Wednesday, November 30, 2011

November 30 2011: Day X

Alexander Gardner Mr. President February 5, 1865
"Abraham Lincoln, seated, holding spectacles and a pencil"

Ilargi: Amid persistent rumors that yesterday the money markets were, in the words of economist Jeremy Cook, "a short shove away from complete collapse", all the world's central banks got together and decided to lower the cost of pushing US dollars across the globe.

Translation: billions of dollars more -albeit in short-term loans- were injected in what Alan Grayson yesterday depicted as "Russian Roulette" (he was talking about earlier Fed loans, same difference).

The stock markets of course are going through the ceiling; they love the smell of free money in the morning. The $16-$26 trillion the Fed has previously loaned may have largely been returned, but, says Grayson - and rightly so-, "what about next time?" After all, today's loans were poured into a financial system in which a whole set of first domino's are about to topple over.

The market reaction shows that there is indeed very cheap cash to be had. But also, and most of all, it shows that there are still a lot of people out there who've never figured out the difference between liquidity and solvency.

And that's going to bite, because all the banks and countries that were broke yesterday are just as broke today. Difference is, now it's going to bite you more, and the banks' investors less. Someone has to pay at the end of the day. Might as well be you; after all, you don't get to talk to the US Treasury Secretary for hot tips.

Wonder how much the ECB has put on the table. And what various parties in Europe think of that.

The calls for Europe to let the ECB jump in big and buy any scrap of paper the banks can come up with don't abate. Certainly not after even German Finance Minister Wolfgang Schäuble yesterday said the EFSF won't be leveraged enough, or in time, to save the hour, let alone the day. Word is it can't get bigger than €600 billion or so. Peanuts in comparison to the debts overhanging Europe.

And yes, it's absolutely true that Europe is handling the crisis completely wrong. But not at all for the reasons the financiers, politicians and other Neo-Keynesian groupies claim.

What Europe does wrong is not that it doesn't splurge additional humongous amounts of cash on member countries' debt. What it does wrong is that it isn't -very busily- restructuring that debt.

Yet. Because it is inevitable. That is where the difference between liquidity -give them billions in short term loans- and solvency -but they're bleeding broke!- becomes glaringly obvious.

How can you arrive at anything but wrong answers if nobody can even get the questions right?

So Schäuble, and a while bunch of others, downplayed the potential role of the EFSF in "solving" the crisis -which can't be solved without massive restructuring-. Also yesterday, a confidential EU/ECB report leaked to the Guardian stated that Italy is on the brink of insolvency. As in days away.

And Dutch PM Mark Rutte, when pushed on the "ECB big-time involvement" question while visiting Obama at the White House, told the President that it is, basically, not going to happen.

Another Dutchman, a former Finance Minister and the present Chairman of the International Accounting Standards Board (IASB), Hans Hoogervorst, told TV program "Andere Tijden" (Different Times) in a show to be aired December 11 that the Euro "has failed". "If we’d known beforehand what problems we now face, nobody with an ounce of common sense would have been willing to launch it."

Hoogervorst was also testifying yesterday before a parliamentary committee in The Hague, tasked with finding out why and how the financial crisis happened in Holland. There, he called the present situation "disastrous" and added that the problems 'may well have become uncontrollable'.

What else can they do, these folks that -exclusively- look for the right answer to the wrong question? As I've mentioned a few times before, their only option left, which happens to be also their -the Europeans- preferred option, is the IMF. Which unfortunately has no more than about $300-400 billion at hand (peanuts, I tell you!).

But the IMF can be refunded by its 186 members. One of which, the US, is required to pay 17.72% of all funding. While the Eurozone countries combined pay -only?!- around 30%. The idea is clear: get the whole world to pay, since if they don't, they too will suffer the consequences. And the Eurozone doesn't have the means to do it by itself. Go through the IMF and Europe saves two thirds of the cost.

Result: a Mexican stand-off. Nobody moves, nobody blinks. Nice predicament. You can just see Obama going to Congress to get permission for a scheme like that. Great way to seal victory in the 2012 election.

If you ask me, though, the main obstacle to the IMF faux solution is the same as with a lot of the intra-Europe ones. Time. Changing treaties, changing mandates, it may all be possible in theory, but the way the Eurozone is set up, it can -and will- take a long time to get any of these things done. Countries may constitutionally require referendums over them. Governments may fall, necessitating elections. Lots of things can happen that -substantially- stall the process.

There is simply no way left that we can be comfortable in thinking and believing the Eurozone will survive. Not even necessarily through December. There are too many dangers lurking in too many different places. Which is why in my next article I intend to launch the idea of "Cash for Christmas". Got to think it over a bit more.

I called this post Day X for a reason (other than it sounds great). You will understand why when reading the following, from this article by staff writers at Der Spiegel:

A Continent Stares into the Abyss
Dirk Meyer, a professor at the Helmut Schmidt University in Hamburg, [..] argues that the Germans should take the initiative and leave the euro zone as quickly as possible. He has even come up with a concrete time frame.

Under his scenario, it begins on a Monday, or "Day X." On the preceding weekend, the government will have issued the surprise order that banks remain closed on this Day X. The bank holiday is needed to incorporate all savings and checking accounts into the changeover.

On Tuesday, banks and savings banks begin to stamp their customers' banknotes with forgery-proof magnetic ink. Inspectors would monitor Germany's borders and international capital transactions to ensure that foreigners do not bring any money into Germany to have it stamped there.

As a result of the expected devaluation, euros that have been stamped in this manner would lose value. The government would have to provide aid to banks that have substantial receivables and assets abroad.

Time to Convert
After about two months, Germany would leave the euro zone and, through an amendment to its constitution, reintroduce its own currency, which could also be a new common currency with other former euro-zone members who had left the monetary union. A second bank holiday would be used to convert all accounts and bank balances to the new currency.

All individuals and companies residing in or headquartered in Germany would be entitled to convert their euros into the new currency. However, at least another year would pass before the new banknotes were printed and distributed. Until then, the stamped euro banknotes would serve as the valid currency. [..]

Meyer estimates the total economic costs of the operation would be between €250 billion and €340 billion, or 10 to 14 percent of Germany's gross domestic product -- a high price indeed. But, he argues, the damage would be even greater if Germany remained in the euro zone. Meyer believes that German taxpayers would face an additional annual burden of about €80 billion should a European "transfer union" come into existence.

Ilargi: This is merely one idea. There are many more floating around in Europe, guaranteed, as people scramble to grasp the enormity of what might happen, and soon. And whichever option prevails, we can still call the day it is implemented:

Day X

To put Dirk Meyer's numbers above into perspective, please allow me to quote from a September 6, 2011 report by UBS:

Euro break-up - the consequences
The economic cost (part 1)
The cost of a weak country leaving the Euro is significant. Consequences include sovereign default, corporate default, collapse of the banking system and collapse of international trade. There is little prospect of devaluation offering much assistance.

We estimate that a weak Euro country leaving the Euro would incur a cost of around €9,500 to €11,500 per person in the exiting country during the first year. That cost would then probably amount to €3,000 to €4,000 per person per year over subsequent years.

That equates to a range of 40% to 50% of GDP in the first year.

The economic cost (part 2)
Were a stronger country such as Germany to leave the Euro, the consequences would include corporate default, recapitalisation of the banking system and collapse of international trade.

If Germany were to leave, we believe the cost to be around €6,000 to €8,000 for every German adult and child in the first year, and a range of €3,500 to €4,500 per person per year thereafter. That is the equivalent of 20% to 25% of GDP in the first year.

In comparison, the cost of bailing out Greece, Ireland and Portugal entirely in the wake of the default of those countries would be a little over €1,000 per person, in a single hit.

The political cost
The economic cost is, in many ways, the least of the concerns investors should have about a break-up. Fragmentation of the Euro would incur political costs. Europe's "soft power" influence internationally would cease (as the concept of "Europe" as an integrated polity becomes meaningless).

It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war.

Ilargi: Losing between 25%-50% of GDP in just the first year. Yeah, that could make a body nervous.

You can bet your buttocks that Monti and Rutte and Papademos and Merkel and Sarkozy know about that UBS report too.

It keeps them up at night. Certainly Sarkozy.

He wants to join Germany if it would leave the euro, and take Holland, Finland and maybe Austria with it. And they won't want France to join that elite group.

To know why, just take one good hard look at this graph from the OECD:

If Greece leaves the Euro however, more weaklings will follow in their "Latin" group: Portugal, Ireland, and then Italy, Spain. Who will all want for France to be the strongest Latin partner. But France wants no piece of that!

This is what makes the European puzzle unsolvable: France. Germany will not accept responsibility for French debt, and without that France will be downgraded. And again. And again.

"What day is today, honey"?

"I think it's Day W, chéri".

"Oh, mais NOOOOOONNN!!!, that means tomorrow is Day X !!!!!!!!!!!!"

Where's my gun?

Where's the bébé?

Where's the cash?

Where's the ammo?

Where's the tuna?

Where’s the pickles?

Where’s the cheese?

What do you mean we ran out of wine?

Wait, where am I?

Why am I so short?

Why are you still here?

And why am I?

Did you invite all those people over for cake?

What's with all the pitchforks?"

Stocks spike on global central bank action
by Jack Farchy - FT

Markets are soaring after the world’s major central banks announced a co-ordinated move to boost liquidity to the global financial system and China moved to ease monetary policy.

Equities have spiked higher led by Germany’s Dax index which rallied nearly 3 per cent in ten minutes and is now up 4.5 per cent on the day. Futures on the S&P index were indicating opening gains on Wall Street of 2.7 per cent.

Oil prices, as measured by the Brent benchmark, have reversed earlier losses and are now 93 cents higher at $111.75 a barrel, while copper has jumped 3.8 per cent to $7,775 a tonne. The euro has surged 1 per cent to $1.3450, and the Aussie dollar is up 2.6 per cent.

The central banks of the US, the eurozone, the UK, Canada, Japan and Switzerland announced that they would cut the cost of dollar swap lines in order to ease a liquidity crunch in the financial system.

The move is aimed to “ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity”, according to a joint statement.

Investors have been growing increasingly concerned about the funding crunch that has been caused by the eurozone crisis. Late on Tuesday, Standard & Poor’s annoucned a downgrade of the credit rating of many of the world’s largest banks, from Goldman Sachs and Bank of America to Barclays and UBS.

The move underscored nerves about the ability of the financial sector to fund itself. The extra cost for a eurozone bank to borrow dollars in exchange for euros for three months in the basis swap market ballooned to 162.5 basis points earlier today – a level only previously seen in the month after the Lehman Brothers bankruptcy.

In the wake of the move by the central banks, the swap rate has fallen sharply, and now stands at 145bp, according to Bloomberg data.

Central bank action is clearly the order of the day for the markets. Risk assets were already rallying before the joint annoucnement on the back of a move by China to cut reserve requirements for its banks for the first time in almost three years.

The news reinvigorated bulls who hope that the latest move marks a turning point in Chinese monetary policy, and Beijing can once again ride to the rescue of the global economy.

The announcement came too late to affect Chinese equities, with the Shanghai Composite index closing 3.3 per cent lower amid concerns that the purchasing managers’ index, to be released on Thursday, will undershoot expectations.

Nonetheless, large amounts of money remain on the sidelines, as investors recognise that the eurozone debt crisis is far from resolution. Indeed, while the bulls have dominated in the immediate aftermath of the central bank annoucnements, bears will retort that both the Chinese cut and the co-ordinated action are signs of quite how bad things are.

In a sign of the weight of money pouring into haven assets, Germany’s one-year Bund yields have turned negative this morning. The one-year Bund fell 13 basis points to a yield of -0.05 per cent. Germany’s 10-year yields are also down 7bp at 2.26 per cent.

The central bank action has almost entirely overshadowed the outcome of a meeting in Brussels, where European finance ministers described how they planned to boost the firepower of the European Financial Stability Fund – including pursuing bilateral loans through the International Monetary Fund.

Firm details and commitments were thin on the ground, however, and traders are now pinning their hopes on the EU summit on December 9 and the European Central Bank meeting the day before. In the shorter term, the focus is on Spain and France, which plan to tap the bond markets on Thursday.

Europe delays major debt decisions for 10 days
by Don Melvin - AP

Under pressure to deliver shock treatment to the ailing euro, European finance ministers failed to come up with a plan for European countries to spend within their means. Such a plan is needed before Europe's central bank and the International Monetary Fund consider stepping in to stem an escalating threat to the global economy.

The ministers delayed action on major financial issues — such as the concept of a closer fiscal union that would guarantee more budgetary discipline — until their bosses meet next week in Brussels.

Stock markets fell Wednesday as a top EU official conceded that the future of the euro now rests heavily on the meeting of European heads of state on Dec. 9. Stock markets had risen this week on hopes that intense bond market pressure would finally force the eurozone into quicker and more robust action.

"We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union," EU Monetary Affairs Commissioner Olli Rehn said, adding: "There is no one single silver bullet that will get us out of this crisis."

At a meeting Tuesday night, finance ministers for the 17 countries that use the euro handed Greece a promised €8 billion ($10.7 billion) rescue loan to fend off its immediate cash crisis and promised to increase the firepower of a fund to help bail out ailing eurozone countries.

But they failed to increase the firepower of a European bailout fund to €1 trillion ($1.3 trillion), as they had hoped to do. "It will be very difficult to reach something in the region of a trillion. Maybe half of that," said Dutch Finance Minister Jan Kees de Jager.

Klaus Regling, head of the bailout fund, tried to be upbeat, saying the ministers had committed to increasing its size from its current €440 billion ($587 billion) but refusing to give a specific size. He assured reporters it was more than big enough to deal with Europe's immediate debt problems. "To be clear, we do not expect investors to commit large amounts of money during the next few days or weeks," Regling said. "Leverage is a process over time."

The ministers did agree to use the bailout fund to offer financial protection of 20-30 percent to investors who buy new bonds from troubled eurozone nations. "We made important progress on a number of fronts," eurozone chief Jean-Claude Juncker insisted late Tuesday. "This shows our complete determination to do whatever it takes to safeguard the financial stability of the euro."

Wednesday's meeting in Brussels has brought in the 10 non-euro finance ministers from the 27-nation EU, who have been pressing hard for a swift solution for fear that their economies will suffer.

Sweden's Anders Borg said there was no more time to waste and that the markets don't provide "any honeymoons" for any countries that stray from fiscal austerity. He stressed that Spain and Italy need to "take out all the skeletons" from their financial closets and implement budgetary belt tightening measures.

Many economists say the 17 nations that use the euro have little choice but to back proposals for much closer coordination of their spending and budget policies. Though such a change would reduce their ability to run budget deficits, it could potentially pave the way for much more aggressive support from the European Central Bank. "If the eurozone is to survive, there needs to be more fiscal union," said Eswar Prasad, an economics professor at Cornell University in the state of New York.

For struggling economies, this might be the necessary price of survival. With such discipline in place, the ECB could then agree to make major purchases of government bonds from Europe's troubled countries. Doing so could help lower their borrowing costs and enable them to finance their debts.

For now, the ECB has been reluctant to take such a frontline role, arguing that it's up to governments to sort out their fiscal mess. It's voiced worries that a big bond-buying program could allow economically reckless countries off the hook for painful spending cuts and tax increases. But a tighter fiscal union could reassure the ECB and lead it to act more forcefully, said Jacob Funk Kirkegaard, a fellow at the Peterson Institute for International Economics.

The alternative could be a default by Greece, or even Italy, and a break-up of the eurozone. That could spark chaos, forcing some or all the countries to return to their own individual currencies.

A default could also cause lending to seize up worldwide. Some European banks holding large amounts of government debt would likely collapse. As credit dried up, other banks around the world would probably hoard cash. The credit crunch could push European countries into a deep recession.

A European downturn would also slow the flow of exports to Europe from the United States and Asia and weaken their economies. U.S. stock markets would likely fall, reducing household wealth and consumer spending and further choking growth.

Many economists say the threat of default means the International Monetary Fund might end up contributing to a bailout fund. An IMF spokesman denied Tuesday that the international lending group is consulting with the Italian or Spanish governments.

But the IMF could work with institutions like the ECB, Cornell's Prasad said. Funneling money through the IMF would be more politically palatable for the ECB than directly aiding individual countries.

Still, the IMF has only about $390 billion available to lend. That wouldn't be anywhere near enough to rescue Italy, which has $1.2 trillion in debt. "In the short term, there is only the ECB," Kirkegaard said.

Europe's Real Problem? Deflation
by John Carney - CNBC

European markets experienced a rare moment of respite yesterday, but this was just a pause in the panic. No comprehensive solution to the continent’s sovereign debt woes seems to be near at hand.

Why can't policymakers and market participants come to a consensus about what needs to be done? I suspect the problem is a serious misunderstanding about what is actually happening in Europe and why it will have dire economic consequences.

Europe is experiencing a stealth monetary contraction, which is another way of saying it is undergoing massive deflation .

This might sound odd to many readers. The voices out of the European Central Bank all sound the alarm of inflation . And it’s not just the central bankers. Journalists too start clanging on about inflation whenever a serious plan for addressing Europe’s problems is proposed.

“The European Central Bank is under mounting pressure to take a leaf out of the Federal Reserve's 1940s playbook by setting caps on government bond yields, a move that may stoke inflation,” John Glover at Bloomberg wrote recently.

What the inflationistas are missing is that Europe is actually suffering from a profound contraction of its money supply. This contraction is crippling the banking system and will bring the economy to a grinding halt if it is not allieviated.

It’s easy to miss the contraction of the money supply because it involves a destruction of financial assets that we do not usually think of as “money” but that, in fact, operate as money — or did until relatively recently.

The fundamental characteristic of modern fiat money — as opposed to commodity-based money under a gold standard — is that it serves as a medium of exchange. This means dollars or euros, for example. Basically, the local currency.

Within the banking system, however, other financial assets also serve as money. These assets can be used to meet margin calls, collateralize obligations, and make payments. U.S. Treasury bonds are the most obvious example of this kind of money-equivalent financial asset.

The U.S. government recognizes the equivalence of Treasury bonds and dollars within the banking system by not requiring banks to hold any reserves against the bonds. They are counted as “cash or cash equivalents” on balance sheets of U.S. public companies.

Over in Europe, sovereign debt issued by euro zone nations also served as a money-equivalent inside the banking system. Banks were not required to hold reserves against sovereign debt. They used them as collateral for obligations, and made inter-bank payments with sovereign bonds. The bonds were, in short, as good as euros.

When the markets turned against nations like Greece and Italy, the cash-equivalency of their bonds came into doubt. It was obvious that they could lose value, and quite rapidly. The debt could no longer be used as collateral, except at extreme discounts.

The discounting of sovereign debt, then, meant that there was less money in the European banking system. If a one million euro bond previously held as a money-equivalent is now worth just 600,000 euros, the holder has lost 400,000 euros. Multiply that across the banking system, and you have millions of euros of money-equivalents simply vanishing.

It is exactly as if some paper-eating plague just started rotting physical euros. The money supply of Europe is vanishing.

This is not the first time this has happened. In the U.S., triple-A rated mortgage-backed securities also served as cash-equivalents within the banking system. They weren’t quite as good as cash — but they were very close. Reserve requirements were minimal, they could be used as collateral, and they were a medium of exchange within the banking system.

When the bottom fell out of the housing market, top-rated mortgage backed securities lost their ratings and the confidence of the market. This represented a loss of money-equivalents within the banking system. It was a stealth monetary contraction.

The Federal Reserve acted by replacing the lost money-equivalents with actual money. Many thought the expansion of the Fed’s balance sheet would be hugely inflationary. When inflation didn’t come, pundits were left sputtering about it being just over the horizon or some other nonsense.

The reason the feared inflation didn’t arise is because the Fed was not expanding the money supply. It was replacing lost money-equivalents with new money. Far from being inflationary, the Fed’s program was probably mildly deflationary because it did not actually replace the lost money-equivalents with new money dollar-for-dollar.

This is why fears of ECB action on European debt are so badly misplaced. Europe is experiencing a Great Contraction — the decline in the supply of its money equivalents. The size of this contraction is stunning. It includes the entire bond markets of Greece, Italy, Spain, and Portugal . Before long, it will include many other nations.

The ECB’s central — perhaps its only mission — is monetary stability. It cannot perform this mission, however, because it doesn’t properly understand that it is overseeing a monetary contraction. Unlike the Fed in 2009 and 2010, the ECB is refusing the replace lost money-equivalents with new euros.

This is what’s gone wrong in Europe. A monetary contraction is still being called a “sovereign debt crisis” and a banking crisis. What we really have is a deflationary crisis.

Italy at risk of insolvency, European finance ministers warned
by Ian Traynor - Guardian

Mario Monti must tackle Italian tax evasion to avoid other eurozone economies being damaged, says report

European finance ministers were warned on Tuesday night that Italy's liquidity crisis could leave the eurozone's third biggest economy insolvent with devastating impact on the fate of the single currency and its big core economies, Germany and France.

Eurozone finance ministers met in Brussels in their latest attempt to plot a path out of the EU's worst crisis. With Mario Monti, the new Italian prime minister and finance minister, reporting to the session on his austerity package aimed at saving Italy and shoring up the euro, a confidential report from the European commission and the European Central Bank said Monti would need to do more than already promised.

The report, obtained by the Guardian, said Monti had to go further in his promises to combat rampant tax evasion in Italy, which is estimated to amount to 20% of gross domestic product.

"The sovereign debt crisis has now moved from the periphery to Italy and other core euro area countries. Pressure on Italian sovereign bond yields is particularly acute, reflecting investors' mounting concerns with the sustainability of Italy's large public debt" – almost €2tn, (£1.7tn) – the report said.

