Ilargi: Watched a few minutes of TV news the other night. There was a item about "world leaders" (why does a term like that feel emptier by the minute?) arriving in Cannes for the G-20 meeting. A camera was fixed on the entrance of a building to the left, and on cars arriving to the right of it.
There was a red carpet on the floor, and I wondered out aloud: "What is this we're watching, the Oscars?" A friend replied: "Yeah, that's what I was thinking: you got all these people getting out of their limos .... to discuss austerity".
"Revenge of a sovereign nation", "A bold move by Papandreou", nice soundbites to counter the Merkozy claims of "utter madness" when the Greek referendum was put on the table. But what's really going on? Now that the referendum seems to be no longer on that table, pundits claim it was all a scheme by Papandreou, in which Merkozy -and perhaps Obama- were involved, to fool the Greek people into thinking they had a vote in their future.
Me, I really don't know. There is no good outcome possible for Greece. If I were G-Pap, I'd suggest something completely impossible, and then run away to my private island as soon as it was "voted" down. But then, these are people who are addicted to power. And addictions defy logic. So I don't know.
Only yesterday, all this happened: First there was supposed to be a Greek referendum. Papandreou stuck to the idea despite virulent Merkozy complaints. Then he was going to resign. Then he was not. Then there was not going to be a referendum. He had negotiated a deal with the Greek opposition parties about the Troika austerity measures, he said. Then these parties denied any such deal and called on him to resign.
Now he faces a non-confidence vote on Friday. What happens after that nobody knows. The vote will be held at midnight Greek time, to make sure all world markets are closed and the potential financial chaos will have to wait until Monday morning.
The IMF is set to receive a lot more funding. This is how the entire planet will be made to pay for allegedly saving European banks, and Wall Street, even though saving them is not possible. We need to save the banks, or utter mayhem will unfold. And while you ponder the terror of this mayhem, the greatest heist in history continues unabated.
Who gets saved when the banks are bailed out? You? That's what you're made to believe (and it works like magic so far), that your fate depends on that of the banks. Or is it maybe the 1% that gets the loot? As in they get saved while you get shaved.
Why are we saving those banks? Why is that good for us? What makes it such a great idea for most people to pay more for bailing out banks than they have in deposits at those same banks? And when will they actually be saved, if ever? How many more rounds of bailouts will that take? And who will have any money left after it's all done? Certainly not those who have no deposits left, or at least less then they owe in bailout funds.
When all countries are weakened, as they are in southern Europe today, it doesn't really matter exactly how weak a country is at a certain point in time; that is not what decides its future. At this point all it takes is for the markets to go after a country to further weaken it and bring it to -the verge of- collapse, first into a state where it will default unless austerity and/or bailout measures are agreed, then into a state of outright bankruptcy despite the measures. Works like a charm.
Which is one of two reasons why the recent new bailout plan for Greece can't possibly work. The first one is that the austerity will be too severe and the timeframe far too long; international finance men would effectively run the country for years to come, and the Greeks would have no voice in their own economy - make that society -. The measures may look nice on paper, but who's going to enforce it all 5 or 10 years down the line when everyone's fed up and boiling with anger?
SocGen’s Albert Edwards compares the situation to Germany after the 1919 Treaty of Versailles, which forced it to pay huge amounts of money in "war damages". The last part was paid in 1991(!). But Germany was alone in its plight back then. Greece is not now. There are easily a handful of others in Europe and beyond who may see themselves wrung through the same wringer.
The second reason the bailout can't work is that these other European countries, when faced with similar problems, will demand similar treatment. That is, having large percentages of their debt written off. Only, the agreement expressly stipulates that this won't happen. So even if Greece remains in the Eurozone (and the EU) after this year, other countries will feel obliged to leave. Or get squeezed far worse than Greece.
The main and major example: Italian bond yields are approaching imminent danger levels. The ECB says it won't and can't prop up Rome forever. Berlusconi will be gone soon, but the debt will not. In a move that mirrors Athens, the IMF is sending a team to Rome to make sure austerity is pushed through. Italian personal debt is relatively low. It's the public debt that stings: Italy's the world's 4th largest bond market. The spread between 10-year German and Italian bonds is rapidly widening:
Perhaps, if the German parliament refuses to show its teeth, the best hope for us all is then that Papandreou loses his confidence vote tonight. The Greeks may be poorer afterwards, but at least they will be master in their own homes. And which option exactly would be the worst for them is unclear: the bailout would be economically hard, and so would leaving the Euro. Anyone who claims to know which is best for the Greeks is a Cretan liar.
If Papandreou wins the vote, he’ll presumably not call a referendum (though how can we be certain?) and start enforcing the austerity measures on his own people. Who will then hate him for it for the rest of his life. Nice prospect for G-Pap. If he loses the vote, a whole parade of power hungry clowns will be waiting in the wings to succeed him.
Some may wish to go along with the bailout, others may not. The elections necessary to pick the successor may throw the bailout off track anyway. They will take months to organize, and Greece may well be broke and in default by year's end no matter what:
Yes, that’s roughly $14 billion in payments before year's end, while the EU and IMF presently refuse to even pay out the $8 billion next bailout tranche.
A Greek exit from the Eurozone would open the doors, if not the floodgates, in the world economy. It would also, however, open the windows, so to speak. It's not going to be fun, but it's a good way to clear the air and make it more obvious where precisely the problems are, and how big they have become. And wouldn’t it simply be better if we knew those things? A full-blown credit event would do wonders for the opacity of the derivatives market, for one thing, and thereby of the main banks.
The limo passengers in Cannes will never admit it, but they have lost control. Keeping it all together, and hidden from view, no longer works. So they declare themselves ready to drop Greece. But not yet Italy. Maybe next week. All they can do is wait and see where the bubble bursts first (and then pretend they're still in control). No matter what happens in Athens tonight, nothing is certain anymore, except that the immediate future will be chaotic. Oh, and that it's going to cost you a lot more money before the fires are out and the dust has settled.
Stop The Presses: Chickens coming home to roost get crushed by debt mountain!
by Albert Edwards - SocGen
Most European politicians and commentators are united in the view that the Greek Prime Minister is in some way bonkers for even suggesting a referendum on the agreed austerity programme and hence allowing for the chance of a rejection.
Most believe rejection would almost certainly mean the end of Greece's EU membership and a disorderly default would ensue. Although most market commentators believe Greece would be mad to take that option, we have always said that this has little to do with logic. This is about politics and emotion.
This is about what the Greek nation might or might not tolerate, for our economists note that whereas previously the Troika's reviews of Greece were quarterly, the new agreement means that a permanent task force of EU spending controllers would be based in all Greek ministries to ensure compliance.
Implicitly, in allowing a referendum, the Greek PM has signed up to the possibility of the big bang default option as opposed to years of long drawn-out economic austerity within the eurozone. Which is better? Probably neither.
Our punchy Rates Strategy team make a valid point worthy of repeating. As an example of how long it could take to work through a massive austerity programme, it was only in 2010 that Germany made the last payment required by the Treaty of Versailles from 1919, which called for reparations of what would be the equivalent of 325bn in todays currency.
Back then, the treaty was not particularly popular with the German population (not unlike the current reaction of Greek citizens to Greeces austerity programme). Following the treaty, the German parliamentary republic (the so-called Weimar Republic) fell into a massive crisis and disintegrated quickly. The rest is history.
One of the lessons learned is that a nation can only be pushed so far and positive incentives need to be set to guarantee cooperation. After World Word II, a different strategy was applied with the Marshall Plan.
Niall Ferguson: We're Playing Russian Roulette With Our Debt And Deficits
by Henry Blodget - Yahoo! Finance
For the past several years, an argument has raged about about how the U.S. should deal with its lousy economy and debt-and-deficit problem.
On the one side are the "austerians," who think the U.S. should immediately cut government spending to balance its budget, "taking our medicine" in one painful dose. On the other side are the Keynesians, like Paul Krugman, who think the U.S. should launch more government stimulus, increasing the debt in the near-term, but helping the economy to grow out of the problem.
One of Krugman's nemeses over the past few years has been Harvard professor Niall Ferguson, the author of a new book called CIVILIZATION: The West And The Rest. Professor Ferguson has been screaming from the rooftops about the risks of piling up too big a debt-mountain, and he's not backing down now.
Countering Krugman's argument that today's low interest rates show that no one is worried about lending money to us and, therefore, that we should borrow and spend our way to prosperity, Ferguson argues that today's interest rates are irrelevant. When countries get into trouble, Ferguson says, they get into trouble quickly, the way Greece and other European countries have.
Taking on huge new debts now with the assumption that interest rates will remain low forever, says Ferguson, is like playing "Russian Roulette." The time to get our fiscal house in order is now, before the crisis, not once interest rates begin to climb and it's too late.
Importantly, Ferguson says he is not in favor of radically chopping government spending in the next year or two, clobbering the economy in the process. Rather, he says, the government should develop and implement a sound 10-year plan, one that phases in the cuts and eventually gets on solid footing.
And what happens if we don't?
If we don't, Ferguson says, we'll eventually pass the point of no return. And then we'll be forced to do what Greece has done: Make such drastic cuts that we get into a "death spiral" in which each new cut shrinks the economy and increases the deficit and debt — the very problems that such cuts are supposed to address.
When Greece Is About To Blow Up
by Joe Weisenthal - Business Insider
The latest rumblings are all about how the IMF won't be paying out a dime more to Greece unless it gets its act together and resolves this referendum issue in one way or another.
The question is: How long does Greece have to pass the referendum, get the money, and pay off its debts.
This chart should answer that.
Sent to use from Erwan Mahe of OTCexGroup, it shows when Greece has some big debt payments due. Obviously, you can see why Greece can't wait until next year.
12/29 looks like a pretty certain drop dead, if not before that.
The New ‘Untouchables’: Down-and-Out and Abandoned
by Eric Pianin - The Fiscal Times
As cash-strapped states relentlessly slash spending on relief for people who fall outside the federal social safety net, a new group of "untouchables" is fast emerging, experts warn.
For years, hundreds of thousands of people in dire straits – mentally or physically disabled, homeless and unemployed, ineligible for federal welfare, disability, or food subsidies – could generally count on state or local government largesse for modest handouts of cash to help scrape by. Under the rubric of "General Assistance," these down-and-out Americans received modest payments – often no more than a few hundred dollars a month – to help defray the cost of necessities including rent, food, clothing, toilet paper, aspirin, phone cards, and bus tickets.
But in the midst of the worst recession of modern times and changing attitudes about the poor, many states have been gradually chipping away at general assistance programs or eliminating them altogether. Only 30 of 50 states currently offer any form of general assistance – down from 38 in 1989. And just this week, Washington State formally ended its "Disability Lifeline" program for an estimated 18,000 to 22,000 economically desperate residents.
That program once provided beneficiaries with as much as $339 a month to help cover the bare necessities of life, but that amount was slashed to only $197 a month in the past year, before the governor and state legislature zeroed out the program, effective Monday.
What remains of general assistance in Washington State includes new proposals for temporary medical treatment, modest housing vouchers, and aid to the elderly and blind and to pregnant women who have no other source of support. But even much of that assistance may never materialize as the state wrestles with its latest budget shortfall and the governor pushes for even deeper cuts, according to state officials.
Although precise figures are not available, states spend an estimated $3 billion to $4 billion every year on basic assistance to needy people, and a fraction of that goes for general cash assistance to people who don’t qualify for other federal programs like food stamps. But even food stamps are not a slam dunk: If the Super Committee fails to reach a minimum $1.2 trillion deal in three weeks, the axe will automatically fall on domestic programs that help the poor.
"The reality is that people aren’t going to be able to get their basic needs met and that is the bitter unvarnished truth," Alison Eisinger, executive director of the Seattle/King County Coalition on Homelessness told The Fiscal Times this week. "And the result we know is going to mean more desperation, more fragmentation of households, more homelessness and higher costs for our community."
Tony Lee, advocacy director for Solid Ground, a social service agency serving King County, said many of those who lost their general assistance support this week are part of what has unfortunately become a throwaway class of people. Hanging on by a thread, many are now certain to end up on the streets or dumped into hospital emergency rooms, detoxification centers, and jails.
"It really is a disastrous situation," Lee said in an interview Tuesday. "General assistance was the ultimate safety net, and we’re doing away with that – we really shredded it."
