline and convergence."
Speaking after talks with Greece’s technocratic prime minister Lucas Papademos, he said the situation in that country was "extremely serious". Greece needs an €8 billion bailout loan to avert bankruptcy next month but the EU authorities won’t pay until conservative leader Antonis Samaras signs a letter pledging to fully implement its EU-IMF plan.
On the day after the centre-right People’s Party seized power in the Spanish election, the country’s 10-year borrowing cost rose close to the "unsustainable" level of 7 per cent. Italy remained under pressure and Moody’s rating agency said recent strain could be negative for France’s triple-A credit rating.
With Belgian borrowing costs under pressure as well, the country’s 17-month-long political crisis worsened when the chief negotiator in coalition talks tendered his resignation a second time. Hungary, not in the single currency, sought further aid from the EU and the IMF.
U.S. Companies Add Workers Abroad, Cut at Home
by David Wessel - Wall Street Journal
U.S.-based multinational corporations added 1.5 million workers to their payrolls in Asia and the Pacific region during the 2000s, and 477,500 workers in Latin America, while cutting payrolls at home by 864,000, the Commerce Department reported.
The faster growth abroad was concentrated in emerging markets, such as China, Brazil, India and Eastern Europe, according to economists Kevin Barefoot and Raymond Mataloni, of the U.S. Commerce Department.
"Judging by the destination of sales by affiliates in those countries," the economists wrote in a recent survey, "the goal of the U.S. multinational corporations' expanded production was to primarily sell to local customers rather than to reduce their labor costs for goods and services destined for sale in the U.S., Western Europe and other high-income countries."
The data show the dramatic changes in the nature of globalization during the past decade, when U.S.-based multinationals concentrated their growth opportunities abroad. And it is likely to become fodder in the political debate over U.S. and foreign corporate tax codes and policies aimed at encouraging companies to produce more jobs at home.
The newly released data also show that while American companies still do the bulk of their capital investment and research-and-development spending inside the U.S., an increasing share is being done abroad.
The multinational companies, for instance, reduced capital-investment spending in the U.S. at an annual rate of 0.2% in the 2000s and increased it at a 4.0% annual rate abroad. Still, they allocated $2.40 in capital spending in the U.S. for every $1 spent abroad.
Among companies in industries outside of finance, 57% of overseas hiring between 1999 and 2009 took place in Asia. The firms added 683,000 workers in China, a 172% increase over the decade, and 392,000 workers in India, a 542% increase. Another 18% of the overseas hiring occurred in Latin America.
Overseas, U.S.-based corporations still employ more people in Europe than in any other part of the world. Most of the hiring during the 2000s took place in lower-wage countries in Eastern Europe. The companies cut 14,700 workers in Germany during the decade and added only 8,700 in France, while increasing their payrolls in Poland by 135,500 and in Hungary by 53,700.
The U.S.-based multinational companies employed 23.1 million workers in the U.S. in 2009 and 10.8 million in majority-owned affiliates in other countries, a total that doesn't reflect millions more employees at unaffiliated overseas companies from which U.S. companies make large purchases.
Between 1989 and 1999, U.S. -based multinationals, both financial and nonfinancial, added 4.4 million workers in the U.S. and 2.7 million workers overseas. In the 2000s, as the government reported in April, the firms cut their work forces in the U.S. as they expanded them abroad. The latest data show that the firms cut 864,600 workers in the U.S. between 1999 and 2009 and added 2.9 million workers abroad.
The Commerce Department's Bureau of Economic Analysis does a benchmark survey every five years to pick up multinational companies it has overlooked. The update for 2009 turned up multinational firms with large U.S. work forces that weren't included in the preliminary data released in April. The earlier data showed that U.S. multinationals had cut 2.9 million workers in the U.S. in the 2000s and added 2.4 million abroad.
Much of the overseas investment and hiring by U.S. multinationals has been in the service sector and other industries outside manufacturing. Among U.S. multinational firms in manufacturing, about 60% of employment is still in the U.S. But the manufacturers cut their U.S. payrolls by 2.1 million in the 2000s and added 230,000 workers overseas. In all, U.S. multinational manufacturers employed 6.9 million workers in the U.S. in 2009 and 4.6 million abroad.
BofA Warned by Regulators to Get Stronger
by Dan Fitzpatrick - Wall Street Journal
Bank of America Corp.'s board has been told that the company could face a public enforcement action if regulators aren't satisfied with recent steps taken to strengthen the bank, said people familiar with the situation.
The nation's second-largest lender has been operating under a memorandum of understanding since May 2009, following repeated tussles with regulators over the purchase of securities firm Merrill Lynch & Co. and a downgrade of the company's confidential supervisory rating. The memorandum, which isn't public, identified governance, risk and liquidity management as problems that had to be fixed, according to people familiar with the document.
