Eurozone: The Kitchen Sink Goes In – Now It’s All About Solvency

By Peter Boone and Simon Johnson

The eurozone self-rescue plan announced last night has three main elements:

  1. 750bn euros in a fiscal support program, with 1/3 coming from the IMF (although this was apparently news to the IMF).
  2. The European Central Bank promises to buy bonds in dysfunctional markets.
  3. Swap lines with the Federal Reserve, to provide dollars.

At first pass this package might seem to be in with what we recommended a week ago and again on Thursday.

But the European central banks have come in very early – with government bond prices still high – and there is no sign yet of credible fiscal adjustment for Spain and Portugal.  The eurozone apparently did not even discuss the situation in Ireland, which seems increasingly troubling.

This is a whole new level of global moral hazard – the result of an alliance of convenience between troubled governments in the south of Europe and the north European banks (and implicitly, north American banks) who enabled their debt habit.  The Europeans promise to unveil a mechanism this week that will “prevent abuse” by borrowing countries, but it is hard to see how this would really work in Europe today.

Overall, this is our assessment:

The underlying problem in the euro zone is that Portugal, Ireland, Italy, Greece, and Spain are locked into a currency which means they are uncompetitive in trade terms while they are also running large budget deficits.  To get out of this they need large wage and price cuts to restore competitiveness, and they need to make fiscal cuts to get budget balances back at sustainable levels. 

Markets decided these adjustments were going to be difficult, so spreads on those countries’ debts widened (i.e., interest rates relative to German government bonds).  As the rates go up, this causes local asset prices to fall, concerns over bank balance sheets increase, etc.  This combination was causing an incipient run on banks.  Any country with its own currency could reasonably devalue in such a situation, but this is not an option within the euro bloc.

All these problems were exacerbated by the appearance that the Germans were going to be unwilling to bail out troubled nations – and would eventually chose to bail out their own banks instead.  It is this risk which is now resolved.  The Germans have shown willingness to provide very large amounts of money (the 750bn euro support is probably just enough for Spain and Portugal if they got packages in line with that received by Greece) and they would obviously provide more if needed (e.g., for Italy).  (Here again is the ready reckoning chart for interlinkages between indebted Europeans.)

However, the solvency issue remains.  The Spanish and Portuguese have said they will now cut their budgets further, but already their forecasts were optimistic, and neither has seemed willing to admit they have severe budget problems, so we will need to watch how they implement in the near term.  Greece remains simply far too indebted

As Willem Buiter (formerly Bank of England, now at Citigroup) remarked last week, you have the greatest incentive to default when you are running a balanced primary budget (i.e., after substantial budget cuts) and still have a large government debt outstanding.   His point is that the incentive structure of these programs means they will postpone a decision to default which would otherwise be rational now. 

There is no discussion of Ireland, which has one of the highest deficits of all the EU nations.  This is a vulnerability to the European Stabilization Mechanism – more countries will flock to its embrace.

There is a more subtle issue with the seniority of debt.  The EU packages to these countries are all senior to existing creditors.  These creditors know therefore that countries which need packages will get senior funds from the IMF and EU, and, therefore recovery values for bonds will be less. 

This is perfectly fair since packages come when no one else will lend, but it explains why packages do not reduce secondary market yields as low as people would expect.  The yield on Greek bonds needs to stay high given the risk that the bonds could have 70% writedowns if the likely default does happen.  The same is true, to a lesser extent, for Portugal, Ireland and Spain.  All of these might eventually need to access the 750bn euros and might eventually default.  Bond market yields need to stay high.

The decision by the European Central Bank (ECB) to intervene in the markets is very important.  That will help keep markets liquid – but the ECB will probably not buy a lot of debt.

Will the ECB buy a great deal of Greek debt?  We doubt it since this constitutes a clear, large credit risk.  But it will be interesting to watch.  If the ECB is not large in the market they will not impact spreads beyond reducing the liquidity risk premium.  Today most of these nations have substantial default risk over 5-10 years, so spreads need to stay high – although they will come in from current levels.

