The Agenda For Emergency Economic Strategy Discussions This Weekend

By Peter Boone and Simon Johnson

Europe needs a new recovery plan, bigger and broader than anything put together so far.  This weekend is the perfect time to put such a plan together.  But be wary of committing official resources too early in this market downdraft – smart policymakers will calmly let the markets fall further, in order to benefit from the rebound potential.

In the last few days, bond markets have decided that the deflationary adjustments – cutting wages and prices — needed in large parts of the eurozone are not politically feasible.  The deflationary spiral that will come with fiscal cuts causes political turmoil and reduces revenues – that in turn makes it ever harder to service debt; see Greece this week.  Eurozone countries running large budget deficits with substantial outstanding public debt are finding they are cut off from credit markets as a result.  This is a solvency issue, not a liquidity issue.

But do not rush into this gap.  If the European Central Bank (ECB) were to start buying Spanish debt today, for example, they would find an abundance of sellers because the bonds are fundamentally overvalued. 

There is a good rule for foreign exchange intervention:  you intervene to buy a currency at a time when you think you can really shift events – i.e., when the exchange rate has fallen more than really makes sense and shorting the currency has become overly fashionable.  In that way you cause traders with short positions to lose a considerable amount of money, and you draw in real buyers who want to own the assets because they are inexpensive and can now see an end to the declines.

We are not yet at that point in the bond markets for weaker eurozone countries or in the foreign exchange market for euro. 

Start with bonds:  Greece clearly must end up restructuring its debt.  The IMF program makes that obvious – how can Greece make a total of 19% of GDP in cuts, only to end with 149% of GDP in debt, and a perpetual bill to pay German, French, and other foreign holders roughly 10% of income each year just to cover interest? 

This is a political disaster for all concerned and should be cleaned up now rather than left to ferment. The markets, with their high interest rates on Greek debt, show they believe this is the outcome.   The market prices in about a 29% chance that Greece’s default within one year, and 35% over two years (assuming a 40% recovery rate on Greek bonds after default and restructuring). 

Portugal should restructure preemptively – they have a large budget deficit and current account deficit, and will have similar problems cutting the budget deficit.  When the government takes fiscal austerity measures, unemployment will rise further, the economy will slow, so revenues will fall, and that will mean they make too little progress bringing in their deficit. 

Spain is in a very difficult position.  It is unlikely they can avoid restructuring for the same reasons as Portugal and Greece, but they are starting from a position with less public debt outstanding (if the numbers are correct).  However, Spanish banks own a great deal of Portuguese debt, so if Portugal restructures it poses a major additional burden on Spain. 

Italy and Ireland are clearly in trouble also, depending on exactly how expectations for eurozone growth are revised downwards.  Given all these nations probably need to restructure their debt, or have large bailout packages that may not succeed in any case, we cannot expect bond markets to rally at this time.  “Investment grade” investors, finally waking to the problems in the market, now fear holding these bonds. 

The traditional holders of these bonds, such as AXA the French insurance group, or German Commerzbank, are telling investors exactly how much risk they have in Portgual-Ireland-Italy-Greece-and-Spain.  The true message is:  “We promise we will not buy more of the these countries’ debt”.  Without the traditional investors available, who is going to finance Spain, Ireland, Italy, and Portugal’s ongoing large budget deficits?

And this is the next problem.  This week the EU commission released its forecasts for budget deficits in 2010 and 2011.  Those were a depressing set of numbers.  They expect Europe will grow by less than 1% this year and only 1.5% in 2011.  Meanwhile, budget deficits would hardly change.  Ireland leads the pack (in a bad sense) with a 11.7% of GDP budget deficit in 2010 and 12.1% in 2011.  Greece, Portugal, Spain are all in the same range – large budget deficits and little improvement on the horizon.  These are unrealistic plans given the lack of buyers for their bonds.  Careful study of the details will only exacerbate concerns about fiscal solvency.

What should economic policymakers – in Europe, the US, and elsewhere – do about all this, for example as they convene in emergency meetings this weekend? 

First, the core problem is that the euro zone as currently designed is a failure.  It has proven wrong to blend so many disparate nations into one currency, and then manage the currency according to relatively hawkish German preferences. 

This is an unfortunate loss of face for the eurozone policy elite, but they need to get over this and move on.

The euro zone in its current form needs to be wound down, most likely being reduced to a core of countries that are sufficiently similar – and without the presumption that others will soon be admitted.  The weaker countries badly need currencies reflect their national fundamentals. Germany does not need a weak currency, but Greece, Portugal, Ireland and Spain today do. 

A depreciation of the euro against the dollar and other major currencies would help.  But these nations trade more with each other more than with non-euro countries, so they need to change competitiveness relative to each other.

Even if by a miracle the worst outcomes are now averted, what will prevent problems like this from happening again if the euro zone stays in place?  The euro authorities have demonstrated repeatedly they are incapable of regulating banks well at the eurozone or EU level – it is unimaginable that the 16 eurozone countries could get together around a table and declare that any one regulator has been seriously derelict.