In recent months, regulators met with Bank of America's board and said they wanted to see more progress on the bank's compliance with the memorandum. Otherwise the informal order could turn into a formal and public action, which would likely mean intensified scrutiny and greater restrictions as Chief Executive Brian Moynihan tries to shed problems tied to the financial crisis. Bank of America's directors were taken aback, said people familiar with the situation. It "put the board on the ground," one of these people said.
The threat of an enforcement action is the latest flashpoint in a tense relationship between U.S. regulators and Bank of America. Directors believe the bank has met demands set out in the 2009 document. Now, "the board's view is it's time to take us out of the penalty box," said one person familiar with the situation. A bank spokesman declined to comment.
But regulators also have told the board they have become concerned about turnover in key management posts. The latest shake-up was the departure in late October of strategy head Mike Lyons, a member of Mr. Moynihan's inner circle who often served as a liaison between the CEO and the board on certain issues.
In less than two years, Mr. Moynihan has changed chief financial officers and chief risk officers twice. In September he ousted the head of wealth management and the head of the consumer bank while elevating two other executives to co-chief operating officers. It is unclear when regulators will decide whether more severe measures are necessary. The bank could yet get the existing penalty lifted, the people added.
Informal memorandums, which are rarely disclosed to the public, typically require banks to address specific problems. Companies that don't deal with deficiencies can be served with public actions requiring them to raise capital or get clearance for any major moves, including asset sales.
There are 1,042 banks and thrifts currently operating under formal enforcement actions issued since 2007, according to SNL Financial, which includes cease-and-desist orders, prompt corrective-action notices, capital directives and formal agreement or consent orders in its tally.
Lifting the memorandum of understanding is a major priority for Mr. Moynihan, these people said. The document was established after the Federal Reserve and the Office of the Comptroller of the Currency downgraded their overall ratings of the bank to "fair" from "satisfactory" and the Fed said in a letter that "more than normal supervisory attention will be required for the foreseeable future."
Regulators have told the bank that they want to be sure that changes made to governance, risk, capital and credit are permanent and can work over time. A shaky U.S. economy and uncertainty surrounding new global capital requirements also are concerns.
Since mid-2009, Bank of America has appointed eight new directors and made a number of internal changes ranging from how it classified credit to risk and liquidity-management controls. After Mr. Moynihan became CEO in 2010, he began selling noncore assets and preserving capital as a way of shoring up the bank's balance sheet.
But frustration is building as the two sides now view Bank of America's progress differently, these people said. "The Fed does not believe Bank of America has done all the work," while Bank of America officials believe "they have done all the work and the Fed keeps moving the goal line on them," said one person familiar with the situation.
Regulators are shortening the leash on the nation's biggest banks as they try to prevent future blowups. Like Bank of America, Citigroup Inc. during the financial crisis was slapped with an informal action asking it to fix an array of problems. This year two foreign banks with U.S. operations were given formal orders over violations of money-laundering laws.
Bank of America has experienced other surprises from regulators this year. In March the Fed rejected a request for a modest dividend increase in the second half of 2011 after Mr. Moynihan had hinted publicly that one was likely.
Bank of America shares have tumbled 58% this year—the biggest decline among major U.S. banks—amid worries about the bank's exposure to mortgage-related legal costs. The shares dropped 29 cents, or 5%, in trading Monday to $5.49.
The next financial crisis will be hellish, and it’s on its way
by Addison Wiggin - Forbes
"There is definitely going to be another financial crisis around the corner," says hedge fund legend Mark Mobius, "because we haven't solved any of the things that caused the previous crisis."
We're raising our alert status for the next financial crisis. We already raised it last week after spreads on U.S. credit default swaps started blowing out. We raised it again after seeing the remarks of Mr. Mobius, chief of the $50 billion emerging markets desk at Templeton Asset Management. Speaking in Tokyo, he pointed to derivatives, the financial hairball of futures, options, and swaps in which nearly all the world's major banks are tangled up.
Estimates on the amount of derivatives out there worldwide vary. An oft-heard estimate is $600 trillion. That squares with Mobius' guess of 10 times the world's annual GDP. "Are the derivatives regulated?" asks Mobius. "No. Are you still getting growth in derivatives? Yes."
In other words, something along the lines of securitized mortgages is lurking out there, ready to trigger another crisis as in 2007-08. What could it be? We'll offer up a good guess, one the market is discounting.
Seldom does a stock index rise so much, for so little reason, as the Dow did on the open Tuesday morning: 115 Dow points on a rumor that Greece is going to get a second bailout. Let's step back for a moment: The Greek crisis is first and foremost about the German and French banks that were foolish enough to lend money to Greece in the first place. What sort of derivative contracts tied to Greek debt are they sitting on? What worldwide mayhem would ensue if Greece didn't pay back 100 centimes on the euro?