The European Central Bank intervention and this package raise enormous moral hazard issues.  The ECB’s management was forced into this kicking and screaming.  It was only when they realized that the whole euro zone financial system was at risk of collapse that they threw the kitchen sink at the problem.  This can now go two ways:  either they tighten fiscal policy across the eurozone, and introduce much more rigorous and enforced rules on deficits and profligate credit through banks, or, they let a system persist which is another “doomsday machine” that will live again to grow, and could one day topple them.

To ultimately get out of this mess, the euro zone needs to grow fast enough to allow nations to grow out of debt.  The global backdrop here is very positive in the short term.  The jobs numbers in the US last week and strong numbers out of core northern Europe suggest the world can grow.  No doubt the ECB and the Fed will use the eurozone scare to justify longer loose policies.  

It could be that in two years time Europe’s deficits are much lower, the ECB has hardly bought any bonds, and they have successfully managed a Greek debt restructuring while Spain is out of trouble, and Portugal and Ireland are scraping by in limbo but now isolated problems.  With the US likely to still be running near 10% GDP budget deficits – who will seem more risky then?  This immediate confidence in the US dollar that has come out of this European crisis could very quickly evaporate.

Alternatively, the underlying fiscal problems in Europe could fester – and the “rules” designed to limit moral hazard may turn out to be a complete paper tiger.  In that case, the Europeans again have to make a fateful decision: Do they try to inflate out of the debt burdens of their weakest member countries; or do they instead try to manage selective default, keeping in mind that most Greek debt at that stage will be held by other eurozone governments.

147 responses to “Eurozone: The Kitchen Sink Goes In – Now It’s All About Solvency

  1. By now I can only laugh at how, the more this insane combination of Tower of Babel and Rube Goldberg contraption becomes unsustainable at its existing level of complexity, the more forcibly reality is pulling it in the direction of simplification with the very real force of gravity, the more the answer, even from the normally more sane and rational commentators, is to add more layers of complexity.

    Rube Goldberg’s running itself to pieces? Double it!

    The system’s already so overheated and turbulent the chaotic forces are smashing it to pieces? Turn up the heat! Pump more energy into the system!

    You’re already busted and the dealer’s showing 21? Double down!

    Most of all, no matter how deep the hole is you’re in, the answer is always to keep digging. Especially if you can use the shovel not to dig, but just to club a slave who must dig with his own bloodied hands.

    By now the Bailout combines an extreme level of existentialist absurdity with an extreme level of world-historical crime. It’s definitely the worst financial crime in history, with no end in sight to the looting. Nothing short of revolution or total collapse will finally bring an end to the robbery.

    Meanwhile, is it also the most clinically insane project in history? Especially from the point of view of the non-rich, i.e. all but a handful in even the “richest” countries, who must after all tolerate this crime or else it couldn’t take place, it’s hard to come up with a rival nominee.

    I’m sorry to goof on Simon, but everything even the better commentators write on this, where they’re so straight and serious about it, reads like something from Lewis Carroll. (I especially like the parts about how “growth” will redeem this. I picture a bizarre musical soundtrack playing, and outlandish cartoon characters talking, while I read stuff like that.)

  2. Simon,

    Most of the 750 billion will go to retiring upcoming maturing bonds, many of which are due to private banks. So, in postponing the day of reckoning, the debt and the attendant default risk will be “seamlessly” rolled over into taxpayers’ hands. The seniority of the new debt to the existing debt is therefore a smokescreen for the fact that politicians have once again bailed out private banks at the expense of taxpayers.

  3. The measures announced will need further supporting political infrastructure and appear to beyond the Treaty of Lisbon.

    Question is whether another round of greater federal powers for Brussels will wash with an increasingly suspicious public – which now includes the previously pro-German electors.

  4. We will take another day of sunshine over storms anyday. Buying more time is good but obviously just postpones the day of reckoning when all the socialized debt will explode and rollover us.

  5. readerOfTeaLeaves

    So much for that whole ‘markets will always reach perfect equilibrium because homo economus is always and everywhere a rational actor’, eh?

  6. The main effect of this is ensuring that the whole Euro-area goes down together. There will not be a surviving Germany kept afloat by their surplus. There is an interesting article in the March/April issue of Foreign Affairs, “Complexity and Collaps” by Niall Ferguson, where he makes a convincing argument that high complexity makes systems collaps instead of just fade away. The steepness of the eventual fall is correlated to the complexity of the falling object.