The planned budget reforms at the EU level will push towards more discipline, but you need an incentive structure to get that and the consensus-based decision-making does not work for that.  If this weekend only produces a reaffirmation of platitudes in this regard, next week will be very bad.  This is fiddling while cities burn.

On top of all this, shocks to economic performance that are different across nations will persist.  Sharing one currency across these very different and insufficiently convergent countries simply does not make sense.

Second, there needs to be an orderly plan for debt restructuring across the euro zone.  This needs to be done quickly (this weekend works, but realistically it will take several weeks), while the exit to a new currency could take longer.  Since most euro zone nations bonds are issued under domestic law, such restructurings should be able to proceed quickly (in emerging markets, most of the bonds are often under US or UK law, which generally makes restructuring much harder).

But do not think that Greece can restructure its debts without having broader repercussions.  All the weaker eurozone countries must proceed together on this front or there will be chaos.

Third, the G20 needs to assist in the euro restructuring project.  This body can authorize the International Monetary Fund to help each affected nation declare a standstill on debt, and then draw up a plan to restructure debt.  The IMF should play a key implementation role in helping to decide which nations should restructure their debts and then support this process – not because it is particularly good or suited to this task, but simply because no one else is available. 

During the next few years each troubled euro nation will need liquidity support from the ECB, and they will need fiscal financing from the IMF and core nations in the EU.  Probably the G20 should commit more resources, at least as a back stop.  These programs can be drawn up quickly, and, they should include a transition to a new currency where appropriate. 

There is no real leadership in the EU, combined with complete unwillingness to admit the fundamental error of the euro zone itself.  The Germans are happy to let other nations suffer for their past mistakes, so they will do nothing until there is a more complete crisis. 

The ECB, as witnessed by Mr. Trichet’s news conference on Thursday, has decided that they will play the hawk, and so offer nothing of support to the nations in the periphery.  Meanwhile, bond markets have closed for the periphery.  This can only mean bond yields keep rising, there are runs on the banks in many nations, and then eventual economic collapse.  This, unfortunately, is the path of least resistance for all parties. 

So, someone needs to take leadership. Who can do this?  Not the IMF by itself – it is too weak and conflicted with Dominique Strauss-Kahn clinging to his position as managing director (against increasing pressure from the United States).  Indeed, Strauss-Kahn should leave the IMF so he can launch his run for the French presidency – it would be appropriately ironic if he were to win; as an architect of the eurozone, he is the perfect person to dismantle it.  A much more independent person with international stature should replace him.

President Obama needs to step in personally to help this process work smoothly.  The president can rightly claim that this is an international issue, not just a euro zone issue, since it impacts global trade and financial stability. All the world’s large banks are closely linked through debt, derivatives contracts, and other finance. 

It would be irresponsible to presume that American banks will smoothly sail through the impending financial collapse in the euro zone.  If this is left to the Europeans, as we learned this week in markets, there is a clear danger that Europe’s problems will topple the world into a new recession and a serious round of financial instability this year. 

Someone needs soon to bring clarity and restore confidence.  If not President Obama, who?

62 responses to “The Agenda For Emergency Economic Strategy Discussions This Weekend

  1. The “perfect” storm, as it has been described. Here is the opportunity (for the president) to bring confidence and calm back into the markets worldwide, the new realities being “All the world’s large banks are closely linked through debt, derivatives contracts, and other finance.”

  2. E. Barandiaran

    Simon, thanks for making clear that there are too many inept and corrupt politicians in Europe as well as a number of jokers disguised as economists that are willing to advise them about how to continue the destruction of wealth. The most interesting part of your post is that a U.S. politician is the Only Savior. I can hear the Joker laughing.

  3. Peter Mountford

    “If not President Obama, who?”

    Gordon Brown…..

  4. RESPECTFULLY, I disagree with Professor Johnson on this. If Germany and France want to stick their neck out, it’s dumb as H$LL, but fine, the French banks’ knees are shaking now, so they want to present themselves as innocent angels, fine it’s their business. But If President Obama spends one more red American penny on this (that includes indirectly with funds that haven’t already been given to the IMF) he’s a fool. A damned fool. And I don’t think President Obama is a fool…but that would be the action of a fool.

    Just ask yourself one simple question : What would any of those European countries do (or did they do in Oct-Sept 2008) that would help America when our back is up against the wall???? Answer: ZERO

  5. Time to admit the common currency was a pipe dream. Eliminate the possibility of exchange rate adjustment and this is what you get every time. The only alternative left is to make Europe one country. Let’s see the corporatists pull that one off.

  6. Germany should leave the Eurozone and return to the D-Mark

    Angela Merkel should cut a deal with China on behalf of the EU – better access to European markets for Chinese exporters in return for extra long term funding of Euro sovereigns by the Chinese

    Why should Germany do any of the above? Because Germany cannot sit idly and watch the periphery collapse. The whole idea of having a periphery in the first place was intended as an outlet for industrialized Europe’s exports. However, the Eurozone as currently constructed is unsustainable; the least worst solution would be for Germany to exit.