"The risks of a full-blown sovereign liquidity crisis can increase rapidly in the absence of a determined policy response … Persistently high interest rates increase the risk of a self-fulfilling 'run' from Italy's sovereign debt. A liquidity crisis could then turn into a solvency crisis, whose repercussions for other large euro area countries would be very acute given their exposure to the Italian economy." Italy on Tuesday easily raised €7.5bn on the bond markets, but at exorbitant rates above the 7% sustainability threshold.

The European finance ministers were expected to agree to release €8bn in bailout funds to Greece, the latest tranche, after months of haggling over whether Athens had done enough to warrant the receipt and the fall of the Papandreou government. Klaus Regling, head of the European financial stability facility, the main bailout fund, was expected to disappoint the 17 governments by telling them there was little chance of leveraging the €250bn pot of money into a trillion-plus war chest by drawing in Asian investors and sovereign wealth funds.

The leveraging plan was drawn up by eurozone leaders at a summit a month ago. "It doesn't look like it will be [multiplied] 4-5 times," said a Brussels diplomat. "More like 2.5 times. That's probably not enough to restore confidence in Italy or Spain."

Tuesday night's meeting came ahead of another crucial summit of EU leaders next week at which Germany and France, while still at odds over central details, will launch a drive for a eurozone "fiscal union", with governments required to forfeit national powers over fiscal, budget, tax and spending policies to a eurozone body.

Angela Merkel, the German chancellor, is the biggest obstacle to any prompt and radical action aimed at stabilising the bond markets and ring-fencing the euro. Others, led by France, want the European Central Bank to be given interventionist powers to defend the currency, print money, and act as lender of last resort as well as the pooling of eurozone debt through the issue of common euro bonds.

Merkel is fiercely opposed to both options, insisting instead on reopening the EU's Lisbon Treaty to entrench new disciplines and intrusive powers of scrutiny over eurozone national budgets. Rather than focus on solving the immediate crisis, Merkel's priority is to create a durable new system eliminating the chances of a recurrence.

Launching eurobonds and empowering the ECB to intervene, said Wolfgang Schäuble, German finance minister, would mean "no European country would retain its triple-A rating". "The Germans want treaty change without eurobonds. The others want eurobonds without treaty change," said the diplomat. "In the end the Germans are in control of this."

Italy’s Debt Must Be Restructured
by Nouriel Roubini - FT

It is increasingly clear that Italy’s public debt is unsustainable and needs an orderly restructuring to avert a disorderly default. The eurozone’s wish to exclude private sector involvement from the design of the new European Stability Mechanism is pig-headed – and lacks all credibility.

With public debt at 120 per cent of gross domestic product, real interest rates close to five per cent and zero growth, Italy would need a primary surplus of five per cent of gross domestic product – not the current near-zero – merely to stabilise its debt. Soon real rates will be higher and growth negative. Moreover, the austerity that the European Central Bank and Germany are imposing on Italy will turn recession into depression.

While the technocratic government headed by Mario Monti is much more credible than Silvio Berlusconi’s former government, the constraints it faces are unchanged: debt is unsustainable and the policy to reduce it will make matters worse. That is why markets have shrugged off news of the new government and pushed Italian spreads to yet more unsustainable levels. The government is born wounded and weakened, as Mr Berlusconi can pull the plug on it at any time.

Even if austerity and reforms were eventually to restore debt sustainability, Italy and countries in a similar position would need a lender of last resort to support them and prevent sovereign spreads exploding while they regained market credibility. But Italy’s financing needs for the next twelve months alone are not confined to the €400bn of debt maturing.

At this point most investors would dump their entire holdings of Italian debt to any sucker – the ECB, European Financial Stability Facility, IMF or whoever – willing to buy it at current yields. If a lender of last resort appears, Italy’s entire debt stock of €1,900bn will be soon supplied.

So using precious official resources to prevent the unavoidable would simply finance the exit of others. Moreover, there is no official money – some €2,000bn would be needed – to backstop Italy, and soon Spain and possibly Belgium, for the next three years.

Even current attempts to ramp up EFSF resources from the IMF (which is reportedly readying a €400 to €600bn programme to backstop Italy for the next 12-18 months), and from Brics, sovereign wealth funds and elsewhere, are bound to fail if the eurozone’s core is unwilling to increase its own contributions, and if the ECB is unwilling to play the role of an unlimited lender of last resort.

If, as appears likely, Italy remains stuck in an uncompetitive recession and is unable to regain market access in the next twelve months, then even if such large official resources were mobilised, they would be wasted on financing investors’ exit and thus postponing an inevitable debt restructuring that would then be more disorderly.

So Italy’s public debt needs to be reduced now to at worst 90 per cent of GDP from the current 120 per cent. This could be done by offering investors the choice to exchange their securities either for a par bond – with a longer maturity and a low enough coupon to reduce the net present value by 25 per cent – or for a discount bond that has a face value reduction of 25 per cent.

The par bond would suit banks that hold bonds to maturity and don’t mark to market. There should be a credible commitment not to pay investors who hold out against participating in the offer – even if this triggers the payment of credit default swaps.

With appropriate regulatory forbearance, it would allow banks to pretend for a while that no losses had occurred and thus give them more time to raise fresh capital. Since about 40 per cent of Italy’s public debt is held by non-residents, a debt restructuring will also imply some burden sharing with foreign creditors.

Some influential figures in Italy have suggested a capital levy, or wealth tax, could achieve the same reduction in public debt. But a debt restructuring is superior. To reduce the debt ratio to 90 per cent of GDP, a wealth tax would need to raise €450bn (30 per cent of GDP). Even if payment of such a levy were spread over a decade that would imply an increase in taxes equivalent to three per cent of GDP for ten years running; the resulting drop in disposable income and consumption would make Italy’s recession a depression.

To reduce such negative effects one would have to focus the tax on the wealthy – raising the rate to ten per cent of their wealth. Leaving aside the political risks of such a move, a debt restructuring is still preferable, as the burden would be shared with foreign investors. It would therefore hit consumption and growth less. Since Italy is running a small primary surplus, a debt restructuring would be feasible even without significant official external financing.

So debt restructuring is preferable to a Plan A that will fail and then cause a bigger, disorderly restructuring or default down the line. Even a debt restructuring would not resolve the problems of lack of growth and outright recession, lack of competitiveness and a large current account deficit. Resolving those requires a real depreciation that may well demand the eventual exit of Italy and other member states from the euro.

But exit can be postponed for a while. Restructuring, however, has to be implemented now. The alternative is much worse.

Citigroup sentences Europe to Lost Decade
by Ambrose Evans-Pritchard - Telegraph

Citgroup's guru Willem Buiter has more or less condemned the eurozone to death by asphyxiation (if it doesn't die of a heart attack first).

In his global forecast for generalized Götterdämmerung in 2012, the Dutch Meister said Euroland will remain in recession for the next two years, contracting by 1.2pc next year and again by 0.2pc in 2013.

Heaven knows what that will do to the South. Dr Buiter said the chance of a euro break-up is low (of course, of course). He assumes that the ECB will blink, acting at the 11th hour as lender-of-last-resort. Well, it had better blink fast.

If his figures are correct, I find it it very hard to see how the eurozone can hold together. Club Med will be in even deeper depression. The debt trajectory will be even worse.

Be that as it may, the Meister and his team said the eurozone will not regain its 2008 level of output until 2016. The overall picture for both EMU-land and Britain will be "similar to, or below" Japan's Lost Decade in the 1990s (though with much higher unemployment than in Japan).

So there we have it. The Japanese handled their mess rather well in retrospect.

Just for the notebook:

"Real GDP per head in 2011 is about 8pc below its pre-recession trend in the Euro Area, 10pc below in the US, and 15pc below in the UK," it said. Sounds right to me. Britain's starting position after the Brown debacle was catastrophic.

Oddly enough, Citigroup thinks France and Austria will lose their AAAs and the US and Japan will be downgraded again, but that Britain will somehow scrape by.

I wish I could believe it. Like my colleague Jeremy Warner, I think Britain has managed to buy time over the last year with a remarkable conjuring trick but the luck can't last. Our private debt to GDP ratios are ghastly.

Although UK exports are holding up a little better than some, thanks to a weak pound.

This is a trade-off. Devaluation has cut living standards faster in the UK, but also makes recovery less impossible than for fellow boom-busters (ie Spain) in the eurozone.

It all depends on your priorities: do you want higher living standards for incumbents with jobs, to the detriment of the unemployed; or lower spending power for incumbents, with lower job wastage and social devastation for those excluded from the system.

I know which side I am on in this debate. And you, dear reader?

Here are some hard figures on those nasty debt auctions.


The High Price of Abandoning the Euro
by David Böcking - Spiegel

There is mounting speculation that the euro zone will break apart, or even that the single currency will be abandoned altogether. It often sounds as if such scenarios wouldn't be so bad for Germany. In fact the consequences would be catastrophic for Europe and for its largest economy.

The warning signs are mounting, and fresh news is adding to the gloom every day. Britain's financial watchdog has instructed banks to brace for a possible break-up of the euro zone. British currency trader CLS Bank is reportedly conducting stress tests to prepare for this worst-case scenario.

Polish Foreign Minister Radoslaw Sikorski made a dramatic appeal to Germany on Monday to prevent a collapse of the currency union, saying: "We are standing on the edge of a precipice."

German investors are jettisoning derivatives on a large scale because they have lost confidence in the instruments. For the first time, it appears, people across Europe regard the downfall of the euro as a real possibility.

Is it really for the first time, though? In fact, scenarios for the euro's breakup are older than the currency itself. At the end of 1998, Harvard Law School Professor Hal Scott published a paper called "When the Euro Falls Apart." He put the chances of the euro failing at around 10 percent.

Today, that's a real prospect. According to Mark Cliffe, the chief economist of ING Bank, "even the most ardent euro admirer must concede that the probability of countries leaving or the breakup of the euro zone is no longer zero."

The economist Nouriel Roubini, known as "Dr. Doom" because he predicted the 2008 financial crisis, recently put the likelihood of the euro zone collapsing at 45 percent. But such expert forecasts sound abstract to most people.

What would be the concrete consequences and costs of a euro apocalypse -- for Europe and for Germany? Here's an assessment:

Is Leaving the Euro Even Possible? And is it a Nightmare Scenario?
The disintegration of the euro zone is basically possible. Back in 1998, Harvard Law School Professor Scott cited a number of factors that would theoretically permit euro countries to return to their national currencies. The euro zone:
  • minted euro coins with national symbols

  • kept national payments systems and national central banks as well as national debt issuance

  • only merged the foreign currency reserves of the member states to a limited extent

So could Germany simply return to the deutsche mark? Could Greece simply reintroduce the drachma?

That wouldn't be as easy as euroskeptics are arguing. The European treaties don't envisage nations leaving the euro zone -- a country can only quit the European Union as a whole. Such a departure would take a long time, and investors could use that time to withdraw their capital, warns economist Karsten Junius in a research note for DekaBank. So the country in question would suffer economic damage on its path back into a national currency.

It is also unclear what would happen to a country's sovereign debt if it left the euro zone. When the single currency was set up, national debt was converted into euros. In many cases, that conversion was enshrined in bond contracts as a one-way street, meaning that a return to national currencies wasn't provided for.

Collapse of Currency Unions often Accompanied by Unrest
The decisive factor would be whether the country in question had borrowed money under national or international law -- and that varies from member state to member state. According to DekaBank, Germany has issued only 0.2 percent of its debt under international law, while the figure for the Netherlands is just under 40 percent. For Portugal, it stands at 60 percent.

The bonds would become the subject of legal disputes which would cause lasting damage to investor confidence in the countries that issued them. Investors are already worried by these factors. Japanese bank Nomura is reported to have advised its customers to check the government bonds in their portfolios to see whether they can be converted into a national currency.

When a currency is abolished, there are always victims, including many citizens whose savings are suddenly worth less or nothing. History shows that the collapse of currency unions is often accompanied by unrest or even civil war. UBS chief economist Stephane Deo believes that it is "virtually impossible to imagine a break-up without severe social consequences."

Violent protests in Europe? It is a nightmare scenario.

At the same time, the EU would suffer an immediate loss of influence in the world if it lost the euro. Efforts to forge a common foreign and security policy would be rendered pointless. Without the euro, the voice even of large countries like Germany would amount to no more than "a whisper on the world stage" writes Deo.

US economist Barry Eichengreen says the disastrous political consequences of a collapse of the euro zone will deter countries from allowing the currency to fail. "The high value that member states attach to their involvement in the larger European process would prevent them from abandoning the euro," he writes, adding: "except under the most extreme circumstances."

Have these extreme circumstances been reached now? Are the costs of saving the euro -- ever-increasing debt and interest payments on that debt -- so high that they exceed its benefits?

Exit from Europe Would Cost Each German Thousands
In no other country is skepticism of the euro as great as it is in Germany. On the one hand, that is understandable given that Germany is responsible for the largest share of the aid packages for the crisis-stricken countries. But it also comes across as a bit absurd considering the high degree to which the country has profited from the introduction of the euro.

Germany is a proud exporting nation, and around 40 percent of its exports go to other euro-zone nations. On Tuesday, the news broke that German exports will exceed the €1 trillion level for the first time. But the very companies enjoying this current success are accustomed to being able to export their goods at the lowest and most stable prices. The euro made both possible. The common currency eliminated exchange rate fluctuations in the euro zone, the euro appreciated less strongly than the deutsche mark. In other words, it kept prices competitive.

The result was a boom in exports. Between 1999 and 1993, German exports rose by around 3 percent. But between 1999 and 2003, exports increased by 6.5 percent. Between 2003 and 2007, two years after the introduction of euro notes and coins, German exports rose a staggering 9 percent. The federal government-owned investment bank KfW researched the benefits of this boom and determined that membership in the currency union has created profits in Germany in the last two years alone of €50 billion to €60 billion.

If Germany were to exit the euro zone, this advantage would vanish quite suddenly. A reintroduced deutsche mark would quickly appreciate against the euro -- UBS chief economist Deo regards a rise by 40 percent to be realistic. The result would be that exports would become more expensive. If a strong country were to leave the euro zone, Deo writes, "it would ultimately have to write off its export industry." For the German economy, this would be a disastrous scenario.

Would Would Happen If Athens Left the Euro Zone?
And what would happen to the crisis-plagued countries like Greece and Portugal? Some economists -- like Hans-Werner Sinn, the president of the Institute for Economic Research (Ifo), a leading German think tank in Munich -- believe Greece could actually regain competitiveness by leaving the euro zone by devaluating the drachma.

That may sound good at first, but there's a catch: Athens would still have to pay back a large share of its debt, even after exiting from the common currency, in euros. But that repayment would be made far more difficult as a result of the drachma's devaluation. An Athens exit from the euro zone would also hit German and French banks, which have a high degree of exposure to Greek debt.

A decisive question is that of the total cost Germany would face if it left the euro zone. Economist Dirk Meyer has developed a scenario in which the total costs would fall somewhere between €250 and €340 billion. That would represent 10 to 14 percent of German gross domestic product, a considerable amount.

UBS chief economist Deo, has even gone so far as to estimate that 20 to 25 percent of GDP might be realistic in the first year after a German exit alone. That would translate to a per capita cost of between €6,000 and €8,000, with costs of between €3,500 and €4,500 in subsequent years. By comparison, if, after Greece, Portugal and Ireland each had to be given a debt haircut of 50 percent, Deo estimates it would only cost around €1,000 per German citizen -- and it would be a one-time cost.

The calculations undertaken by ING chief economist Cliffe are similarly pessimistic. In his scenario, he assumes that the breakup of the euro zone would create many additional problems: falling stock prices, the need to bail out further banks to the tune of billions and a sharp drop in the euro exchange rate. "Compared to the presumed long-term benefits, the scope of the economic damage in the first two years would weigh heavily," he concludes.

"Decision-makers," he warns, "perhaps ought to think of that before they gleefully describe the exit from the currency union as an option." This sounds like a clear message to Europe's politicians. But it isn't just the real economy that would be affected massively by the end of the euro zone. The financial sector would also face new perils.

How Reinstating Old Borders Would Ravage the Financial System
The impressions left by the last financial crisis in 2008 and 2009 remain fresh, the worries of new problems among banks still great. In this situation the exit of a single country from the euro zone could be fatal.

Should a weak country like Greece pull out, a panicked reaction by its citizens is to be expected. In expectation of currency devaluation, hundreds of thousands of people would likely clean out their bank accounts, creating a run on banks. People would subsequently try to put their money in foreign banks. A capital flight like this would finish off banks that are already in distress.

Were the entire euro zone to dissolve, even a strong country like Germany would suffer. In this case each former member country would have to establish a new exchange rate for their new currency. Europeans would then have an incentive to swap their remaining euros against a strong national currency -- like the deutsche mark, for example. Thus Germany would attract piles of capital, in turn increasing inflation pressure.

According to economist Junius, countries have two possibilities for avoiding these problems: On the one hand they can act so quickly that the financial markets would be surprised by their exit from the euro zone. In this case, however, the move couldn't be communicated politically and legitimized -- making it practically unthinkable.

On the other hand, countries that pull out could, through the implementation of capital controls, among other things, take precautions for monitoring the amount of money that comes in and out. Harvard economist Scott has already thought extensively about how Italy could introduce a new Lira with temporary border closures and stamping.

But Junius sees such a step as unrealistic for Europe. "In light of the geographical proximity and intensive trade relationships it would be a very impractical solution that would offer a few days of relief at best," he said. Furthermore, the capital controls would contradict the principle of the common market, putting the concept of the European Union itself in question.

S&P may cut France outlook within 10 days
by Catherine Bremer, Leila Abboud, Blaise Robinson and Cecile Lefort - Reuters

Credit rating agency Standard & Poor's could change its outlook on France's triple-A credit rating to negative within the next 10 days, a French newspaper reported on Monday, citing sources, the latest signal that France's top-tier status is at risk.

An S&P spokesperson in Paris said the agency did not comment on rumours. A spokesman in Melbourne earlier also declined to comment on the report, which if true would signal a heightened risk of a downgrade in the weeks ahead. "It could happen within a week, perhaps 10 days," La Tribune quoted a diplomatic source as saying of a change to the outlook.

The economic and financial daily said S&P -- which cut Belgium's credit rating to double-A from double-A-plus on Friday -- had planned to make its announcement on France the same day but postponed it for unknown reasons.

The euro briefly dipped on the report, which coincided with news that credit rating agency Moody's could downgrade the subordinated debt of a swathe of euro zone banks.

French Finance Minister Francois Baroin said the focus should not be solely on France and that while the euro zone debt crisis was serious, France was "clear-sighted" on it. "Everyone is concerned, not just France. It's all the euro zone countries," he told France Info radio, asked about the La Tribune report.

"France is not an island or economically cut off from the world. It depends on different parts of the euro zone for a large part of its economic activity and that's why we are, to a large extent, clear-sighted on the crisis."

On Tuesday morning before the opening bell, futures for French blue-chip index CAC 40 were down 0.2 percent, underperforming futures for Euro STOXX 50 and for Germany's DAX, up 0.1 percent.

France's ratings outlook is stable with S&P, but months of talk that a downgrade by one or more of the rating agencies could be on the cards is rattling the French government, which would face a surge in borrowing costs under a downgrade. President Nicolas Sarkozy, who faces a tough re-election battle in April, has said he will do everything in his power to defend France's cherished triple-A badge.

On Nov. 10, Standard & Poor's mistakenly announced it had cut the nation's rating, frightening investors already anxious over Europe's worsening debt crisis. Last week, Fitch Ratings said France's debt and deficit levels remained consistent with a triple-A rating but the euro zone's No. 2 economy would have limited room to absorb new shocks to its public finances without endangering that status.

Banks to Slash Bond Sales By 60% as Costs Soar, SocGen Forecasts
by Hannah Benjamin - Bloomberg

Banks will slash bond sales by 60 percent in Europe next year as the sovereign debt crisis sends issuance costs soaring, Societe Generale SA predicts.

Lenders will sell 50 billion euros ($67 billion) of senior notes, down from a euro-era low of 121 billion euros so far this year, according to SocGen. The extra yield that investors demand to hold European bank bonds is the highest since May 5, 2009, while the cost of insuring the debt is near a record.

Banks are the biggest holders of plunging euro-region government bonds, and are already finding it hard to sell their own debt. That's forcing them to consider alternative sources of funding such as top-rated covered bonds and even asset sales to help refinance some of the $800 billion of notes that Moody's Corp. estimates will come due next year.

"We can expect massively reduced issuance of unsecured bank debt," said Roger Francis, an analyst at Mizuho Securities Co. Ltd. in London. "Most banks have got contingency plans for how to get around this. Banks are saying they can do more private placements and then there's always the covered bond market, which has been open intermittently."

Spreads on euro-denominated bank bonds widened to 424 basis points, from 336 on Oct. 31, Bank of America Merrill Lynch's EUR Corporates, Banking index shows. The average yield climbed to 6.08 percent from 4.85 percent.

European non-financial companies may also sell fewer bonds next year, with SocGen forecasting 70 billion euros of issuance compared with 82 billion euros year-to-date. Speculative-grade issuers will cut borrowing by a third to 20 billion euros, the Paris-based lender estimates.

Covered bonds -- backed by mortgages or public-sector loans as well as the borrower's guarantee -- and asset-backed securities will be the only type of debt whose sales increase, SocGen forecasts. Covered bond issuance will rise to 185 billion euros, from 183 billion euros so far in 2011, according to the bank's estimates.