The New Underclass
In the first comprehensive national study of general assistance in more than a dozen years, the Center on Budget and Policy Priorities has documented decades-long erosion in the programs as more and more states abandoned the concept or could no longer afford it.
Just three-fifths of the states and the District of Columbia still offer general assistance, and only to those people who do not have minor children, who are not disabled enough to qualify for the federal Supplemental Security Income Program (SSI) and are not elderly. For those still lucky enough to qualify, the benefits are extremely modest. In 29 of the 30 states with general assistance programs, the maximum benefit falls 50 percent or more below the poverty line for individuals.
What’s more, the rules established for many of these programs seem to set logic on its head. Some of the lowest benefit levels serve individuals who are mentally or physically unable to work and are therefore incapable of earning money to supplement their handout. The median benefit level is $215 a month for those people, yet the median benefit level for employable individuals – who presumably could earn some extra money – is $381.
Delaware, Illinois, Kansas, and Ohio provide a benefit only for unemployable individuals, yet they set the maximum benefit level at or below $115 a month, or barely subsistence. In the majority of states with general assistance programs, most recipients qualify for health coverage, generally through Medicaid or a state-funded health care program. There is no federally supported cash program for poor childless adults who do not receive SSI.
"It is definitely a safety net of the very last resort," says Liz Schott, a veteran lawyer specializing in government assistance for the poor and a co-author of the new study issued this week. "Because general assistance is entirely state or local funded and… budgets are pressed with the increased demands, we’re seeing programs being cut just when the people who need them need them more than ever."
This year alone, as officials struggled to close large budget shortfalls, 10 states considered proposals to further shrink or eliminate general assistance, and seven states adopted such measures, according to the new study.
Kansas and the city of Chicago eliminated their programs; Minnesota restricted eligibility; Michigan reduced benefit levels for all recipients; and Rhode Island is cutting benefits for some recipients. The District of Columbia reduced funding for its program by two-thirds and plans to limit the size of its caseload accordingly.
In Washington State, Democratic Gov. Christine Gregoire and the Democratic-controlled state legislature are eliminating general assistance as part of an ongoing financial crisis brought on by the recession and steep drops in revenue. Over the past three years, the governor and legislature have cut government agencies and programs by $10 billion, and they are now facing an additional $2 billion budget shortfall.
Gregoire last week circulated a list of dozens of potential budget cuts that includes elimination of the general assistance medical program and the other remaining vestiges of the general assistance program. "This is not what I signed up for when I started as a caseworker 40 years ago," Gregoire said last week. "But it’s what the world economy handed our state and our country."
Increase In Extreme Poverty Leaves Millions of Americans Stranded
by Peter S. Goodman - Huffington Post
The number of Americans living in communities of extreme poverty -- neighborhoods in which at least 40 percent of the population is poor -- soared by one-third between 2000 and the latter half of the decade, according to a new study from the Brookings Institution.
The marked increase in so-called concentrated poverty underscores the distress tearing at communities across the nation amid the worst economic downturn since the Great Depression. It highlights a stunning reversal of economic fortune since the 1990s, when powerful job growth combined with the expansion of tax credits for lower-income households lifted millions of Americans above the poverty line.
Between 1990 and 2000, the number of poor people living in concentrated areas of poverty plunged from 4.4 million to three million, according to the study. By 2009, the number again exceeded four million, and the Brookings researchers assume the figure will be larger still when the Census releases detailed data for 2010. Preliminary figures for 2010 showed more than 46 million Americans -- some 15 percent of the population -- living below the federal poverty line, defined as annual income of $22,314 for a family of four.
"The gains that we made in the 1990s, with targeted policies and a booming economy, a lot of those have been erased over the 2000s," said Elizabeth Kneebone, a senior research associate at Brookings' Metropolitan Policy Program, and the study's lead author. "Places that used to be solidly working class in the '90s have fallen behind after two recessions."
The broad elimination of working opportunities in many poor communities has left millions of people effectively stranded on islands of economic desolation, with the attendant problems of poverty -- dilapidated housing, crime, social strife -- deterring the investment that might alleviate their plight.
In New Haven, Conn. -- where the number of poor people living in neighborhoods of extreme poverty jumped by nearly half between 2000 and the latter years of the decade -- Jason Newton, 26, described an urban wasteland increasingly devoid of legitimate way to pay the bills.
"This whole area is just ignored," said Newton, who recently lost his job in housekeeping at a local hotel. "The violence is getting more and more, because there's nothing to do but do drugs and sell drugs. Businesses don't want to come out here. For the younger generation, they don't care to the point that they're out killing each other. There's not a lot for them to pursue. They don't have no hope."
While the broad expansion of poverty in recent years is the source of considerable concern among experts, concentrated poverty presents a particularly stark problem. Poor people living in areas in which many others are also struggling tend to confront heightened troubles that reinforce poverty.
Schools full of poor children tend to have less experienced teachers, higher dropout rates and more troubles to contend with at home that take up the time and resources of staff. Large concentrations of poor people can require municipal attention -- from counseling to law enforcement -- absorbing resources that might otherwise be devoted to other public benefits, such as parks and cultural offerings.
Neighborhoods with concentrated poverty tend to be afflicted with higher crime rates and lower real estate values. This hinders the ability of residents to borrow against their assets to finance businesses, while discouraging outside investors from setting up new ventures -- all of which perpetuates joblessness.
"When you're surrounded by people who have money, even if you're bankrupt and out of work, maybe you live next door to a guy who has money and you could go into business with him," said Newton. "Here, the options for the guy on the street, it's like, if I'm not out selling drugs, I'm in jail. They have no options."
The study released Thursday morning compares poverty rates in 2000 to averages from the data running from 2005 through 2009. The result is a tapestry of extreme poverty that varies considerably by region. The study found particularly prominent increases in concentrated poverty in the industrial Midwest, where the loss of manufacturing jobs has eliminated a crucial source of livelihood for lesser-educated workers.
In the Detroit and Toledo metropolitan areas, nearly one in four poor people was living in an extremely impoverished neighborhood by the latter half of the 2000s, according to the study. Overall, Midwestern metropolitan areas saw rates of concentrated poverty nearly double between 2000 and the second half of the decade.
Southern communities also suffered significant growth in extremely poor populations, with El Paso, Baton Rouge, La., and Jackson, Miss. among the metro areas with the sharpest increases. The study reinforces how poverty has emerged as a force in suburban communities, a trend that has been underway for more than a decade, yet has accelerated in recent years as housing prices have plummeted, and as joblessness has reached previously healthier areas.
The number of poor people living in areas of extreme poverty in the suburbs increased by 41 percent between 2000 and the latter years of the decade, as compared to 17 percent growth in cities during that same timeframe, according to the study. Still, poor people living in concentrated poverty inside cities still vastly outnumbered those in suburbs.
Though the northeast saw less of an increase than other areas of the country, New Haven -- best known as the home of Yale University -- stands out as one of the nation's fastest-growing centers of concentrated poverty. By the end of the decade, nearly one in four poor people living in the city was in a community with 40 percent or greater rates of poverty.
Newton has seen it unfold up close. Two years ago, he was earning $12-an-hour driving people with developmental disabilities to medical appointments. But that job was in the suburbs. When his car broke down, he lacked the money to fix it, forcing him to rely on infrequent public bus service to get to work. He quit that job to take a position at the hotel. It paid only $10 an hour, but it was close to his apartment, making it possible for him to accrue more hours because he was able to work on short notice.
But the hotel was itself struggling. For weeks at a time, management told him not to bother coming in. "There were no business meetings," Newton said, "no people coming into the hotel."
When he lost that job six weeks ago, he had no savings to fall back on, forcing him to borrow from friends just to make the rent on his subsidized apartment. He has been looking for work day after day, but has come up empty, frustrated that all the better paying jobs -- at medical offices, where his resume shows experience -- seem to be out in the suburbs.
Employers seem reluctant to take a chance on a guy who lives in the city, with questionably reliable transportation. Newton is a single, young African-American man living in a time in which the unemployment rate among single African-American men 25 years and older is 21 percent. He went to college for a couple of years, and now he is searching for a way to resume his studies, researching possible sources of grant money. But Newton is also thinking seriously about a job in the only industry that seems to be holding steady in his neighborhood: fast food.
"I've never been a guy to work at McDonald's or Popeye's or KFC," he says. "I've tried to be involved in helping people. But it's about finding a way to pay the bills." He tries to keep his mind centered on what he can control, what he can achieve, despite the strife around him. "Just a couple of days ago, a 13-year-old boy got killed," he said. "When I look in the paper, and there's that obituary, it just shatters me."
Newton was recently walking around in his neighborhood when he overheard two guys talking, and the snippet of their conversation now replays itself in his head. "This dude was like, 'If I lose my job I'm going to be out here doing another job,' some kind of robbing people," Newton said. "I see things like that, I keep it moving. I hold it in the back of my head that's what's out on these streets."
It was like that when he was growing up, too, to a large degree. "It was no peaches and cream," he said. Yet he senses a change: Never abundant, jobs have become permanently scarce, with employers afraid to take a chance, and many companies just moving away.
Newton says he looks around and sees so many people like him, so many people eager for work and unable to find it, and there is little comfort in not being alone. "I can't think about the negative," he said. "I've got to surround myself with positive people, positive thinking. Sometimes, you experience things you never want to experience but you've got to keep it together."
Euro zone contemplates future without Greece
by Dina Kyriakidou and Noah Barkin - Reuters
European leaders were preparing on Thursday for the possibility of Greece leaving the euro zone to preserve the 12-year-old single currency.
French President Nicolas Sarkozy and German Chancellor Angela Merkel told Prime Minister George Papandreou at a torrid meeting in Cannes that Athens would not receive a cent more in aid -- Greece was due an 8 billion euros aid payment this month -- until it votes to meet its commitments to the euro zone.
In Athens, Greece's powerful finance minister broke ranks with his prime minister, rejecting a proposed referendum on staying in the euro, hours after they received an ultimatum from France and Germany to make up their minds. The growing chaos in Greece and uncertainty over the euro zone sent stocks and commodity prices lower in Asia, and fueled a rush into safe-haven German bonds.
On his return with Papandreou to Athens from Cannes, Finance Minister Evangelos Venizelos issued a defiant statement, saying Greece's euro membership was a historic achievement and "cannot depend on a referendum".
A finance ministry source said Venizelos, who was kept in the dark by his Socialist rival about Monday's referendum call, opposed risking a public vote at this crucial moment. "Under these conditions, a referendum is exactly what the country does not need," the source told Reuters, speaking on condition of anonymity.
More dissident lawmakers in the ruling PASOK party spoke out against a referendum and called for a national unity government or early elections, casting doubt on whether Papandreou can win a confidence vote on Friday or pass a bill to hold a plebiscite.
Euro area leaders talked openly for the first time of a possible Greek exit from the 17-nation currency area, seeking to maximize pressure on Athens and to preserve the euro in case of a Greek "no" vote. Merkel told a midnight news conference that while she would prefer to stabilize the euro with Greece as a member, the top priority was saving the euro, not rescuing the Greeks.
The chairman of euro zone finance ministers, Luxembourg Prime Minister Jean-Claude Juncker, said policymakers were working on possible scenarios for a Greek exit. "We are working on the subject of how to ensure there is not a disaster for the people in Germany, Luxembourg, the euro zone. We are absolutely prepared for the situation," Juncker told Germany's ZDF television.
France's Europe minister, Jean Leonetti, said bluntly the euro could survive without Greece. "Greece is something we can get over, something we can live without," he told RTL radio in an interview
Spectre Of Default
The specter of a hard Greek default and euro exit hung over a meeting of G20 leaders beginning in Cannes on Thursday, highlighting Europe's frailty just when Sarkozy wanted to showcase his leadership of the world's major economies. The summit on the French Riviera had been meant to focus on reforms of the global monetary system and steps to rein in speculative capital flows, but the shockwaves from Greece have upended the talks.
Merkel and Sarkozy convinced Papandreou to bring forward the referendum to early December and insisted it be focused on the broad issue of whether Greece wants to stay in the currency bloc rather than limiting it to a vote on a new 130 billion euro bailout package, which a strong majority of Greeks oppose.
A chastened Papandreou said before leaving Cannes that the referendum could take place on December 4 and would be focused on "whether we want to remain in the euro zone". But after Venizelos' statement and the start of a backbench PASOK revolt, it was unclear if the government would survive the week.