  7. A view from Europe: They will not give up on the common currency, Trichet retiring this year and others fought for many years, it would be easier and better to dismantle the TBTF.
    Reading your comment, apart from a telephonic round
    last evening between the G7 members, it seems clear
    , time will quickly tell ho much theater is involved,
    take a look at the ‘joint’letter drafted by the German
    Chancellor and the French President sent to the
    two-headed executive chiefs of Europe, Barroso and
    Van Rompuy, ahead of the summit:

    http://www.bundesregierung.de/nn_1272/Content/DE/Pressemitteilungen/BPA/2010/05/2010-05-06-brief-englisch.html

    Imho, our wise European politicians are hoping to
    ‘curtail’ Europe from speculation, as for the envisioned and needed urgent structural reforms, at the pace they have been going, we will be underwater much quicker than they ever imagined…

  8. Yep. It’s inevitable.

    The only question is whether the process can be effectively managed (it will be phase 2 of the Great recession, but we’re talking avoiding a world depression) and done in a fair manner for the common citizens of both the bailed-out countries and the bailers (e.g. the Germans, French and others).

    If the US example is followed (our inability to downsize and restructure the financial system despite the obvious need as you and others have so sensibly argued), it will be a depression.

    The only upside here, is that maybe this result would finally provide the impetus for the US and other G-20 leaders to make the changes to the World’s financial and trading system that we so desperately need. But of course, the major downside is the same sort of economic & nationalistic chaos that followed the last great depression and resulted in WWII.

  9. Ted, look into the details surrounding the Central Bank Liquidity Swap engineered by Bernanke and the other central bank heads around the world in the fall of 2008. It seems to have worked. The US Federal Reserve Banks took on a trillion bucks worth of these critters as an asset. The counterparties were the central banks of the world. The deposit quickly, almost immediately, travelled onto the books of the US banks as Reserve Deposits at their Federal Reserve Bank.

    It might have been a trick but it worked until the Central Bank Liquidity Swap was mostly replaced by Mortgage Backed Securities guaranteed by Fannie and Freddie.

  10. Re: @ TedK____The European Bankers were well aware of their problems as far back as mid/2007. They sat on their hands because they also were fully abreast of the horrific tradewinds coming too America’s financial markets. I believe half-heartedly (now a true cynic) that if they had simultaneously, had shown their financial hand, it would have been total calamity for the entire world. Think of this analogously as a patient needing a “Hip Replacements”,as well as a “Knee Replacements” concurrently. The Doctor can only do one operation at a time, til the patient stabalizes,and is back on his feet. Once stabalized from the Hip Operation , the Doctor proceeds to fix the Knee’s. Just imagine if the Eurozone came out of the “Bond Ghoul’s Money Closet”, and said, their will be no more pork in Europe’s diet!

  11. Re: @ George___The German’s would love this,…but their torn between two lover’s?

  12. Re; @ Joe K____You mean take up the “New World Order Mantra”?

  13. Wonderful,and timely post Simon. I have a three names that President Obama should consider as bringing onboard: #1) Mr. Ross Perot (excellent anaytical/pragmatic business mind,and patriotic); #2) Mr. Paul O’Neil (solid stewardship,and a no-nonsense guy,a true patriot); lastly, #3) Mr. Lawrence Lindsey (by far the most astute financial wizard,with exemplary integrity,and as the others a true patriot). These three are in my opinion market movers,and changers – laboring for the good of all America. I realize that Obama – where he stands now, regarding the political atmosphere would give a “Nay” down, but just maybe he can put his, “hubris,soaked narcissism” back in the closet, and think about “Change”? Thanks Simon,and please for the, “Sake of America keep up the Good Digging”

  14. Had it occurred to anyone at this website to conclude that deficit spending is simply untenable, the welfare state a complete disaster, the attempts to delay the day of reckoning completely unrealistic. It’s going to be ugly, ugly, ugly. To think the president, who thinks the p/e ration means “profits to earnings” and who has never achieved anything of significance or substance outside of a political campaign is going to be the Saviour of the World Economy is positively laughable.

    How about a nice dose of reality, anyone?

  15. Even though the US isn’t in the EU, we have to get involved What we have learned from our own banking collapse, is that this “is” a global economy w/global money markets. If the Euro is allowed to deflate to protect the “PIGS” the countries in trouble now, the trickle down/domino effect is sure to happen to all in the EU zone. We have to get involved at the top of this, to find reasonable solutions (like ones mentioned in article) or this will be a Global depression like we’ve never seen. And if the G20′s are out of money to lend/spend,just think how the poorer nations that depend on our help will suffer.