"It doesn't take a genius to work out that 2012 will possibly be as choppy as this year" with "a slowing economy and still immense uncertainty as to how the euro-zone crisis will play out," said Suki Mann, the head of credit strategy at SocGen in London. "It is now clear to all that there will be no single, absolute and definitive solution to the crisis, so we should stop looking for one."

Default Swaps
The Markit iTraxx Financial Index of credit-default swaps tied to the notes of 25 lenders and insurers rose to an all-time high 358 on Nov. 25, according to JPMorgan Chase & Co. The gauge's 60 percent jump this month is the biggest since February 2008.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point on a contract protecting 10 million euros of debt for five years is equivalent to 1,000 euros a year.

"There's a lot of uncertainty over the whole bank funding issue," said Otto Dichtl, a managing director at Knight Capital Europe Ltd. in London. "Most likely banks won't be able to get a lot of long-term, senior unsecured funding done. Banks will try to sell some subsidiaries where they still can get a decent price and free up capital."

Banks are suffering as investors flee from even bonds issued by AAA rated euro-region governments.

French Yields
France's 10-year bond yield rose to as high as 3.72 percent last week, the highest closing price since April. The yield premium investors demand to hold the top-rated nation's debt instead of benchmark German bunds increased to 190 basis points on Nov. 15, a euro-era record.

Italian 10-year yields climbed to a high of 7.26 percent on Nov. 25, breaching the 7 percent threshold above which Greece, Portugal and Ireland were forced to seek international bailouts. Italy's spread versus bunds widened to a euro-era record of 553 basis points this month.

"How banks will raise money is the big question next year," said Roger Webb, the fixed-income investment director at Scottish Widows Investment Partnership in Edinburgh. "In the current environment of massive uncertainty investors will be increasingly unwilling to fund the banking sector."

It's payback for longest boom in history
by Jeremy Warner - Telegraph

Bleak as the OECD's latest "Economic Outlook" seems, with its prediction of a double-dip recession for both the UK and the eurozone, it more likely understates the risks than overstates them.

The OECD has been a bit better than the IMF in catching up with fast deteriorating events, but not much. Like most forecasters, it has tended to trail the reality rather than predicted it.

Little more than a year ago it was still enthusiastically urging nations to adopt "exit strategies" from the extreme policy stimulus put in place in the wake of the Lehman's collapse. Now it wants more QE in the UK, for the ECB to reverse last summer's rate rises, and urgent action all round to resolve the eurozone crisis. Otherwise much worse outcomes are possible.

Few can claim to have been any better during the crisis of the last four years. Never mind the OECD and the IMF, the Bank of England, the ECB, most mainstream City forecasts, the Office for Budget Responsibility, Uncle Tom Cobley, Lance Corporal Warner and all have been similarly guilty of undue optimism. Hopes of robust recovery from the calamities of 2008 have consistently proved premature. And latterly with good reason.

What nobody had bargained for was quite how inept the eurozone was likely to be in addressing its problems. I'm not saying that everything would have been fine but for the idiocies of the single currency, but they certainly would have been a great deal better than they are. The eurozone crisis has been hanging over everything like a pall for more than two years now. Meaningful resolution looks further away than ever.

This may or may not have been always predictable, but until very recently, it has been an article of faith in markets and internationally that the eurozone would eventually sort out its problems. Self evidently, that's not happened and it is looking ever less likely it will.

Hardest of all to understand about this slow-motion pile up is why Europe's policy elite continues to believe, as they manifestly do, that in the end everything will work out fine. The problem has been diagnosed as one of lack of fiscal discipline and competitiveness in the periphery.

Once these issues are adequately addressed through reform, eurozone leaders seem to have concluded, everything will miraculously correct itself and the euro will become seen as one of the most stable currencies in the world. Well, we can all believe in fairies if we want to.

The reality was rather better explained by Sir Mervyn King, Governor of the Bank of England, to MPs on the UK Treasury Select Committee on Monday. The crisis is essentially one of large scale current account imbalances, he pointed out. Some countries have got themselves into a position where markets will no longer finance their deficits or service their debts. Borrowing more, even if they could do so, wouldn't help them very much; it would only make them still more insolvent.

Until these countries can get back to competitiveness, a process that will take at best years, and not the few short months policymakers seem bizarrely to think possible, they will have to be supported through transfer payments, either directly from taxpayers in the surplus countries, or indirectly through monetisation of their debts by the European Central Bank.

Markets are looking for a clear signal from eurozone governments that some such form of burden sharing between creditor and debtor nations is going to be forthcoming. They've been looking in vain.

The working assumption has been that once Germany is satisfied that the sinners of the south will never again be allowed to stray, that once proper rules and sanctions are imposed to prevent further transgressions, then it will cave in and allow the transfers. To date, Germany has given no cause for such faith. There's been plenty of stick, but not a carrot to be seen.

In such circumstances, the OECD's "worst case scenario", where the single currency meets a disorderly and traumatic end, becomes much easier to envisage.

The OECD puts it thus: "If everything came to a head, with governments and banking systems under extreme pressure in some or all of the vulnerable countries, the political fall-out would be dramatic and pressures for euro area exit could be intense. The establishment and likely large exchange rate changes of the new national currencies could imply large losses for debt and asset holders, including banks that could become insolvent.

"Such turbulence in Europe, with massive wealth destruction, bankruptcies and a collapse in confidence in European integration and co-operation, would most likely result in a deep depression in both the exiting and remaining euro-area countries as well as in the world economy."

The OECD assigns quite a low probability to such an outcome. On the evidence of eurozone policy paralysis to date, it is unfortunately becoming quite hard to imagine any other.

Against such a potentially lethal hurricane blowing in from the Continent, whatever the UK Chancellor, George Osborne, has to announce in his Autumn Statement on Tuesday to support growth would seem like no more than spitting against the wind.

Certainly, it won't help demand much in the short term. The £5bn of extra capital spending for infrastructure is neither here nor there at less than 0.5pc of GDP, and in any case is going to be paid for out of cuts elsewhere. As for the £20bn of infrastructure investment the Government is hoping to coax out of pension funds, this is a very welcome initiative, but will take some years to pay dividends.

Likewise, the promised £20bn of "credit easing". As a way of getting the benefits of ultra-low government borrowing costs to small and medium-sized businesses (SMEs), this looks a neat trick, but given that banks will be required to shoulder the credit risk, it remains to be seen whether it significantly expands the quantity of such lending.

If the Government had said it would assume responsibility for the bad debts as well, then it would have led to a boom in SME lending, culminating, one suspects, in an eventual bust. Banks would have lent with impunity until they reached the ceiling. But if, as banks suggest, the problem is not really one of lack of credit, but of credit worthy demand, then it is hard to see the scheme making much impact.

Demand is the problem. It's a problem for the eurozone, it's a problem for America, and it is a problem for the UK. With the fiscal and monetary cannon pretty much exhausted across all three economies, it's depressingly difficult to see where salvation might eventually come from. At the zenith of the boom in 2007, Gordon Brown boasted that the UK had experienced the longest period of uninterrupted growth in history.

And boy, are we now being made to pay for it.

Europe's shrinking money supply flashes slump warning
by Ambrose Evans-Pritchard - Telegraph

All key measures of the money supply in the eurozone contracted in October with drastic falls across parts of southern Europe, raising the risk of severe recession over coming months.

The three main gauges – M1, M2, and M3 – have each begun to decline in absolute terms after slowing sharply over the Autumn.

The broad M3 measure tracked closely by the European Central Bank as an early warning indicator shrank last month by €59bn to €9.78 trillion, a sign that Europe's long-feared credit squeeze is underway as banks retrench to meet tougher capital requirements.

"This is very worrying," said Tim Congdon from International Monetary Research. "What it shows is that the implosion of the banking system on the periphery is now outweighing any growth left in the core. We are seeing the destruction of money and it is a clear warning of serious trouble over the next six months."

"This is the first sign of an emerging credit crunch," said James Nixon from Societe Generale. Banks cut their balance sheets by €79bn in October, while mortage lending saw the biggest drop since December 2008.

Simon Ward from Henderson Global Investors said "narrow" M1 money – which includes cash and overnight deposits, and signals short-term spending plans – shows an alarming split between North and South.

While real M1 deposits are still holding up in the German bloc, the rate of fall over the last six months (annualised) has been 20.7pc in Greece, 16.3pc in Portugal, 11.8pc in Ireland, and 8.1pc in Spain, and 6.7pc in Italy. The pace of decline in Italy has been accelerating, partly due to capital flight. "This rate of contraction is greater than in early 2008 and implies an even deeper recession, both for Italy and the whole periphery," said Mr Ward.

The shrinking money supply comes as banks step up the pace of deleveraging. As feared, lenders are slashing loan books and selling assets to meet 9pc core Tier 1 capital targets imposed by the EU rather than raising fresh capital in a hostile market. "Forcing banks to recapitalise in a hurry is a major blunder," said Mr Congdon.

Societe Generale said bond issuance by European banks has come to a standstill, dropping to €11bn since the end of June. Lenders face a funding gap of €180bn so far this year as they fail to roll over debt coming due. Deutsche Bank expects deleveraging to reach €2 trillion over the next 18 months alone.

The grim monetary data came as Moody's warned that Euroland's crisis is metastasising, with risks of a chain of sovereign bankruptcies unless Europe "acts quickly" to stop the rot. "The probability of multiple defaults by euro area countries is no longer negligible."

The agency said defaults would threaten to break up the euro itself. "Any multi-exit scenario would have negative repercussions for the credit standing of all euro area and EU sovereigns." The wording is a reminder that Britain would be engulfed by the maelstrom through a nexus of banking and trade ties, however hard it tries to build a firewall.

Moody's warned that the crisis has already dragged on so long that it will have "very negative rating implications" for European states even if the euro holds together. The agency does not expect any decisive action by the EU until the region is hit by a "series of shocks" that first make matters even worse.

It is unclear which states are first in the firing line for a downgrade but France, Britain, and Austria may all struggle to hold on to their AAA ratings, especially if Europe slides into a deep recession that pushes debt dynamics closer to the edge.

The OECD club of rich states exhorted the ECB on Monday to take radical measures to contain the crisis. "The ECB should buy bonds and set a limit to yields, or a floor to bond value," said chief economist Pier Carlo Padoan.

The group said the bank should prepare to take "radical, non-standard measures" if necessary, and called for the EFSF rescue fund to be given "large enough firepower" to halt contagion.
"Europe's leaders have been behind the curve. Everyone should be clear that the euro is at stake and everyone should do what is needed to avoid the worst," he said.

Financial system creaks as loan lubricant dries up
by Tracy Alloway - FT

Whoosh! That’s the sound of up to $5,000bn worth of collateral draining from the financial system. And it is not a reassuring one.

“Collateral is the grease that oils the lending system,” says Richard Comotto of the International Capital Market Association. “If the grease starts to freeze or run out, the loan cogs won’t run as well.”

Large banks typically reuse securities handed over to them by big investors such as hedge funds, insurers or pension funds. They do so by pledging the assets out through the so-called repo or securities lending markets, generating a return for themselves and their clients but, in the process, also helping to lubricate the global financial system.

Since the financial crisis, though, these “chains of collateral” have become much shorter, meaning securities including government or mortgage bonds are not being recycled through the system as much as they used to be.

While that might help reduce overall risk, by limiting leverage, it has important implications for the way the system works and the global economy. Some analysts believe that this fall in collateral use could actually serve to increase “hidden” risk in the financial system as the market devises new ways of tackling the shortage.

Manmohan Singh, an IMF economist, says in a new working paper that there has been “a significant decline in the source of collateral”. “Since collateral can be reused, the overall effect may have been a $4,000bn-$5,000bn reduction in collateral,” he says. That takes the estimated amount of collateral flowing through the system to about $5,800bn at the end of 2010, far below its 2007 peak of $10,000bn.

According to Mr Singh, the number of times a security is passed around the system has fallen from an average of three times before Lehman’s 2008 collapse to 2.4 times at the end of 2010. “Intuitively, this means that collateral from a primary source takes ‘fewer steps’ to reach the ultimate client,” he writes in the paper.

One reason collateral use has fallen is that market participants are more vigilant about the creditworthiness of counterparties and how business partners might use collateral sent to them. “Everybody is less trusting about the use of collateral,” says Fred Ponzo, founder of GreySpark Partners, a capital markets advisory business.

Financial institutions are also increasingly trying to manage risk by taking “haircuts” – clipping some of the value on assets being traded to add a bigger safety cushion. That, in turn, limits the extent to which securities can be recycled just as the pool of available collateral is shrinking.

“There’s less and less high quality collateral and more and more demand [for collateral],” says Mr Commotto, who adds that even government bonds are being questioned as collateral as a result of the sovereign debt crisis in Europe.

More collateral is also being tied up at the world’s central banks, and especially at the European Central Bank, as commercial lenders turn to them for financing. The ECB’s balance sheet has ballooned to more than €2,000bn as the region’s banks exchange their assets, such as bank bonds or bundled loans, in return for central bank funding.

The lack of financial lubricant has important consequences. It may, for example, be one reason why businesses and households have not felt the full effect of monetary easing by central banks, analysts say. Financial lubricant is needed to transmit rate cuts and boost the economy.

“You’ve got a massive disruption of liquidity,” says Marc Ostwald, government bond specialist at Monument Securities. “The transmission mechanism for monetary policy breaks down if trust perceptions” disintegrate, he says.

Regulatory reforms, including new capital rule for banks and moves towards central clearing of derivatives trading, are expected to intensify the chase for “decent” securities, potentially clogging the system further by locking up more collateral.

One result of all this has been a boom in specialist collateral management services. So-called “collateral transformation” is being marketed to derivatives users as a way for them to obtain the cash or government bonds they will need for central clearing. Liquidity swaps, where banks exchange illiquid assets for more liquid ones, are also being used by banks to help meet the new requirements on capital.

These kinds of services may help to keep the world’s financial plumbing in good running order. However, many market participants still expect demand for collateral to exceed supply.

Moreover, some argue that such services place a question mark over whether risk is being reduced or simply shifted around the system, potentially flowing into less regulated areas as it did before the 2008-09 crisis.

The concern over such flows is that the effect, should there be another bout of severe market turmoil, could be similar to the rise of the “shadow banking system”, which thrived on leverage in the run-up to the financial crisis and helped cause the huge losses at Lehman and others. The decline in collateral “may entail some difficult choices for the markets and regulators”, says Mr Singh.

Germany told to act to save Europe
by Quentin Peel, Jan Cienski and Norma Cohen - FT

Germany is the only country in Europe that can act to save the eurozone and the wider European Union from “a crisis of apocalyptic proportions”, the Polish foreign minister warned on Monday in a passionate call for more drastic action to prevent the collapse of the European monetary union.

The extraordinary appeal by Radoslaw Sikorski, delivered in the shadow of the Brandenburg Gate in the German capital, came as the Organisation for Economic Co-operation and Development called on European leaders to provide “credible and large enough firepower” to halt the sell-off in the eurozone sovereign debt market, or risk a severe recession.

The OECD’s comments came as the organisation slashed its half-yearly forecasts for growth in the world’s richest countries, warning that economic activity in Europe would grind to a near-halt. Yet their calls were met by a stubborn insistence in Berlin that only EU treaty change to forge a “stability union” in the eurozone would revive confidence in the markets.

Wolfgang Schäuble, German finance minister, rejected calls for the European Central Bank to act as a “lender of last resort” in the eurozone, and for the introduction of jointly guaranteed eurozone bonds to relieve the pressure on the most debt-strapped members of the common currency such as Greece and Italy.

Germany was not big enough to support the rest of the eurozone on its own, Mr Schäuble told foreign correspondents in Berlin. The way to win back the confidence of the markets was to complete monetary union with a “stability union” based on strict budget discipline enshrined in the treaties of the EU.

In a startling comment for a senior Polish minister, Mr Sikorski declared that the biggest threat to his nation’s security was not terrorism, or German tanks, or even Russian missiles, but “the collapse of the eurozone”.

“I demand of Germany that, for your own sake and for ours, you help it survive and prosper,” he said. “You know full well that nobody else can do it. I will probably be the first Polish foreign minister in history to say so, but here it is: I fear German power less than I am beginning to fear German inactivity. You have become Europe’s indispensable nation.”

Yet he backed Germany’s drive for deeper integration in the EU and the eurozone. The member states faced a stark choice between “deeper integration or collapse”, he warned, challenging the UK government to support reform, or “risk a partial dismantling” of the union. “We would prefer you in, but if you cannot join, please allow us to forge ahead,” he said.

His call for the EU member states to decide whether they wanted to become “a proper federation” is in line with the German government’s insistence that only much closer political integration is essential to underpin the existing rules of the eurozone.

Angela Merkel, the German chancellor, called last week for a “big step towards fiscal union”. But Mr Schäuble said on Monday that his government wanted a quick and limited treaty change to enshrine budget discipline in the EU’s Lisbon treaty.

He rejected any suggestion that this was a way of forcing all the EU members to become more Germanic. “The Mediterranean countries will not become German,” he said. “And Europe will not be speaking German.”

Wolfgang Schäuble admits euro bail-out fund won't halt crisis
by Louise Armitstead - Telegraph

Europe's "big bazooka" bail-out fund is not ready and won't stem the debt crisis that on Tuesday pounded Italy and the European Central Bank (ECB), admitted Wolfgang Schauble, Germany's finance minister.

Mr Schauble said eurozone finance ministers, who are meeting in Brussels, could not agree on the terms of the European Financial Stability Facility (EFSF). He told Germany's Handelsblatt that although Europe desperately needed a fund "capable of action", plans for the EFSF were too "intricate and complex" for investors to understand.

The finance ministers, who were meeting ahead of a full Ecofin summit today, admitted the €440bn (£376bn) fund was unlikely to win support to leverage it up to €1trillion. It would be closer to €625bn instead. There was also disagreement about whether the bank recapitalisation programme should be carried out nationally or by Brussels.

However, Mr Schauble concurred that the €8bn of international aid to Greece should be disbursed before Athens runs out of cash in two weeks. Evangelos Venizelos, Greece's finance minister, said: "In Greece we have all the necessary conditions in order to go ahead with the next disbursement. It was seen as a small advance amid the worsening crisis. Italy was forced to pay a crippling 7.89pc - the highest level since 1996 - to raise €3.5bn of three-year debt.

Meanwhile, the ECB admitted it had failed to attract enough deposits from European banks to balance out the sovereign bonds it has recently bought. As part of its strategy called "sterilisation" the bank said it had asked European banks for €203bn of deposits for a week but had only attracted €193bn. Although small, the €9bn shortfall was a rare failure.

Raoul Ruparel, of the respected think-tank Open Europe, said: "The fact banks seem to be hesitant to commit to even one-week ECB deposits highlights just how uncertain the situation has become – banks are keen to hold on to any liquidity given that the situation is now so serious it can change from day to day."

The failure has also led to questions over the bank's ability to buy bonds without being allowed to print money. Germany is staunchly opposed to such quantitative easing but maybe forced to capitulate – or insist on less ECB intervention in the bond markets – if the central bank is unable "sterilise".

The yields on French, German and Spanish debt rose. But the euro and most stockmarkets rallied amid relief Italy was able to raise the cash at all. The Euro Stoxx was up 0.56pc; in London the FTSE 100 closed up 0.46pc. Traders were also watching French sovereign bonds amid reports that the AAA credit rating was under threat from Standard & Poor's. The rumour prompted strong denials from Paris.

OECD: euro collapse would have 'highly devastating outcomes' worldwide
by David Gow - Guardian

Chief economist Pier Carlo Padoan scolds hesitancy of European leaders in grave warning on global economic health

The collapse of the euro could send the world's advanced economies into a severe recession, dragging emerging markets with them into the mire, the Organisation for Economic Co-operation and Development warned on Monday.

The Paris-based thinktank slashed its forecast for growth among its 34 members from 2.3% half a year ago to 1.6%, with Europe dramatically downgraded from 2% to just 0.2% because of the unresolved sovereign debt crisis.

Pier Carlo Padoan, OECD chief economist, made plain in the body's latest six-monthly economic outlook that the greatest threat to global economic health comes from the eurozone rather than from the tax-and-spend gridlock in the US Congress.

In his introduction to the report he said: "Recent contagion to countries thought to have relatively solid public finances could massively escalate economic disruption if not addressed." In a devastating critique of eurozone leaders' hesitancy and dilatoriness, he said: "The scenario so far is that Europe's leaders have been behind the curve. We believe this could be very serious."

His comments came amidst evidence that the 17 eurozone countries are even wider apart on the measures required to staunch the exit of global investors and prevent a credit crunch on an even worse scale than in 2008-09.

Padoan also made plain that the OECD's depressed economic forecasts could be downgraded even further if one or more countries default on their sovereign debt and EU leaders fail to agree on solutions to the crisis at their summit on December 8-9.

As IMF managing director Christine Lagarde insisted Italy had made no request for a reported €600bn bailout, Padoan warned that a "black swan" event in the euro area could bring "highly devastating outcomes."

In a prolonged, deepened recession, unemployment would soar and the US and Japan would see "marked declines in activity" and emerging markets would not be immune as global trade declined.

Noting that contagion is spreading from the weaker periphery of the eurozone to the once-stable core, the OECD is urging European leaders to give the main bailout fund, the EFSF, enough firepower to counter-act the sell-off in debt markets. But plans to boost this to €1tn or more appear to have collapsed.

Padoan said political leaders needed to ensure "smooth financing at reasonable interest rates for sovereigns" in order to block contagion. "This calls for rapid, credible and substantial increases in the capacity of the EFSF together with, or including, greater use of the ECB balance sheet. "Such forceful policy action, complemented by appropriate governance reform to offset moral hazard, could result in a significant boost to growth in the euro area and the global economy."