Merkel and Sarkozy also made clear that Athens would not receive an 8 billion euro aid tranche it desperately needs to avoid default until the referendum had passed.
Should it fail, the EU/IMF aid would end, plunging Greece into a disorderly default that would reverberate across the euro zone, potentially engulfing big economies like Italy and Spain. "Our Greek friends must decide whether they want to continue the journey with us," Sarkozy told reporters at a joint news conference with Merkel after the crisis talks.
The leaders of France, Italy and Spain, the German finance minister and the heads of the International Monetary Fund, European Central Bank and other top EU officials were to meet in Cannes on Thursday morning to explore ways of accelerating the implementation of an anti-crisis package agreed on October 27.
That plan, which includes debt relief for Greece, a recapitalization of European banks and a leveraging of the bloc's rescue fund, the European Financial Stability Facility (EFSF), was meant to stem the two-year old crisis before Papandreou's referendum call cast the bloc into turmoil again.
"The referendum adds a further layer of complexity and uncertainty to an already complex crisis," said Domenico Lombardi, a former IMF executive board member who is now a senior fellow at the Brookings Institution in Washington. "Most importantly, it starts off a political mechanism that could eventually result in Greece leaving the euro."
As the mini euro zone summit is taking place, Merkel will be holding talks with U.S. President Barack Obama. Heading into an election year, Obama is worried the euro zone crisis could blow up and hit the struggling U.S. economy. Ben Bernanke, the chairman of the U.S. Federal Reserve, announced on Wednesday that the central bank was slashing its projections for growth and raising forecasts for unemployment.
The meeting of leaders from the world's 20 major economies will formally begin with a working lunch that had been meant to focus on the world economy, but is now likely to be dominated by Europe's debt woes. Sarkozy had hoped to use his presidency of the G20 as a springboard for his own re-election campaign in 2012, setting ambitious goals including a rethink of the global monetary system and measures to fight commodity price volatility.
But he has been forced to scale back expectations as crisis-fighting has taken priority over grand visions of world economic reform. Sarkozy met Chinese President Hu Jintao on Wednesday as part of a European effort to convince the world's emerging powers to help boost the firepower of the bloc's bailout fund.
But he told the French president that it was up to Europe to solve its debt woes, according to a statement published by China's Ministry of Foreign Affairs. China's deputy finance minister Zhu Guangyao said after the talks that Beijing needed more details from Europe before considering any bigger investment in the EFSF.
Doubts about Europe's ability to contain the debt crisis has put Italy firmly in the firing line. The risk premium on Italian bonds over safe-haven German Bunds has hit euro-lifetime highs this week, despite European Central Bank buying of its bonds.
Italian Prime Minister Silvio Berlusconi has scrambled to come up with measures to placate markets, holding an emergency cabinet meeting to accelerate budget reforms amid mounting calls for his resignation.
ECB's Teutonic Mario chills bond rescue hopes
by Ambrose Evans-Pritchard - Telegraph
Investors are slowly digesting the bittersweet message from Mario Draghi, the Teutonic Italian now at the helm of the European Central Bank (ECB).
While he surprised and delighted markets with a quarter-point cut in interest rates to 1.25pc, reversing last July's ill-judged rise, he also dashed hopes for mass bond purchases to save Italy and for radical action to stop the crisis spiralling out of control. That matters far more. "What everybody wanted to know was whether the ECB would step up to the plate and do something grand and we didn't get that at all," said David Owen, of Jefferies Fixed Income.
In a sombre debut, Mr Draghi warned that Euroland's economy is "heading towards mild recession by year-end" with mounting risks as the debt crisis drags on. He professed his "great admiration" for the hawkish traditions of the Bundesbank, seeking to allay fears in Germany that the ECB might drift away from orthodox monetarism. This was wise. One German tabloid said the job could not safely be entrusted to anyone from Italy, where inflation is as much a part of life as pasta – a crude variant of suspicions held from top to bottom of German society.
To drive home the point, Mr Draghi issued a categoric warning that the ECB would not act as final guarantor of the system, or step in to rescue feckless states. "It would be pointless to think that sovereign bond rates can stably be brought down for a protracted period by outside intervention. The first and foremost responsibility lies with national economic policies. Put your public finances in order.
"What makes you think that to become the lender of last resort for governments is actually the thing that you need to keep the euro area together? I don't think that is really in the remit of the ECB."
A chorus of voices from global bodies, led by the US Treasury, have called on Europe to mobilise the ECB's full lending power to restore confidence. City banks say the ECB may have to commit up to €3 trillion to contain the brushfire. George Soros said the EU was making a grave mistake by failing to harness the ECB. "Europe is right now at the crisis point, and the authorities are doing too little too late," he said.
News that Greece had scrapped its referendum on the EU summit deal lifted Club Med bond markets late Thursday, but only after yields on 10-year Italian bonds first hit 6.39pc – their highest point since the ECB first began buying Italian debt in August.
Italian premier Silvio Berlusconi – already facing four sets of criminal charges – appears to have exhausted the country's patience after failing to meet EU demands for an austerity decree before the G20 meeting in Cannes. His majority in parliament was crumbling on Thursday night after rebel deputies urged him to leave, and rumours circulated that a salvation government would soon be appointed.
Just as worrying, the spread between French bonds and German Bunds reached a post EMU-high of 130 basis points earlier in the day. France has been hit by a trifecta of worries: French banks' €400bn exposure to Italy; a recession that will almost certainly cost the country its AAA rating, and perhaps two notches according to Standard & Poor's; and plans to leverage the EU's bail-out fund EFSF to €1 trillion by using it as a "first loss" insurer. "What people are worried about is the contingent liability for France of bailing out the eurozone," said Jacques Cailloux from RBS.
Mr Draghi was at pains to stress the bank's intervention to buy southern European bonds could be justified only if it was "temporary", "limited in amount", and undertaken with the strict purpose of "restoring monetary transmission" rather than propping up states. The language is code for what amounts to a German veto on further bond purchases. Two German ECB members have already resigned in protest over the policy, and German president Christian Wulff has accused the bank of going "far beyond its mandate", subverting the Lisbon Treaty.
Mr Cailloux said the ECB has been buying bonds at a €450bn annual rate since "D-day" in August and needs to step up the pace to cap yields. "The situation is critical. This is the biggest financial crisis Europe has ever seen. Persuading Germany to get fully behind the ECB is going to be long and drawn out. I don't know whether we have the time," he said. What is clear is that the ECB does not have a treaty mandate to rescue states that cannot fund themselves at a viable cost. The bank already faces a challenge at the European Court.
Mr Draghi will have to bide his time. A former Goldman Sachs banker who learned his economics under Robort Solow at MIT, he is a New Keynesian soulmate of the Fed's Ben Bernanke, rather than the "hard money" doctrines of Jean-Claude Trichet. His curse is that he has to pretend otherwise.
Fed downgrades growth forecasts, sees high unemployment for years ahead
by Neil Irwin - Washington Post
The Federal Reserve sharply downgraded its projections for the U.S. economy Wednesday, warning that weak growth and high unemployment will be the norm for years.
The Fed expects that the unemployment rate will be around 8.6 percent at the end of next year, down only slightly from 9.1 percent today, and will still be between 6.8 percent and 7.7 percent in late 2014. In their June forecast, Fed officials said joblessness would come down faster, to around 8 percent by the end of 2012, when the next presidential election will take place.
Despite these projections, the Fed’s policymaking board declined during the two-day meeting that ended Wednesday to take any new action to boost growth, leaving ultra-low interest rates unchanged.
Leaders of the central bank are coming around to a view they had resisted: that the economy, weighed down by consumer debt and a depressed housing market, will not soon return to its old path of growth. The pace of economic growth the officials expect in 2012 is not high enough to put Americans back to work in large numbers.
Fed Chairman Ben S. Bernanke said Wednesday that problems in the housing market were more severe and stubborn than analysts had thought. "Evidently . . . the drags on the recovery were stronger than we thought," he told reporters at a news conference.
Economic growth picked up in the July-through-September months, to a 2.5 percent annual rate of growth. But that is not very fast for an economy with 9.1 percent unemployment, and both Bernanke and private analysts attribute the growth pickup in significant part to a reversal of the high fuel prices and other disruptions that held growth back earlier in the year.
In deciding not to take any new steps to invigorate the economy, the Fed’s policy committee noted that growth "strengthened somewhat" in recent months. The Fed took action at its last meeting, in September, to try to lower longer-term interest rates and encourage growth.
Government policy more broadly appears to be on hold, with few prospects for a deeply divided Congress to take steps that would encourage job creation. Bernanke signaled his consternation with this inaction, saying, "It would be helpful if we could get assistance from some other parts of the government to work with us to help create more jobs."
Some Fed officials had argued for the central bank to take further action to pump up growth, such as beginning new purchases of mortgage-related securities to try to lower interest rates and support the housing market. Bernanke said the strategy was "certainly something we would consider if conditions were appropriate," but he declined to be specific about what those economic conditions would be.
By declining to take new action, the Fed reserved some ammunition in case the economic outlook darkens further and the risk of a recession returns. "It’s probably better to keep their gunpowder dry until there are more obvious signs of trouble," said Bruce McCain, chief investment strategist at Key Private Bank. "If they move too quickly on a new easing program, they run the risk of ramping up the cost of commodities or financial markets in ways that complicate the inflation picture."
One member of the policy board, Chicago Fed President Charles Evans, opposed the decision to stand pat, arguing that the Fed should have taken more steps to help the economy. While it has become common for board members who prefer less-aggressive policies to dissent from Fed decisions, Evans was the first one in four years who formally dissented because he favored stronger action.
Evans has argued for a variety of stronger steps to strengthen the economy and reduce unemployment but had not dissented from a Fed action. At the past two Fed meetings, three policymakers dissented in the opposite direction, worried the Fed was doing too much to boost growth and thus risked fueling inflation. None did so at this meeting.
During the two-day meeting, the leaders of the central bank spent much of the time discussing how they communicate their expectations and goals for the economy.
Bernanke said no decisions had been made. But he noted several options the Fed might consider, such as announcing what it expects its interest rate policies to be over the years ahead. That would give the Fed greater ability to affect longer-term interest rates. For example, if the Fed said rates would probably be increased in 2014 instead of 2013, investors would accept lower rates because borrowed money would be cheaper for longer.
Another approach, advocated by Evans, would be to announce specific levels of unemployment or inflation that would prompt the Fed to begin raising interest rates, which have been near zero for almost three years. That approach could also help keep rates lower by clarifying how far off any interest rate hikes would be. "That is certainly something that we have discussed and I think is an interesting alternative," Bernanke said.
Selling More CDS on Europe Debt Raises Risk for U.S. Banks
by Yalman Onaran - Bloomberg
U.S. banks increased sales of insurance against credit losses to holders of Greek, Portuguese, Irish, Spanish and Italian debt in the first half of 2011, boosting the risk of payouts in the event of defaults.
Guarantees provided by U.S. lenders on government, bank and corporate debt in those countries rose by $80.7 billion to $518 billion, according to the Bank for International Settlements. Almost all of those are credit-default swaps, said two people familiar with the numbers, accounting for two-thirds of the total related to the five nations, BIS data show.
The payout risks are higher than what JPMorgan Chase & Co., Morgan Stanley and Goldman Sachs Group Inc., the leading CDS underwriters in the U.S., report. The banks say their net positions are smaller because they purchase swaps to offset ones they’re selling to other companies. With banks on both sides of the Atlantic using derivatives to hedge, potential losses aren’t being reduced, said Frederick Cannon, director of research at New York-based investment bank Keefe, Bruyette & Woods Inc.
"Risk isn’t going to evaporate through these trades," Cannon said. "The big problem with all these gross exposures is counterparty risk. When the CDS is triggered due to default, will those counterparties be standing? If everybody is buying from each other, who’s ultimately going to pay for the losses?"
Similar hedging strategies almost failed in 2008 when American International Group Inc. couldn’t pay insurance on mortgage debt. While banks that sold protection on European sovereign debt have so far bet the right way, a plan announced yesterday by Greek Prime Minister George Papandreou to hold a referendum on the latest bailout package sent markets reeling and cast doubt on the ability of his country to avert default.