  16. Oops! That should be p/e ratio. Guess I’ll never be president, huh?

  17. Simon,

    it is painful to watch you call, on the one hand, for governments (taxpayers) to do WHATEVER IT TAKES to prop up this diseased system of global finance, and also call, on the other hand, for the government to rein in global finance, or for the financiers to politely stop screwing us all over.

    I mean, I understand that your position is coherent. But it’s completely fanciful. Continued government support of elites will only further entrench the oligarchies of the world. And anyway governments can no longer afford to support these elites; that is what the market is saying.

  18. Following Jal’s comment, an interesting read:

    ‘Secretive Group of International Bankers to form a World Government?’

    http://www.globalresearch.ca/index.php?context=va&aid=18940

    calling attention on a speech given by Mr Trichet
    on April 26 to the Council on Foreign Relations
    : ‘Global governance today’

    http://www.bis.org/review/r100428b.pdf

  19. Earle, I’m not a mantra kind of dude. What I see, based on what I’ve heard and read over the years is that our (US) financial system has become massively bloated with overpriced and unnecessary activities. Financial services was 10% of our GDP in the 1950′s but over 20% recently. But real GDP has been weaker since the 80′s than the prior decades. So who is it financial services are serving, the real economy or themselves.

    And unfortunately, most of the rest of the world’s fin systems have been catching down to us (heavily aided of course by the Washington Consensus, which unfortunately has not yet fully disappeared from the policy scene).

    So prescription? Implement Simon & James’s ideas (but haven’t read the book yet), and go back to the way we used to do things 30-40 years ago (but keep ATM’s and computers), including Glass Steagel.

    Plus prohibit regulated or tax-advantaged entities from lending to or investing in Private equity and Hedge funds. Make it a rich person’s game only. Who wins or loses, I don’t care.

  20. European Liquidity Issues

    5/07/2010 01:29:00 PM – CalculatedRisk – excerpt

    “There is a rumor circulating that the ECB is prepared to announce a €600 billion loan facility for European banks over the next few days. One key analyst has suggested that the FOMC might re-open the dollar swap lines for Europe. Update: I don’t usually post rumors during the day, but this is being widely circulated as a possibility.

    Note that the Bank of Japan moved last night, from the Financial Times: Bank of Japan pumps funds into market…

    The Libor rate has increased, but it is still at a very low level. This could be something to watch.”

    http://www.calculatedriskblog.com/

    (The Baltic Dry Index isn’t revealing much.)

  21. O’Neil is interesting. He’s getting older, but anyone who quits a job to stand on principle deserves some respect.

    Lindsey? You mean the guy who brainstormed and barnstormed Bush’s 2001-2002 tax cut fiasco, that helped trigger the current debt glut we now are laboring under? No.

  22. I have been following this blog for some time now, I fail to understand however how it can make sense to rally against the big (TBTF)banks almost constantly whilst at the same time advocating indirect subsidies via government bailouts(be it for nations or banks. It seems like Mr Johnson is under the spell of an intellectual capture 2.0. It may very well be the time to let the chips fall as they may. Of course all the large financial institutions would like us to believe, the world would end if they go under. Whilst that may still be true in the US, most European nations have passed legislation(provided that it wasnt already on the books), which insulates the “payment system” relevant functions of banks from the more speculative ones in case of bankruptcy.

  23. How does this affect Chinese diversification out of the Dollar?

  24. Perhaps there should be come consideration of a “Brady Bond” plan to try to address some of these issues in Greece, et al.
    Also, just for comparative purposes, it would be interesting to see how such problems are addressed in the CFA Franc zones of Western and Central Africa. (Where the two regional Central Banks appear to operate with some discipline apparently learned at the Bank of France.) I think there are at least nominal budgetary and debt limits for member countries (like the EU?), but there may be a history of CFA Franc member country defaults and corrective measures. (The IMF must have looked at these.)

  25. Bayard Waterbury

    Wow, Simon, you and Peter have definitely told the whole story. I say that knowing full well that the story you haven’t told is that European egos are at stake here, and well as severe variances between the cultures of the various nations, and also the European plutocracy. After all, based upon your description of outcomes and measures necessary to avoid the worst case, there will be some fairly serious winners (a few) and some really serious losers (many).
    If the US is to get involved in this debacle, we must carefully consider how to do it and what we might be creating (maybe more of the TBTF’s as nations), and at what cost we can effectively do it. After all, we are in fairly serious long term fiscal condition ourselves, and further overextension may have some fairly serious consequences in lots of ways. Unfortunately, it may come down to making politically unpopular decisions (with both the plutocrats, who don’t seem to yet grasp what their substantial profiteering is doing in the age of a vanishing middle class taxpayer, and with the populace, who will just see this as more of its tax dollars going for what will be rightly perceived as a bailout).
    I advocate doing little but serving as a rational voice, perhaps intermediator, but not further stressing our own currency and economy by offering anything other than strictly proportional financial support (proportional to other developed nations in at least the G20). We have a natural leadership role, which, although fairly tarnished now, is still probably sufficient to intermediate the issues between the various finance ministries. Having said that, and with full knowledge of human nature, economic history(ies), I certainly understand that there is but a small hope that another round of global recession (or, this time, even depression) can be avoided. Certainly there are better and worse solutions, with potential matching outcomes, but these usually are not politically acceptable enough to be able to be effectively and timely instituted.
    Based upon all of this, I am substantially cynical, even pessimistic, that a reasonable and timely resolution of the crisis is possible. We better buckle ourselves in and prepare for what I believe will be five to seven years of extreme global hardship. I hope I am very wrong.