The think tank is demanding a "substantial relaxation of monetary conditions" – code for the ECB to follow the lead of the US Fed and Bank of England by embarking on quantitative easing and substantially increasing its purchases of sovereign bonds.

The OECD also urges that Europe's banks be well-capitalised, with reports circulating that the European Banking Authority will be forced to raise substantially the estimate of €106.5bn required to meet tough new capital ratio targets.

Germany's second-largest lender, Commerzbank, alone needs €5bn and could be forced to turn again to Berlin for a bailout. Many analysts believe the debt crisis is now accompanied by a serious and growing banking crisis.

Monday's report sees OECD area unemployment remaining at 8% in both 2012 and 20913, with inflation down to 1.5% in 2013. Growth in the US rises to 2.5% in 2013 but this assumes a "muddling-through" scenario rather than the more pessimistic prospect of disorderly defaults, systemic bank failures and excessive fiscal tightening.

Italian Bond Dispute Illustrates Obstacles to Triggering C.D.S.
by Floyd Norris - New York Times

The publisher of the Italian yellow pages directories, Seat Pagine Gialle, has missed a payment on its bonds and announced a tentative agreement to cancel the bonds and issue shares in the company instead. But that agreement may collapse because of a disagreement over how much stock will be issued.

That sounds like a prime example of how bondholders could have protected themselves by buying credit-default swaps, which are supposed to assure that investors will not suffer if a creditor defaults. But it may not be.

At a meeting Monday, a committee of the International Swaps and Derivatives Association, the trade group that administers the credit-default swap, was unable to decide whether a “credit event” had taken place. So the decision was delayed until a group of three independent experts could be appointed to consider the issue.

All this may soon be moot if the company does not manage to make the bond payment by Wednesday. In the meantime, however, it serves to emphasize how difficult it can be to determine whether a credit event has taken place. If it has, procedures go into place to determine how large the losses are and require those who issued the credit-default swaps to pay that amount to the purchasers.

Under the association’s rules, in some cases there is no event if investors “voluntarily” agree to exchanges that in reality cost them money, a fact that has made it seem likely that credit-default swaps on Greek debt will not be activated if a European plan to encourage banks to exchange their bonds for bonds worth half as much goes through. Since that exchange would not be mandatory, the swaps would not be activated if interest payments continue on the bonds that are not swapped.

Yellow page directories have lost business everywhere, and Seat has tried to expand its Internet business. But it reported a loss of 33.2 million euros for the first nine months of this year, and on Oct. 28 it said it would delay an interest payment of 52 million euros, or about $69 million, for a month.

Last week, it said it had reached a tentative agreement with a majority of creditors, but that disputes remained with its senior debtholders over how much equity would go to the holders of 1.3 billion euros in bonds. It said that if a final deal were reached and accepted by bondholders, it would make the interest payment by Wednesday.

The swaps association’s committee for Europe — the same one that would determine whether a Greek default occurs — met three times over the last two weeks and delayed a decision. On Monday, eight of the 15 members voted there was a credit event, but the other seven voted that there was not. Since support of 12 members is needed, the proposal failed.

Six of the 10 members that came from banks that make markets in swaps voted that there had been an event, but only two of the five members that come from institutions that invest in swaps agreed. The association said no one would discuss reasons for their votes.

If the tentative deal falls apart and the interest payment is missed, there would be no doubt that a credit event had taken place. But since Seat Pagine Gialle is trying to get a voluntary agreement for a swap of the bonds for stock, it may be possible that there would be no credit event at all, even though it will be clear that bondholders have suffered a major loss.

With a new doubt regarding whether the swaps would be activated, the price of credit-default swaps on the company dipped a bit on Monday, but remained high. Markit, a market information firm, said the cost of buying a swap on 10 million euros of bonds was 7.25 million euros on Monday, down from 7.95 million euros on Friday.

European Banks’ Subordinated Debt May Be Downgraded by Moody’s
by Jacob Greber and Chitra Somayaji - Bloomberg

Banks in 15 European nations, including the largest lenders in France, Italy and Spain, may have their subordinated debt ratings cut by Moody’s Investors Service Inc. to reflect the potential removal of government support.

All subordinated, junior-subordinated and Tier 3 debt ratings of 87 banks in countries where the subordinated debt incorporates an assumption of government support were placed on review for downgrade, the ratings company said in a statement today. The subordinated debt may be cut on average by two levels, with the rest lowered by one grade, Moody’s said.

Lenders in Spain, Italy, Austria and France have the most ratings to be reviewed as governments in Europe face limited financial flexibility and consider reducing support to creditors, the rating company said. Moody’s has said that a “rapid escalation” of Europe’s sovereign debt crisis threatens the entire region. U.S. President Barack Obama renewed pressure on European leaders to prevent a dismantling of the euro.

“Systemic support for subordinated debt may no longer be sufficiently predictable or reliable to be a sound basis for incorporating uplift into Moody’s ratings,” the company said in the statement.

The Bloomberg Europe Banks and Financial Services Index fell 1.7 percent by 10:10 a.m. Central European Time, led by Dexia SA, KBC Groep and Raiffeisen Bank International AG. The euro was little changed after the Moody’s announcement, trading at $1.3333 as of 9:15 a.m. in London from $1.3320 late yesterday in New York.

BNP Paribas, UniCredit
Moody’s said the review will include banks such as BNP Paribas SA and Societe Generale SA, France’s biggest lenders, UniCredit SpA, Italy’s largest, and Spain’s Banco Santander SA. Zurich-based Credit Suisse AG and UBS AG will also be assessed, according to a list of lenders published by Moody’s.

Agreeing on a sufficient response to Europe’s problems is of “huge importance” to the U.S., Obama told reporters after meeting yesterday with European Union President Herman Van Rompuy and European Commission President José Barroso. Finance chiefs from the 17-member euro area will gather in Brussels today to discuss how the European Financial Stability Facility will boost its muscle by insuring sovereign debt with guarantees.

Economists from banks including Morgan Stanley, UBS and Nomura Holdings Inc. said over the past week that governments and the European Central Bank must step up their response. Nomura, Japan’s largest brokerage, said in a statement late yesterday that it reduced assets linked to Italy by 83 percent from the end of September, and cut the value of assets linked to Spain by 62 percent. Greek holdings were slashed 43 percent.

'Stark Trade-Off‘
“Policy makers are increasingly unwilling and/or constrained in their support for all classes of creditors, in particular for subordinated debt holders,” Moody’s said today.

There have also been cases where countries have “faced an increasingly stark trade-off between the need to preserve confidence in their banking systems and the need to protect their own balance sheets,” the statement said.

Banks will cut bond sales by 60 percent in Europe next year as the sovereign debt crisis drives up issuance costs, Societe Generale predicts. Lenders will sell 50 billion euros ($67 billion) of senior notes, down from a euro-era low of 121 billion euros so far this year, according to the French bank.

The extra yield that investors demand to hold European bank bonds is the highest since May 5, 2009, widening to 424 basis points on Nov. 25 from 336 on Oct. 31, Bank of America Merrill Lynch’s EUR Corporates Banking index shows.

Predictions of an economic collapse in China are in vogue
by David Pierson - Los Angeles Times

Once-unbridled optimism is giving way to fears that slowing GDP growth, rising public debt and stubbornly high inflation are signs of bigger problems to come.

Not long ago, those who predicted that China's economy was headed for a fall were in a lonely place.

U.S. economist Nouriel Roubini, widely praised for calling the U.S. housing meltdown, was dismissed as a serial contrarian when it came to his pessimistic China views. So was well-known hedge fund manager Jim Chanos. Lawyer and author Gordon Chang was derided as a Chicken Little for his 2006 book "The Coming Collapse of China."

Suddenly they're all Nostradamus.

Backed by data showing a slowdown in the world's second-largest economy, doomsayers have taken center stage. Unbridled optimism has given way to fears over widening cracks in the Chinese economic miracle.

The gloomy sentiment has spilled into financial markets, whose investors have been running for the exits.

The Hang Seng China Enterprises Index, which tracks the stock performance of major mainland companies listed in Hong Kong, is down 26% so far this year, making it the worst-performing market gauge in Asia.

The practice of short-selling — betting that a stock will fall in value — has become so pervasive among traders of Chinese equities that analysts at French banking firm Societe Generale deemed China the "world's most crowded short." For instance, nearly a third of the shares of China Overseas Land & Investment Ltd. were shorted in August and September, signaling doubts about the prospects of China's largest property developer.

"There's growing sentiment that the Chinese story doesn't make sense," said Chang, who is now invited to investor conferences and remains convinced of a looming crash.

Bears like Chang see slowing GDP growth, rising public debt and stubbornly high inflation as evidence China's problems are about to get bigger.

Skepticism runs especially deep when it comes to real estate, which represents about a fifth of China's economic output, by some estimates. In a pattern eerily similar to the U.S. housing boom, easy financing in recent years unleashed a Chinese development frenzy that sent prices soaring. Eager home buyers camped out for the chance to buy into planned developments, sight unseen. The typical 1,000-square-foot apartment in Shanghai costs $335,000, about 45 times the average resident's annual salary.

Now China's housing bubble is deflating. Home prices reversed in October for the second consecutive month as cash-strapped developers became desperate to unload homes. An index of 35 major cities showed 29 had experienced a decline in sales from a year ago; sales plunged more than 50% in six of them, including Beijing.

The Chinese government says it's all part of the plan. After loosening the credit spigot during the financial crisis to keep the economy humming, it's now tightening lending and clamping down on speculators.

But critics said the damage has been done. Behind China's gleaming new high-rises, freeways and bullet trains, the bears see ghost towns, empty roads and superfluous rail lines. Public debt has exploded, raising fears of an overload that could weigh on China's economy.

"A lot of that growth was just state-led investment on a massive scale," said Victor Shih, a political scientist at Northwestern University and expert on Chinese local government debt who is firmly in the bear camp. "China is a behemoth now. If it gets in trouble, everyone gets in trouble."

Faced with a growing number of clients worried about China's prospects, Tao Wang, a Hong Kong-based economist at financial services giant UBS, recently released a research note aimed at calming investors' fears.

"We have had to refute different arguments about why China is about to collapse or implode every day," she wrote.

But hardly anyone disputes that China's current economic model is under pressure.

Its government-backed spending binge isn't sustainable. And China is feeling the effects of a slowdown in Europe and the U.S., the two largest customers for its exports. Longer term, its days as the world's low-cost factory floor are threatened by cheaper competitors and a shrinking labor force.

The global economy would benefit if China could rebalance its economy so that its 1.3 billion citizens started spending more. But they can't because China has structured its economy to favor big businesses over consumers.

Beijing does this by keeping its currency, the yuan, artificially weak. That benefits exporters by making Chinese goods cheap. But a weak yuan fuels inflation at home and makes imported goods expensive. Authorities also keep interest rates low so that state-owned companies get cheap loans. But that means depositors earn puny returns.

It all adds up to less money in the pockets of consumers, said Peking University economist Michael Pettis.

"The repression of consumption is why I never bought the bulls' story," Pettis said. "China has to go through an important restructuring of sources of growth that will have very big implications."

China's breakneck pace of expansion will inevitably moderate. The question is whether that slowdown will be carefully engineered by China's government — a scenario Roubini called "mission impossible" — or a harder, more painful landing.

Some say all the hand-wringing is overwrought and that China short-sellers such as Chanos, founder of the New York investment firm Kynikos Associates, have everything to gain by espousing gloom and doom.

"Chanos is a company analyst with no understanding of economics who treats China as if it were a company. It's not; it's a country," said Arthur Kroeber, managing director of the Beijing-based research firm, GaveKal-Dragonomics, in an e-mailed response to questions.

Chanos did not respond to a request for an interview.

Bill Bishop, a closely followed independent tech analyst in Beijing, said that "the pendulum has swung too far" in favor of the bears.

"I think the fears are overblown. People in the U.S. are scared of China, and some people hope it drops," said Bishop, co-founder of financial news service CBS Market Watch. He described himself as belonging to the "China-will-muddle-through camp."

That faction says China's leaders will do what it takes to avoid calamity. Others aren't so sure.

"The reasonable bulls and bears among us agree on most of the facts," Northwestern's Shih said. "But at the end of the day, we disagree on the Chinese government's ability to make tough changes."

Citigroup-SEC settlement rejected by New York judge
by Dominic Rushe - Guardian

Jed Rakoff blocks $285m CDO settlement, arguing that the deal obscured an 'overriding public interest in knowing the truth'

Citigroup faces a day of reckoning in court after a New York judge struck down a $285m settlement the bank reached with its financial regulator, arguing that the deal obscured an "overriding public interest in knowing the truth".

Legal experts said the move could put pressure on the SEC to stop the "legal charade" of imposing fines without demanding an admission of liability, a common practice between regulator and Wall Street banks. It comes as major US financial institutions are still trying to reach agreements with US authorities over their share of the blame in the run-up to the credit crisis.

Last month, Citigroup agreed to settle claims that it misled clients in a $1bn collateralised debt obligation (CDO), an investment linked to sub-prime residential mortgages. Investors lost about $700m from the CDO, according to the Securities and Exchange Commission (SEC), while the bank made $160m in fees and trading profits.

Judge Jed Rakoff said the deal would have imposed penalties on Citigroup but allowed the bank to deny allegations that it misled investors. "In any case like this that touches on the transparency of financial markets, whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth," Rakoff wrote in his opinion.

"In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers," the judge said. "Even in our nation, apologists for suppressing or obscuring the truth may always be found. "But the SEC, of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if fails to do so, this court must not, in the name of deference or convenience, grant judicial enforcement to the agency's contrivances."

Rakoff consolidated the case with a suit brought against Citigroup employee Brian Stoker, who was responsible for structuring the CDO, according to the SEC. He set a trial date for 16 July 2012. Citigroup may try for a revised settlement, which would also have to be approved by Rakoff.

Chicago-based securities attorney Andrew Stoltmann called Rakoff's decision "historic". "This is horribly embarrassing for the SEC. A federal judge is basically telling them to do their job," he said.

Stoltmann said federal judges have often been little more than a rubber stamp of approval for the SEC. "Imposing fines without admitting liability is a legal charade that has been going on for decades," he said. "The SEC refuses to hold people's feet to the fire and force them to admit liability. It just wants the headline and them to move on," he said.

It is common for the SEC to reach settlements with banks that do not contain an admission of liability. Formally admitting liability would give a powerful boost to investors suing the bank as well as handing the bank with a public relations issue. For the SEC it reduces the chances of a costly court case and to avoid the uncertainty of a trial.

"The SEC's longstanding policy – allowed by history, but not by reason – of allowing defendants to enter into consent judgments without admitting or denying the underlying allegations deprives the court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact," the judge said.

Rakoff has been a consistent critic of the SEC's tactics. In September 2009 he rejected the regulator's settlement with Bank of America over claims it misled investors about bonuses paid to Merrill Lynch, which the company had taken over that year.

The deal suggested "a rather cynical relationship between the parties," he said. "The SEC gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger," Rakoff wrote. "The bank's management gets to claim that they have been coerced into an onerous settlement by over-zealous regulators. And all this is done at the expense not only of the shareholders but also of the truth."

Rakoff approved a revised settlement in February 2010 in which Bank of America agreed to pay $150m to resolve broader allegations about misstatements to investors.

Day of strikes as millions heed unions' call to fight pension cuts
by Severin Carrell, Dan Milmo, Alan Travis and Nick Hopkins - Guardian

• Disruption across UK as many services come to virtual halt
• Airports, schools, rail services and hospitals affected
• Reform of public sector pensions is at heart of dispute

The UK is experiencing the worst disruption to services in decades on Wednesday as more than 2 million public sector workers stage a nationwide strike, closing schools and bringing councils and hospitals to a virtual standstill.

The strike by more than 30 unions over cuts to public sector pensions started at midnight, leading to the closure of most state schools; cancellation of refuse collections; rail service and tunnel closures; the postponement of thousands of non-emergency hospital operations; and "horrific" delays at airports and ferry terminals.

The TUC said it was the biggest stoppage in more than 30 years and was comparable to the last mass strike by 1.5 million workers in 1979. Hundreds of marches and rallies are due to take place in cities and towns across the country. Pickets began to form before dawn at many hospitals, Whitehall departments, ports and colleges.

The strikes have been called over government plans to overhaul pensions for all public sector workers, by cutting employer contributions, increasing personal contributions and, it emerged on Tuesday, increasing the state retirement age to 67 in 2026, eight years earlier than originally planned.

Union leaders were further enraged after George Osborne announced that as well as a public sector pay freeze for most until 2013, public sector workers' pay rises would be capped at 1% for the two years after that.

In Scotland an estimated 300,000 public sector workers are expected to strike, with every school due to be affected after Scottish headteachers voted to stop work for the first time.
The UK Border Agency is braced for severe queues at major airports after learning that staffing levels at passport desks will be "severely below" 50% despite a successful appeal for security-cleared civil servants to volunteer.

"We will have the bare minimum to run a bare minimum service," said a Whitehall insider. Many major public buildings and sites, including every port, most colleges, libraries, the Scottish parliament, major accident and emergency hospitals, ports and the Metro urban light railway around Newcastle and Sunderland will be picketed.

At Holyrood, Scottish government ministers and MSPs in the ruling SNP, the Liberal Democrats and Tories are expected to cross picket lines to stage a debate on public pensions; Labour and Scottish Green party MSPs will join the protesters.

Here are some of the actions across the country:
  • In London up to 2,000 schools will be shut or affected, and ambulance crews will strike, there will be pickets in Whitehall, at universities, hospitals and a TUC regional march through the city from Lincoln's Inn Fields to the embankment.
  • In Scotland union leaders including Rodney Bickerstaff, general secretary of Unison, will march through central Edinburgh to a mass rally outside the Scottish parliament, with protests at Edinburgh castle, a major march and rally attended by Scottish union leaders in Glasgow, where civil servants will picket MoD and tax offices. There will be marches and protests in Dundee, Inverness and Aberdeen.
  • In southern and south-west England and Wales unions will hold marches and rallies in towns and cities including Brighton, Southampton, Bristol and Exeter, while a New Orleans-style marching band will lead a march through Cardiff.
  • In the north-west up to 25 Cumbrian schools may open, the Mersey tunnel is expected to be closed, while in Liverpool protesters will be urged to sound car horns, blow vuvuzela horns, clap and shout at 1pm in an action dubbed "One Noise at One".
  • In the Midlands union general secretaries including the TUC leader Brendam Barber and Dave Prentis of Unison will lead a rally at the Birmingham Indoor Arena, while marches will be held in Nottingham.
  • In the north-east of England, Metro services will be severely hit and the RMT rail union leader Bob Crow will address a rally.
  • In northern England marches are due to be staged in Manchester, Bradford, Leeds and Sheffield.
  • In Northern Ireland there will be no train or public bus services, Belfast's passport office will be closed along with leisure centres and schools. The main march will be through central Belfast.

The TUC said the strike would also include tens of thousands of border agency staff, probation officers, radiographers, librarians, job centre staff, courts staff, social workers, refuse collectors, midwives, road sweepers, cleaners, school meals staff, paramedics, tax inspectors, customs officers, passport office staff, police civilian staff, driving test examiners, patent officers, and health and safety inspectors.

Unions and employers have struck local deals to avoid disruption to emergency operations and essential medical services at hospitals, mental health units and residential care units for children. Emergency rotas have been introduced by mental health social workers with union agreement.

The Prospect union has exempted staff from strike action who work in 100 essential defence posts, including intelligence analyst posts at British bases in Afghanistan and civil servants supplying frontline troops.

Steve Jary, the national secretary of Prospect, which represents thousands of MoD staff, said: "These people are not the Whitehall bureaucrats of popular imagination. It is ironic that this important work by staff who risk their own lives in supporting the UK's armed forces only comes to light in a situation like the industrial action."

Dean Royles, the director of the NHS Employers organisation, which represents NHS trusts in England and Wales, said the unions had agreed to protect emergency services but he warned patients they might still experience significant delays that could spill over into Thursday.

"The absolute priority of everyone in the NHS must be to ensure that patients are safe and we avoid unnecessary distress too patients," he said. "We believe robust plans will be in place for the people who need urgent care but those needing non-urgent care may experiences delays."

The Local Government Association, which represents English and Welsh councils, said it was "working tirelessly" to minimise disruption to essential services, and to protect services for the elderly, vulnerable and young. Social workers were operating emergency rotas, children's residential centres were being staffed as fully as possible and service updates would be posted on council websites.

Greece gets $10.7 billion but rescue plan stalls
by Raf Casert - AP

Eurozone ministers finally handed Greece an euro8 billion ($10.7 billion) rescue loan to fend off its immediate cash crisis yet failed to resolve overall fears about the viability of the euro.

Stock markets had risen hoping that intense bond market pressure would finally force the 17-nation eurozone into quicker and more robust action -- but that was not to be. Even as Italy's borrowing costs skyrocketed to a euro-era record, the finance ministers failed to increase the European bailout fund to match earlier predictions and kicked other major financial issues -- like a closer fiscal union -- over to their bosses, the EU leaders meeting next week in Brussels.

The ministers did agree to use the fund to offer financial protection of 20 to 30 percent to investors who bought new bonds from troubled eurozone nations. "We made important progress on a number of fronts," Jean-Claude Juncker, the eurozone chief, insisted late Tuesday. "This shows our complete determination to do whatever it takes to safeguard the financial stability of the euro."

The EU's monetary chief Olli Rehn said eurozone nations needed to work on many financial issues at once to ease global pressure on their currency. "There is no one single silver bullet that will get us out of this crisis," Rehn told reporters.