That's a rhetorical question, since the balance sheets of European banks are even more opaque than American ones. Whatever the actual answer, it's scary enough that the European Central Bank has refused to entertain any talk about the holders of Greek sovereign debt taking a haircut, even in the form of Greece stretching out its payments.
That was the preferred solution among German leaders. But it seems the ECB is about to get its way. Greece will likely get another bailout — 30 billion euros on top of the 110 billion euro bailout it got a year ago. It will accomplish nothing. Going deeper into hock is never a good way to get out of debt. And at some point, this exercise in kicking the can has to stop. When it does, you get your next financial crisis.
And what of the derivatives sitting on the balance sheet of the Federal Reserve? Here's another factor behind our heightened state of alert. "Through quantitative easing efforts alone," says Euro Pacific Capital's Michael Pento, "Ben Bernanke has added $1.8 trillion of longer-term GSE debt and mortgage-backed securities (MBS)."
Think about that for a moment. The Fed's entire balance sheet totaled around $800 billion before the 2008 crash, nearly all of it Treasuries. Now the Fed holds more than double that amount in mortgage derivatives alone, junk that the banks needed to clear off their own balance sheets. "As the size of the Fed's balance sheet ballooned," continues Mr. Pento, "the dollar amount of capital held at the Fed has remained fairly constant. Today, the Fed has $52.5 billion of capital backing a $2.7 trillion balance sheet.
"Prior to the bursting of the credit bubble, the public was shocked to learn that our biggest investment banks were levered 30-to-1. When asset values fell, those banks were quickly wiped out. But now the Fed is holding many of the same types of assets and is levered 51-to-1! If the value of their portfolio were to fall by just 2%, the Fed itself would be wiped out." Mr. Pento's and Mr. Mobius' views line up with our own, which we laid out during interviews on our trip to China this month.
Rolls-Royce tastes lead to fiat money – time we wean ourselves off high debt
by Larry Elliott - Guardian
People will borrow too much as long as the 1% have all the cash but until private indebtedness is cut, we'll be living with the eurozone crisis
Central bankers are by nature sober creatures so it was hardly a surprise to find Sir Mervyn King in downbeat mood last week. The Bank of England governor's message to the nation was that recovery from the Great Recession will be long and arduous – a statement of the obvious if ever there was one. Events of the past week provided plenty of evidence to support King's argument: the UK unemployment figures were dreadful, the sovereign debt crisis in the eurozone is intensifying, and consumer confidence is crashing.
John Cridland, director general of the CBI, said business is hunkering down and forward-looking surveys of activity suggest he is right. For companies of modest means that are dependent on lines of credit from the banks, a tough winter is in prospect. It is not just European governments that are trying to reduce their debt burdens; European banks – which are loaded up with sovereign debt – are de-leveraging as well. All the ingredients are there for a full-scale credit crunch, leading to businesses going bust and a surge in jobless totals.
This much is obvious but not especially helpful. The task now is threefold: to learn lessons from the crisis; to put in place a workable plan for recovery, and to ensure that the next phase of the downturn is as short and pain-free as possible. A bit more optimism from policymakers would help as well. We could do with a bit less of the "blood, sweat and tears", and a bit more of the "we have nothing to fear but fear itself".
It's a moot point whether policymakers have learnt the right lessons from the crisis. The Australian economist Steve Keen – one of the handful of practitioners of the "dismal science" to have spotted the crisis coming – was in London last week and it was interesting to hear his take on what went wrong.
Keen's argument is that the sovereign debt crisis is merely a symptom of the real cause of the problem: an exponential increase in private debt as a share of national income. In the early stages of a credit cycle, the private sector borrows to fund investment that pays for itself, but in the euphoric bubble phase borrowing is used to speculate on rising asset prices.
Debt grows much faster than income but those borrowing the money assume they will be able to pay off what they owe from the rising capital value of their assets. This model of growth, in other words, is no more than a gigantic Ponzi scheme, named after the fraudster who paid out investors with money raised from the next wave of suckers.
The figures are quite startling. In the US, for example, private debt was 45% of national output (gross domestic product) in 1945. By the peak of the boom in the last decade, it was 300% of GDP, and has subsequently fallen to 265%. Over the same period, public debt has risen by 30 percentage points, softening the blow of the private-sector de-leveraging.
Britain has followed a similar pattern: during the economic upswing, individuals used their homes as cashpoints, withdrawing £300bn in equity as property prices rose. Since the crash, they have taken advantage of low interest rates to reduce their indebtedness. Equity repayment has been a little more than £50bn, suggesting this process may have some way to go. The global economy is not going to return to sustained growth until debt is significantly reduced.