  26. M. B. Drapier

    If the European Central Bank (ECB) were to start buying Spanish debt today, for example, they would find an abundance of sellers because the bonds are fundamentally overvalued.

    On the one hand, it is entirely against the law for the ECB to directly purchase Spanish debt. I encourage you to confirm this for yourself. On the other hand, if you include indirect buying, hasn’t the ECB already been doing this to varying extents over the past two years?

  27. “President Obama needs to step in personally to help this process work”

    I don’t think that the president needs to do that. The Greeks and Portuguese have already done the same things that he has done in America, so what can he do there? Something different than what he has done at home?

  28. Adventures in the Central Banking Trade: “Nobody knows anything.” And double that for the US stock market after Thursday adventure in Dada.

  29. I see only jealousy. He seems he would like to have DS-K’s position.

  30. ” First, the core problem is that the euro zone as currently designed is a failure. It has proven wrong to blend so many disparate nations into one currency, and then manage the currency according to relatively hawkish German preferences. ”

    “The euro zone in its current form needs to be wound down, most likely being reduced to a core of countries that are sufficiently similar – and without the presumption that others will soon be admitted. The weaker countries badly need currencies reflect their national fundamentals. Germany does not need a weak currency, but Greece, Portugal, Ireland and Spain today do.”

    Reducing the Euro to a smaller set of similar countries would probably result in an upward revaluation of the Euro against the dollar and thereby improve the competiveness of U.S. exports (less competition). I can see why the U.S. want to push that idea. Perhaps we should brand the Germans as currency manipulators, like the Chinese?

    “The Germans are happy to let other nations suffer for their past mistakes, so they will do nothing until there is a more complete crisis. “ Yes let’s blame it on the fiscally responsible Germans

    “Someone needs soon to bring clarity and restore confidence.  If not President Obama, who?”
    Right, the U.S. Has done such a great job with it’s finances, that we should export this model.

  31. The previous entry is by Fred.

  32. What American model? The system is based on fraud and IS fraudulent. Lack of confidence in the financial system is at the root of the current crisis. Soon the fiat money system will collapse, and people are preparing for the worst.

  33. Here’s the supporting link for the fiat money system post:

    http://www.globalresearch.ca/index.php?context=va&aid=18944

  34. “All the weaker eurozone countries must proceed together on this front or there will be chaos.”

    Question: So you think that the countries who won the moral hazard’s race to the bottom are now ready to exercise fiscal responsibility?

    “The Germans are happy to let other nations suffer for their past mistakes, so they will do nothing until there is a more complete crisis.”

    Question: Why would the Germans do anything but buy Greek bonds from their banks or let them treat Greek bonds with a stabilization floor for capital purposes.

    Nuclear question: How do you incentivize fiscal discipline with bailouts?

    Suggestion: let Trichet play Tito

    Stephen A Boyko

    Author of “We’re All Screwed: How Toxic Regulation Will Crush the Free Market System” and a series of articles on capital market governance.

    http://w-apublishing.com/Shop/BookDetail.aspx?ID=D6575146-0B97-40A1-BFF7-1CD340424361

  35. @ charles: From your post I think you may agree with me that Trichet and the leadership of France and Germany, among others, may not want to but they may have to give up the Euro as it has existed for the last decade.

    The only hope I have, and it is very small with European politics being what it is, is that despite the rhethorics, solutions are being discussed that are adequate to be put in place very quickly, including a (partial) breakup of the Eurozone.

    Without at least a minimum of planning a breakup will be a disaster. I am all for releasing soothing statements, but only if the hard work is being done in parallel, even if behind tightly closed doors.

  36. @ Ted K: While I disagree with you regarding the trans-atlantic cooperation which I think still works very well for the benefit of both sides (and I hope it will continue that way because otherwise the mess will be even bigger), I do agree that President Obama would be very foolish to try to take the lead at the current state of discussion. I am sure he realizes this, he won’t need another PR disaster after the Copenhagen failure, and as your post implies there is very little to be gained for him domestically.

    The time may come however for the US to forcefully assert leadership in the face of the European crisis, but it is important to keep an ancient Greek concept in mind here: Kairos, loosely to be translated as the art of picking the right moment (http://en.wikipedia.org/wiki/Kairos)

  37. “What would any of those European countries do (or did they do in Oct-Sept 2008) that would help America when our back is up against the wall???? Answer: ZERO”

    Sorry, Europe (at least the ECB thus Eurozone) allowed you and the UK to de facto devalue your currency, and they swallowed a big share of the CDO losses, while supporting their banks so that Wallstreet’s counterparties in Europe continued to honor their obligations.