But the question of how to beef up the leverage capacity of the European Financial Stability Facility from its current euro440 billion ($587 billion) to a hoped-for euro1 trillion ($1.3 trillion) was not resolved. The fund is supposed to be a firewall that protects European nations from the financial chaos of their neighbors.

Fund chief Klaus Regling refused to give a specific size for the fund after Tuesday's meeting, but assured reporters it was more than big enough to deal with Europe's immediate debt problems. "To be clear, we do not expect investors to commit large amounts of money during the next few days or weeks," Regling said. "Leverage is a process over time."

Dutch Finance Minister Jan Kees de Jager said investors had appeared less eager than originally anticipated. "It will be very difficult to reach something in the region of a trillion. Maybe half of that," he said.

Italy remained an enormous concern. Carrying five times as much debt as Greece, Italy was battered for the third straight day Tuesday in the bond markets, seeing its borrowing rates soar to unsustainable levels of 7.56 percent. Investors appear increasingly wary of the country's chances of avoiding default -- and making matters worse, the eurozone's third largest economy is deemed too big for Europe to bail out.

The ministers still insisted Italy's new prime minister has promised to balance Italy's budget by 2013. "We have full confidence that Mario Monti will be able to deliver this program," Juncker said.

The eurozone ministers also called on the International Monetary Fund for more resources to help further protect Europe's embattled currency. But the IMF has only about $390 billion available to lend, which wouldn't be anywhere near enough to rescue Italy. The eurozone ministers agreed to seek new ways to increase the resources of the IMF through bilateral loans that could protect EU nations facing financial trouble.

French Finance Minister Francois Baroin said it was "evident" that the eurozone was moving towards greater fiscal convergence and better coordination of budgets. He said, far from indicating a loss of national sovereignty, these moves would guarantee countries' sovereignty by helping them bring down their debt burdens. "Reducing our debts is the best way to guarantee our sovereignty," he told reporters.

Eurozone countries have enormous debts that must be refinanced -- with €638 billion ($852 billion) coming due in 2012 alone, 40% of which needs to be refinanced before May, according to Barclays Capital.

A failure of the euro would lead to drastic consequences around the world. Bank lending would freeze, stock markets would likely crash, European economies would go into a freefall, and the U.S. and Asia would take big hits to their economies as their exports to Europe collapsed.

A Continent Stares into the Abyss
by Martin Hesse, Dirk Kurbjuweit, Armin Mahler, Alexander Neubacher, Ralf Neukirch, Christian Reiermann, Mathieu Von Rohr, Michael Sauga And Christoph Schult - Spiegel

Fear is spreading through the financial markets as investors pull their money out of the crisis-stricken euro-zone countries. With Chancellor Angela Merkel opposed to using the ECB's firepower to solve the crisis, the monetary union appears increasingly in danger of breaking apart. Some economists are even arguing for Germany to reintroduce the deutsche mark.

Euro bonds? French President Nicolas Sarkozy apparently isn't familiar with the term. He talks and talks, but he never mentions euro bonds. And then it's Italian Prime Minister Mario Monti's turn. Euro bonds? Never heard of them. Or at least he says nothing about them in his speech. The next speaker is German Chancellor Angela Merkel, who wouldn't dream of mentioning euro bonds.

It is last Thursday, and the three European leaders have just had lunch together in Strasbourg and are giving a press conference on the subject of the euro. It must have been an amazing lunch, full of unity, harmony and understanding.

Or at least that's the way they describe it. And when something is that pleasant, it makes complete sense not to talk about euro bonds, even though they are now the central issue in the debate over the euro crisis. Merkel is opposed to the idea and Sarkozy and Monti are in favor, but they don't want to say as much.

Of course, there is, as always, a journalist around who is leery of the harmonious mood, which is why he asks about the bonds that everyone knows about but isn't mentioning. Merkel says that she hasn't changed her opinion on the issue, but without actually uttering the distasteful words. Sarkozy mentions the Rhine River, tells a joke about a hypochondriac, talks and talks and finally says that he and his counterparts will certainly come to an agreement. But he doesn't mention euro bonds by name.

And then it's Monti's turn again, and what does he do? He does use the word euro bonds, but then he quickly switches to a new, more attractive synonym, noting that he would not be overly opposed to "stability bonds." His words reveal that there is indeed a serious conflict within the euro zone.

Hopelessly Divided
Nothing works in Europe without Merkel. And the German chancellor isn't just opposed to euro bonds. She also refuses to accept a move by the European Central Bank (ECB), backed by the French in particular, to buy up the bonds of ailing euro-zone countries on a much larger scale than it has done to date, in order to bring down the yields on those bonds. But that was not an official topic in Strasbourg, where Sarkozy assured his fellow leaders that France respected the independence of the ECB.

The staged harmonious mood stands in sharp contrast with reality. In the middle of its biggest crisis, Europe is hopelessly divided. One summit follows the next, and they all end with conciliatory statements and avowals, but not with any shared plan for how to save the euro.

The situation could hardly be any more dramatic. The European monetary union threatens to implode unless something happens soon. The ambitious project that was supposed to permanently unify the continent will have failed, with dramatic consequences for Europe and the rest of the world. Countries would go bankrupt, banks would have to be rescued once again, and the economy would sink into a recession that would last for years.

The moment of truth is approaching, now that the end game for the euro has begun. But what will happen now? In the coming weeks, but particularly in the first quarter of 2012, the ailing European countries will have to raise massive amounts of money. In Italy alone, more than €110 billion ($145 billion) in old debt is set to expire, which will have to be refinanced (see graphic). But who is going to give these countries fresh capital at the moment?

Losing Confidence
Investors have lost confidence in the euro-zone countries and in their ability to rescue the common currency. Not even the recent changes of government in Italy, Greece and Spain have been enough to persuade them otherwise.

There is a growing sense of fear, both in the financial markets and in government offices. Even serious bankers who exude confidence in public admit privately that the monetary union could soon fall apart.

The previous bailout attempts have been worthless, they say, noting that Europe must finally reach for the only weapon whose firepower is endless, the European Central Bank. The ECB must finance the debtor nations, even if its own constitution bars it from doing so. The central bank has enough money, and it can also print money if necessary.

Most European leaders share this realization by now -- all except Merkel. She remains resistant, concerned about the central bank's independence and monetary stability. She is also staunchly opposed to all attempts to pool the debts of euro nations through jointly issued debt known as euro bonds.

The German chancellor is increasingly isolated. At home, she must defend any concessions to save the euro against her coalition partners, the business-friendly Free Democratic Party and the conservative Christian Social Union (the Bavarian sister party to Merkel's Christian Democratic Union). She must convince members of parliament from her own party and abide by the rules set by Germany's Constitutional Court in its far-reaching decisions on the euro crisis.

The FDP is creating alarm by polling its members on the party's position on the crisis. In other countries, Merkel is seen as a stubborn defender of German interests who hasn't recognized how serious the situation is -- and is therefore jeopardizing the entire monetary union.

Jacques Attali, who used to be an adviser to former French President François Mitterrand, paints the concerns of partner countries in a particularly drastic light. After the two world wars, says Attali, it is "now Germany, once again, that holds the weapons for the entire continent's suicide in its hands." If Germany doesn't change its position, says Attali, "there will be a catastrophe."

Europe's Failed Attempts to Save the Euro
From the foreign perspective, the situation is clear: Rescuing the euro depends on Germany, which merely has to abandon its resistance to pooling debt. But this sort of "liability union" would not only contradict the so-called no-bailout clause of the European treaties, under which no euro-zone country can be held liable for the debts of another, but it would also be particularly dangerous for the Germans.

As Europe's largest economy, Germany would shoulder the biggest burden and, in the end, could even be plunged into ruin with the rest of the euro zone. Merkel is also concerned that the debt-stricken nations would immediately revert to their old bad habits if they felt that their rescue was certain. For this reason, the Germans only want to approve aid in return for strict conditions.

The chancellor has behaved very cautiously from the start. She has made an incrementalist approach the cornerstone of her crisis management, and has always insisted there would be no bold stroke that would slice through the Gordian knot. She wants to think about solutions in terms of an end result. But what if this end result remains so nebulous that tiny steps are in fact the only alternative?

As a result, the efforts to manage the crisis have hobbled along from one summit meeting to the next, without any evidence of lasting success. International investors have set their sights on more and more ailing countries, which in turn have been forced to pay higher rates on their sovereign bonds.

Timid Steps
The instruments and programs with which Merkel and her counterparts have sought to control the crisis have proved to be too timid. Because the first bailout package for Greece was inadequate, it was followed by a second one. The European bailout fund was also enlarged. But because the fund still isn't fully functional, the ECB is constantly intervening in the bond markets, buying up Italian and Spanish sovereign debt to stabilize yields.

But the chronic stopgap measures have failed to reestablish confidence in the monetary union. There have also been glaring inadequacies in crisis management, as a result of infighting over competencies as well as jealousies between the European Commission and national governments, the ECB and the politicians, and among the central banks of individual countries.

There is also no love lost among the senior-most representatives of the European Union and the euro zone. European Commission President José Manuel Barroso envies European Council President Herman Van Rompuy for his prominent position, while Van Rompuy in turn challenges Euro Group President Jean-Claude Juncker's authority. All of this infighting leads to strife, ambiguities and a cacophony of voices.

Barroso's hapless actions are a case in point. Less than two weeks after the crisis summit in late July, he settled his scores with the European heads of state and government, saying that their resolutions were not far-reaching enough, and that their implementation was deficient. The intervention did not exactly build confidence in Europe's ability to get its act together, and the risk premiums on some European government bonds rose significantly as a result.

Too Small
Even worse than the disharmony is the fact that the euro zone's backstop fund, the European Financial Stability Facility (EFSF), is not functioning correctly. It was originally set up for crisis-ridden peripheral euro-zone members, but it was soon clear that it was too small even for that. The member states had to add additional guarantees so that the EFSF's effective lending capacity could actually reach €440 billion as originally planned.

But even that amount was quickly stretched to its limits. The markets were not in the least bit impressed by the Europeans' commitment. A few weeks ago they targeted two countries, Italy and Spain, which would overburden the EFSF if they had to be bailed out.

In the future, the EFSF's remaining funds of €250 billion are to be leveraged, or increased, to between four and five times their current value, using complex financial constructs involving the participation of private investors. The reasoning is that this could also protect countries like Italy or Spain, in the event that they are faced with liquidity problems due to turbulence in the euro zone. If necessary, the funds could also be used to prevent banks from collapsing.

But the euro rescuers did not take investors into account when they were doing their calculations. During his recent promotional tour of state-owned funds in China and investors in Japan, EFSF chief executive Klaus Regling, who had hoped to persuade Asian investors to put their money into the bailout fund, encountered noticeable reticence. The managers of the large investment funds apparently no longer trust the Europeans to get their problems under control.

To make the new instruments more attractive, the EFSF itself must become more heavily involved than planned. This would reduce the necessary leverage considerably. At a meeting of euro- zone finance ministers this week, Regling intends to present solutions that amount to only a doubling or, at most, a tripling of the EFSF funds.

A Buyers' Strike on Euro-Zone Debt
The more desperately the euro governments have tried to make the EFSF more effective, the faster the prices of euro-zone government bonds have fallen. "The term 'buyers' strike' isn't strong enough to describe what's happening," says Joachim Fels, chief economist at the American investment bank Morgan Stanley. "I would call it a flight from government bonds."

In November, the yields on Italian, Spanish and even French sovereign bonds shot up, mirroring the downward slide in bond prices -- a sign of the growing risk of default that investors now see on almost all euro-zone bonds. Recently, Italy had to pay interest rates of more than 7 percent on its 10-year bonds. The question of how much longer the highly indebted peripheral countries can last is becoming more and more pressing. Close to €9 billion in Italian government bonds will mature this week, while more than €30 billion will come due by the end of the year.

When governments can no longer place their long-term debt with investors, they plug their holes with short-term loans. But investors are also demanding higher and higher yields for short-term bonds. On Friday, Italy had to offer rates of at least 6.5 percent for six-month bonds. By the first quarter of 2012 at the latest, when more than €112 billion in Italian bonds will mature, this short-term strategy will no longer work.

Broad Retreat
That's because an end to the buyers' strike is not in sight. In the first phase of the debt crisis, politicians from Berlin to Brussels still suspected that it was speculators, in conjunction with the rating agencies, who were driving Greece and others to the brink of insolvency.

It is now clear, however, that a broad retreat from the crisis-stricken countries is underway across almost all investor groups. "It's no longer just the banks. Now insurance companies, pension funds and even sovereign wealth funds are selling off euro-zone bonds," notes Joachim Fels, the Morgan Stanley economist. The fear of losses and of a breakup of the euro zone is driving investors away -- as are the politicians who have fueled this fear through poor decisions.

The first attempts to bail out Greece already planted the seed of subsequent failures. In May 2010, German Finance Minister Wolfgang Schäuble wrested the promise -- albeit a nonbinding one -- from German banks that they would keep their credit lines to Greek banks open and would not sell off the country's bonds.

A year later, the banks felt betrayed. After weeks of negotiations, the banking industry grudgingly agreed to a "voluntary" haircut on Greek debt. Initially, the banks abandoned 21 percent of their claims against Greece, and in October they agreed to accept a 50-percent writedown on their Greek holdings.

'High Price'
Investors see the involvement of private creditors in the debt-relief program as a serious blunder. If one country in the euro zone isn't able to fully repay its debts, who can guarantee that it won't be joined by another country in the future?

Josef Ackermann, the CEO of Deutsche Bank, warns that there are many investors in the United States and Asia who will no longer want to invest in euro-zone bonds under these conditions. "We will be paying a high price for a long time to come for having violated the principle that European government bonds are risk-free," he recently said in Frankfurt.

Many others in the banking industry agree. On the sidelines of the November 2010 G-20 summit in Seoul, the euro-zone countries signaled that the participation of private investors in the costs of a national bankruptcy would only be possible on new debt issued after 2013, at the earliest. In the nervous fall of 2011, investors have now realized that these assurances are worthless.

Politicians have also made other mistakes. On Oct. 26, the euro rescuers in Brussels, Paris and Berlin imposed higher capital reserve requirements on their banks, so that they could brace themselves against possible defaults on euro-zone government bonds. The lenders now have until Christmas to explain how they intend to meet the new standards by the end of June 2012.

But what was intended to stabilize the euro-zone banking system and mitigate the consequences of a possible national bankruptcy came back like a boomerang. First, with their decision, the euro partners signaled that they themselves were anticipating defaults. In that situation, any rational investor would try to sell off their euro-zone holdings.

Offloading Bonds
Secondly, most banks are not trying to raise new money to reach the new equity capital requirement of 9 percent of total assets. This wouldn't even be possible, given the hyper-nervous markets. Instead, the banks are reducing the size of their balance sheets, and thus their capital requirements, by selling off assets -- such as government bonds.

According to a study by the Landesbank Baden-Württemberg (LBBW), a German state-owned bank, the banks in the core euro-zone countries have reduced their holdings of government, bank and company securities from the EU periphery by 25 percent, down to €1 trillion, since the beginning of 2010. "The trend (toward reduction) is likely to continue," the LBBW concludes.

What is more, bank regulators are making government bonds fundamentally less attractive to banks in the future. Until now, banks were not required to secure investments in European government bonds with capital. This was advantageous for the governments, because it meant that they would always find willing buyers for their debt among banks. This will, however, probably change under new regulations for banks, which will also require them to maintain capital reserves to back investments in sovereign debt.

The calendar is also accelerating the flight from government bonds. Banks, investment funds and insurance companies close their books shortly before the end of the year and make hardly any new investments. At the same time, they often sell off those securities that have brought them losses, like European government bonds. Few institutions would want to have to explain to investors why, after a debt crisis that has lasted almost two years, they are still sitting on the sovereign debt of crisis-ridden countries.

For all of these reasons, the debt-stricken nations are now cut off from access to new money, just as banks were after the Lehman Brothers' bankruptcy of 2008. Who will finance them in the future?

The Last Hope
The meager successes of the euro rescuers to date have fueled calls for the use of what is perceived as a stronger weapon: the ECB's so-called "big bazooka." Until now, the Germans, in particular, have refused to deploy the central bank's ultimate instrument of deterrent, but the pressure is mounting.

In recent days and weeks, world leaders including US President Barack Obama, British Prime Minister David Cameron and Spanish Prime Minister-elect Mariano Rajoy have called upon the new ECB President Mario Draghi to embark on permanent and unlimited purchases of the bonds of troubled euro-zone nations in future, using what is in principle the infinite capacity of the money presses.

This would, in a manner of speaking, turn the ECB into Europe's lender of last resort. Economists and politicians want to see Europe's monetary watchdogs rush to the aid of its governments, using the US central bank, the Federal Reserve, as their model.

But the ECB has already been buying sovereign debt for the last year and a half. The central bank has now spent more than €190 billion on Greek, Portuguese and Spanish bonds, but the results have been less than encouraging. Despite the ECB's increasing intervention, risk premiums are still going up. Axel Weber, the former head of Germany's central bank, the Bundesbank, and Jürgen Stark, the former chief economist at the ECB, resigned in protest against the questionable measures.

Weber and Stark were convinced that the controversial purchases not only violate the traditional principles of the Bundesbank, but are also illegal in the long term. Weber's successor, Jens Weidmann, agrees, and he vehemently opposes all attempts to fight the euro crisis by printing money.

Opening the Floodgates
The ECB's interventions are still somewhat justifiable, because they are limited in scope and in time. However, if the central bank were to open all the floodgates, as some are demanding, its actions would hardly be compatible with the European treaties. They expressly prohibit the ECB from financing the countries of the euro zone with the money presses. The Treaty on the Functioning of the European Union states that the central bank may not "purchase (debt instruments) directly."

The ECB is only permitted to buy government bonds on the so-called secondary market, i.e. indirectly from investors like banks and insurance companies, but not on the primary market, or directly from the issuing countries. But what happens if investors don't buy the large numbers of bonds that will come on the market in the coming weeks and months? Then the bazooka will only work if the ECB buys the debt securities directly.

In fact, say market players, the ECB is already circumventing the prohibition on direct government financing today. They argue that countries like Italy and Spain were only able to raise sufficient new funds at 7 percent interest because the ECB took securities off the market before and after their auctions.

Investors and governments are calling on the central bank with increasing urgency to buy the sovereign debt of cash-strapped countries on the primary market as well, and in much bigger amounts.

The Fed as Example
There are many who see this further breach of the European treaties as the lesser evil. They argue that Europe is in an extraordinary state of emergency, because if nothing is done the monetary union will collapse, plunging Europe into crisis.

Many advocates of increased ECB interventions point to the American Fed as a model. However, the Fed buys US treasury bonds primarily to flood the domestic economy with money. The purchases are not needed to finance government spending, because the worldwide demand for US bonds remains consistently high, despite the country's high debt levels.

It's a completely different story in Europe. If the ECB were to issue the desired general guarantee for all government bonds, it would reduce itself to acting as the servant of the European debtor nations. Its political independence, one of the most important principles on which the monetary union is founded, would be lost.

German taxpayers, in particular, would be left to suffer the consequences. As soon as a country became unable to repay its debts, the ECB would be forced to write off the bonds, and German taxpayers would be burdened with more than a quarter of the losses. Thus, in a roundabout way, the ECB would become the facilitator of precisely the "transfer union" that the German government is determined to avoid.

What's Wrong with a Little Inflation?
This too is one of the distinctions between the European and US central bank systems, says the Oxford-based German economist Clemens Fuest. Unlike the Fed, the ECB is responsible for a number of different countries. According to Fuest, if it were to buy up the bonds of certain countries, the risks would be redistributed within the European central bank system. "The Americans don't have this problem," says Fuest. "That makes it easier for them to intervene."

Critics fear that unlimited sovereign debt purchases will fuel inflation. Europe's monetary watchdogs are trying to neutralize the purchase of Spain or Italy bonds by requiring that the banks, in return, invest their money in forward accounts with the central bank. But many economists warn that with this method the ECB could only keep the money supply constant for a limited period of time.

"At the latest when the demand for credit in the private economy picks up again," says Bonn money expert Manfred Neumann, "the banks will dissolve the forward accounts and channel the funds into the economy," thereby triggering inflation.

The question is whether this would be such a bad thing. Isn't a little inflation an acceptable price to pay for saving the euro? What are the relatively minor losses for savers and asset owners compared to the costs of a collapse of the euro?

The question is more difficult to answer than it would seem at first glance. Economic history teaches us that once inflation is underway, it is often difficult to control. To make matters worse, if governments hope to sell their bonds in times of rising prices, they must offer buyers higher yields. The debt burden grows and, with it, the financing risk for government budgets.

Thus, it cannot be ruled out that the ECB interventions that are being called for will ultimately produce completely different results than expected. The risk of government bankruptcies would actually be increased instead of being reduced -- across the entire euro zone.

Are Euro Bonds the Lesser Evil?
Many politicians in the euro zone believe that a different and less harmful miracle weapon could bring calm to the financial markets: jointly issued euro bonds. Speculators could no longer take aim at individual euro-zone countries, argue the proponents of euro bonds, and interest rates would be tolerable, because the strong countries would also guarantee the bonds. Supporters also argue that this would create a large, liquid market that would offer investors a true alternative to US treasury bonds.

Last week, European Commission President Barroso presented three possible options, much to the irritation of German Chancellor Merkel. Under the first proposal, there would only be common bonds with a uniform interest rate and joint guarantees. Under option two, a country could only borrow up to a limit equivalent to 60 percent of its GDP using euro bonds.

With the third option, countries would only be liable for the common debt securities according to their relative size and economic strength. Germany would be responsible for the biggest share of liability, 27 percent, with the smallest share, 0.1 percent, going to Malta.