The CDS holdings of U.S. banks are almost three times as much as their $181 billion in direct lending to the five countries at the end of June, according to the most recent data available from BIS. Adding CDS raises the total risk to $767 billion, a 20 percent increase over six months, the data show. BIS doesn’t report which firms sold how much, or to whom. A credit-default swap is a contract that requires one party to pay another for the face value of a bond if the issuer defaults.
The jump in CDS sold by U.S. banks on Greek, Portuguese, Irish and Spanish debt was almost the same as the decline in the exposure of German and U.K. lenders. German and U.K. risk related to Italy didn’t fall, even as the amount of CDS sold by U.S. lenders on debt related to that country rose.
Five banks -- JPMorgan, Morgan Stanley, Goldman Sachs, Bank of America Corp. and Citigroup Inc. -- write 97 percent of all credit-default swaps in the U.S., according to the Office of the Comptroller of the Currency. The five firms had total net exposure of $45 billion to the debt of Greece, Portugal, Ireland, Spain and Italy, according to disclosures the companies made at the end of the third quarter. Spokesmen for the five banks declined to comment for this story.
While the lenders say in their public disclosures they have so-called master netting agreements with counterparties on the CDS they buy and sell, they don’t identify those counterparties. About 74 percent of CDS trading takes place among 20 dealer- banks worldwide, including the five U.S. lenders, according to data from Depository Trust & Clearing Corp., which runs a central registry for over-the-counter derivatives.
In theory, if a bank owns $50 billion of Greek bonds and has sold $50 billion of credit protection on that debt to clients while buying $90 billion of CDS from others, its net exposure would be $10 billion. This is how some banks tried to protect themselves from subprime mortgages before the 2008 crisis. Goldman Sachs and other firms had purchased protection from New York-based insurer AIG, allowing them to subtract the CDS on their books from their reported subprime holdings.
When prices of mortgage securities started falling in 2008, AIG was required to post more collateral to its CDS counterparties. It ran out of cash doing so, and the U.S. government took over the company. If AIG had collapsed, what the banks saw as a hedge of their mortgage portfolios would have disappeared, leading to tens of billions of dollars in losses.
"We could have an AIG moment in Europe," said Peter Tchir, founder of TF Market Advisors, a New York-based research firm that focuses on European credit markets. "Let’s say Greece defaults, causing runs on other periphery debt that would trigger collateral requirements from the sellers of CDS, and one or more cannot meet the margin calls. There might be AIGs hiding out there."
The bailout of Dexia SA by Belgium and France last month resembled AIG’s rescue. The bank, based in Brussels and Paris, faced 16 billion euros ($22 billion) of new margin calls on Oct. 7 as a result of interest-rate swaps it had sold, Belgian central bank Governor Luc Coene said.
The two countries agreed to aid Dexia on Oct. 9, assuring creditors -- including holders of CDS and other derivatives counterparties -- they would be paid in full, the same way AIG’s were after the U.S. takeover. Goldman Sachs and Morgan Stanley were among the lender’s biggest trading partners, the New York Times reported on Oct. 23, citing people it didn’t identify. Benoit Gausseron, a spokesman at Dexia in Paris, didn’t confirm or deny the newspaper report.
"The risks for the U.S. banks are particularly relevant if their counterparties are European," said Darrell Duffie, a Stanford University finance professor who has written seven books about derivatives. "What if they sold protection to some banks and bought protection from others, and they can’t get paid by the ones they bought protection from?"
Banks also buy CDS on their counterparties to hedge against the risk of trading partners going bust, Duffie said. To ensure those claims are paid, the banks may be turning to institutions deemed systemically important, such as JPMorgan, according to Duffie. The bank, the largest in the U.S. by assets, accounts for a quarter of all credit derivatives outstanding in the U.S. banking system, according to OCC data.
Goldman Sachs said it had hedged itself against the collapse of AIG by buying CDS on the firm. Company documents later released by Congress showed that some of that protection was purchased from Lehman Brothers Holdings Inc. and Citigroup, firms that collapsed or were bailed out during the crisis.
U.S. banks are probably betting that the European Union will also rescue its lenders, said Daniel Alpert, managing partner at Westwood Capital LLC, a New York investment bank. "There’s a firewall for the U.S. banks when it comes to this CDS risk," Alpert said. "That’s the EU banks being bailed out by their governments."
European leaders are doing everything they can not to trigger the default clauses in CDS contracts to avoid putting the banking system at risk. They persuaded bondholders to accept a 50 percent loss on their holdings of Greek debt in an agreement reached in Brussels last week with the Institute of International Finance, an industry association. The deal calls for a voluntary exchange of debt.
Another trade group, the International Swaps & Derivatives Association, or ISDA, decides whether a debt restructuring triggers CDS payments. The committee that will rule on the Greek deal is made up of 10 bank representatives and five investment managers and needs 12 votes to reach a decision. ISDA said on Oct. 27 that the agreement would most likely not be considered a default since it’s voluntary.
That determination is difficult to justify because almost every sovereign debt default includes some restructuring in which bondholders participate, according to Janet Tavakoli, founder of Tavakoli Structured Finance Inc. in Chicago.
Favoring Big Banks
"The ISDA ruling favors the big banks that sold the CDS because those banks sit on the ISDA board," said Tavakoli, a former head of mortgage-backed-securities marketing at Merrill Lynch & Co. "Smaller banks or other institutions that might have bought the swaps to protect against a default like this don’t have as much influence." Some bondholders might challenge the ruling in court, Tavakoli said. Lauren Dobbs, an ISDA spokeswoman, declined to comment.
U.S. Treasury Secretary Timothy F. Geithner urged European leaders and finance ministers to increase the firepower of their 440 billion-euro rescue fund. The Obama administration’s stance might have been prompted by worries that defaults in the euro zone would hurt U.S. banks through their CDS exposure, according to Christopher Whalen, managing director of Institutional Risk Analytics, a Torrance, California-based bank-rating firm.
"Geithner keeps asking Europeans to fix their shop, but he doesn’t do anything to rein in the risk-creation at home through these derivatives," Whalen said.
Leaders of the 17 euro-zone countries decided last week to more than double the size of their rescue fund to 1 trillion euros. They haven’t yet said how it will be financed. Geithner and Federal Reserve Chairman Ben S. Bernanke have said they’re not worried about U.S. banks’ exposure to European sovereign debt.
Regulators, including the Fed, are monitoring CDS risk, according to one official who declined to be named because he wasn’t authorized to discuss the matter. U.S. banks have collected sufficient collateral from counterparties on the CDS and should be able to manage defaults, the official said.
JPMorgan CEO Jamie Dimon, 55, said last month that the New York-based bank hedges its exposure to European sovereign debt through contracts with lenders in other countries, including Germany and France. The counterparties are diversified, and JPMorgan takes sufficient collateral to protect itself against losses, Dimon said during a third-quarter earnings call.
MF Global Holdings Ltd., a broker-dealer run by former Goldman Sachs co-Chairman Jon Corzine, reported $1 billion of net exposure to Spain and $3 billion to Italy in its second- quarter financials, explaining in a footnote that the net was partly due to a short position on French bonds. Those hedges weren’t enough to protect MF Global, which filed for bankruptcy yesterday after losses in the portfolio wiped out its capital.
Hedging and other ways of netting help banks report lower exposures than the full risk they might face. Morgan Stanley said last month that its net exposure in the third quarter to the debt of Spain’s government, banks and companies was $499 million. The Federal Financial Institutions Examination Council, an interagency body that collects data for U.S. bank regulators and disallows some of the netting, said the New York-based firm’s exposure in Spain was $25 billion in the second quarter.
The net figure for Italy was $1.8 billion, Morgan Stanley said, compared with $11 billion reported by the federal data- collection body. Ruth Porat, 53, Morgan Stanley’s chief financial officer, said during a call with investors after the earnings report last month that the data compiled by regulators didn’t take into account short positions, offsetting trades or collateral collected from trading partners.
"It’s the firms that don’t post collateral because they’re seen as more creditworthy that pose the counterparty risk," said Tchir. "Those could be insurance companies, mid-size European banks. If some of those fail to pay when the CDS is triggered, then the U.S. banks could be left holding the bag."
Subprime moment looms for 'risk-free' sovereign debt
by Gillian Tett - FT
Pillar of the regulatory structure looks wobbly
When future financial historians look back at the early 21st century, they may wonder why anybody ever thought it was a good idea to repackage subprime securities into triple A bonds. So, too, in relation to assumptions about the “risk-free” status of western sovereign debt.
After all, during most of the past few decades, it has been taken as a key axiom of investing that most western sovereign debt was in effect risk-free, and thus expected to trade at relatively undifferentiated tight spreads. Now, of course, that assumption is being exposed as a fallacy. Just look at those Greek haircuts, or the scale of future losses now being implied in the credit derivatives markets for Portugal, Ireland and Italy.
As the turmoil in the eurozone spreads, forcing a paradigm shift for investors, the intriguing question now is whether we are on the verge of a paradigm shift in the regulatory and central bank world, too. After all, it is not just investors who have tended to assume that mainstream sovereign bonds are risk-free; this assumption has also acted as a pillar of the entire regulatory structure, and many central bank operations.
When regulators drew up the Basel I capital adequacy framework in the 1980s, for example, they gave western sovereign bonds a “zero” risk weighting, in terms of how capital is calculated. This was subsequently modified in Basel II, to give banks some theoretical discretion to raise reserves against sovereign risk. In practice, this zero-risk weighting policy has prevailed.
In some senses it has been actually reinforced in the past five years because regulators have demanded that banks raise their holdings of liquid, safe assets, following that subprime turmoil. Those “safe” assets have been – you guessed it – mostly government bonds.
But as Greek woes mount, there are now some hints that we may be on the edge of a paradigm shift. One straw in the wind can be seen in recent comments from Sharon Bowles, head of the monetary committee at the European parliament, who is now urging regulators to remove the risk-free sovereign tag, not just in relation to reserves (ie for any holdings of Greek bonds, say, or loans) but for counterparty risk in trading deals, too.
Over in Washington, a behind-the-scenes debate has started at the International Monetary Fund, too, about what risk-free means in regulatory systems. Last week, Hervé Hannoun, deputy director general of the Bank for International Settlements, gave a fascinating – and startling – speech which called for a shift “from denial to recognition of sovereign risk in bank regulation” to “help to restore confidence and to foster fiscal discipline”.*
More specifically, Hannoun wants banks to incorporate realistic assessments of credit risk when they make reserves for sovereign debt and calculate capital adequacy; and not just in the eurozone (which is belatedly moving that way in relation to Greece) but in countries such as Japan or the US, too.
If these ideas gather pace, they could have big implications in the longer term. For one thing, more realistic assessments of sovereign risk would probably force the banks to hold more capital, and raise sovereign borrowing costs. They might also force the central banks to change how they conduct money market operations, and impose tougher haircuts not just for obviously impaired debt (such as Greece), but bonds carrying potential risk, too (how about Japan, with a debt to gross domestic product ratio 220 per cent?).
The other 800lb – or $500,000bn – gorilla in the room is the derivatives market. Until now, sovereign entities have generally not posted collateral for derivatives deals, partly because of that risk-free tag. But Manmohan Singh, an economist at the IMF, believes that this anomaly has helped to create a severe under-collateralisation problem, worth $1,500bn-$2000bn for the 10 largest banks alone.
If “true” counterparty risk were ever recognised in derivatives, in other words, the implications could be brutal (not least because there may simply not be enough decent collateral to go around, or enough room for manoeuvre by state entities.)
Of course, regulators understand this. Thus, I don’t expect Hannoun’s appeal to be heeded too widely, too soon. It is one thing for European regulators to make banks write off Greek bonds; it is another to reshape the entire rules of modern finance. But the more contagion spreads across Europe’s sovereign debt market, the more pressures will rise for a longer term rethink of that zero-risk label.
After all, as Hannoun says, if regulatory systems had not encouraged banks and investors to be so complacent about sovereign risk in the past, markets might have done a better job of signalling that structural tensions were rising in the eurozone – and today’s crunch would not be creating such a convulsive shock. It is, as I said above, wearily reminiscent of the subprime tale. And, sadly, that is no comfort at all.
*Sovereign risk in bank regulation and supervision: Where do we stand? Hervé Hannoun; October 26 2011. BIS
The debt trap time bomb
by Jeff Randall - Telegraph
With Britain's households now owing £1.5 trillion in mortgages, overdrafts, loans and credit cards, the day of reckoning nears.