  7. Kevin M. Capuder

    It seems the EU and the ECB have learned from wall street. A special purpose vehicle will be set up for the loan facility. Presumably to keep this off-budget for the EU. The ECB will only buy from the secondary market in order not to explicitly violate both its Charter and the Lisbon Treaty. Solving debt issues with more debt? Until the solvency issues are addressed, the solution is simply modern finance that sounds good at first, but ……………………..

  8. Kevin M. Capuder

    For the ECB, the relevant articles are 122 & 123 from the Lisbon Treaty and Article 21 of the founding charter.

  9. Erich Riesenberg

    The ECB should issue food stamps rather than debt guarantees.

  10. Simon,

    Sorry, I do not understand your optimism here; nothing has been done to only follow the path of installing congruent fiscal and economic rules; hence, the EURO will suffer as before and can not survive no matter how many billion or trillions one throws after what are trillions and trillions of debts already. Do not forget, the package is a debt package, far from being fresh money.

    Markets reacting positive is one thing; a mortal Ponzi scheme just another.

    Christian

  11. Simon van Norden

    Two quick comments:

    “There is no discussion of Ireland, which has one of the highest deficits of all the EU nations.”
    Unlike the other PIIGS, British banks have a bigger stake in Ireland than those of any other lending nation. It is hard to discuss Ireland when Britian has no government and therefore refuses to commit to anything. This situation is likely to resolve itself quickly, however.

    “Alternatively, the underlying fiscal problems in Europe could fester – and the “rules” designed to limit moral hazard may turn out to be a complete paper tiger.” I’m not aware of any such rules that have not already turned out to be mere paper tigers. What specific rules were you thinking of?

  12. theotherguydidit

    The only thing left to do this week is bomb Iran.

  13. John Smith

    All this massive, transcontinental restructuring of debt into the public sector is all fine and good, as long as the taxes that are assessed to pay off the debt are extracted predominantly from the rich…as they are the primary beneficiaries of all this decades-long nonsensical over-leveraging.

    In other words, by placing massive taxes on the rich, governments in effect will not be bailing out the bankers and their co-beneficiaries, only spreading out the deleveraging onus among their beneficiaries and co-conspirators in fiscal mismanagement.

    Specifically, and just for starters, bank bonuses and profits should automatically be taxed by at least 80% until all the debt the banks at the expense of taxpayers in their respective countries is completely retired.

    And once again, just as a pure example of commitment to fiscal justice, we must demand the clawback of the $13 billion in AIG counterparty payout Goldman Sachs stole from the taxpayer and distributed amongst themselves as “profit”.

  14. yours is one of the very few insights into this indescribable fraud and insanity that the mainstream may, if lucky, discover in 20+ years

  15. Russ you took the words right out of my mouth….”You’re already busted and the dealer’s showing 21? Double down!”

    The only thing missing now is WWIII, so I’ll give that about a 50/50 chance in about two years, just in time for the Myan meltdown. Debt wonderful debt as far as the eye can see and the American tax payer gets screwed again via the back door to the IMF. I think it’s 17% we contribute but I’m sure US taxpayers won’t mind.

  16. “But the European central banks have come in very early – with government bond prices still high…”

    “This is a whole new level of global moral hazard – the result of an alliance of convenience between troubled governments in the south of Europe and the north European banks (and implicitly, north American banks) who enabled their debt habit.”

    Seems to me what we have with this “rescue plan” (aka bailout), is more of the same thing we saw in fall 2008:

    TBTF Banks that helped create the mess get NO HAIRCUT, while taxpayers get left forking over trillions…

    Yes, indeed, moral hazard is alive and well, and growing strong…

    Someday though, the taxpayers will run out of funds for these “rescues” I suspect.

  17. That’s when WW III will begin. Give it a couple of years if not sooner. Worked for Roosevelt and they will probably try it again.

  18. The money will come from wage earners at some point and will go to bond-holders. Why are the bond holders not taking a reduction? Maybe usury laws would be helpful in this crisis.