The third model could be introduced relatively quickly, but it's also the least effective. The other options would require amendments to the so-called Lisbon Treaty among European countries, because Article 125 of the treaty prohibits a member state from guaranteeing the debts of another member state.

Stopping Budget Offenders
The Germans also want an amendment to the EU treaties -- not to introduce euro bonds, but to make them unnecessary.

Berlin proposes amending the Lisbon Treaty in such a way that budget offenders could be stopped in time. This is intended to harmonize budgetary policies in the euro countries over time.
European Council President Van Rompuy is expected to submit proposals by the next Council summit on Dec. 9. However, ideas about these proposals diverge widely between Berlin and other capitals.

For this reason, Van Rompuy has already suggested postponing the discussion. But the German Chancellery is standing its ground. The Germans are concerned that if the discussion is postponed, they will be forced to make further financial concessions without having achieved any progress in achieving a so-called "stability union."

A possible compromise does exist, but it would put Merkel under considerable political pressure at home: The Germans get their amendment to the Lisbon Treaty in return for agreeing to the introduction of common bonds -- which the German government has vehemently rejected so far.

The Temptation of Cheap Money
German Finance Minister Schäuble believes that common bonds could only function if the member states of the monetary union were to relinquish a significant share of their sovereignty in terms of fiscal policy to a central European body. Otherwise, the Germans fear, euro bonds would provide the wrong incentives. They would benefit only those countries that are currently forced to pay high interest rates. Euro bonds would enable them to raise funds under significantly better terms.

The concern is that the cheap money could tempt the countries that are now ailing to let their reform efforts slide. Merkel and Schäuble also fear that Germany would end up bearing a greater financial burden with euro bonds and be held liable for countries with poor credit ratings. Germany is currently able to borrow money at lower rates than any other country in the euro zone. The yield on a 10-year German treasury bond is now at 2 percent. If the risk is distributed among all euro-zone countries, the German finance minister will find himself paying higher interest rates.

The costs can be substantial. Assuming a refinancing need of €300 billion, it would cost the government an additional €3 billion a year if rates went up by only one percentage point. And the amount would increase every year.

Proponents of common bonds consider these calculations to be too pessimistic. In fact, they anticipate the trend moving in the opposite direction. Because the market for euro bonds would be of a similar size to the market for American treasury bonds, euro bonds would become more attractive. Common bonds would thus promote the role of the euro as a reserve currency. Both effects would increase demand for the new bonds, which in turn would bring down yields. It remains unclear whether this effect could offset the increase in interest rates.

Increasingly Isolated
Either way, Merkel and Schäuble aren't even interested in taking the plunge, at least not voluntarily.

They have now become relatively isolated with their position. Most other countries openly advocate euro bonds, and large segments of both the European Parliament and the European Commission are in favor of the bonds.

Nevertheless, government insiders believe that it is inconceivable that Merkel will relent. But should the crisis continue to escalate, possibly spreading to core nations of the euro zone, she will hardly be able to resist the pressure.

From the standpoint of domestic policy, Chancellor Merkel could hardly risk accommodating outside demands at this point. She is anxious to avoid anything that could provide the euroskeptics in the pro-business Free Democratic Party (FDP), the coalition partner to her center-right Christian Democratic Union (CDU), with new arguments. But proponents of euro bonds expect that, given that the FDP leadership managed to convince the party base to support the permanent bailout fund, the European Stability Mechanism (ESM), it would ultimately also accept jointly issued bonds.

Alarm Signals
The only question is whether it will be too late by then. The credibility of the instrument depends primarily on Germany's solvency, especially now that other important countries with top credit ratings, like France and Finland, have come under fire from the markets in recent weeks. Euro bonds would only appeal to investors if they were guaranteed by the German government. But there are growing doubts as to whether Germany could in fact shoulder the burden alone.

The first alarm signals became evident in the last few weeks. On Wednesday, the German government's financial agency failed to fully place a bond offering. Optimists attribute the weak response from investors to insufficient yields. Others see the development as the first indication that markets are beginning to lose confidence even in traditionally robust Germany -- and that investors are now not only pulling their money out of the peripheral countries, but out of the monetary union as a whole.

Time for a Messy Breakup?
There is growing skepticism in the financial markets over whether the euro can even be saved in the end. Last week, Britain's Financial Services Authority already called upon British banks to prepare themselves for the end of the monetary union.

But what would happen if the euro-zone countries returned to their old currencies? And how could it even be accomplished? Until recently, hardly any reputable economist had even considered such questions. The notion that the euro zone could break apart was regarded as an absurd idea.

That has now changed. Some experts even consider it advisable that highly indebted countries like Greece, Portugal and possibly even Italy withdraw from the common currency. Others are even looking at a plan B for Germany to withdraw from the euro and reintroduce the deutsche mark. Would having a breakup of the euro zone now, however messy, be preferable to letting things drag on?

Hans-Werner Sinn, president of the Ifo Institute for Economic Research, is convinced that it would be the best thing for everyone involved if Greece were to return to the drachma. Greek banks would have to be closed for a week, all accounts, balance sheets and the government debt would be converted, and the drachma would then be devalued.

Are the Euro's Days Numbered?
Sinn argues that this would enable Greece to regain its competitiveness. Greek products would be marketable once again, and the tourists would return. Former ECB chief economist Otmar Issing also believes that this would justify the economic damage caused by such an operation.

Economists believe that the withdrawal of Greece, and possibly also Portugal, from the euro zone would have an important disciplinary effect. The euro zone would have demonstrated that it could not be blackmailed, which in turn would accelerate reforms in a country like Italy. The experts are also convinced that the monetary union would find it very difficult to cope with an Italian default.

In contrast, Hans-Joachim Voth, an economic historian who teaches in Barcelona, feels that the euro's days are numbered. He considers it advisable for economically strong countries like Germany to withdraw from the euro, because, so he argues, "not every stupid economic idea has to be defended to the bitter end." In theory, says Voth, the upcoming Christmas holidays could be a good time to take this step, because, as he argues, it's important to take the markets by surprise.

Dirk Meyer, a professor at the Helmut Schmidt University in Hamburg, also argues that the Germans should take the initiative and leave the euro zone as quickly as possible. He has even come up with a concrete time frame. Under his scenario, it begins on a Monday, or "Day X." On the preceding weekend, the government will have issued the surprise order that banks remain closed on this Day X. The bank holiday is needed to incorporate all savings and checking accounts into the changeover.

On Tuesday, banks and savings banks begin to stamp their customers' banknotes with forgery-proof magnetic ink. Inspectors would monitor Germany's borders and international capital transactions to ensure that foreigners do not bring any money into Germany to have it stamped there. As a result of the expected devaluation, euros that have been stamped in this manner would lose value. The government would have to provide aid to banks that have substantial receivables and assets abroad.

Time to Convert
After about two months, Germany would leave the euro zone and, through an amendment to its constitution, reintroduce its own currency, which could also be a new common currency with other former euro-zone members who had left the monetary union. A second bank holiday would be used to convert all accounts and bank balances to the new currency.

All individuals and companies residing in or headquartered in Germany would be entitled to convert their euros into the new currency. However, at least another year would pass before the new banknotes were printed and distributed. Until then, the stamped euro banknotes would serve as the valid currency.

In his scenario, Meyer expects the new currency to gain up to 25 percent in value against the euro, which would adversely affect companies that are dependent on exports. The foreign assets of German investors denominated in euros would also lose value. According to Meyer, the losses would amount to upwards of €225 billion, with major investors like banks and insurance companies being especially hard hit.

Meyer estimates the total economic costs of the operation would be between €250 billion and €340 billion, or 10 to 14 percent of Germany's gross domestic product -- a high price indeed. But, he argues, the damage would be even greater if Germany remained in the euro zone. Meyer believes that German taxpayers would face an additional annual burden of about €80 billion should a European "transfer union" come into existence.

Last Principles
But a government can hardly base its policies on projections and models, even if it feels that they are plausible. The consequences of a breakup of the monetary union would affect everyone immediately, whereas the impact of all other strategies, as dangerous and costly as they might be, would only be felt in the future.

Merkel's credo is that, "if the euro fails, Europe fails." And if she is serious about this sentence, a case can be made that she will do everything possible to save the common currency -- even something that she has ruled out until now.

Then, even the last principles Merkel has staunchly defended until now will fall by the wayside, namely that the monetary union is not a debt and liability union -- and that the euro cannot be defended with the money presses.

Britain is facing many more years of misery
by Jeremy Warner - Telegraph

We knew it was going to be bad, but as the Chancellor George Osborne made clear in his Autumn Statement, Britain is facing many more years of misery.

This piece carries a government health warning; be careful not to choke on your cornflakes. Everyone knew, when Lehman Brothers went bust three years ago, that we were facing an almighty economic adjustment; it is only now becoming clear just how long that adjustment will take.

New forecasts contained in the Office for Budget Responsibility’s assessment of the Autumn Statement paint a grim picture of relative economic decline and ballooning debt. It’s now going to take six years to eliminate the structural deficit, two years longer than originally forecast, and even then, cash spending on public services will be higher at the end of the period than at the beginning.

That’s not going to stop public sector job losses escalating from a previously forecast 400,000 to 710,000. As for public debt as a proportion of GDP, that’s going to reach 78 per cent of GDP, 7.5 percentage points higher than previously thought, before it starts falling again. The economy as a whole will be 13 per cent smaller by 2016 than had been forecast just three years ago, and still, some nine years after the banking crisis began, not much bigger than it was back in 2007.

Meanwhile, disposable incomes will shrink 2.3 per cent this year, a post-war record, with still more pain to come next year. Even assuming things pick up thereafter, we may be looking at a period as long as 14 years in which living standards don’t rise at all in real terms, the longest such freeze ever recorded.

All this is assuming that the OBR’s somewhat optimistic forecasts for eventual economic recovery are met. These forecasts were again cut sharply yesterday (the fourth such cut the Chancellor has been forced to preside over), but they may already be behind events. The City investment bank UBS this week predicted that the economy will shrink 0.1 per cent next year and the OECD foresees a double-dip recession. Against a fast deteriorating consensus, the OBR seems positively Panglossian in its outlook.

And even the OBR admits it is more likely to have been over-optimistic than too pessimistic, since it has no way of modelling for a disorderly end to the eurozone crisis. Ominously, it concludes that the probability of a much worse outcome is higher than a much better one.

We seem already to have settled into that pattern of adjustment where with each passing year the point at which the public finances finally return to a sustainable footing is pushed further out into the future.

Only it is not as easy to shirk the task as it used to be. The Chancellor has set himself defined goals for fiscal policy, and now that he is held to account by the organisation he created, the independent OBR, he is sticking to them. The upshot is that the Government will have to take additional measures, on top of the austerity programme already announced, in order to meet its fiscal mandate of removing the structural deficit five years hence.

What the Chancellor announced yesterday was some further cuts to tax credits and an extended cap on public sector pay. But there are further cuts still to be made into the next parliament if the mandate is to be met. The process is proving much tougher than the Government had expected. It had hoped that we would be through the austerity programme by the time of the next election. That’s not now going to be the case.

The Chancellor is to be commended for his resolve, but this was not the way things were meant to work out. Little more than a year ago, Mr Osborne announced the biggest fiscal squeeze since the 1970s, in the confident belief that he was getting the pain over with early; by the time of the election, voters would be able to look forward to better times, with the promise of tax cuts to come.

Those plans are now toast. This is going to be a much longer, and harder, slog than anyone imagined; quite as bad, in many respects, as the austerity programmes faced in some of the troubled periphery nations of the eurozone.

Ed Balls, the shadow chancellor, would like you to believe that this is because the Government has cut too far, too fast. As it is, the deterioration in the economy means that the Government will be borrowing rather more to support spending than even Labour had originally suggested it would, but this has failed to satisfy Mr Balls, who wants more still.

It is a curious political argument that faults the Government on the one hand for borrowing far more than it had planned, while on the other suggesting that the solution is to borrow even more. Leaving aside the fact that Labour is still widely blamed for the mess we are in, it is not hard to see why the party’s core economic message is gaining so little traction with the voters. It’s simply not credible.

Despite the shock of the OBR assessment, credibility is one thing the Government has managed to maintain through the gathering maelstrom which is descending on the Continent. Faced with the news that under the old plan he would have broken his fiscal mandate, the Chancellor has buckled under and pencilled in further cuts towards the end of the Parliament to make sure he stays on track.

This was a remarkably brave thing to have done, given the potential damage it might inflict on the Government in the next election. The mandate has taken priority over the demands of the ballot box. Though the Chancellor is criticised for an unduly “political” Autumn Statement – sprinkled with micro measures that at times made it seem more like a Gordon Brown Budget than the considered reassessment of economic forecasts it is meant to be – in fact the reverse was the case.

A further 1 per cent cap on public sector pay, a review of national wage bargaining to prevent the private sector being crowded out in regions such as the North East – these are not the sort of measures designed to win votes. To the contrary, they will buy him nothing but trouble.

It was a disappointment that the Chancellor didn’t go further with supply side reform. It would have been good to see Mr Osborne do something about National Insurance, a direct tax on employment, by for instance declaring an NI holiday for new jobs. But outside the bankers, there was nothing obviously in the statement that further hit the business sector, which is something of a first by the standards of these events.

The new focus on infrastructure spending (quite a bit of pork barrel politics no doubt involved there), and the plan for credit easing, are both in themselves welcome initiatives that in the long term might do some good.

There was, however, little in the statement to encourage short-term demand and growth. The priority is still very much stability and credibility, in the hope of keeping interest rates low so as to encourage the private sector to start borrowing and investing again.

Eventually, this ought to work, but the problem is that for now there is no good reason to invest anywhere in Europe, and regrettably that includes the UK alongside the eurozone. The uncertainties are too great. There is also quite plainly no help coming from the hoped-for increase in net trade.

That leaves only two viable sources of support for the economy in the short term – private and government consumption. Both are on a declining trajectory. All Chancellors need a little luck in getting things right, this one more so than most, given the scale of the fiscal adjustment he has to make. Despite all the pain he is being forced to inflict, public debt is still set to rise by a half to a jaw-dropping £1.5 trillion by 2017, and that’s assuming the eurozone doesn’t blow up in the Government’s face.

Few outside the OBR would any longer bet on such a benign outcome to Europe’s sovereign debt crisis. Luck, it would appear, is one thing the Chancellor doesn’t have.

S&P downgrades British and US banks
by Richard Blackden - Telegraph

Royal Bank of Scotland, Barclays and HSBC were among a slew of global banks that had their credit ratings cut by ratings agency Standard & Poor's late last night.

S&P said it downgraded a host of banks after changing its criteria earlier this month to take into account new considerations, including the likelihood that a government would again provide state aid as it did during the financial crisis of late 2008.

Across the Atlantic, Goldman Sachs, Citigroup, Bank of America and Morgan Stanley all had their credit ratings cut by a notch as S&P implemented the new criteria. Although S&P had warned earlier this month that it would be reviewing the ratings of 37 banks, the changes will do little for investors who are already nervous about possible contagion from Europe's financial system.

Shares of most major banks were buffeted over the summer on concern that sovereign defaults in Europe would leave them nursing losses from their holdings of government debt. Barclays' rating was reduced to A+ from AA–; Royal Bank of Scotland had its rating lowered to A– from A and HSBC saw its rating lowered to AA– from AA.

The downgrade from S&P came as a new study showed that Switzerland's banking industry risks losing out on almost Sfr50bn (£35bn) in assets as new tax accords with Britain and Germany prompt wealthy clients to withdraw money, according to a new study.

The country's banks, which have historically been a home for wealthy people looking for lower tax rates, also face missing out on about Sfr1.1bn in annual revenue from managing the offshore assets because of tax agreements that come into effect in 2013.

Under those agreements, struck earlier this year, Britain and Germany will secure revenues from taxes on investments and capital gains held in offshore accounts with Swiss banks.

China Reduces Reserve Ratios to Spur Bank Loans
by Li Yanping - Bloomberg

China cut the amount of cash that banks must set aside as reserves for the first time since 2008 as Europe’s debt crisis dims the outlook for exports and growth.

Reserve ratios will decline by 50 basis points effective Dec. 5, the People’s Bank of China said in a statement on its website today. Before the announcement, the level was a record 21.5 percent for the biggest lenders, based on previous PBOC statements.

A government clampdown on property speculation has added to the risk of a deeper slowdown in the economy that contributes the most to global growth. Exports rose by the least in almost two years in October and inflation eased to 5.5 percent, the smallest gain in five months.

“The move will help ease liquidity after previous tightening measures cooled credit growth too much and may have added to the risks of a hard landing for China,” Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd., said before today’s release.

The People’s Bank of China previously allowed reserve ratios to fall by half a percentage point for more than 20 rural credit cooperatives. Those lenders had been subject to elevated requirements for a year as a penalty for failing to meet lending targets.

Premier Wen Jiabao said last month the government will fine-tune economic policies as needed to sustain growth while pledging to maintain curbs on real estate. Economic growth cooled to 9.1 percent in the third quarter from a year earlier, the slowest pace in two years.

Grayson: Fed played 'Russian roulette' with U.S. money
by Andrew Jones - Raw Story

Former U.S. congressman Alan Grayson (D-FL) appeared on Countdown Monday evening to discuss how an audit of the Federal Reserve revealed the private bank giving $26 trillion to U.S and foreign banks without Congress’ authorization.

“For the first time in history, I’m talking the 100 year history of the Federal Reserve, they played favorites,” Grayson told host Keith Olbermann. “They said we’ll give a hundred billion to this institution, another hundred billion to this institution, and so on down the line, when you and I couldn’t even come close to accessing that kind of money of those terms.”

Grayson mentioned the leniency the Fed had with giving money to the banks. “They lend out this money at 0.01 percent interest,” he said. “Go try to get a loan like that from your bank. It was corporate welfare, pure and simple, and what they were doing is they were playing around with the value of the money in your pocket, and the money in my pocket.”

“They were taking the U.S dollars and playing Russian Roulette with it, giving it out in enormous staggering sums in the hope that they might get it back. They did get most of it back, but what about next time.”

He added: “The regional banks of the Fed are actually populated and controlled by the local banks. And all of these bailouts were actually administered by the Federal Reserve bank of New York, which has on its board many Wall Street executives. I’m talking about current Wall Street executives. Not the Tim Geithers of the world, the people who used to be or in the future will work for Wall Street, but the current Wall St. executives on the board making decisions on who would get what themselves.”

The Government Accountability Office revealed that the Fed gave out over $16 trillion to U.S. and international financial institutions between 2007 and 2010 without revealing it to Congress. Another $10 trillion was given out to foreign institutions in currency swaps.

Iceland wins in the end
by Ambrose Evans-Pritchard - Telegraph

The OECD has come very close to predicting a depression for Europe unless EU leaders conjure up a lender-of-last resort very quickly, and somehow manage to make the world believe that the EFSF bail-out fund really exists.

Even if disaster is avoided, the eurozone growth forecast is dreadful. Italy, Portugal, Greece will all contract through 2012, while Spain, France, Netherlands, and Germany will bounce along the bottom.

Unemployment will reach 18.5pc in Greece, 22.9pc in Spain, 14.1pc in Ireland, 13.8pc in Portugal.

Yet Iceland stands out, with 2.4pc growth and unemployment tumbling to 6.1. Well, well.

Here is the box from the OECD.

Iceland's policy of drastic devaluation with capital controls has not proved to be the disaster that so many foretold. Its refusal to accept the full burden of private bank losses has not turned the country into leper-land.

The nation has held its social fabric together. Had Iceland been in the eurozone, it would have been forced to pursue the same reactionary polices of "internal devaluation" and debt deflation being inflicted today on the mass ranks of unemployed across the arc of depression.

Sorry I could not resist posting this. Shame on me.


Journal Actif said...

Back with news from France:
None of my friend's family member who went to withdraw on his advice got any problem doing so. They basically were treated the same way as your friend Robert1.
What seems happened is he was, for some obscure reason, flagged and the teller made a thourough verification of his identity.

Sorry for the false alert. He and I jumped to conclusions too fast. Anxiety can do that to you...

Journal Actif said...

Oh, I forgot to precise the bank is Caisse d'Épargne (formerly Caisse d'Épargne Écureuil)

NZSanctuary said...

Washington's Blog on Central Banks' attempts to provide liquidity to Europe

Also a nice link to Deepak Chopra's speech to OWS.

Ash said...

El G (from last thread)

The dollars are definitely "printed" in the sense that all credit (and most of the money supply) is printed. It is best to think of it as a "sterilized" operation, similar to what the ECB does when it purchases bonds on the secondary market. The amount printed must be offset by future transactions. In theory, there is no effect on the money supply, but in reality, there will be over years, since the expansion in their balance sheets can't be reduced without crashing global markets. The swaps, though, are much more capable of being sterilized.

"The Federal Reserve was thus in a unique position to mitigate pressures in dollar funding markets. Initially, the Fed funded the dollar swap lines by reducing its holdings of Treasury securities,particularly Treasury bills. Later, as the swap lines and other liquidity facilities expanded in size, the Fed increased its liabilities commensurately, taking on the proceeds from the sale of a special series of Treasury bills and boosting incentives for depository institutions to hold reserves at the Fed. No other institution was in a position to undertake these efforts in support of dollar funding markets."

I find it very interesting that the ECB failed to sterilize its entire bond purchase operation the same week the Fed had to cancel its POMO liquidity draining operation (selling T-bills), even though the latter would be offset in the near future. When we factor in German short-term yields going negative and the "unexpected" (for everyone but the biggest players), coordinated CB action, there's a decent argument that a major bank (probably European) was on the verge of going under.