One way of doing this is through "nature's cure": accepting that it will take time for the debt hangover to wear off. In the meantime, governments also need to put their house in order, reducing their borrowing so that interest rates can stay low and so that finance ministries build up sufficient ammunition to deal with any future crises. This option does, however, mean that the depression will continue for many years, because the result of the private and public sectors de-leveraging simultaneously is a hefty fall in aggregate demand.
In the US and the UK, quantitative easing (QE) has been deployed in an attempt to prevent private sector de-leveraging leading to a prolonged and deep contraction. Asset purchases by central banks boost the balance sheets of financial institutions and drive down the interest rates on government bonds, making other forms of investment more lucrative. The idea is for the money created by QE to flow out of the banks and into the wider economy.
Given the amount of money that has been created through asset purchases, the impact on growth rates has been disappointing. This is perhaps not all that surprising, given the desire of banks to hold more capital and the reticence of a debt-saturated private sector to borrow more. Ironically, the one bit of the economy that ought to be benefiting from QE – the small businesses in need of working capital – is still struggling to get the finance it needs.
Oiling the wheels
Keen says the solution to this problem is for governments to change dramatically the balance between fiat and credit money in the economy. Fiat money is the cash directly created by governments; credit money is created through a process known as fractional reserve banking, in which banks can lend more money than they hold as reserves. The assumption currently is that repeated doses of QE will oil the wheels of the fractional reserve-banking machine.
But by increasing the quantity of fiat money, Keen says this process could be circumvented. What should happen, he says, is that governments should give the public a big dollop of cash. Those that had debts would be obliged to use the money to pay them down; those that didn't would be able to spend the money however they wished. The result would be lower debt levels and greater spending power.
A more radical version of this idea would be a debt amnesty for those gulled into borrowing more than they could afford during the bubble years.
This, though, is not a realistic option: it would be seen as unfair by those who did not get into debt and it would be strongly opposed by the banks, many of which would go bust as a consequence. One thing we have discovered during the crisis (not that there was much doubt about it) is that the lobbying power of Wall Street and the City of London is immense. If they can head off the threat of a Tobin tax then they would certainly be able to nix a debt jubilee.
The attraction of Keen's proposal is that it attacks the root cause of the problem while at the same time offering to shorten and alleviate the cold turkey as individuals try to kick the debt habit. Rising household incomes would spur consumption – the biggest component of GDP – and would encourage those companies sitting on big cash piles to invest rather than hoard. Stronger growth would make it easier for governments to balance their books and reduce their debt-to-GDP ratios.
There would, of course, still be plenty of problems left to solve. The global economy, as King reminded us last week, remains grotesquely unbalanced. The financial system is not fit for purpose. The tendency to take on more debt than is good for us will remain endemic until labour increases its share of income. But confronting the issue of private indebtedness is crucial. Unless it is tackled, a crisis now deep into its fifth year will continue for years to come.
Tests Mount for Argentine Economy
by Matt Moffett - Wall Street Journal
President Cristina Kirchner's mixed signals about how she plans to address longstanding problems in Argentina's economy are adding to uncertainty that is causing capital flight, analysts say.
In the gap between Mrs. Kirchner's re-election last month and her December inauguration, Argentines aren't clear which policy makers are in charge and what the strategy is, the analysts say. In recent days, government policy has veered from market-intruding controls on foreign-currency transactions to market-friendly reductions in some utility subsidies to consumers.
The dissonance seems to reflect internal struggles within Mrs. Kirchner's team on whether Argentina will moderate its free-spending and interventionist policies in the second term, or whether it will offer more of the same, even though fewer resources are available. The outcome of the apparent debate won't become clearer until Mrs. Kirchner announces her new cabinet, sometime closer to the Dec. 10 start of her second term.
One government official said the recent turmoil was a temporary blip, partly related to economic uncertainty in Brazil and Europe. The official said Mrs. Kirchner was politically strong, following her landslide re-election with 54% of the vote, and that there were signs in the past few days that the worst of the dollar drain had passed.
Others point to underlying problems. "For a while, most of the decisions were easy because the government was dealing with abundance," said Gabriel Torres, an economist at Moody's Investors Service. "It was a question of, 'Do we spend 100% of the money coming in or 110%?' "
But after years of fast growth and heavy government spending, fueled by high farm commodity prices, Argentina will be hard-pressed to maintain business as usual, Mr. Torres said. The big trade and fiscal surpluses that once provided Argentina with an economic cushion have withered. The peso, once undervalued to keep industry competitive, has appreciated against the dollar over the past couple of years.
Many Argentine savers and investors started switching from pesos to dollars a few months ago, anticipating that the government would devalue the currency after the election. But then, at the end of last month, the interventionist wing of the government moved to try and throttle the dollar outflow by requiring that foreign-currency purchases receive prior approval from Argentine tax authorities.