  19. The EU bailout: Too much, too late

    MAY 10, 2010 02:07 EDT – Reuters – Felix Salmon – excerpt

    “Meanwhile, Peter Boone and Simon Johnson have some very scary numbers about Greece in particular: it will have to cut spending by a whopping 11% of GDP; its debt-to-GDP ratio will rise to at least 149% of GDP in a best-case scenario; and realistically Greek GDP could fall by 12% between now and 2011. Now that’s a recession.

    To recast my matrimonial analogy, the parents have promised to bail their wayward children out of jail. And they think that the children will respond overnight with gratitude and with a fundamental change of behavior. Does that ever actually happen?”

    http://tinyurl.com/33jv8d3

  20. Optimism? I don’t think so. The tone, if anything, is matter-of-fact, acknowledging that at least the crisis is being seriously addressed.

  21. Huge banks with even huger derivatives’ hedging needs may soon beg their own correction: solvency shields.

    I suspect events like last week’s panic in equity markets will become far more frequent so long as derivative use, and thus necessity of hedging thereof, continues to grow.

    Warren Buffett, before a Galileo-like recantation and rebaptism in the church of TBTF finance, was a pioneer in recognizing derivatives as financial weapons of mass destruction. Like the nuclear weapons of WWII, modern WMD are examples of tremendous leverage- tiny amounts of fissile material or premium, respectively, explode with enormous yield, wrecking horrific damage.

    Unlike atomic weapons, whose direct effects are limited to a blast and radiation radius, modern WMD, like CDS use high speed connectivity and computer driven hedging as transmission mechanisms. The “Fat Finger” ignites a “critical price deviation” forcing hedgers of naked CDS to (try to) sell what might be many multiples of available securities.

    Thursday’s market action might in the future be seen as the Trinity test of the financial Manhattan Project, broadcast live to anyone in the world with an internet connection.

    Fortunately, just as atomic weapons require radioactive cores, so too do our CDS WMD. In the latter case, the underlying core (financial entity) must be highly leveraged. Instability, either at an atomic or financial level, is key to explosive yield. Trying to force default in an unleveraged, highly solvent financial entity would be about as fun as using carbon-12 instead of uranium-235 in an atomic bomb.

    In other words, while real world WMD deterrence might require a missile shield, financial WMD deterrence might require a solvency shield. The more solvent, and less leveraged a company becomes, the less it needs to respond to the whims of the markets. It can just go about its business.

    Highly leveraged financial companies like Lehman and Bear Stearns were prime “fissile” material- so unstable they needed daily financial stabilization. Unfortunately, there seems to me to be far more financially unstable material laying around than fissile isotopes- Wall Street finance being far more effective than, say, Iranian centrifuges.

    On the bright side, fears of “Fat Fingers” igniting naked CDS into financial WMD might someday be seen in the same light as plans for mutually assured destruction (MAD)- as signs of the need to dismantle armaments. Perhaps Homeland Security should audit the Fed, and dismantle the highly leveraged and unstable financial cores we’ve strategically placed around the nation.

    Either that or people of the future might visit New York as they now visit Hiroshima and Nagasaki- looking at a plaque commemorating the destruction caused by a “Fat Finger” instead of a “Fat Man” or a “Little Boy”.

  22. My guess is: “mainstream” will be looking at what Russ writes about squarely in the eye…within months, not years.

    Why?

    Because the masters of the universe are at the edge of the cliff. No more running room. Yeah, this latest ruse…just that, a ruse. A show. Yada yada yada markets will recover stock exchange rebounding propaganda propaganda propaganda sleight-of-hand sleight-of-hand sleight-of-hand mental gymnastics mental gymnastics mental gymnastics and all is well in the world. Except…

    …the masses are getting clued in to the shell game. And are collectively getting close, very close to saying: You’re done, guys. We want ya outta there.

    Too bad the “Controllers” didn’t – and still don’t – come clean, ‘fess up, make amends, start over.

    Alas, they’ve chosen to hold on tighter. Only…not gonna work this time around. No matter how much financial word play Simon offers.

    Not a question of “if” any longer. And my bet: The charade will come crashing down…sooner than you think.

  23. Sorry, the crisis is not seriously addressed; they act like a doctor that feeds an obese cancer patient and declare the disease healed.