It is the scandal of which we no longer speak. Like a mad aunt in the attic, the problem is not going away, indeed it can only get worse, yet we’re encouraged to pretend that the embarrassment doesn’t exist. When David Cameron tried to raise the issue in his address to the Conservative conference in Manchester, he was nobbled by advisers. The Prime Minister’s expunged comments were deemed "unhelpful".
The Treasury, it seems, prefers to avoid the matter lest the afflicted start doing something about it. As for the Opposition, how could it possibly get stuck in without reminding us on whose watch this disaster began?
I’m referring, of course, to the obscenity that is the United Kingdom’s ballooning personal debt. It stands at £1.5 trillion, a little more than the country’s annual GDP, our national output. This figure is neither the budget deficit (forecast to be £122 billion in 2011-12] nor the national debt, which, despite so-called "savage" public-spending cuts, is on course to hit £1 trillion by the end of the financial year.
No, £1,500,000,000,000 is the amount owed by individuals in the form of mortgages, overdrafts, loans and on credit cards. It is perilously high, but indicates only where we are, not the direction of travel. The full horror of what is happening to household borrowing can be found tucked away on the Office for Budget Responsibility’s website. The numbers are shocking – they point to another looming crisis – which, perhaps, explains why no one at Westminster is willing to highlight them.
According to the OBR, UK personal debt will grow by nearly 50 per cent between now and the end of this parliament. Come 2015, it is forecast to reach £2.12 trillion pounds. How can this be right? The average British adult already owes £29,500, about 123 per cent of average earnings. I thought we were meant to be getting a grip, not letting rip.
Is the OBR expecting a sudden burst in take-home pay to offset a massive expansion of household debt? No, quite the reverse.
It explains: "We forecast that income growth will be constrained by a relatively weak wage response to higher-than-expected inflation. But we expect households to seek to protect their standard of living ... this requires households to borrow throughout the forecast period [2011-2015]".
Borrowing to support lifestyles that are desirable but not affordable is where Britain’s financial nightmare began. If the OBR is correct, we are hurtling towards a second, more threatening phase, with household debts (including mortgages) rising on average from £55,800 to £81,700 in just four years.
What’s more, we are not going to be rescued by a fresh surge in house prices. Mortgages currently account for about £1.25 trillion of personal debt, but the OBR says "net worth is forecast to decline as a percentage of income", largely as a result of a relative decline in the value of household assets. House prices are already down 20 per cent from the peak and, according to the Land Registry, continue to fall almost everywhere except London.
British consumers’ heavy dependence on debt is not a product of the banking crash and subsequent recession. It took root during the Great Delusion, 1997-2007, a time when Gordon Brown was busy abolishing boom and bust. So good was the feeling of living beyond our means that disbelief was suspended by a conspiracy of irresponsible lenders, reckless borrowers and the then Chancellor who liked to dress up consumption as investment.
In 2003, I wrote a piece for the BBC, warning of the debt trap: "British consumers are living in a never-never land of very high personal borrowings. They simply cannot carry on spending more than they are earning without a hard landing."
This message did not go down well at Television Centre. I largely failed to get the corporation’s news editors to take it seriously, with one accusing me of overcooking the story in order to denigrate Labour’s success.
As the borrowing binge went on, Britain’s savings ratio fell below zero in the final quarter of 2007, at which point consumers were spending more than they were earning. They had become spellbound by Mr Brown’s voodoo economics – a weird belief in the magic of profligacy.
The upshot was a growth model that required shoppers to exhaust all available supplies of credit – and then find some new ones. Maximum spending first became the norm and then the minimum. Saving was for mugs, or so we were told.
The housing market, too, relied on hocus-pocus. When a chasm opened up between average house prices (2006: £200,000) and average salaries (£25,000), it was filled with "creative solutions", ie, loans greater than the value of the properties. Borrowers were covered, but only by a diaphanous veil of sorcery.
The 2008 credit crunch stripped them bare, forcing monetary authorities to take unprecedented action on interest rates. With its base rate down to 0.5%, the Bank of England has bought time for overstretched consumers. It has postponed their day of reckoning but, as the governor, Sir Mervyn King, pointed out recently, "the underlying problems of excessive debt have not gone away".
Indeed, they are about to become very much worse, as a hideous combination of inflation and unemployment corrodes domestic balance sheets.
The UK savings ratio shot up after 2008, but is back on a downward trend. Some borrowers seem to believe that rock-bottom interest rates are here to stay and are splashing out again. This is foolish. History tells us that the long-term trend rate is way above today’s level. In the 1990s, the range was five to 13 per cent. In the 1980s, it was seven to 16 per cent.
Others would like to save but simply cannot. A survey by Markit, a financial information company, showed that higher debt levels were recorded for the seventh consecutive month in October. By income group, the sharpest rise in demand for unsecured credit was in the middle band (£23,000 – £34,500). Respondents working in the public sector saw the fastest fall in savings, with 32 per cent noting a decline last month.
A Bank survey in 2010 found stark differences between household saving patterns, with over one third putting away nothing. This chimes with research by Morrisons, the supermarket group, which estimates that three in ten of its customers run out of cash at the end of every month. For some of these, borrowing on credit cards (average interest rate: 18.5 per cent) offers a quick but unsustainable fix.
The Bank’s dilemma is that by locking down its base interest, it is fuelling inflation, which gobbles up real incomes, hurting disproportionately those at the bottom end. With CPI inflation at 5.2 per cent and RPI at 5.6 per cent, prices are rising three times more quickly than the average wage settlement, 1.8 per cent.
Yet, were the Bank to ramp up the base cost of borrowing to, say, 2.5 per cent (still historically very low), 2.9 million mortgage holders, who are only just clinging on to their bricks and mortar, would have home loans that breached the Financial Services Authority’s affordability guidelines.
The number of homes repossessed in the second quarter fell by one per cent to 9,000, according to the Council of Mortgage Lenders, as banks and building societies offered revised payment schemes to help delinquent borrowers. But with 350,000 houses in negative equity, one mortgage broker, Obligo, is talking of an arrears "time bomb" that’s set to explode when interest rates go up.
The Consumer Credit Counselling Service identifies 6.2 million households as "financially vulnerable", including 3.2 million that are already either three months behind with a debt payment or subject to some form of debt action.
Having observed Labour build a dysfunctional economy partly on an altar of consumer immolation, George Osborne (who seemed unbothered by much of this until the country’s finances fell apart) is stuck with the consequences.
He knows that it’s crazy for over-borrowed households to carry on spending money they do not have. Yet, in his desperation to kick start a stalling economy, he dare not recommend prudence. At some point, the truth will out: in order to slay the Debt Monster, retrenchment and hardship are unavoidable. Faced with the Paradox of Thrift, consumers should look after their families first.
Greek vote sets off 'pandemonium', engulfs Italy
by Ambrose Evans-Pritchard - Telegraph
Greece's startling decision to call a referendum on last week's EU summit deal has set off wild tremors across the eurozone, pushing Italy to the brink of a perilous downward spiral.
The country's ruling Pasok party appeared to be splintering on Tuesdsay night, leaving it unclear whether the governent of premier George Papandreou can survive a parliamentary vote of confidence on Friday. Signs that the EU's pain-stakingly negotiated Grand Plan is unravelling within days has been a profound shock to confidence.
A frantic search for safe havens led to the second biggest one-day fall ever recorded in Europe's AAA bond yields. Ten-year German Bund yields tumbled 25 basis points to 1.77pc, with similar moves in non-EMU Swedish and Danish debt. British Gilt yields fell to 2.2pc.
Italy took the brunt of the punishment. Spreads over Bunds spiked to a crisis-high of 459 basis points before the European Central Bank came to the rescue. Spanish spreads reached 384. Andrew Roberts from RBS said Italy's debt stress is "dangerously close to a level that could cause pandemonium in financial markets".
The point of no return - judging from the sequence in Greece, Ireland and Portugal - would most likely be if LCH Clearnet imposed higher margin requirements. This trigger is 450 points over a basket of AAA benchmark bonds. The spread reached 388 on Tuesday. "We're two more days of violence from this point, but we're not there yet," he said.
The Greek move - denounced by France's Elysee as "irrational and dangerous" - raises the serious possibility that a euro member could soon be forced out of the monetary union, setting a precedent with explosive ramifications for other states in trouble. "I would have liked to do without this piece of news," said Eurogroup chairman Jean-Claude Juncker. "It is something that brings a great nervousness, that adds great insecurity to already great insecurity."
Mr Juncker said a "no" vote by Greek citizens would set in motion events that could lead to bankruptcy and threaten Greece's foothold in Europe. "If the Greek people say no to everything that has been agreed so far, then I don't see either how we can continue with the Greeks on good terms," he said.
If is far from clear how Greeks might vote. A Kappa Reserach poll found that 80pc oppose the EU-IMF "Memorandum", but far less would vote against it, and 70pc want to stay in the euro. The EU's haircut deal leaves Greece with debt of 120pc of GDP in 2020 - if all goes well - after nine years of austerity and slump.
However, quest for membership of every part of the EU system has been central to Greece's foreign policy since the return to democracy in the 1970s. For Greeks, cut off in the furthest corner of the Balkans, and cheek by jowl with the Near East, European identity has almost sacred importance.
While it is likely that the Greeks would vote "yes", the referendum ensures weeks or months of eurozone chaos and calls into question every component of the EU rescue package.
China, Japan, Russia and Brazil have already reacted coldly to calls to rescue Euroland by playing a direct role in the EU's bail-out fund (EFSF). They are likely to keep an even wider berth now that monetary union is once again proving unmanageable without an economic government to back it up.
Yu Yongdin, a former Chinese rate-setter, told Europe not to expect too much. "Eurozone countries will have to save themselves. Expectations of a 'red knight' are sorely misplaced."
Jacques Cailloux, Europe economist at RBS, said the Greek demarche is an ugly turn of events. "This added uncertainty will likely block any new potential financial support from countries outside monetary union to the EFSF," he said "In the current situation, the ECB remains the only credible backstop and will be forced to step up massively its bond purchases to prevent a new escalation of contagion risks."
The crisis in Italy is a nightmare debut for the ECB's new president Mario Draghi, who took over on Tuesday from Jean-Claude Trichet - viewed by Frankfurt as more German than the Germans.
Mr Draghi, former head of Italy's central bank, is in an awkard position where his first act in office is to oversee the purchase or "monetisation" of Italian bonds. If he presides over a cut in interest rates on Thursday - as demanded by the OECD and a chorus of global voices - the move will inevitably fuel suspicions among German and Dutch hardliners that the ECB has turned Latin. "He had better find himself a German grandmother fast," said Hans Redeker, currency chief at Morgan Stanley.
The collapsing credibilty of Silvio Berlusconi's coalition in Rome is bringing matters to a head. The Democrat opposition called on Italy's president to appoint a salvation government immediately. "This is an urgent necessity to face the coming storm," it said.
The bail-out machinery was already under scrutiny before Greece's move. Plans to leverage part of the EFSF four or five times to €1 trillion, by using it as a "first loss" bond insurer, concentrates risk for the six AAA states that underpin the fund. The danger is that this will cost France its AAA rating, accelerating contagion to the eurozone core.
Critics say this is a massive design flaw in the concept and will never gain market acceptance. Mounting evidence that Europe is tipping back into slump may, in any case, finish off the idea. Standard & Poor's has warned that it will cut France's rating by up to two notches if there is an EMU recession.
John Higgins from Capital Economics said events are closing in on Euroland. "We expect the crisis to build, prompting a prolonged recession in the eurozone, and at some point the end of the euro itself in its current form."
Fast cars and loose fiscal morals: there are more Porsches in Greece than taxpayers declaring 50,000 euro incomes
by Ian Cowie - Telegraph
Jubilation about the German deal to save the euro could prove short-lived if fresh news of Greek tax evasion gains wider currency. There are more Porsche Cayennes registered in Greece than taxpayers declaring an income of 50,000 euros (£43,800) or more, according to research by Professor Herakles Polemarchakis, former head of the Greek prime minister’s economic department.
While German car workers may take pride in this evidence of their export success, German taxpayers may be less keen to bail out a nation whose population appears to take such a cavalier approach to paying its fiscal dues. Never mind all that macroeconomic talk about deficit distress, many Greeks are still plainly riding high on the hog.
Something can’t be right when the modest city of Larisa, capital of the agricultural region of Thessaly with 250,000 inhabitants, has more Porsches per head of the population than New York or London.