The immediate problem was that inter-bank lending markets were completely frozen, so the CBs had to step in and subsidize the cost of short-term funds. I'm sure many of those swapped dollars are being used to keep a few major banks in operation, rather than for speculative purposes, although I'm sure a few banks can afford the latter. Not even a remote chance the swaps will spur lending to businesses and consumers.

The banks haven't gotten what they want at all, i.e. the ECB acting as a lender of last resort, European countries agreeing to pool interest rate risk on their bonds and/or the IMF/China throwing more money at them. As Ilargi's post makes clear, there are very real talks occurring about how to prepare for the inevitable EMU collapse (in no small part due to the fact that time is simply NOT on their side). There is also very real pressure to get those things mentioned above. However, I view the coordinated CB action as a sign that they are further away from achieving that than most analysts think.

Ashvin said...

Comments open.

bosuncookie said...

For Gravity:

In the meantime, risk is merely adding some additional vertical distance before it has to be reacquainted with gravity all over again, and much more has to be done by the global central banking cartel.

From Zero Hedge today!

Ashvin said...

The ultimate contrarion indicator - ECB propaganda videos uploaded to YouTube.


"The ECB uploaded this video to YouTube yesterday, prematurely celebrating the 10th anniversary of euro banknotes; the first 12 countries introduced them on January 1, 2002. In the video you can see people eagerly lining up at cash machines just before midnight to withdraw the first notes.

Today there are 14 billion euro banknotes in circulation, but the real question right now is whether or not there still will be in another ten years time. Or even ten months...

Mario Draghi pops up at one point to say: "Despite the challenges currently faced by Europe, as well as the rest of the world, the people of the euro area can rest assured that the ECB will remain faithful to its mandate of maintining price stability"."

Ashvin said...

Coordinated CB action restored confidence in European sovereign debt. Well, at least it did for one single bank.

"There's also an interesting rumour in the City about the Spanish bond auction (in which, as we wrote about at 9.55am, Spain successfully sold all the debt on the table). M&G's bond market team reckon that almost all the debt went to a single buyer, rather than being divvied up between several bidders.

For that too happen, the successful bidder would have had to undercut the rest of the market, by agreeing to pay a higher price (thus a lower yield) for all the debt on offer.

Here's how M&G explained it

Bondvigilantes: Spain had very strong auction earlier, but turns out 1 bank took almost the whole lot, very unusual. Something political going on here

Bondvigilantes: Not the ECB as they can't buy gov bonds directly at auctions. Suspect a politician has given someone a tap on the shoulder."

Biologique Earl said...

Journal Actif said... "None of my friend's family member who went to withdraw on his advice got any problem doing so."

Thanks for checking that. I think the time is near when banks may (voluntarily?) start putting in place restrictions regarding cash withdrawals.

jal said...

With all the payroll tax cuts that the US "consumers" have been enjoying, thanks to the lawmakers, and with 70 % of GDP coming from consumers, and with 2/3 living from paycheck to paycheck and an increasing number of them living in a house and not paying their mortgages ...

Raising any taxes, fees, etc. could break the system.

The middle class is going to be the straw that breaks the camels back.

A lender has more downside risk than being a snowball in hell.

Its too bad that the lenders are getting overly paid to lend granma's money and will not suffer any downside.


Journal Actif said...

@Robert1: Yes, maybe. I'm not very knowledgeable of these things, as you might have guessed with my reaction to my friend's ordeal.

I can't help but think it's odd that Crédit Agricole and La Caisse d'Épargne own together an investor's services firm:
and then learn (ZH article posted this morning) Crédit Agricole might be the bank in big trouble 24 hours ago.

There's no link with the way my friend's request was met last Thursday and this week's events, probably. But still, I find it special.

el gallinazo said...


What I didn't know and you related on this thread was that the Fed sold off treasuries to finance the additional demand for the swap at a lower interest rate, and thus did not invent the "money," as is their wont, out of thin air. If they did finance the swaps through selling off treasuries, then you are correct. Since the swap line has no fixed amount, that the line was open before their announcement yesterday that they would drop the rate 0.50%, we can hope that they continue to finance it through treasury sales, though in the end it makes little difference as they originally bought the treasuries with thin air "money."

Ilargi said...

Kyle Bass: Imminent Defaults

"We believe the debts of the following nations, among others, are not sustainable in the current economic environment,

"Greece, Italy, Japan, Ireland, Iceland, Japan, Spain, Belgium, Japan, Portugal, France, and have we mentioned Japan ?"

"While there are many inputs that are functionally relevant, we look for a couple of warning signs. We move a nation out of risk free category as soon as they spend more than 10% of their central government revenues on interest alone. We also worry about debt loads that represent more than 5x the revenue of the responsible government. When these and other characteristics are met or exceeded, it can quickly move the country into checkmate."

Bass: “Japan Will Soon Be On The Front Page".

The European debt crisis will simply act as an accelerant to the Japanese situation as it will most likely change the qualitative thoughts of JGB investors. We believe that the sequence of events is set to begin in the new few months.


Ilargi said...

Re: France.

I've spent a lot of time in France the past little while, and JA's story sounds a tad too wild; banks don't set their own policies when it comes to depositors' money.

I don't use a French bank, but taking out a few thousand through a friend at the post office 2 years ago was no problem; just took a few days. And since ATM's allow banks to have virtually no cash on hand at all, that's not surprising.

That said, the main French banks, Paribas, SocGen and Crédit Agricole are in very deep doodoo as we speak, kept alive by Paris, the ECB and the Fed swap lines.

Just happened to leaf though a local paper here in Bretagne this morning, really small time stuff, and there were 4(!) full page color ads from different banks.

They are all very eager to get people into mortgages etc. Partly because all sorts of special government loans will cease to exist Jan 1, like 0% for renovating old buildings, but still: 4 full pages in a 28 page local rag filled with Grandma's recipes and jeu de boules scores, it's just weird.


Journal Actif said...

Illargi, I didn't invent it. Merely reported a 3rd party story, which is not a good idea, I see that now.

Let's forget about it since I'm not the person who it happened to. Maybe I'm too naive.

I'll return to my habit of reading without commenting.

A Fall Guy said...

@ Journal Actif

Don't be put off by Ilargi's gruff attitude (I personally prefer brutal honesty to sugar coating). While your friend's experience was perhaps unique, it's still good to keep eyes and ears pricked for such changes. Increased "security to protect the people" goes hand in hand with increased attempts to consolidate wealth and power.

el gallinazo said...

Journal Actif

You made it very clear in the comments that you were simply reporting on a third party story from a friend in France. It turns out that his recent experience is not at the moment representative. The comment section here is not a USA court of law, which used to forbid third party evidence back in the days when the USA often operated under the rule of law. Please do not feel intimidated and continue to comment.

seychelles said...

Candid and useful commentary by Ann Barnhardt on Financial Sense Newshour today:

el gallinazo said...

Karl warns that the Fed will not like the discount rate at 0.75% and the new swaps rate lower at 0.50%, so they will probably announce a 25 bp drop shortly. It is meaningless, but the equity idiots may make a big deal out of it.

el gallinazo said...


The previous interview on FS was really good also, with Peter Schweizer, author of the recently published bombshell, Throw the Bums Out, where they discuss in some detail the "legal" fraud and graft of congress critters as well as the Octogenarian of Omaha.

Ashvin said...

Just call 2011-12 "The Downgrade Years".

(Telegraph) "Moody's has downgraded its outlook on the Czech banking system to negative from stable on prospects of a "broader slowdown" in the EU.

(Moody's) 'The change in outlook primarily reflects the rating agency's view that the banks' operating environment will weaken, amidst a broader EU economic slowdown. This will create renewed pressures on asset quality and impair the banks' profitability and capitalisation.'"

Ilargi said...

Journal Actif,

I have absolutely no clue why me calling your story "a tad wild" would lead someone to warn you of my "gruff attitude". That just simply doesn't look all that bright to me. Which in turn will probably be taken as a confirmation of that same attitude, for all I know.....

Still, please remember this: you're likely to learn a lot more from engaging in conversation than to shy away from it. So I'd say: speak up!


Journal Actif said...

@ Fall Guy, el gallinazo & Ilargi:

No problem.

Ashvin said...

Another Confirmation of the Solvency Crisis Masquerading as a Liquidity Problem

"The banking system that froze in 2008 never really righted itself, preferring instead to fully participate and advance the worldwide regime of “extend and pretend.”

The pervasive apprehension is coming primarily from the banking system itself, as its vital interbank market continues to be inoperable. There is a severe problem when system insiders no longer trust the very system they are inside of (and have a vested interest in seeing return to uninterrupted operations).

The pathology of conventional interpretations of this type of troubling circumstance leads to the incorrect and widespread diagnosis of a liquidity problem. Thus liquidity solutions are implemented to placate the financially uninitiated, doing nothing to actually solve the underlying systemic tribulations."

scandia said...

@Journal Actif, I was so " naive " and ignorant of financial affairs my first question on this board was " What is a counterparty." I still blush when I think of it. So I agree with Ilargi that it is best to keep commenting and asking questions.

@Ilargi, your essay drew a " wow " from me as I read your analysis that France is the state noone wants a financial relationship with. Brilliant and entirely original as I haven't read anywhere that anyone else on the blogosphere has come to that insightful conclusion.

Nassim said...

I have absolutely no clue why me calling your story "a tad wild" would lead someone to warn you of my "gruff attitude"

Not to worry Ilargi, I have been told that I am "bad tempered" even as a child for not suffering fools gladly. Quite impossible to shake off that sort of stigma. :)

Greenpa said...

"I haven't read anywhere that anyone else on the blogosphere "

boy, whattami, chopped liver? It was what, a couple weeks ago; right here on this forum, I said, in plain English, "And France is watching from the wings, ready to dance out on stage when Italy is done..."

Or something like that. Ok, so, that's conclusion without providing analysis, but- hey!

I'm tawkin here. :-)

Nassim said...

And that's going to bite, because all the banks and countries that were broke yesterday are just as broke today.

I was doing a little more thinking about Greece - since it has always been one of my favourite destinations. I have tried to think what it is that they export. Other than olives and similar products, I could not think of much. Of course, the Greek shipowners are really Londoners with mansions in Greece and their ships hardly need Greek sailors any more.

Greece was a great holiday destination - when the Drachma was 80 to the pound sterling. It was fixed at 340 to the Euro back in 2000 - equivalent to around 500 to the pound. The fact that it lost 80% of its value against sterling in 30 years should have been a signal. The pound sterling is not exactly like sterling silver.

Here is a less frivolous look at Greece's exports and imports - Economy of Greece. In 2010, exports were €16 billion and imports €48 billion. I guess holiday makers and foreign remittances would have to make up this difference of €32 billion. Fat chance.

Not so long ago, Athens was famous for its smog and its traffic jams. I expect its oil consumption is going down a lot faster than most other places - Lethal Air Pollution in Athens (2007).

I think, like Ilargi perhaps, that even if all their debts were forgiven tomorrow, it would not change their fate by much.

Ilargi said...


"@Ilargi, your essay drew a " wow " from me as I read your analysis that France is the state noone wants a financial relationship with.

Brilliant and entirely original as I haven't read anywhere that anyone else on the blogosphere has come to that insightful conclusion."

Now, now! I've mentioned this a few times before, maybe not made it clear enough. It's very obvious from where I'm sitting. France sits -awkwardly- between north and south. And it's as screwed as any of them.

But still, he first thing I thought when I read your comment was: Don't worry, they'll all claim it as their own soon enough.


el gallinazo said...

I think that Nomi Prinz and Reggie Middleton have a thing different and two things in common. The thing different is that Reggie probably looks a lot better than Nomi would when he photographs himself stripped to the waist in Zulu shorts and spear. What they have in common is that they both published today on ZH indicating that the Fed's move yesterday was to save the Squid's ass. Reggie goes into a lot more detail including his 5 part Hunting the Giant Squid series prior to today's article. He points out, for one thing, that MF Global had a Squid CEO, and that the Squid, MFG, and JPMC all use the same audit accountant, Price Waterhouse Cooper which gave MFG a total clean bill of health on March 31 of this year. And you never find just one cockroach in the kitchen. They also both point out that although JPMC hold the largest stash of derivatives, the Squid is hugely more leveraged against them than even JPMC at 537 to 1 against assets as opposed to JPMC at 44 to 1. Citi is 46 and BAC is 36. So if the world wiggles the wrong way, even a little bit, the Squid is calamari. Reggie thinks that the Squid has made the same bad bets in PIIGS bonds that skewered MFG, and it will fall the same way, only 75 times as hard. Think King Kong in the final scene only it wasn't beauty that killed the beast, it was doing God's work. And as Reggie has been warning forever, the first domino that will set it all off is one of the three giant French banks. And now the rumor mill is saying that the Fed liquidity stick save was Credit Agricole to fight another day, maybe even two days. But as everyone knows, the swap did nothing to solve the problem. Just gave the junkie one more hit and put it, as usual, on our tab.

Joe in NC said...


Interesting info and thoughts on Greece. I also think about Greece but it's only in a derivatives perspective - I think Mish posted awhile ago that just because a "credit event" hasn't happened yet (50% haircut) does not mean it will not.

El G,

GS is so politically connected, I can't wrap my head around the thought of TPTB ever letting that ship sink.


Nassim said...

Across Wiener Feinbäcker’s 350-strong chain of bakeries, the posters are everywhere. This typical German midsized company is promoting a bond alongside its Brötchen.

The unusual offer, which promises a 7 per cent coupon for five years, is an eloquent sign of the times. When a thriving business with profits growing at 30 per cent a year resorts to this kind of financing, it is a pretty sure sign that banks are not fulfilling their traditional role.

Return of the credit crunch: caught in the grip

Localisation and disintermediation - a sign of the times.

A Fall Guy said...

@ Ilargi

I guess you didn't notice that I meant "gruff attitude" as a compliment to your tendency to call a spade a spade. Just trying to help JA keep confidence to continue posting. And insulting me as "not bright" isn't gruff so much as rude.

el gallinazo said...

Joe in NC

GS is so politically connected, I can't wrap my head around the thought of TPTB ever letting that ship sink.


Yeah, I have the same thoughts. Just can't imagine it, certainly not before the 7th inning. But the interesting point is that they are so fragile and vulnerable when stripped of their political connections. It just may have made them so arrogant that even all the Kings horses and all the Kings men ..............

Additionally, they are just so hated, thanks to some extent to Matt Taibbi, that getting a giant bailout could have some serious political headwinds if it weren't done secretly through the NY Fed.

Ashvin said...

Brilliant deconstruction of the corrupt EU pipe dream, decades in the making, by Nigel Farage when speaking in Croatia (convincing them not to join).

seychelles said...

Bob Prechter has argued for years that when all is said and done, GS (and the FR) will be toast.

Gravity said...

I was listening to a recent radio interview with Catherine Austin Fitts, elaborating on her experience with massive systemic corruption in the US housing market, black budgets and breakaway barbarism. She mentions evidence of insider trading in indonesian sovereign wealth funds on plausible foreknowledge of the 2004 tsunami. part 1 part 2
Unpacking Mr.Global part2, 13 minutes into it.

Disregarding infintesimal probability of coincidence, foreknowledge could have been attained by unusually accurate seismic pattern analysis of natural tectonic stressors around the indian ocean faultline, or alternatively by artificial tectonic forcing, in conjunction with predictive hydrodynamic shockwave modelling.

Tradeable foreknowledge of the disasterous tsunami effects on indonesia specifically would require a degree of controllable certainty to the hydrodynamic effects of a given deepsea seismic event, which is less plausible within natural causal mechanisms.
Artificial tectonic forcing facilitated by some manner of tectonic weapon, rather than natural seismic activity, is therefore more likely to be the cause of said event, assuming that such forcing yields a more controllable and predictable hydrodynamic effect than natural seismic mechanisms would, and if posited insider trading requires exact foreknowledge of the damage magnitudes effecting specific countries and sovereign wealth positions.

The rest of that interview is no less sinister and quite insightful, worth listening to. It may have been linked here already.

el gallinazo said...


The Fitts interviews were discussed here in some detail when they came out a few of weeks ago. As to a forcing of the plates, in another interview on KPFA, the physicist, Steven Jones, who was forced to resign his full professor tenured position from BYU for proving that unreacted nanothermite was in the twin tower dust, dealt with that issue in relationship to HAARP (intense radio frequency EM), and he could not come up with any known conceivable mechanism for this. But he said that if any one could send him some decent scientific data, he would examine it. If you want the details, look in the Guns & Butter archives for Jones maybe 5 months ago. This doesn't mean that Fitt's suspicions aren't true, but it does mean that if the technology does exist, its mechanism lies outside the knowledge of a very competent and open minded physicist.

The first part of Jones' interview did deal with man made earthquakes, but the two types he recognized were shallow level fluid injection like frakking, and the strange story of how Nicola Tesla initiated a small earthquake in downtown Manhattan (a few blocks from where the NY Fed would later be) around 1900 with a small mechanical device. He didn't own up to it until decades later for liability reasons. The device worked on resonance but the details are still a mystery. Tesla was quite a character.

el gallinazo said...

Karl gives a very knowledgable interview on the latest Keiser regarding mainly MF Global. Worth the watch. BTW, I looked in Wkipedia and there really is a Niceville FL. Formerly called Boggy. I thought Karl made it up to keep his home town anonymous :-)

Joe in NC said...

El G,

"not before the seventh inning"

What would you guess the current inning to be? And with the "lack of natural resources" problem running concurrent with the solvency issues, is there a 9th...or does the game completely change?


Joe in NC said...
This comment has been removed by the author.
seychelles said...

Several comments were made recently about Vanguard possibly being a less risky custodian for retirement funds. Today I phoned and inquired with their brokerage department about custodial fees for Roth IRA holdings consisting of one year T-bills laddered quarterly and reinvested at maturity. Not bad, less than $50 per year. Their custodian bank is B of NY Mellon. In the recent S&P re-rating of 37 major banks, B of NY Mellon and its listed subsidiaries were all downgraded. See

for details, page 4. Just a FYI. I am not sure which is the more important consideration, the brokerage firm or its custodian bank. Prechter in his writings has advised great attention to the latter.

Nassim said...

The problem for Mörner's detractors is that, eccentric and outspoken Danish count though he no doubt is, he also happens to be the world's pre-eminent expert on sea levels. Besides being responsible for dozens of peer-reviewed papers on the subject, he was also chairman of INQUA Commission on Sea Level Changes and Coastal Evolution. This means that his findings can not easily be dismissed as those of a raving 'climate change denier'.

I have heard Mörner speak many times and his position is not nearly as controversial as it is sometimes made out to be by his detractors. His view is simple: 'If sea levels really are rising and islands like Tuvalu and the Maldives are in imminent danger of drowning, where is the physical evidence to support it?' So far there is none. It is those who claim otherwise who are the true 'deniers'.

Good news! Sea levels aren't rising dangerously

Let's have some fun. :)

Journal Actif said...

scandia said...

"I was so " naive " and ignorant of financial affairs my first question on this board was " What is a counterparty." I still blush when I think of it. So I agree with Ilargi that it is best to keep commenting and asking questions."

Scandia, just wanted to acknowledge your message and say thank you.

scandia said...

@ Greenpa...Jeez, I missed your comment about France! Glad you spoke up...

@Ilargi, I,until this post, had a world view of the EU crisis as Pigs in one group, original members in another. I had not grasped the red balance sheets that threaten the core group. For sure I never imagined even more complexity with France as outsider. And on further thinking the picture shifts again as although the UK is physically close to Europe its heart and mind is with the US. I suspect that is true of some Baltic nations as well.It is all up for review as I reexamine the alliances.

@El the squid, Mark Carney of the Bank of Canada is also a Goldman man and he is being moved to the European front.

scandia said...

@Journal Actif, some time ago Stoneleigh offered one of her favorite quotes. I have it posted on my frig.

"ancora imparo " Michelangeo " (age 87 )
translates as " I am still learning."

Nassim said...

Our whole system's in crisis: Mervyn King warns mortgage rates are likely to soar and tells banks to slash bonuses

In 30 years I've never heard such talk from a Bank chief

ogardener said...

Blogger Nassim said...

"Let's have some fun. :)"

No thanks. I had enough fun with Hurricane Irene and October snow storm Alfred.

Coco said...

So any advice for those of us living in the PIIGs?

1. Can´t keep cash in a bank because of imminent failure.

2. Can´t keep cash out of a bank because of imminent re-denomination in national currency.

3. Can´t buy govt bonds because of imminent default.

4. Can´t buy PMs because of imminent price collapse.

5. Can´t buy foreign currencies because of 1 and 2 and imminent capital controls over wire transfers, etc.

And we can´t start renovating our country place because we´re still waiting for a building license.

Frankly, I´m depressed.

Ilargi said...

A Fall Guy,

point taken, apologies offered.


Alexander Ac said...

Mike Shedlock lately asks:

Has Ambrose Evans-Pritchard Lost His Mind?

well, we already know he never had any head... :-)


Ash said...

Alexander Ac,

The phrase which shows that Mish really "gets it" from that article (or at least a critical part of "it"):

Pritchard poses a false dichotomy: print money or impose various austerity measures like hiking taxes to bail out banks. Why do either?

Exactly. I would take it a step further and say that writing off debts and/or printing money is a necessary step towards changing the system, but the latter should only be done at a national level and by sovereign governments, rather than central banks.

p01 said...


This is what Stoneleigh meant by "headless chickens". AEP wants a "solution" for BAU, and there is none. The time for solutions has looooong passed.

Ashvin said...

When they say jump, will the EUR keep saying "how high"??