Overseeing the currency controls has been Guillermo Moreno, the internal commerce secretary whose zeal has prompted some in the business community to dub him "El Loco," the Crazy Man. Previously, Mr. Moreno had been responsible for enforcing price controls that are unpopular in the business community.
Mrs. Kirchner herself has tried to counter the flight to the dollar, jawboning companies to reinvest profits rather than transferring them out of the country. At the recent opening of a General Motors Co. plant, she praised the company's investment as exemplary and decried business executives who "make formidable sums of money and don't reinvest and take them out of the country."
Even though transactions on the foreign-exchange market have plummeted recently due to the exchange controls, the central bank has experienced a slow, steady drain on hard currency reserves. Reserves have fallen to $46 billion from $52 billion in August.
In part, the loss of reserves has persisted because the currency controls boomeranged and made Argentines even more jittery. Some Argentines with dollar-denominated local bank accounts have been withdrawing money to place under the mattress.
Late Friday, Miguel Angel Pesce, vice president of the central bank, said the rate of withdrawals had declined in an "important" way by the middle of last week, and that the scenario was improving. Still, Argentina lost $1.7 billion in dollar deposits, about 11% of the total, in the first two weeks after the exchange controls announcement on Oct. 28, the bank said.
The negative repercussions of the currency moves have been partially offset by initiatives this month to reduce government subsidies that have kept consumers' electricity, water and gas rates at rock-bottom levels. Those subsidies cost about 4% of Argentina's gross domestic product and are no longer affordable, economists say.
The subsidy reductions will be initially limited to industrial users and residential users located in wealthy neighborhoods of Buenos Aires, said planning minister Julio de Vido and economy minister Amado Boudou, two cabinet officials who are favored by the business community.
But other Buenos Aires residents will be required to fill out forms justifying that they actually have an economic need for the subsidies, said Mr. De Vido, who is a candidate to succeed Mr. Boudou as economy minister when the latter moves on to serve as Mrs. Kirchner's vice president in December.
It is still unclear how far the government will go in cutting subsidies among residential users, analysts say. Steep cuts would increase the utility bills paid by the mass of the population and likely cost the government political support.
Investors have been left to put their own interpretation on the mixed signals. During a recent conference call with investors, Franco Bernabe, CEO of Telecom Italia SpA, a telecommunications giant that is a big investor in Argentina, praised the subsidy cuts as representing "a very positive approach on problems that have been developing for over a long period of time."
Nevertheless when pressed by a stock analyst on Argentina's currency policy, Mr. Bernabe acknowledged that companies were facing "moral pressure from the government" against transferring dividends outside of the country. He nevertheless said that Argentina was on "the right track."
Spain's debt crisis worsens as country begins month of post-election limbo
by Giles Tremlett - Guardian.
A landslide victory by Mariano Rajoy's People's party (PP) in Sunday's general election did nothing to stop Spain's debt problems worsening on Monday as the prime minister elect remained powerless to calm the markets. Spaniards were proud of having avoided an Italian-style government of unelected technocrats after they gave conservative Rajoy the go-ahead to introduce reform and impose further austerity.
But commentators warned that, similar to the technocrats running Italy and Greece, he had only limited options. "None of his predecessors have accumulated as much power as he will have," said Jesús Ceberio, a former El País editor. "But, paradoxically, none had such little room for manoeuvre."
Rajoy is hampered by the country's system for handing over power, which takes a month, and the impatience of markets that sent the cost of Spanish debt higher on Monday morning. He must also obey the dictates of an EU, dominated by German chancellor Angela Merkel, which has imposed severe austerity programmes on member countries with debt problems. "A large part of his most immediate programme is already set out in the fiscal consolidation plan demanded by Europe," Ceberio said.
Rajoy will, for example, be unable to choose Spain's deficit levels over the next three years, as strict targets have already been set by the EU. The PP leader has warned that he does not carry a magic wand and will not be able to perform instant miracles, even though yields on Spanish bonds are floating dangerously towards the 7% level that economists consider unsustainable.
Rajoy's main message to investors is that Spain will be "compliant", meaning it will meet the deficit target of 4.4% set by the EU for next year. In a country where growth is zero and austerity already threatens a double-dip recession, that is likely to require further massive spending cuts or tax hikes, or a mixture of both.
On Sunday night he pledged to make Spain respected in, among other places, Frankfurt. That was recognition that the country now depends heavily on the Frankfurt-based European Central Bank, which has been buying Spanish bonds to keep yields down. Rajoy is, however, in tune with Merkel, with whom he spoke by phone on Monday. Merkel's spokesman, Steffen Seibert, said they discussed "Spain's great problems".
Reforms that bring no cost to Spain's cash-strapped treasury, such as to the labour market, may come first. Jaime García, an economist at a PP thinktank, said he expected Rajoy to announce "shock measures" soon.