Perhaps the penny – or the euro – is already dropping, because Professor Polemarchakis writes that Larissa "is the talk of the town in Stuttgart, the cradle of the German automobile industry, and, particularly, in the Porsche headquarters there", since it "tops the list, world-wide, for the per-capita ownership of Porsche Cayennes".
"The proliferation of Cayennes is a curiosity, given that farming is not a flourishing sector in Greece, where agricultural output generates a mere 3.2pc of Gross National Product (GNP) in 2009 – down from 6.65pc in 2000 – and transfers and subsidies from the European Commission provide roughly half of the nation’s agricultural income. "A couple of years ago, there were more Cayennes circulating in Greece than individuals who declared and paid taxes on an annual income of more than 50,000 euros."
Hard to believe? Don’t take my word for it. The report in Athens News will add to fears, expressed by leading economist George Soros and others, that last week’s deal to save the euro can only buy a little time – not a permanent solution. China may also question why it should support economies that pay their unemployed more than most of its workers earn.
Binding such widely differing cultures as Greece and Germany together was always going to be a problem; not least because of diverging attitudes to such financial fundamentals as work and tax. Now, ahead of this week’s G20 Summit in Cannes, some euro-enthusiast must be sent to the cradle of culture to explain that deficits will balloon unless all taxpayers pay their fiscal dues. I nominate Vince Cable.
Nicolas Sarkozy tells Greece: If you don't stick to the rules, leave the eurozone
by Louise Armitstead - Telegraph
The break-up of the eurozone has been dramatically placed in the hands of the Greek people as George Papandreou announced that a referendum on the Hellenic Republic’s membership will be held on December 4.
The Greek prime minister announced the decision in Cannes after Angela Merkel and Nicolas Sarkozy gave him an ultimatum that Greece had to "abide by the rules" of the Brussels bail-out agreement – "or leave the eurozone".
Mr Papandreou said that that "being part of the eurozone means having many rights and also obligations". He said that the debt crisis deal agreed in Brussels a week ago would be "difficult" for Greece and while he "hoped for a yes vote" he wanted the "Greek people to speak".
He added: "I believe in benefits for growth, lowering our burden of debt, a strong package of support for the next few years. We can put our house in order and make a viable economy. It is important that the Greek people make decisions on important developments. They are, I believe, mature and wise enough to make this decision.
"We're very proud to be part of the eurozone. But this comes with obligations and it is crucial we show the world we can live up to those obligations. "We could hold the referndum on December 4. A positive decision by the Greek people is not only positive for Greece but for Europe. The Greek people want us to be in eurozone - I want them to speak and they will speak soon>"
Mr Sarkozy said that European leaders were powerless to stop Greece holding a referendum but he said the bail-out agreement was conditional "according to certain rules". He said it was "up to them whether they accept the rules or not".
Ms Merkel added that they would "not not abandon the principles of democracy. We cannot put at stake the great work of the unification of the euro." "The referendum is a question of whether Greece wants to be in eurozone with the euro currency - that is the issue," she said.
The German Chancellor and French President, who summoned Mr Papandreou to crisis talks ahead of the G20 meeting in Cannes that starts on Thursday, to tell him that the debt restructuring and austerity measures agreed a week ago were not negotiable. The leaders threatened to withhold €8bn (£6.9bn) of international aid from Greece until Athens accepted the terms.
Mr Papandreou’s refusal to bow to their pressure is likely to rattled global markets. Hours before the Cannes talks, the European Financial Stability Facility (EFSF) was forced to pull an auction to raise €3bn of debt because investors felt uncertain about the terms. It was an inauspicious start for the vital bail-out fund which is supposed to be capable of raising up to €1trillion.
The Italian cabinet held an emergency meeting in a bid to agree economic reforms which Silvio Berlusconi promised as part of the Brussels deal. As the cost of insuring Italian debt against default remained at record highs of 6.1pc, Giorgio Napolitano, the Italian president, appeared to threatened to bring down the government if the reforms were not agreed.
Ignazio Visco, the new head of the Bank of Italy, urged Mr Berlusconi to mee the demands. He said it was "necessary to proceed resolutely" in order to achieve "the lasting reduction of sovereign risk and preserve the stability of the financial system". Mr Sarkozy had a "working dinner" in Cannes with President Hu Jintao as part of his on-going efforts to attract Chinese investment in eurozone debt.
Meanwhile, rumours swept the markets that France could lose its AAA credit rating after economic data revealed that the eurozone economies are stagnating.
The Markit Eurozone Manufacturing Purchasing Managers Index (PMI) for October fell to 47.1 down from 48.5 in September, where any number below 50 shows contraction. Standard & Poor’s recently warned it would cut France’s rating by up to two notches if there is a recession in the eurozone.
France’s data, at 48.5, was better than that of Greece, Italy and Spain and not far behind Germany. But the spread between French sovereign bonds and German bunds soared to it widest point since the euro was launched amid fears of a downgrade - which in turn could de-rail the terms of European rescue agreements.
Even so global stockmarkets were calmer following the rout on Tuesday. The Stoxx Europe 600 clawed up 0.9pc, in Germany the DAX gained 2.3pc, in France the CAC rose 1.4pc and in London the FTSE 100 added 1.2pc.
There were more dire warnings that a Greek referendum, expected in December, could trigger the break-up of the eurozone. Mr Papandreou faces a vote of confidence on Thursday. But traders were appeased by assurances from leaders that prolonged uncertainty would not be tolerated.
Francois Fillon, the French prime minister, said: "Europe cannot be kept waiting for weeks for the outcome of the referendum. The Greeks must say, rapidly and unambiguously, whether or not they will choose to remain in the eurozone."
Greek military leadership changes spark opposition outcry
by Paul Anast - Telegraph
As Greek politics grew ever more chaotic strong political protests erupted as the government moved to replace military chiefs with officers seen as more supportive of George Papandreou, the prime minister.
In a surprise development, Panos Beglitis, Defence Minister, a close confidante of Mr Papandreou, summoned the chiefs of the army, navy and air-force and announced that they were being replaced by other senior officers.
Neither the minister nor any government spokesman offered an explanation for the sudden, sweeping changes, which were scheduled to be considered on November 7 as part of a regular annual review of military leadership retirements and promotions. Usually the annual changes do not affect the entire leadership.
"Under no circumstances will these changes be accepted, at a time when the government is collapsing and has not even secured a vote of confidence," said an official announcement by the opposition conservative New Democracy party. "It has no moral or real authority any more, and such surprise moves can only worsen the crisis currently sweeping the country".
The party said it will not accept the new nominations and will take its own decisions on armed forces changes if it comes to power at the general elections that are expected to take place in Greece if the government loses the vote of confidence on Friday night.
The left wing SYRIZA party said that the government’s decision "gives the impression that it wants to create a highly politicized armed forces that it can control at a time of political crisis". It called on the President of the Republic not to proceed with the formal ratification of the defence minister’s decree and to wait until new general elections take place. Similar statements were made by all smaller political parties from the extreme right to the hard-line communists.
The development gave the impression that a Turkish-style military conspiracy was suspected by the government, but no such rumours or allegations had circulated in the country. Greece has been free of political interventions by the military since the overthrow of the military junta that ruled the country in the 1967-74 period.
Greek woes send Italian yields to euro-era high
by David Oakley - FT
Italian bond yields rose to new euro-era highs as worries about a disorderly Greek default hit sentiment. Italian 10-year bond yields rose to 6.399 per cent, while the extra premium the country pays over Germany jumped to 459 basis points.
The growing worries over Greece could undermine key government bond auctions later on Thursday, with Spain due to sell a total of €4bn in 2-year and 4-year notes and France planning to raise €6bn-€7bn in 10-year and 15-year paper.
Italian yields and spreads over Germany are around levels at which the markets believe make the country’s debt payments unsustainable and could trigger extra margin payments for the use of Rome’s bonds as collateral.
Markets consider yields of 6.5 per cent unsustainable on 10-year debt, while spreads above 450 basis points over Bunds have in the past prompted clearing houses to charge extra margin payments for Ireland and Portugal. LCH.Clearnet, for example, considers 450bp over a basket of triple A countries a point at which extra fees may have to be charged.
In a further worrying sign, French borrowing costs rose, lifting the premium it pays over Germany to a fresh euro-era record of 135bp. Investors are increasingly worried that France could lose its triple A rating, which in turn would threaten the status of the European financial stability facility, the eurozone’s rescue fund.
Greece’s move to call a referendum on last week’s eurozone package puts the sixth tranche of EU-IMF funding to Athens in doubt.
Italian bonds have also been hit by the plan to use the EFSF to cover first losses of new Italian debt which, some investors say, means that there is little point in buying the country’s bonds ahead of such a scheme being implemented.
The fact that the EFSF was forced to delay its own bond issue on Wednesday has also hurt sentiment, as it calls into question not only its ability to fund Ireland and Portugal but also its value as a guarantor.
As for Greece, €7.6bn of the country’s short-term bills and €6.8bn of longer-term bonds mature by the end of this year, with €3.6bn of bills maturing in November and another €10.8bn of bills and bonds in December, according to Evolution Securities.
Greece’s finance minister has previously indicated that the country has liquidity to take it through to mid-November, subject to payment of taxes including the emergency property tax, although it has been reported that it may have sufficient resources to take it through to the middle of December.
Bill Blain, a strategist at Newedge, the broker, said: "Unfortunately the prospects for a disorderly Greek default are increasing and that is weighing heavily on the market. "The abject failure of the new EFSF deal also confirms the European nightmare is deepening, and should be a wake-up call to Europe’s elites that their current efforts are going in the wrong direction and failing. Failing dismally."
Greece's Government Teeters
by Alkman Granitsas, Terence Roth And Costas Paris - Wall Street Journal
Greek Prime Minister George Papandreou may resign by the end of the day and work towards the formation of a national unity government, a senior socialist party official said Thursday.
Mr. Papandreou is holding an emergency cabinet meeting, a decision forced upon him after more defections by his socialist party's lawmakers over his surprise plan for a euro referendum erased his majority in Parliament.
"The climate in the cabinet meeting is very heavy. Papandreou could go as early as today and tell the president of the republic that he wants to work towards the creation of a coalition government," said the socialist party official, who is close to Mr. Papandreou. The official said a confidence vote scheduled for Friday probably won't take place. "I think the debate in parliament will end today without a vote," he said.
Earlier, a cabinet minister said Mr. Papandreou is considering the formation of a national unity government that will be able to negotiate with Greece's creditors, but also prepare the country for early elections.
"I think the Prime Minister is coming to terms that he can't carry on leading the country. He is looking into whether and how a national unity [administration] could be formed," a cabinet minister close to Mr. Papandreou said. "He may visit the President of the Republic to discuss this as early as today."
The minister also said Mr. Papandreou's call for a referendum on whether the country should stay in the euro zone "is off the table." Health Minister Andreas Loverdos told reporters he had told Mr. Papandreou at a cabinet meeting Tuesday that a referendum would be a "catastrophe."
Mr. Papandreou's hold over the party was seriously undermined early Thursday after Greek Finance Minister Evangelos Venizelos came out against the plan. Mr. Venizelos, who like other cabinet colleagues wasn't informed of Mr. Papandreou's plan before the surprise announcement on Monday, said in a statement he is against a referendum that essentially will decide whether Greece remains in the euro zone.
"Greece's place in the euro is a historical conquest by the Greek people that cannot be placed in question...this cannot be made dependent on a referendum," he said after returning from a meeting of leaders from the Group of 20 industrial and emerging economies in Cannes, France.
Earlier Thursday, one Socialist lawmaker announced her resignation from the party, while a second declared she would vote against the confidence motion. That effectively erased Mr. Papandreou's already slender governing majority to 150 seats in Greece's 300-member parliament—effectively making it impossible for him to govern.
Several other socialist lawmakers called for the creation of a unity government that will secure approval of Greece's latest loan agreement and lead the country to new elections. "It is critical that the country's political forces agree to the creation of a national salvation government," Socialist party lawmaker Dimitris Lintzeris told reporters in parliament. "Papandreou is past."
Two senior opposition officials said the leader of the opposition party New Democracy is considering entering into a possible coalition government if Prime Minister George Papandreou is forced to resign after a revolt inside his Pasok socialist party against his euro reform plans.