(Bloomberg's Repeat Rumor of the Day)

"A European proposal to channel central bank loans through the International Monetary Fund may deliver as much as 200 billion euros ($270 billion) to fight the debt crisis, two people familiar with the negotiations said.

At a Nov. 29 meeting attended by European Central Bank President Mario Draghi, euro-area finance ministers gave the go- ahead for work on the plan, said the people, who declined to be named because the talks are at an early stage. The need for a new crisis-containment tool emerged as the effort to boost the 440 billion-euro rescue fund to 1 trillion euros fell short.

Under the proposal, national central banks would recycle funds through the IMF, potentially to underwrite precautionary lending programs for Italy or Spain, the two countries judged to be the most vulnerable now, the people said."

Ashvin said...

NFP Report.

120K private jobs created (at about expectations), jobless rate down to 8.6% as labor force participate decreases by 0.2% (many people giving up looking for jobs that don't exist)

Work week hours were flat, and average earnings were down 0.1%. Manufacturing only added 6K, while public sector dropped 20K.

i.e. nothing good

Greenwood said...

As Max K so often repeats, the City of London is the Ground Zero for Global Financial Terrorism.

Even more so than the Fed, which historically is The City's illegitimate bastard bad seed evil spawn.

As the British Empire when into it's death throes at the beginning of the 20th century, in no small part due to the Bank of England's Ponzi going belly up, The City's last gasp hail Mary was to pass the diseased torch of a centuries old financial terrorism culture to the United States in the form of the newly minted 'Federal Reserve'.

The Fed was the reincarnation of the Bank of England. A Vampire with new duds and an American swagger.

So when I hear Ambrose Evans-Pritchard open his pie-hole once more in tedious repetition of his role as Head Cheerleader for The City and it's virginal purity, I wanna puke, really.

This guy is a shill on a level rivaled by none.

England has no really economy as Max says, it's all financial fraud, through and through and through, like no other country has historically ever, ever accomplished.

Ambrose Evans-Pritchard has always sniped at 'the Euro' but not for the legitimate reasons that the EMU had at it's core but as a pure propagandist for the Financial Terrorists LTD, sometimes casually known as 'Great (cough) Britain', a mythic fabrication spewed out by the Goebbels & Bernays of the post post modern era.

He is not even a has-been 'journalist', he's a never been.

As in his only real message, England=good, Euro=bad has a very limited world audience except for the brain dead of Britain.

Any cool 'inside sources' he has (read: City of London Financial Terrorists) are completely negated by his obvious 'shilly shall-we hokey pokey' chicken dance.

What a pathetic show.

Ambrose needs to get his little Organ Grinder Monkey Suit pressed at the cleaners.


Ashvin said...

ZH sums up NFP report with 4 graphs.

"Percentage wise this was a drop [in civilian labor force] from 64.2% to 64.0%: the lowest since back in 1983. Naturally, this would mean that the people not part of the labor force rose, and indeed they did by 487,000 to a record 86,558 from 86,071. This also means that more people are looking for a job: and indeed, the number of "Persons who want a job now" rose by 192K to a record 6,595 million. And lastly, confirming the behind the scenes disaster of the US jobless picture, the average duration of unemployment rose to a new record 40.9 weeks from 39.4 weeks previously."

Hombre said...

Alexander Ac - Thanks for the Mish link!
It's articles like the one by A E-P that keep so many folks confused about what is going on and what are the realistic possibilities.
Like this line...
"This crisis can be stopped very easily by monetary policy..."
Yeah, right, and if only we would drill... drill... drill... we would have plenty of oil!
And as the months roll by, even years, after the crisis of 2008, the impression grows of some huge but vague clandestine financial repair evolving, and in progress, that will keep the current system functioning well into the future.
And while the world's energy limitations are easily understood, the complex financial entanglements are not--at least to most of us.

Ashvin said...

And Bloomberg rumor denied after 2 hours... again...

SAO PAULO, Dec 2 (Reuters) - "The International Monetary Fund is happy to play a behind the scenes role in resolving the European debt crisis, which needs to be tackled with fiscal consolidation and structural reforms, the lender's chief Christine Lagarde said on Friday.

Largarde, in Brazil for the last leg of a Latin American visit to drum up support for more global cooperation, said the risk of contagion from the crisis had materialized.

"I'm very happy if the IMF is in the middle of it, but in an effective way, not necessarily a visible way," Lagarde said in the recording of a Globo News TV news show in Sao Paulo.

Lagarde urged euro zone countries to find a collective, comprehensive solution to the crisis or risk enduring a lost decade."

Ashvin said...

Comments from Fed's Fisher.

(Telegraph) "Some extraordinary comments from Richard Fisher, a senior Federal Reserve official: the world's biggest economy will go the way of Italy and Greece unless US leaders fix the national deficit.

The Dallas Fed president told business leaders they should take the Occupy Wall Street Protestors "seriously" because too many people are out of work.

"Our nation has a crying need for public leadership to correct what's wrong in the economy," he said. "Doing deficit math is a sobering if not depressing exercise.""

p01 said...

There's a documentary called "Wild Carpatia" floating on some darker parts of the Internets (and presumably on cable TV - I wouldnèt know about that).
I have not seen it yet (probably will tonight), but my wife has, and she tells me it`s well worthy of viewing if you can stomach that way of life being the absolute best one can ever expect (she was raised a bit closer to rural life than myself, but we both have tasted it first hand).
If you can see it, please do.

Archie said...

@TAE Daily

re: unemployment data

Tsk, tsk, such negativity! Don't you realize that the unemployment rate is now as low as it was in Spring 2009? We are on our way to the 5% rate that the great savior O has promised!

Barkeep, another round for the house please!! Just put it on Cheryl's tab.

Ashvin said...

So now governments are directly commandeering pensions to "plug holes".

(Telegraph) "A remarkable act by Portugal to plug the hole in its public accounts today: it has agreed with the country's four biggest private banks to transfer €5.6bn of pension funds to the state.

The transfer was approved in cabinet today, and will bring Lisbon under the budget deficit reduction goal agreed under the €78bn bailout deal with the EU and IMF. The move - which they insist is a one-off - became necessary after the government found an unexpected hole in public accounts."

Greenpa said...

Coco- I like solar panels, and small diesel engines. Both keep their value long term, and store well, though mice can nibble wires.

But- like all stores of value, they will attract thieves; you still have to think about secure storage. Panels and engines are at least a lot of work to steal and move, unlike silver coins...

YesMaybe said...


Your and Stoneleigh's writings here are wonderful, and deeply appreciated, but I wanted to ask you about the rationale for your view of the markets.

On a not-so-recent post you wrote something like that the markets aren't stupid, and then on one from a few days ago you said

"Confused? No need to be. If you want to know who's right, follow these two easy steps:
1. The bond markets are always right
2. In case they seem to be wrong, refer back to 1)"

For some reason, this just doesn't seem (to me) to fit in with the usual skepticism about markets here at TAE. Now, I agree with the often-made point that bond markets are a better guide than equity markets. But how can a claim such as above be justified? The last couple of days bond yields have dropped a ton, in the face of central bank moves and politicians' speeches which suggest nothing good is coming (clear enough, but discussed in Yves Smith's piece "Does Anybody Who Gets It Believe Central Banks Did All That Much Yesterday?"). To me it seems quite clear that these markets are not driven by an even minimal understanding of fundamentals either. So I wanted to get your take on what the deal here is.

el gallinazo said...

Joe in NC

In terms of a deflationary collapse, I would call it the top of the third inning. Re resource depletion, Stoneleigh has it right in terms of a downward seesaw, alternating between lower demand and reduced resources.

Nassim - Rising ocean levels

At this point, rising global temperature levels have melted primarily ice floating on the seas, which obviously would have no effect on the shorelines. There has been some accelerated glacial calving as well as receding glaciers in the high mountains. I have seen the latter in the high Andes of Peru. It will be devastating in regards to irrigation of the coastal desert and hydroelectric, but a piss in the bucket in terms of shorelines. The SHTF when we start losing the Antarctic ice cap resting on terra firma, and to a lesser extent Greenland, but that will take a while.

I was listening to an old Quirks and Quarks in my archives describing an earth core sample drilled near the North Pole. This was no mean feat as it required two large ice breakers like football linemen blocking the ice up current for a couple of days. The core, as I recall went back to the late Cretaceous. The most interesting finding was that at about 55 million years ago, the polar sea were at about 21 C and the atmosphere had very high levels of CO2. Times change.

el gallinazo said...

IMO opinion, the central banking cartel has exercise primary control over both the equities and bond markets. The bond market tends to be more circumspect than the equities markets, which are dominated by frontrunning headless chickens, primarily focused on the coming millisecond. The primary axiom has been Don't Fight the Fed. I&S are correct that at some point, and I think it will be soon, that the dam(n) will break and the central banks will lose control of the markets, but for the moment, they have and do exercise vast control. People use to laugh at the PPT comparing it to alien landings, but no one laughs at it any longer. Since central banks can invent money and are shielded from public scrutiny; have the latest computers and programmers, and leverage their nearly unlimited resources against futures, it is no mystery how they have dominated the markets.

el gallinazo said...

IMO the economic statistics, coming from governments, think tanks, and universities have reached a new, unprecedented level of bogosity. They are now nothing more than Central Command propaganda. Other than noticing how the chickens run when they are released, they should be ignored. Furthermore, the worst offender is GDP itself which incorporates the broken window thesis into its measure. The only way to see how things are going now is to put on your running shoes and go out on the street. Are you gonna believe them or your lying eyes?

Ash said...


I'm going to go out on a limb and say that no one here literally believes bond markets or any other markets are "always right". I'd say it should be interpreted more along the lines of what you say:

"Now, I agree with the often-made point that bond markets are a better guide than equity markets."

It's all relative. If we want to gauge the stresses of the extremely opaque financial system, it's much better to look at credit markets than equity markets. And within credit markets, the sovereign bond markets are the biggest and therefore may be superior indicators (aside from shadow derivatives markets). However, all of these markets have huge flaws as "efficient" indicators, since they are all quite opaque, and they all operate on collectively irrational dynamics and manipulation. That is clear from the unprecedented short-term volatility in all of these markets. Manipulation has become increasingly pervasive over the last few years, both directly and through perception management (rumors, bogus statistics, media spin, etc.), but at the same time there is a good argument that it has become increasingly ineffective over all but the shortest time frames.

Anonymous said...


Europe has its problems, but Nigel Farage has a way of twisting things around to suit his own purposes that is counterproductive to any real understanding of the situation.

For example, he cites Denmark and Schengen, implying that the Danes are blocking access because too many EU citizens from poorer countries are trying to move to richer countries. If you look at the data, the number of people actually making such a move is very small. This same scare tactic was used in 2005 prior to the vote on the EU constitution. At the time, the French were encouraged to fear "Polish plumbers". The business with the Danes a few weeks ago concerned illegal immigrants, not EU citizens.

Farage has a political agenda, few scruples and a nasty streak. I would not take him too seriously.


Ash said...

I too am offended by many of AEP's recent articles, which appear to display a frightening lack of understanding about the predicaments we face, but I don't think we can dismiss him as an ignorant moron. His latest blog post seems to be a bit of a retraction, where he acknowledges that there are no easy "solutions", that Germany has very legitimate concerns about loss of fiscal sovereignty and democracy, and that there do exist other options besides printing vs. austerity. I tend to view him as a Michael Hudson lite, who recognizes current plans of "austerity" are nothing more than economic oppression combined with suicide for the masses, but is still rather naive about who is really pulling the strings in Europe and the West in general.

"As the wise professors warned at the time, EMU would lead ineluctably to full fiscal union because an orphan currency would not endure without an EU Treasury and government to back it up, but it would a fiscal union accountable to nobody, because no European democracy exists, or can exist.

It would lead to debt pooling and shared budgets.

It would lead – fatally – to loss of the Bundestag’s sovereign powers to tax and spend. The core functions of parliament would slip away to EU mandarins.

It would lead to the emasculation of Germany’s exemplary post-War democracy.

It would lead in essence to the abolition of Germany as a nation state, even if the window flowers remained in place.

All else was illusion and wishful thinking.

"But this is where Germany now is. It must either immolate itself and dismantle the Bismarckian state for the cause of EMU, or prepare to finance an orderly withdrawal from monetary union (with the Finns, Dutch, and Austrians) so that the South can breathe again and hope to recover.

That is the choice. All else is can-kicking, denial, obfuscation, muddle, and self-delusion. As is now becoming obvious, the failure to resolve the matter one way or the other is becoming a danger to the global financial system. It threatens to uncork a global depression. Germany must at last decide.

It is a horrible choice. My sympathies go to the German people who were never given a vote on this ensnarement and infeudation of their peaceful country, and who were egregiously deceived by their own leaders, and who cannot now begin to understand why they suddenly are target of such furious and venomous global criticism.

The Germans too are victims of this ruinous project, the greatest victims of all. Their elites have led them into a diplomatic and economic Stalingrad."

Ruben said...

re: Sea level rise

Even though Morner was former "chairman of INQUA Commission on Sea Level Changes and Coastal Evolution" the "Current president of the INQUA commission on Coastal and Marine Processes, Professor Roland Gehrels of the University of Plymouth, says his view do not represent 99% of its members, and the organisation has previously stated that it is "distressed" that Mörner continues to falsely "represent himself in his former capacity." (emphasis mine)

The Spectator runs false sea-level claims

The article spends some time mocking Morners claims of paranormal powers, which you can take as you will. But the descriptions of how Morners "measures" sea level rise are also good for a laugh.

Ash said...


"Farage has a political agenda, few scruples and a nasty streak. I would not take him too seriously."

Funny, because that's my impression of everyone other than Farage who constantly tell us the only way forward from here is further immolation (to use AEP's word) into the nightmarish ideal of a European Union. A "political agenda" doesn't even begin to describe what those people have. Til' death do us apart, indeed.

Ash said...


I realize now that I didn't actually address the substance of your issue with Farage. Can you point me towards recent immigration data in the EU that contradicts him? I'll admit that I simply accepted his anecdotal claims as being representative of a trend when I heard them. At the same time, I can understand how someone with his personality and in his position, with such little support from others, may exaggerate on specifics to make a broader point. I do not believe that would in any way undermine his broader argument about very immense and shady pressures being applied within the EMU and between the EMU and Europe. From what I can tell, he is someone with very valid concerns and a genuine interest in doing what's best for Europeans. If the latter isn't true, that doesn't mean the former isn't true either.

Frank said...

>>because no European democracy exists, or can exist.

I agree, it does not exist. I do not however see why the European Parliament cannot be given actual powers. Replace the European Commission with a cabinet, and the power of the purse to reign in the Brussels Eeurocrats.

Hey presto. A functioning democratic republic, with the biggest GDP, the third largest population and [I'm not sure about] land area in the world. (My swag is that they would be #5 after the US/China who are tied for 3rd/4th, but I don't care enough to look up 27 countries and decide how to count Greenland)

Ilargi said...


Bond markets can take a step or two back knowing what the reaction to a central bank intervention will be.

And then step forward again a few days later. It's a game they can't possibly lose, it's like how a cat plays with a mouse. Many countries are broke, they pick them off one by one. Or in pairs, or three at a time. not all at the same time though, too much hassle. A cat doesn't catch six mice all at the same moment either, even if it couldn't lose.

If Kyle Bass is right, it'll be Japan's turn soon.


Ash said...


Think about it this way. Democracy in the US doesn't actually exist anymore, if it ever did (somewhat debatable). That is despite and/or because of our fiscal union and national "representative" branches of government. Now the cultural splits within the US are one thing, but those across Europe are a whole nother' ball game, as they go back thousands of years. Instead of artificially suppressing them, they should be embraced and "managed", but that cannot be done from the top down by centralized institutions. I am still of the opinion that "democracy isn't dead yet" in Europe, but that all changes if the integration hawks get their way, regardless of how they technically set it up.

A Fall Guy said...

@ Greenwood

re: the Fed is The City's illegitimate bastard bad seed evil spawn

Often we think of the UK empire and US empire as distinct, the former having declined as the latter rose. But the relationship is more akin to the shift of the Roman Empire from Rome to Byzantium. Many dramatic changes, but also some seamless continuities. The shift from Rome to Byzantium gave several centuries more; the shift from London to New York just one.

el gallinazo said...

If one were forced to put a date on the tombstone of American democracy, I would choose Nov. 22, 1963.

From Wikipedia, Allan Dulles:

"The reputation of the agency and its director declined drastically after the Bay of Pigs Invasion fiasco, and Dulles and his staff (including Deputy Director for Plans Richard M. Bissell, Jr. and Deputy Director Charles Cabell) were forced to resign in September 1961. President Kennedy reportedly said he wanted to "splinter the CIA into a thousand pieces and scatter it into the winds."[18]

We saw how that ended.

Anonymous said...

@ Ash

It is not easy to find (rapidly) data on EU workers in other EU countries, but you will find some below. I can say however, from daily experience, that it is simply not an issue, even on the extreme right. The numbers even before 2008 were not high and are receding rapidly with the crisis. Look at the article on Germany below, a total of 140 000 expected for Germany for all of 2012. That is hardly a wave of immigration.

Here is some data for immigration to the U.K.

For the EU

Again for the U.K.
Since 2004 over 1,000,000 migrants from accession countries have arrived in the UK;
approximately half are thought to have subsequently returned home

Germany (article from May 2011)
The federal labor agency in Berlin, the BfA, estimates it will seen an influx of up to 140,000 immigrants from within the EU throughout the next year, and then less and less every year after. BfA director Heinrich Alt says they will give a much-needed boost to the economy.

But to return to Farage, you write "he is someone with very valid concerns and a genuine interest in doing what's best for Europeans".

Are you at all familiar with this guy? Anyone today can come up with some good arguments against the EU, but you have to look at the underlying motivations and the political affiliations. To say that Farage has the interests of Europeans at heart strikes me as ludicrous. He is interested in British interests alone.


Frank said...

@FB While I agree that Farage's true interests are for the UK, that in no way contradicts the idea that he sincerely believes that the policies he advocates for the UK would also benefit most if not all other European countries if they too adopted them

Frank said...

Ash, We may have to agree to disagree. I live in a town of 800 in New Hampshire.

Town meeting, and school district meeting which happens the week after, have a very visible effect on life here. The articles on the warrant are published weeks in advance, and extensively discussed at the general store, the post office and the town dump.

I know it's not this way everywhere, but towns have a lot of authority here -- I've seen NH referred to as a confederation of 217 Sugarbush Republics. The only real inaccuracy is that they are Sugarbush Democracies in the literal Greek sense.

Ka said...

My reaction to, e.g., Farage, is that this crisis makes strange bedfellows. I don't know what I would do if I were a voter and the only party that calls for making the banks take their medicine were otherwise mean and nasty.

YesMaybe said...

Ash & El G:

Thanks, that's more along the lines I was thinking.


Unfortunately, that's just confused me further. I understand that when markets have big moves they tend to then recoil a bit like a rubber band. But that's not an adequate way to describe spanish yields falling by 1% or belgium's by 1.2% (from a few days earlier, when all the bonds had been surging, not merely one or two like mice). Your metaphor is going over my head. Are you saying the big players in the bond market are bidding it up in the expectation that others will jump in because of the central bank move? If so, that's along the line of what El G was saying, that the markets are controlled by TPTB for their own profits. Well, anyway, I was just trying to articulate my confusion at your reply. Thanks at any rate.

Ilargi said...

New post up.

The Debt Walkers Strike Back


el gallinazo said...

For those of you who enjoy snappy paced economic videos, I must recommend yesterday's (half hour) Capitol Account as a must see, interviewing Reggie Middleton. For the guys in the group, even the geezers, try not to be too distracted by the under the glass table shots of Lauren Lyster's shapely legs or her black nail polish. For the women, unfortunately Reggie is in a dress shirt and tie (and no spear), though his famous photo does appear for a moment :-)

BTW, Lauren's financial word defined for the day is "vampire squid."

Re the question of democracy and the Eurozone breakup with Ash, Frank, and FB.

I see no real difference between Ash and Frank's arguments. As you slide down the pyramid from an increasingly hard fascist empire, to states, to counties, and particularly to small towns, you see an increase in participatory democracy. That is the reason why I would wish to see increasing governmental power reside in smaller and smaller demographics. Which is easier to influence or overthrow, an emperor or Boss Hogg? Frank, while I am a great enthusiast of the town hall meeting, is the Fed's future QE policy or an upcoming trillion dollar bail out for the vampire squid on the voting agenda?

If someone had told me 10 years ago how far I would come toward a libertarian position (not the co-opted Tea Party Koch Bros fascism), I would have laughed in their face.

I lived on a small Caribbean island for 13 years where I was an active snorkeler and scuba diver. There was nothing that I enjoyed more, other than snagging a tasty lobster for dinner, than being immersed in a school of small squid. They are amazingly beautiful and graceful. Their iridescent colors shift from moment to moment, and they are highly intelligent. After all, the famous German Paul the Octopus, a close cousin, got 8 World Cup matches right with no errors. He should have been a hedge fund manager, but they only live for 2-3 years. I was in Argentina during the World Cup, and when someone had trouble with my name, I would say (como Pulpo Paul - like Paul the Octopus) and everybody would nod. He was a real celebrity. Thus I do have mixed feelings about referring to something really disgusting, such as Goldman Sachs, as a squid.

Supergravity said...

What a piece of work is Goldman! how evil in scheming! how infinite in tentacles! in form and moving how expressly abominable! in action how like a vampire! in apprehension how like a sociosquid! the misery of the markets, the paragon of parasites! And yet to me what is this quintessence of crime? Goldman defrauds not me- no, nor JPMorgue neither, though by your smiling you seem to say so.