    When that equals ZERO, you should really learn how to count.

  38. The contagion has already happened. In Fact, it has been going on since 1946 when most of Europe made a turn to the left and embraced the socialist system. They have created a “Slave Class” dependent on welfare, and when the welfare state can not provide, the slaves will revolt. It is the US that is now just making the turn to the welfare state in order to eventually become a Greece.
    The only piece that puts its finger on the real danger is at “Lessons From Greece: It Got A Slave Class That America Wants to Create” at http://www.robbingamerica.com
    The contagion is not financial, it is the creation of socialism

  39. El-Erian on a critical weekend for Europe and the economy

    May 08 17:32 – Financial Times – excerpts

    “This is a critical weekend for Europe (and the global economy), with governments shifting to a “whatever it takes” mode as they scramble to regain control of the situation, Pimco’s chief executive Mohamed El-Erian writes for FT Alphaville.

    Yesterday night’s important news out of Europe points to renewed efforts to rescue Greece and safeguard the Euro. The news will undoubtedly be accompanied by additional announcements out of Brussels and Berlin, as well as Washington DC. In the process, the stakes are getting even bigger…for Greece, Europe and the global economy.

    Even with this critical uncertainty, we should not under-estimate the historical relevance of what is happening this weekend; and the stakes for Europe and the global economy are huge.

    If this rescue attempt does not work, there will be a material acceleration in the process of change to Europe’s economic, financial, and institutional landscape; and the reality of the debt explosion in industrial economies will become even more of a destabilizing factor for the world economy.”

    http://tinyurl.com/2axewrr

    Mohamed El-Erian is CEO and co-CIO of PIMCO.

  40. Portugal is not looking good.

    May 7, 2010, 6:50 PM – NY Times – Paul Krugman

    http://online.wsj.com/mdc/public/page/2_3022-govtbonds.html?mod=topnav_2_3000

  41. Merkel calls on EU to cut deficits with ‘great speed’

    Saturday, May. 08, 2010 12:21PM EDT

    “The leaders of the European Union are crafting a second plan this weekend that will see all members pledge to cut deficits with “great speed” in an effort to stop the spread of the Greek debt crisis.

    …… Ms. Merkel was in Brussels with her E.U. counterparts where they assigned their respective finance ministers to craft a financial plan that is in addition to the $140-billion (U.S.) rescue package already pledged jointly with the International Monetary Fund.

    The drop in markets throughout the past week fuelled speculation that the package would not be enough to stop Europe’s debt troubles from ultimately triggering a double dip global recession.

    The IMF, which meets Sunday to approve its share of the bailout, had stated Friday that the plan is sufficient and that the nervous reaction from stock markets is overdone…”

    http://www.theglobeandmail.com/report-on-business/merkel-calls-on-eu-to-cut-deficits-with-great-speed/article1561595/

  42. SpanishMikeLondon

    Maybe it’s time to change the rules of our financial games and agree a new social contract for our bankrupt economies. And since a lot of people have benefited from this system and have become multi-millionaires, I think it is about time a lot of their wealth is re-distributed to plug our financial black holes.
    I am not advocating for communism outright. I still believe that a fairer, better incentivised, better governed (political and justice reforms), and regulated capitalist system is the least bad for our western democracies, but I can’t understand why taxpayers and dependents are going to have to suffer so much for many years to come, while a privileged few will continue to enjoy their billions.
    How come no billionaire has volunteered yet to plug the budget deficits in health care, pensions, education …?
    Let’s promote it and campaign for it. I am not suggesting taking property or assets by force, nor nationalising private companies.
    I am just suggesting we encourage the wealthiest to give back to society in these times of need, because it has been all of us who have made it possible for them to amass billions.
    I am not advocating no financial reform, no budget cuts, or no economic reforms, but just asking for help for all from those that have a lot.
    Let’s do it!

  43. Shiller: “The Real Worry Is That We’ll Grow Slowly Until We Run Into The Next Recession.”

    06 may 2010
    
    “Yale Professor Robert J. Shiller spoke to the National Economists Club at lunch today in Washington, D.C. He expressed concern of slow growth until the next recession, his definition of a double-dip.”

    http://tinyurl.com/2flyuay

  44. Erich Riesenberg

    What is being proposed is the bankers be honest, and not try to prop up the euro with comments known by everyone to be false.

    That is not going to happen.

    Now what?

  45. Get Greece out A.S.A.P. with Spain and Italy.
    Make it a Pigs snake. Fluctuating within sertain bounderies peged to the uro. Surrunding Nations help. The uro frezone has been berthed into creation. Wolla.