The officials said that Antonis Samaras was prepared to reconsider his reluctance to participate in a government of national unity if Mr. Papandreou stepped down as prime minister and a snap election date was set immediately. "We are prepared to discuss an interim solution if he [Papandreou] goes," one of the people said. A senior Pasok deputy said he believed a Mr. Papandreou resignation and the formation of a national unity government was the most prominent scenario.
A New Democracy deputy, Sotiris Hatzigakis, sent a letter to Mr. Samaras asking him to lead procedures to form a government of national unity that would include as many parties as possible. "[Samaras] ought to take initiative for a national unity government with the participation of parties of the wider democratic spectrum," the letter said. Officially, the New Democracy was non-committal. "We are observing developments closely and considering our response," Mr. Samaras's spokesman said.
In Cannes on Thursday, Mr. Papandreou was grilled by other euro-zone leaders Wednesday night when it was made plain that Greece was running out of time and needed to make a clear decision that it would make the sacrifices needed to continue to receive financial support and remain in the euro zone.
Several European leaders have stated their deep frustration that this latest development risks delaying broader efforts to defend the euro by months, including an enhanced bailout found for insolvent governments.
French President Nicolas Sarkozy warned in Cannes that Greece won't receive any further aid until the issue is resolved, echoing the views of German Chancellor Angela Merkel, who was also present. "Does Greece want to remain part of the euro zone or not," Ms. Merkel said. "That is the question the Greek people must now answer."
Greece's partners insisted that if Greece goes through with a referendum on the euro, that it at least be held no later than early December. Many fear that prolonged uncertainty increases the risk of a Greek bankruptcy that could unsettle holders of debt in other weaker euro-zone governments, such as Italy or Spain.
Mr. Sarkozy and Christine Lagarde, head of the International Monetary Fund, both said Wednesday night that Greece wouldn't receive the next €8 billion ($11.0 billion) aid payment until clarity is restored to Greece's future. Amounting to a three-month delay in a payment that was originally due in September, the postponement adds new pressure on Greece's public finances.
Potential investors in Europe's new bailout fund, notably China, now say no decisions will be made until the fund's details are known and Greece's future is clear.
Also on ice is a tentative agreement for Greece's creditor banks to accept a 50% loss on their Greek government bond holdings, the core of a debt-relief program for Athens. "The unexpected springing of the referendum on EU partners immediately after two EU summits in a week had reached what looked like a breakthrough deal has shredded that irretrievably," BNP Paribas economists said in a a note to clients.
by Paul Krugman - New York Times
Things are falling apart in Europe; the center is not holding.
Papandreou is going to hold a referendum; the vote will be no. Italian 10-years at 6.29 at pixel time; that’s a level at which the cost of rolling over the existing debt will force a default, even though Italy has a primary surplus. And with everyone simultaneously pushing for fiscal austerity, a recession seems almost certain, aggravating all of the continent’s problems.
I’ve been charting this trainwreck for a couple of years, and am feeling too weary to trace through it again right now. Let’s just say that the euro was an inherently flawed idea that can work only given a strong European economy and a significant degree of inflation, plus open-ended credit to sovereigns facing speculative attack.
Yet European elites embraced the notion of economics as morality play, imposing across-the-board austerity, tightening money despite low underlying inflation, and have been too concerned with punishing sinners to notice that everything was going to blow apart without an effective lender of last resort.
The question I’m trying to answer right now is how the final act will be played. At this point I’d guess soaring rates on Italian debt leading to a gigantic bank run, both because of solvency fears about Italian banks given a default and because of fear that Italy will end up leaving the euro. This then leads to emergency bank closing, and once that happens, a decision to drop the euro and install the new lira. Next stop, France.
It all sounds apocalyptic and unreal. But how is this situation supposed to resolve itself? The only route I see to avoid something like this involves the ECB totally changing its spots, fast.
Aside from that, Mr. Draghi, are you enjoying your new job?
UK faces 70% chance of recession
Think tank NIESR reiterates chancellor his fiscal policy is too tight
The possibility of another recession hitting the UK is ever closer as an influential think tank said on Thursday that the economy faces a near 50 percent chance of a double dip even if Europe's debt crisis is resolved.
The National Institute of Economic and Social Research said if euro zone policymakers merely "muddle through," the chance of a recession would rise to 70 percent, the academic think tank predicted.
NIESR's central forecast is for gross domestic product to grow by just 0.9 percent this year and 0.8 percent next, with risks to the downside, revised sharply down from forecasts of 1.3 and 2.0 percent respectively it made in August.
"There is a weakness in demand from both consumers and investors but the main downside risk is from the euro zone crisis," said NIESR's director, Jonathan Portes.
European leaders announced a deal last week to help reduce Greece's huge debts and put an end to a two-year debt crisis that has raged across the bloc but a shock call from Athens for a referendum stoked fears that the plan would crumble.
The government has embarked on its own tough austerity drive to pay off a deficit running at nearly 10 percent of GDP by 2015, but the slowing economy makes this an increasingly difficult task.
Chancellor George Osborne acknowledged on Tuesday that the country faced a rough ride but reiterated his commitment to erase the record budget deficit.
"The impact of the government's tough fiscal policy has been negative. Going forwards they should loosen policy moderately to help growth," Portes said, reiterating NIESR's long-standing criticism of government policy.
Even with the slower growth, NIESR predicted that the government was on track to run a surplus on its current budget - which excludes investment - by 2016/17. This is two years later than the government's fiscal watchdog forecast in March, but still in line with the government's rolling five-year target, NIESR said.
The Bank of England has already launched a second round of quantitative easing, pumping an additional 75 billion pounds into the economy, and policymakers have warned that the country risks slipping into another recession.
Data released on Tuesday showed the economy grew 0.5 percent last quarter, its strongest showing in two years, but economists see weaker growth ahead and gave a median one-in-three chance the country will head into another recession in the next 12 months.
ECB cuts interest rates to 1.25%
by Phillip Inman - Guardian
New European Central Bank boss Mario Draghi defies expectations with quarter-point cut
The European Central Bank has reacted to deepening fears of a long recession in the eurozone with a quarter point cut in interest rates to 1.25%. The decision will cheer countries like Spain and Italy, which criticised the ECB for raising rates earlier in the year despite the Greek debt crisis and worries that growth was faltering.
New central bank boss, Mario Draghi, defied the expectations of most analysts who said a rate cut was more likely next month. The former head of the Italian central bank, who took over from Jean-Claude Trichet this month, instead asserted his authority. The ECB also cut the interest rate on its deposit facility to 0.5% and the rate on the marginal lending facility to 2%.
Trichet was widely criticised for raising rates by 0.5% during the spring. Spanish and Greek politicians condemned him for make borrowing costs higher at a sensitive time for the currency club. Trichet said the hikes were necessary to tackle inflation. In his valedictory speech before stepping down he said the ECB's task of maintaining low and stable inflation had been achieved in his eight-year term and over the 12-year life of the euro.
Ian Kernohan, economist at investment firm, RLAM, said: "Although the market was expecting a rate cut in December, it can't have been a huge surprise that the ECB cut rates today, given the very poor run of economic data in Europe. "I don't think this move has much to do with change at the top of the ECB. The economic backdrop has altered dramatically since the summer, and I suspect Trichet would have agreed to this move, if he was still president."
Natalia Aguirre, research director at Renta 4 brokerage in Madrid, said: "There's no doubt it's good for all of the heavily indebted economies such as Spain. Now we just need it to be transferred to the Euribor review. "The markets right now needed help from every side."
Pierre Ellis, global economist at Decision Economics in New York, said: "This is a response to the weakening European economy. There is not a situation to further roil the market given the situation in Greece. They are in a situation that makes conforming to a pure inflation target a charade."
Italy's 'shock therapy' as eurozone manufacturing buckles
by Ambrose Evans-Pritchard - Telegraph
Europe is sliding into a full-blown industrial recession with contraction spreading to Germany and a drastic decline under way in Italy, greatly complicating efforts to contain the region’s debt crisis.
Markit’s manufacturing index for Euroland dropped well below the break-even reading of 50 in October. The data for Italy plunged five points to 43.3, the biggest drop since the survey began in the 1990s.
“Italy is a serious concern. Total and export new orders collapsed,” said Francois Cabau from Barclays Capital. Italy’s economy is almost certainly in a double-dip recession already, exacerbating the country’s fragile debt dynamics.
Manufacturing data for the eurozone as a whole showed the fastest decline since mid-2009 in new orders and export orders. Germany has at last tipped over into contraction as markets cool in Asia.
Italy’s premier Silvio Berlusconi was closeted with top ministers on Wednesday night, drawing up “shock therapy” measures in time for Thursday’s G20 summit in Cannes.
Italy’s press reported the drastic steps to be pushed through by decree may include levies on bank accounts, as occurred during the ERM crisis in July 1992 as a last-ditch move to save the lira. The hated policy amounted to wealth confiscation and failed to stop Italy being blown out of the system two months later. Plans for some form of property wealth tax have also been mooted.
Such one-off moves do nothing to lift Italy out of its stagnation trap. The country is suffering the delayed effects of a 30pc to 40pc loss of labour competitiveness against Germany within EMU, an overvalued euro externally against China, and a 70pc collapse in foreign direct investment (FDI) flows into Italian plant since 2007.
Capital flight from Italy has become a grave threat. The central bank reported a €21bn (£18bn) exodus in August, following a €20bn loss in July. “I fear these figures are likely to get worse", said Rony Hamaui from Milan’s Catholic University.
It is unclear whether Mr Berlusconi’s coalition can hold together if he agrees to EU demands for sweeping pension and labour reform. Parliament has already passed a €55bn austerity package intended to balance the budget by 2013.
Northern League leader Umberto Bossi threatened to set off “revolution” if money is taken from pensioners to bail out Rome, a reminder his party began life calling for an independent state of “Padania” in the North.
The skirmishes came as president Giorgio Napolitano summoned key party leaders for urgent talks and hinted at the drastic step of appointing a salvation government. “The country is in danger,” said Emma Marcegaglia, head of the business lobby Confindustria. “If the government is not able to agree on reforms tonight, the implications are self-evident.”
Yields on 10-year Italian debt fell back slightly to 6.18pc after nearing danger levels earlier this week. The country has been first in the firing line following Greece’s decision to hold a referendum on Europe’s rescue package, a move that threatens to paralyse each component of the summit deal and delay the EU’s €1 trillion fund (EFSF) for months.
“Contagion to Italy is a whole new ball game, so everybody is fixated on Italian yields,” said David Bloom from HSBC. “The idea behind the Greek bail-out is to keep the pin firmly in the grenade.”
Irish finance minister Michael Noonan said the European Central Bank (ECB) will have to come to the rescue. “The firewall to prevent contagion spreading to countries like Italy and Spain is not yet in place. They need to go into the market and say they have a wall of money and, no matter how much speculation there is, keep buying Italian bonds. I think they will do that. They don’t have any choice,” he said.
The ECB is loathe to take on this task. Existing bond purchases already face a legal challenge at the European Court for breach of the Lisbon Treaty. Germany’s president has denounced the action as illegal and the Bundestag backed the bail-out on the condition the ECB pulls back from bond support.
Mr Bloom at HSBC said market fears may be overblown. “We remain optimistic. Europe has already held 14 summits and will hold another 14 if necessary. They are showing a cast-iron will to do whatever it takes to resolve it,” he said.
“The good news is that Italy’s debt to GDP ration is stable, nor rising. It has been running a primary budget surplus for the past five years, unlike the UK or the US that have to borrow to cover expenditure. The bad news is that the debt is enormous.”
Britain poised to provide billions for new rescue package as euro crisis deepens
by Robert Winnett and Damien McElroy - Telegraph
Britain is poised to provide billions of pounds for a new global economic rescue package, prompted by concerns that the EU plan to save the euro will not be enough to stabilise the world economy.
A deal being negotiated by world leaders at the G20 summit in Cannes could see the International Monetary Fund (IMF) double in size. David Cameron will face strong opposition from Conservative MPs over the potential use of taxpayers’ money to assist European countries after repeated assurances from the Government that Britain would not provide extra funds to help the eurozone.
Both the Prime Minister and George Osborne, the Chancellor, insisted that the crisis is so grave that intervention is now required. “When the world is in crisis, it is right that you consider boosting the IMF, the International Monetary Fund, an organisation founded by Britain in which we are a leading player,” Mr Cameron said. He added: “I’m here to safeguard the British economy. We have taken difficult decisions at home that have protected us from the worst of the debt crisis, and that’s right.