PP leaders have urged the outgoing socialist government of prime minister José Luis Rodríguez Zapatero to speed up the transfer of powers, even though the law requires parliament to meet on 13 December before Rajoy can take over.
"There are extraordinary problems which demand that a holiday period between governments should not exist," said PP spokeswoman Soraya Sáenz de Santamaría. Economist Nicholas Spiro, of Spiro Sovereign Strategy, said: "The fact that investors have to wait another month for Mr Rajoy's cabinet to take the reins only adds to the uncertainty."
The outgoing socialists have set into motion the process of calling a party conference to transfer power to a new leadership. The conference is likely to take place in February.
Spanish boom town that went bust
by Giles Tremlett - Observer,
Benalup used to be thriving but now has the worst levels of unemployment in a country on brink of economic collapse
The shiny Audis and BMWs that still line the narrow streets of Benalup are a reminder that this Andalucían country town once boasted the greatest number of luxury cars per head in the south-western province of Cádiz. These days this charming place, set bull-rearing countryside inland from Gibraltar, holds a different kind of record: not only the worst unemployment rate in the country, but the worst in Europe.
"I don't know whether they can fix this," said 19-year-old Juan Carlos Gutiérrez, one of hundreds of young people who dropped out of school and now drift between part-time work, training courses and the dole queue. "I've picked asparagus and worked in a packing factory, but the jobs never last. The future is screwed."
"Everyone our age is out of work," agreed Nora Pérez, 22, as she waited for the hearse bringing her grandmother to her funeral in the picturesque square of Our Lady of Perpetual Help. "My father went to Germany when he was young. Our generation may emigrate as well. Some of my friends have already left."
A grey-bearded, bespectacled man grins from a campaign poster overlooking the tiny ornamental gardens and bandstand on San Juan Street and calls on the people of Benalup to "sign up to change". He is Mariano Rajoy, the conservative People's party (PP) leader set to become Spain's prime minister at the general election on Sunday.
Rajoy will inherit a country in crisis. Growth is zero and unemployment has hit 23%. In Cádiz province, one in three is jobless. In Benalup 1,500 adults are without work. In a country where 46% of the under-25s cannot find employment, Benalup's unqualified youngsters are getting desperate.
"Many got into debt when times were good, buying houses and cars and starting families," says Ricardo Jiménez, who runs the local branch of the Catholic charity Caritas. "Families are very close and help one another out, but we already help 80 families and more come every month. Some are asking for help to feed their babies," he said. That means almost 5% of the town needs church handouts.
Others are handed money by the town hall or given whatever jobs local politicians can invent. "If we have to dig a ditch we do it by hand, rather than with a digger, because that way we employ more people," said councillor Manuel Moguel.
When Luis Moreno, 23, left school five years ago there was no need to worry about finding a job. All you had to do was walk on to a building site. "It was very simple," he says. Now he receives €526 (£450) a month to attend a training course designed to turn a dozen locals into graphic designers, though design jobs are not plentiful in Benalup. "We have to learn new skills," he says. He is one of the lucky ones. Courses like this are heavily oversubscribed.
As markets demand ever higher interest payments for lending Spain money, and the European Union instructs its politicians to slash its deficit, public money is drying up. Yields on Spanish debt have now overtaken Italy's and soared to the same levels at which Greece and Portugal needed to be bailed out. And if Spain – a much larger economy – fails, then it may bring down the euro.
Spain's biggest problem remains the money owed to banks for property or land bought during a decade-long boom fuelled by cheap credit. The rows of unsold new homes in Benalup are evidence of Spain's housing bubble, which burst in 2008, leaving 700,000 unsold new houses on the market.
By 2004, more than 80% of Benalup's labour force worked in construction, building homes or holiday apartments along the nearby Mediterranean coast. "Kids left school at 16 because they could earn €3,000 a month working a three-and-a-half-day week," says Moguel. "I had university-trained engineers working in my company who were earning less than that."
As money poured into people's pockets, the number of banks in town doubled. La Caixa, a newly arrived savings bank, started a local lending war – its manager winning awards. "Kids were buying houses and cars with the loans. And those who already had a house bought another one," says Moguel.
Now the town is plastered with "For Sale" signs from Servihabitat, the real estate branch of La Caixa, which is repossessing properties – though owners must still pay off their full debt after homes have been taken away.
"That's unfair. You can't have a bank saying your home is worth €180,000, lending you the money and then repossessing it at half that price," says Moguel, a Socialist. He is uncomfortably aware that Spain's torrid affair with speculative capitalism happened largely on the watch of the Socialist government led by outgoing prime minister José Luis Rodríguez Zapatero.