    Will take questions on this brilliant Idea wia email.. in Iceland. villi@this.is

    have fun and come to Iceland where things are ewen more interesting than falling markets and currency’s

  46. Despite current woes, the euro has been a success; net job creation in 1999-2008 outpaced the US and three times more than Europe’s record during the same number of years before the euro launch in Jan 1999; intra-region trade has expanded and the record on inflation has been better than Germany’s pre the euro launch.

    Europe has steadily expanded its share of the world’s 100 biggest multinationals compiled annually by the UN Conference on Trade and Development, from 57 in 1991 to 61 last year, while the US number has dropped from 26 to 19.

    Greece and Portugal account for less than 5% of the Eurozone’s GDP. Even when Ireland and Spain are added in, the so-called peripheral countries or PIGS account for less than one-fifth of the region’s GDP. 

    Of the 16 members of the currency union, these 4 countries were woefully misgoverned during the international credit boom. In 5 years to 2009, 100,000 civil servants were added to the public payroll in Greece and the prime minister has said his country is endemically corrupt with just 5,000 declaring annual incomes of over $130,000 in an economy of 11m.

    Far away hills are green and in the US, it was not uncommon for Ireland’s Celtic Tiger to have been held up as a model of development; it’s temporary prosperity was built on quicksand; while the Irish became the second biggest investors in commercial property across Europe from the windfalls of a housing bubble at home and employment grew by 25% in the decade to 2008, jobs in the export sector stagnated. Today, 90% of Ireland’s tradable goods and services exports are made by foreign-owned firms, mainly American.

    In 2006, Spain with a population of 40m, was building as many new housing units as the US.

    In the early years of the last decade, Germany went through painful labour and welfare reforms and was called the “sick man of Europe.” In March 2010, it was the only Eurozone economy to have added jobs compared with March 2009.

    Yes, restructuring of debt may be inevitable, but to do it now would not serve the interests of those countries in dire need of reform.

    I admire Pres Obama but getting involved in this issue would be counterproductive; as for DSK and his role in the IMF, Simon’s views may be coloured by some personal issues.

    As for Trichet’s press conference last Thursday, with banks and broker analysts begging for public protections, why should he have caved-in when he deemed it inappropriate.?

    The ECB has considerable firepower in its arsenal and has shown since 2007 that it can act very aggressively when necessary.

    As for the future of the Eurozone, the reversion to own currencies, high interest rates and inflation, may be a cure worst than the disease. The majority of Iceland’s exports are its own fish resources; devaluation for other countries without hard fought reform, could only be a short-term benefit if at all.

    Ireland will only become a net contributor to the EU budget in 2013 — 40 years after joining what was called the European Economic Community; Spain, Portugal and Greece have also benefited from huge cash transfers, mainly funded by Germany. In the period 1994-2006, Greece was given cash foreign aid of $60bn to support its infrastructure development. Germany is now blamed for being a huge export success to emerging markets.

    Yes the rules for entry to the EMU were too easy and fiscal surveillance was weak, nevertheless the euro has been a success.

    The Euro is a success; Free lunch yet to be invented:

    http://www.finfacts.ie/irishfinancenews/article_1019628.shtml

  47. good blog and interesting posts will come back, I have your RSS

    this is my site: http://schufaeintragloschen.com

  48. EU vows to defend euro against market “wolves”

    Sun May 9, 2010 9:56am EDT

    * EU ministers promise to do all possible to defend euro

    * EU set to approve stabilisation mechanism for euro zone

    * Existing aid plan for non-euro states to apply to eurozone

    * EU exec to propose 60 bln euro top-up of existing plan

    BRUSSELS, May 9 (Reuters) – “European Union finance ministers promised to do everything to defend the euro from the “wolfpack” of the financial markets as they began talks on Sunday on emergency measures to stop Greece’s debt crisis spreading.

    “We now see … wolfpack behaviours, and if we will not stop these packs, even if it is self-inflicted weakness, they will tear the weaker countries apart….

    The European Commission will present the ministers with a proposal on a stabilisation mechanism intended to provide a multi-billion euro safety net for other euro zone countries with bloated public finances such as Portugal, Spain or Ireland…

    The maximum available now is 50 billion euros.

    EU sources said the 60 billion top-up would be used as base capital, or collateral, for borrowing on the markets, which would allow the Commission to raise up to 10 times that amount.”

    http://www.reuters.com/article/idUSLDE6480C420100509?type=marketsNews

  49. Felix Salmon’s Message To Investors: Get Out Of The Stock Market Right Now (VIDEO)

    05- 8-10 08:57 PM

    “Financial blogger Felix Salmon has a message for investors: unless you’re a large institution, get out of the stock market right now.

    The lesson from the nearly instant crash and rebound of the Dow on Friday is that “stocks are dangerous things to own.” Salmon cautions that we are “entering an era of massive volatility. You, as an individual investor, just simply don’t have the risk appetite to be able to deal with that kind of volatility.”