“But there is a big opportunity here, because if the world could come together and solve some of its problems – the worst of which is the eurozone crisis – then actually that would be a big boost to the British economy.”
Asked why British money should be used to help rescue eurozone countries, Mr Osborne said that taxpayers from around the world, including those in America and China, would be “exposed” under the plan. “Britain was there at the creation of the IMF,” he said. “At a time of international economic instability it would be very strange for Britain to walk away from the IMF. I don’t think that would be a sensible thing for Britain to do.”
The Chancellor added that G20 negotiations last night were “getting down to the nitty gritty of numbers”. Under IMF rules, Britain would underwrite a portion of loans to struggling countries, but would only pay out if they defaulted. The deal is expected to be agreed today, with the IMF poised to intervene to prop up Italy and other beleaguered European nations. The eurozone has struggled to raise sufficient funds for its own rescue package. The announcement followed another chaotic day in Greece, where the government appeared on the brink of collapse.
European leaders yesterday attempted effectively to force George Papandreou, the country’s Prime Minister, from office in response to his plans to hold a referendum on whether to adopt the austerity measures that the EU is demanding in return for a rescue package. There were repeated rumours that he had brokered a deal to step down. Yet last night he was still clinging to power, appealing instead to the main opposition party to join him in a coalition of national unity.
Despite hints from Mr Papandreou that a referendum on the Greek bail-out would be abandoned if the coalition was formed, the opposition walked out of parliament. Antonis Samaras, the opposition leader, demanded Mr Papandreou’s departure. “Mr Papandreou pretends that he didn’t understand what I told him. I called on him to resign,” he declared. A former governor of the Greek central bank was being lined up last night to take over in the event the government collapses after a no-confidence vote tonight.
Yesterday, Mark Hoban, a Treasury minister, disclosed to MPs that the Government has drawn up contingency plans for the collapse of the euro. He described the single currency as “breaking up”. World leaders meeting at the summit yesterday had originally been expected to discuss medium-term plans to help improve financial regulation and boost global economic growth.
They have been forced to abandon large parts of the agenda as ongoing discussions about rescuing the single currency have dominated proceedings. President Barack Obama said: “The most important aspect of our task over the next few days is to resolve the financial crisis here in Europe.”
Angela Merkel, the German Chancellor, and Nicolas Sarkozy, the French president, have become increasingly aggressive as they put pressure on Greece to accept the terms of an EU bail-out. Mr Sarkozy is said to be “furious” with Mr Papandreou, privately accusing him of betrayal. Yesterday, the French president said: “We cannot allow the euro to break up – that would be the break-up of Europe.”
Despite the apparent improvement in the Greek outlook, major doubts have emerged over other parts of the EU bail-out plan. It now seems increasingly unlikely that the EU will be able to persuade other countries to provide money to a “special purpose” investment scheme to lend money to beleaguered European countries. A more modest insurance scheme to underwrite loans is thought to be under consideration.
It is against this background, that the plan to boost the “firepower” of the IMF is now being urgently drawn up. The IMF currently has total funds of almost one trillion dollars. However, it has already lent, or is committed to lend, the majority of its funds and therefore has about $380 billion (£240 billion) of “available” reserves. The cost of a full eurozone rescue has been estimated at almost £2 trillion.
Therefore, for the IMF to be able to intervene in a worst case scenario, which some economists think is increasingly likely, it may have to more than double in size – even with some help from the EU.
British taxpayers will lend money to the IMF, which will in turn loan tens of billions of pounds to European countries. Britain has already agreed to provide up to £29.5 billion to the IMF, the equivalent of £1,000 for every British household. This is now set to rise significantly. Under the terms of its IMF engagement, Britain underwrites 4.2 per cent of any bail-out funds.
Chinese Property Collapse 101
by Tom Orlik - Wall Street Journal
What does a meltdown in China's economy look like?
It starts in the property sector, the main domestic growth driver. Government controls on speculators have already started to bring residential property prices down. National average prices for residential property fell 0.23% month-to-month in October, the second month in a row of falling prices, according to data released Tuesday by the China Real Estate Index System.
If buyers who are used to prices moving only upward adopt a wait-and-see attitude, then sales volumes will fall. Sales so far this year have been robust, up 12% year-to-year in the first nine months. But it has not always been that way. In 2008, sales fell 15% year-to-year. A repeat would leave developers short of cash to cover their costs.
The most stressed developers would be forced into a fire sale of inventory, sharply lowering prices to attract buyers. In what could be a sign of things to come, prices at two new developments in Shanghai were slashed by more than 20% in October. In a competitive market, once one developer starts to lower prices, everyone will be forced to follow. The result would be a write-down of asset value and profit expectations across the sector.
Developers in crisis mode would slow investment. Real-estate investment so far in 2011 is tearing along at a torrid 35% year-to-year. But that level of expenditure is not guaranteed. In the first two months of 2009, year-to-year growth dipped to 4.7%. If sales dry up and credit remains in short supply, a similar decline in 2012 is not outside the realm of possibility.
A fall of that magnitude in real-estate investment could knock more than two percentage points off China's gross domestic product growth, expected to come in around 9% in 2011. The spillover from the slowdown in demand for construction materials, unemployment among construction workers and the hit to household wealth means the full impact could be much greater.
The financial system would not escape the consequences. Around 20% of banks' loan book is directly tied to the real-estate sector. Another 16% has been lent to local governments, which receive 40% of their revenue from land sales. Falling prices for property would knock land prices lower and increase defaults from both sources. With growth slowing and asset quality crumbling, the Chinese government would have a full-fledged crisis on its hands.
That's the worst-case scenario. The central case is that China will muddle through with strong fundamental demand underpinning property prices, and deep government pockets backstopping the banks. But Beijing is not omniscient. China's property prices are edging down, and the response of buyers and builders is difficult to predict. The possibility of a sharp fall in prices spiraling out of the government's control is small—but it exists. If that happens, it's time to revisit the chances of a hard landing.
Greek Referendum On Bailout Deal Scrapped
Greece's Prime Minister has told Sky News the referendum on the the eurozone bailout plan will no longer go ahead - and it was never his intention for it to happen.
"The referendum was never an end in itself," George Papandreou told the cabinet according to statements released by his office. "We had a dilemma - either true assent or a referendum. I said yesterday, if the assent were there, we would not need a referendum."
Mr Papandreou had been under pressure to stand down, as a split emerged in his government over the plans to hold a public vote on the rescue deal. He now says he has no intention to quit, but will hold talks with the opposition over their calls for a transitional government and early elections.
However, he warned against holding elections in the near future - as this would entail a "big risk of bankruptcy".
Markets across Europe have been rising since lunchtime, as investors realised the likelihood of a Greek referendum - and subsequent threat of a 'no' vote - was falling. Earlier, the opposition leader called for the formation of a coalition government and the immediate ratification by parliament of the new bailout deal. Conservative leader Antonis Samaras made the demand after several of Mr Papandreou's own ministers announced they were against the referendum decision.
A group of around 30 politicians across the ruling party and the opposition also signed a letter calling for snap elections and the scrapping of the referendum, according to the news agency Reuters. "We consider the formation of a unity government necessary to take over the implementation of national goals and lead the country as soon as possible and securely to elections," the letter reads.
The developments come as G20 leaders begin talks in Cannes, where the future of the eurozone bailout deal is dominating discussion.
The Greek finance minister Evangelos Venizelos this morning exposed the split within the Greek cabinet after he declared his opposition to hold a public vote on the bailout deal. "Greece's position within the euro area is a historic conquest of the country that cannot be put in doubt," he said.
It "cannot depend on a referendum", Mr Venizelos added. The finance minister said the country's attention should be focused on quickly getting a crucial £7bn installment of bailout funds, without which it faces bankruptcy with weeks.
Revenge of the Sovereign Nation
by Ambrose Evans-Pritchard - Telegraph
Greece’s astonishing decision to call a referendum – "a supreme act of democracy and of patriotism", in the words of premier George Papandreou – has more or less killed last week’s EU summit deal.
The markets cannot wait three months to find out the result, and nor is China going to lend much money to the EFSF bail-out fund until this is cleared up. The whole edifice is already at risk of crumbling. Société Générale is down 15pc this morning. The FTSE MIB index in Milan has crashed 7pc. Italian bond spreads have jumped to 450 basis points.
Unless the European Central Bank step in very soon and on a massive scale to shore up Italy, the game is up. We will have a spectacular smash-up.
If handled badly, the disorderly insolvency of the world’s third largest debtor with €1.9 trillion in public debt and nearer €3.5 trillion in total debt would be a much greater event than the fall of Credit Anstalt in 1931. (Let me add that Italy is not fundamentally insolvent. It is only in these straits because it does not have a lender of last resort, a sovereign central bank, or a sovereign currency. The euro structure itself has turned a solvent state into an insolvent state. It is reverse alchemy.)
The Anstalt debacle triggered the European banking collapse, set off tremors in London and New York, and turned recession into depression. Within four months the global financial order had essentially disintegrated. That is the risk right now as the reality of Europe’s make-up becomes clear.
The Greek referendum – if it is not overtaken by a collapse of the government first – has left officials in Paris, Berlin, and Brussels speechless with rage. The ingratitude of them. The spokesman of French president Nicolas Sarkozy (himself half Greek, from Thessaloniki) said the move was “irrational and dangerous”. Rainer Brüderle, Bundestag leader of the Free Democrats, said the Greeks appear to be “wriggling out” of a solemn commitment. They face outright bankruptcy, he blustered.
Well yes, but at least the Greeks are stripping away the self-serving claims of the creditor states that their “rescue” loan packages are to “save Greece”. They are nothing of the sort. Greece has been subjected to the greatest fiscal squeeze ever attempted in a modern industrial state, without any offsetting monetary stimulus or devaluation.
The economy has so far collapsed by 14pc to 16pc since the peak – depending who you ask – and is spiralling downwards at a vertiginous pace. The debt has exploded under the EU-IMF Troika programme. It is heading for 180pc of GDP by next year. Even under the haircut deal, Greek debt will be 120pc of GDP in 2020 after nine years of depression. That is not cure, it is a punitive sentence.
Every major claim by the inspectors at the outset of the Memorandum has turned out to be untrue. The facts are so far from the truth that it is hard to believe they ever thought it could work. The Greeks were made to suffer IMF austerity without the usual IMF cure. This was done for one purpose only, to buy time for banks and other Club Med states to beef up their defences.
It was not an unreasonable strategy (though a BIG LIE), and might not have failed entirely if the global economy recovered briskly this year and if the ECB had behaved with an ounce of common sense. Instead the ECB choose to tighten.
When the history books are written, I think scholarship will be very harsh on the handful of men running EMU monetary policy over the last three to four years. They are not as bad as the Chicago Fed of 1930 to 1932, but not much better. So no, like the Spartans, Thebans, and Thespians at the Pass of Thermopylae, the Greeks were sacrificed to buy time for the alliance.
The referendum is a healthy reminder that Europe is a collection of sovereign democracies, tied by treaty law for certain arrangements. It is a union only in name. Certain architects of EMU calculated that the single currency would itself become the catalyst for a quantum leap in integration that could not be achieved otherwise.
They were warned by the European Commission’s own economists and by the Bundesbank that the undertaking was unworkable without fiscal union, and probably catastrophic if extended to Southern Europe. Yet the ideological view was that any trauma would be a “beneficial crisis”, to be exploited to advance the Project.
This was the Monnet Method of fait accompli and facts on the ground. These great manipulators of Europe’s destiny may yet succeed, but so far the crisis is not been remotely beneficial.
The sovereign nation of Germany has blocked every move to fiscal union, whether Eurobonds, debt-pooling, fiscal transfers, or shared budgets. It has blocked use of the ECB as a genuine central bank. The great Verfassungsgericht has more or less declared the outcome desired by those early EMU conspirators to be illegal and off limits.
And as my old friend Gideon Rachman at the FT writes this morning: the Greek vote is “a hammer blow aimed at the most sensitive spot of the whole European construction – its lacks of popular support and legitimacy.”
Indeed, how many times did we chew this over in the restaurants of Brussels, Stockholm, Copenhagen, Dublin, or the Hague years ago, as one NO followed another every time an EU state dared to hold a referendum. I think it is fair to say events are unfolding more or less as we expected.