Even in Benalup, where the Socialists once won 90% of the vote and which still remembers the bloody suppression of an uprising by local anarchists in the 1930s, the vote is now sliding to the right. "It used to be tough in this town to be from the People's party, but we won 43% of the vote at municipal elections in May," says Vicente Peña, a 40-year-old veterinarian who heads the party's local branch.
Peña delivers the same diagnosis of Benalup's ills as his Socialist opponents. "Too many people dropped out of school to become bricklayers. They can't even write a sentence properly."
Vicente Ruiz, owner of the El Buyí bar, will vote for Rajoy. "When Caritas is the biggest employer in town, things are really bad," he says. "It is shameful to have to ask for charity. What we need is a Mrs Thatcher."
Public money is being spent on silly projects, clients in his bar agree. "I've had 60-year-old women coming to bricklaying courses," says one, Nicolás. "It is ridiculous, but they each get their own overalls and hammer."
Peña says that, among other things, people will have to go back to the land. But even there things are going badly. Local horses, bred at stud farms set up as a trophy hobby by nouveau riche local builders, are now being sacrificed for meat and exported to dinner tables in northern Spain.
Pura Raza Española ponies are going for €150. Even fighting bulls are on the decline. "Town halls subsidised many bullfights," says rancher Salvador Gaviria. "But now they have no money, so the market is sinking." The number of bullfights across Spain has fallen by a third as a result.
Benalup is too far inland from the beach to attract tourists. A golf resort set up by a Belgian company, Fairplay, is said to be struggling. The Hotel Utopia, a boutique-style establishment that opened recently, was almost empty this week.
Spaniards hope Rajoy, who has been deliberately ambiguous about his austerity programme and liberal reform plans, can fix their problems. "If changing to Rajoy is going to solve everything, then why haven't the markets – which know he is going to win — shown they trust him?" asks Moguel.
Rajoy will come under immediate pressure to reveal how he plans to square a budget that needs some €41bn of savings next year. Those must come on top of austerity measures already imposed by Zapatero, who cut civil service pay and froze pensions.
Alberto Ruíz Gallardón, PP mayor of Madrid and a probable minister, has called on the socialists to hand over power quickly. "It could be dangerous to prolong the caretaker period," he says. But parliament does not meet again until 13 December and it may take another fortnight to appoint Rajoy formally. Even if he takes over immediately, jobs are unlikely to reappear in Benalup.
Fortunately it retains the Cádiz tradition of laughing at adversity. Benalup's carnival musical groups are already practising the typical chirigota songs that parody the powerful. Rajoy, Angela Merkel and the European Central Bank can all expect to feature in them by the time carnival comes around in February.
The Shadow of an Anchovy
by Florence - Slipping Glimpser
My mother-in-law's family were poor peasants, and they would tell the story of being so poor that instead of having meats at the center of the round of polenta, they had a single small anchovy hanging over the center, casting its shadow. They said that the shadow of the anchovy was all they had to bring a little richness to the polenta.
I was in Italy at the end of October and beginning of November, in the provinces of Tuscany, Umbria, and Le Marche. I was more than a traveler there: I was named for Florence - Firenze to my mother and those who knew me as a child - and my childhood was woven with the narrow streets and convent cloisters, churches and olive groves of Firenze and Tuscany, as I traveled back and forth with my art-historian single mother between the surreally different worlds of the American Midwest and Italy.
Fields, vineyards and villa, Setignano
From the time I was five until I was fifteen, we lived in Florence for part of every year. I went to kindergarten and fifth grade in Italian schools. I spoke Italian. Some of who I am came from that life, so far-away and mysterious to my American school-mates. I hadn't been back in many years, and this trip was a poignant, sweet chance to be there again with my mother, while it is still possible for both of us.
Although Italy is wealthy now, when I was a child - thirty, forty years ago - Italy was poor, third-world poor, and we were poor too, despite (or maybe because of) our bicontinental life.
The convent on Via Giuseppe Giusti
When I was small, we lived in a convent pensione across the street from the archives where my mother did her research. She couldn't afford child care, so in the early morning, when I was still asleep, she would go out, buy a roll and jam, sneak back in and leave it by the bed for me. When I woke up I would find my roll waiting for me, and for the rest of the morning, until lunchtime, I would lie in bed, get crumbs all over the sheets, and read, endlessly.
If I really needed something, the Italian nuns were down below, cooking in the big dark kitchen, cleaning the already-shining floors in the mostly empty main rooms, or cultivating the garden behind the building. I remember eating zucchini flowers for the first time, deeply comforting pastina in brodo with grated parmigiano on top, hard Tuscan bread. A great treat was a single Baci, the chocolate and hazelnut "kiss" made by Perugino, or an aranciata, an orange soda.