  24. You mean happy days aren’t here again??

    http://marketwatch666.blogspot.com/

  25. You are not alone Russ. When I am confronted with too much insanity on one particular day, I often look up the quote underneath, read it and find some sort of relief;

    ‘How have individuals been affected by the tech­nological advances of recent years? Here is the answer to this question given by a philosopher-psychiatrist, Dr. Erich Fromm:

    Our contemporary Western society, in spite of its material, intellectual and political progress, is in­creasingly less conducive to mental health, and tends to undermine the inner security, happiness, reason and the capacity for love in the individual; it tends to turn him into an automaton who pays for his human failure with increasing mental sickness, and with despair hidden under a frantic drive for work and so-called pleasure.

    Our “increasing mental sickness” may find expres­sion in neurotic symptoms. These symptoms are con­spicuous and extremely distressing. But “let us beware,” says Dr. Fromm, “of defining mental hygiene as the prevention of symptoms. Symptoms as such are not our enemy, but our friend; where there are symp­toms there is conflict, and conflict always indicates that the forces of life which strive for integration and happiness are still fighting.” The really hopeless victims of mental illness are to be found among those who appear to be most normal. “Many of them are normal because they are so well adjusted to our mode of existence, because their human voice has been si­lenced so early in their lives, that they do not even struggle or suffer or develop symptoms as the neurotic does.” They are normal not in what may be called the absolute sense of the word; they are normal only in relation to a profoundly abnormal society. Their per­fect adjustment to that abnormal society is a measure of their mental sickness. These millions of abnormally normal people, living without fuss in a society to which, if they were fully human beings, they ought not to be adjusted, still cherish “the illusion of indi­viduality,” but in fact they have been to a great extent deindividualized. Their conformity is developing into something like uniformity. But “uniformity and free­dom are incompatible. Uniformity and mental health are incompatible too. . . . Man is not made to be an automaton, and if he becomes one, the basis for mental health is destroyed.”

    In the course of evolution nature has gone to endless trouble to see that every individual is unlike every other individual. We reproduce our kind by bringing the father’s genes into contact with the mother’s. These hereditary factors may be combined in an al­most infinite number of ways. Physically and mentally, each one of us is unique. Any culture which, in the interests of efficiency or in the name of some political or religious dogma, seeks to standardize the human individual, commits an outrage against man’s biological nature.’

    III. Overorganisation

    http://www.huxley.net/bnw-revisited/index.html

  26. Patrice Ayme

    Ferguson’s thesis is just a smokescreen to hide the role of plutocracy in collapses, and is not even factually correct. I started an essay on it, but got bored because what he was saying was so obviously wrong and specious. It’s the usual, government-is-bad, plutocracy-never-heard-of-that rant.

  27. Patrice Ayme

    Don’t forget the euro is STILL WAY TOO HIGH…

  28. LOL. You have to crack a few eggs to make an omelet.

  29. PIGS fly and markets surge, but will Europe’s plan work?

    May. 10, 2010 10:41AM EDT – Globe & Mail – excerpt

    “Global markets are surging this morning after the extraordinary $1-trillion rescue package aimed at stabilizing up Europe’s common currency and the countries that have been battered by the continent’s debt crisis.

    “This is indeed the proverbial shock and awe package that quells contagion risk,” Scotia Capital economists Derek Holt …

    “In the short term, it may be viewed as a positive and we may recover some of the losses we had in equities last week,” said Blackrock portfolio specialist Oscar Pulido, The Globe and Mail’s European correspondent Eric Reguly reports from Rome. “In the longer term, it’s going to be very much dependant on whether governments in these countries can truly take the measures to reduce the deficits they’ve accumulated.”

    http://tinyurl.com/29wdrgd

  30. Great post!

  31. Rene – I’ve always liked Fromm. Thanks for sharing this. It is very validating. I’m copying it and saving it.

  32. Agreed.

  33. I agree completely, this fellow is the only son of a gun who really gets it. We are definitely through the looking glass and well intentioned members of the establishment like Simon can no longer see how the system is destroying the middle class globally and the etheral fabric of democracy.

  34. The market-makers and their collaborators have been given their latest fix.

    It will ware off, and then they’ll demand more.