    It’s best to get out now because you can sell “without taking a big loss because [stocks have] come back a lot from their lows.”

    http://tinyurl.com/29554wn

  50. Europe Update

    5/09/2010 12:11:00 PM – by CalculatedRisk

    Update2: Report: “Meeting delayed. German Finance Minister Wolfgang Schäuble has been taken to a hospital with an “adverse reaction to medication”.

    * You can’t make this stuff up.

  51. Dodd: SEC Should Examine High-Speed Trading Behind Stock Plunge

    05/ 9/10 12:32 PM | excerpt

    WASHINGTON — “Federal regulators have got to address the “casino environment” on Wall Street where computerized high-frequency trading can trigger market-shaking turmoil, Senate Banking Committee Chairman Chris Dodd said Sunday.

    Dodd, D-Conn., pointed to the new phenomena of computers buying and selling stock in nanoseconds as a possible cause of last Thursday’s meltdown. The market fell nearly 1,000 points within minutes before rebounding.

    The top Republican on the committee, Sen. Richard Shelby of Alabama, joined Dodd on CBS’ “Face the Nation” to agree that something must be done about a situation in which technology has gotten ahead of the regulators. “You’ve got a high risk in the market place that something could go wrong and once it really goes wrong it could be catastrophic,” Shelby said.

    Dodd said his committee will hold hearings on last Thursday’s events. But he said that for now the priority is for the Securities and Exchange Commission and the Commodities Futures Trading Commission to come up quickly with answers for dealing with high-frequency trading marked by a lack of marketwide circuit breakers to prevent the market from spiraling out of control.”

    http://www.huffingtonpost.com/2010/05/09/dodd-sec-should-examine-h_n_569314.htm

  52. May. 09, 2010 2:40PM EST

    “The EU’s new efforts to prevent the debt crisis from deepening is, in effect, admission that the Greek bailout package was too little, too late. While the package will allow Greece to roll over its bonds and fund its deficit away from the public markets for about two years, it did not convince investors, economists and strategists that it was sufficient to prevent an eventual default or debt restructuring.

    In response to the skepticism, Portuguese and Greek bonds rose so high the countries were virtually unable to fund themselves. On Friday, the yield on two-year Portuguese notes reached 8.78 per cent. That’s about eight percentage points above the yields on comparable German bonds, the debt considered the euro zone’s safest.

    Portugal and Spain’s woes have been pushing down the euro at alarming speed. On Friday, the currency hit a 14-month low of US$1.250 after sliding about 5 per cent over the week.”

    http://www.theglobeandmail.com/report-on-business/euro-zone-vows-to-fend-off-wolf-pack-traders-at-all-costs/article1562226/

  53. Book sales down huh?? Be careful. Desperation doesn’t inspire confidence in potential readers. Unless you’re going for an unknown sage kind of vibe. In which case you’re doing good on the first part.

  54. They are going to whup the speculators at their own game. Some secret weapon will go into effect tomorrow to ensure that speculators get burned. The EU is going to exert political control over the wild wild market. Place your bets.

    http://globaleconomicanalysis.blogspot.com/2010/05/french-president-nicolas-sarkozy-vows.html

    http://beforeitsnews.com/news/41/448/8220;We_Will_Defend_the_Euro,_Whatever_it_Takes_8221;_Says_EC_President;_Neither_Speculators_nor_Goldman_Sachs_to_Blame;_What_is_the_EU_Really_Defending.html

  55. This is dark matter. Might this secret weapon have a chilling effect on free speech? Isn’t the attempt at political control of the market state sanctioned rigging? Caution: slippery slope.

  56. EU assembling ‘big bang’ response to euro crisis

    Monday, May 10, 2010 – Irish Times

    “AFTER MONTHS of indecision, moves to set up a rescue mechanism for all euro countries are a huge leap into the dark for the European authorities. The development, which marks a capitulation to market forces, suggests EU leaders perceive a serious threat to the single currency in the turmoil unleashed by Greece’s financial crisis.

    As a fully-fledged sovereign debt crisis in the euro zone draws closer, this is Europe’s “big bang” response. The rescue mechanism as framed would essentially enable distressed euro countries to draw special loans from the European Commission. In a separate but related development, the purchase of government debt by the European Central Bank (ECB) is also in prospect…

    With that comes the threat of rising inflation and the prospect of higher interest rates, something that carries its own risks in a volatile economic scenario.”

    http://www.irishtimes.com/newspaper/opinion/2010/0510/1224270049596.html

  57. The article is a cronicle of finance
    and economic strategy better maffia
    stratetic round the world.
    We have the ilo,wto, iwf and world-
    bank. They can’t immidiatly work
    for a better life for all human being.against foodcrisis, workcrisis and
    naturalproduction for a better word-
    clima.
    gerd brunner, vienna
    ecuse my bad english.
    Gz

  58. baselinescenario.com’s done it once again! Incredible article.

  59. Really interesting read. Honestly..

  60. You’ve done it once again! Amazing read!