When we lived in Italy for longer times, we rented an apartment from an English doctor who owned a farmhouse in the hills to the west of the city. The contadini, the traditional Italian peasants who worked the land, lived down below us, next to their animals. Every morning I would wake to the sound of the cart and white oxen going by below our windows, slowly, slowly, with much shouting.
Two white oxen in the Tuscan hills
Our back windows looked out over a quintessential, "romantic" Tuscan landscape: hills, olives, dark spires of cipressi (cypresses), stone walls, the old stone village of Pian dei Giulari perched along one side of the valley, just down the road from us. What was concealed was the poverty, the backbreaking work, the deep knowledge that knew how to rebuild the stone walls, how to prune the olives, how to breed the oxen, how to survive. Now most of the contadini, as a culture, are gone, gone to work the well-paying jobs in the cities, and the absentee landlords struggle to keep the vineyards and groves alive without that deep and unacknowledged wisdom.
Sheep and stone trough
I remember, vividly, walking as a child on a country road and looking down into a farmyard where a contadini family was gathered around a round of polenta. Polenta was peasant food - no city restaurant would have dreamed of featuring it on a menu - and it was formed into enormous flat cakes, as wide as a circular table. It was cut with a string into wedges (this fascinated me), and each person at the table would eat their wedge toward the middle. In the middle would be whatever protein the family might have, and whoever could eat their wedge most quickly would get more of what was there.
A meat shop in Norcia - yes, those are boars' heads
While we were in Italy this time, we spent time with Peggy Haines-Capelli, an American art historian whom I knew and loved as a child and who, unlike us, chose Italy as her home and country. She eventually married an Italian journalist, and is now a widow. She told us the story of her husband's family and the anchovy as we sat around her round table, eating food we had brought back from our trip into the mountains of Umbria: famous tiny lentils from the town of Castellucio, pecorino cheese, salame called "mules' balls" from Norcia, with a white center of lard - a feast somewhere between a picnic and a high tea, rich with the stories of our trip to the wild and mysterious Monti Sibillini, the mountains of the sibyls. When I heard Peggy's story, probably in mid-bite of something delicious, it felt like a koan: what is the taste of the anchovy's shadow?
Quinces in farmer's market, Florence
While I was in Italy I was puzzling over the particular flavor of Italian life - the tremendous soul and depth that can be felt in the simplest village piazza or in the most elegant Florentine coffee bar. There is an appreciation of the sensuous things of the world, which, far from seeming superficial and materialistic, actually feels life-affirming, ancient, hugely sane. How do they do it? And how is it, that with all the force of modernism and wealth and speed, it is still alive, a heart at the center of things, something that can be tasted in the olive oil sitting on a trattoria table or in the syrupy intensity of a morning one euro espresso at the train station? And this story, of the anchovies...I think it's a key. I think it's a teaching story, perhaps for all of us.
Chestnuts, hazelnuts, fennel, honey in a farmer's market, Florence
We live like gods, these days. Not necessarily happy gods, but gods nonetheless. Few of us can imagine the poverty that would have a whole family only able to eat what is essentially ground field corn and water. No doubt life was hard, even sometimes hellish, for that family gathered around the polenta and that single, hanging anchovy. It drove the man who would become Peggy's husband to spend his life dedicated to defending the poor and oppressed.
House for a cat, Narni
But there is also something quintessentially elegant and clever in the story of the anchovy's shadow, although I can't quite put my finger on what it is. If there is only one anchovy to bring a little something to your polenta, what do you do? Can you appreciate the shadow of an anchovy, its salty, fishy scent perfuming the air as you eat? Can you raise your empty glass to your neighbor? Can you laugh a little, at yourself and at life, which is only providing this one little fish? Can you take what you have, a little or a lot, and make a feast? That's what it is - it's something about creating a feast out of famine, out of so little, a kind of grace, in both senses of the word.
View from hermitage, San Euitizio in ValleThat's what I feel in Italy, when I'm there: a soulful, embodied willingness to live, whatever comes. Maybe it's my projection on the place and its people, but I don't think so...I feel and see it with the part of me that was formed there. And as the country teeters on the edge of economic collapse, after so few decades of relative wealth, I think, "Well, maybe they'll be fine. Maybe they haven't forgotten how to live, under those designer clothes and behind those smart phones. Maybe they could teach the rest of us a few things about living."
"Life is too short", graffiti on a rural wall
And as I imagine a loaf of Tuscan bread, just water and flour and yeast, that intentionally hard crust to protect the soft interior, no salt because who could afford salt - and then I remember how profoundly GOOD it is, in its simplicity, in its poverty - it gives me courage.
If we are all (or most of us) going to get poorer in the future, which seems like a distinct possibility, let's do it with class. Let's celebrate the shadow of the anchovy.
This essay is dedicated to Signor Mauro Meniconi, the proprietor of a roadside porchetta van in rural Umbria, and one of the secret saints of the world.