    Attribute it to a world comprised of “Phantom Economies” and the accompanying Financial Terrorism.

    ………….

    It takes an “Alice and Wonderland” paradigm to expect taking on huge amounts of debt will stave off the ravages of huge amounts of debt.

    This situation is completely about transferring wealth – and nothing (NOTHING) to do with improving REAL economies.

  35. Me three! But I know I didn’t give enough to Obama’s campaign to influence what segments of society he taxes, or by what amounts. It’s a pretty safe bet the Wall Street rich gave him plenty.

    Great idea and would be the “richest” of poetic justice to finance the affects of their thievery with their own money…I just don’t see it happening.

  36. As a general rule, arguing with Ferguson is a waste of intellectual energy. His eloquence and cleverness hides what are basically incoherent ideas. You’re right not to waste your time.

  37. This seems to me to be THE critical issue.

  38. So they’ve done what the Fed did. They’ve moved massive private and country debt onto the continental public balance sheet. But the debt is still there. They also put it into a SIV, of all things, which sort of reminds me of Enron or Repo 105. How well did those SIVs work out?

  39. Great post, but when does the relief kick in?

  40. Lady Godiva

    Interesting discussion. What all this calls to my mind is the last scene in Butch Cassidy and the Sundance Kid, where the heroes leap off the cliff just ahead of the Mexican mercenaries.

    Are we seeing Europe and the US in a similar death-defying Hail Mary suicide jump? What are the implications for the rest of the world? When the Sovereign Debt crisis comes due will the West shed our burden together and leave the BRICs holding the bag? What is the endgame???

  41. Re @ Barbara____IMF’s $250bn Euro’s at the normal proportional (US,and Japan are largest contributers) contribution rate for the United States is 17% +/+ ,…converted EUR/USD ~= $52bn. I wonder what pot (ECB’s,or IMF’s) of cash they dip into first? Just another straw on the American Taxpayers back!

  42. SJ & PB:

    “Alternatively, the underlying fiscal problems in Europe could fester…”

    Very true – at a deep level there are structural problems that remain unaddressed. However, the monetary and fiscal problems are not unrelated, as James frequently points out when he posts on the causes behind the rise in the US deficit (e.g. it’s mostly lost tax income and unemployment support, which is largely a nominal GDP issue that is amenable to monetary fix).

    Moreover, the monetary problem remains, and is made worse precisely by this “defense” of the Euro. It’s an open question exactly how to drop the wage/price level throughout the entire economy when it’s dripping with non-adjusting nominal debt. Krugman is already focusing on this.

    SJ & PB:

    “ECB’s management was forced into this kicking and screaming”

    An entertaining mental image (I’m grinning at the thought), but I have to wonder whether that’s really the case. I think Trichet just (unfortunately) got everything he wanted – a strong Euro, and absolute confirmation of no price level increase. If there was no deal, the Euro was going to die by speculative attack. This deal preserves the Euro, and puts the ENTIRE BURDEN on the fiscal accounts of European sovereigns (until the _next_ funding crisis hits) with some US support. Moreover, such support that the ECB provides by injecting liquidity into illiquid markets is supposed to be “sterilized” (by issuing bonds to soak up extra currency, one imagines).

    In essence, the ECB is absorbing RISK, but NOT deploying monetary stimulus to alter the price level (which alters the real value of nominal obligations).

    Aka, piling debt on to rollover debt, with the expectation that the EU will just “grow” out of a nominal debt gridlock, without any adjustment to existing debt load (either targeted restructuring, or monetary), and while huge burdens from fixed obligations and automatic stabilizers continue to beat the tar out of real economic activity into the projected 5 year future.

    As Krugman says:

    Let’s HOPE Trichet isn’t serious about that sterilization part…

    http://krugman.blogs.nytimes.com/2010/05/10/shock-and-uh/

  43. To add insult to injury, the US tax payer will get stuck with a portion of this bailout through the IMF. Helicopter Ben is now going global except now he needs a bomber to carry all those worthless dollars. Bombs away Benny boy, but sooner or later it will be time to pay the piper. You just kicking the can down the road probably based more on political survival rather than sound economic principals if there are any left.

  44. I must say I’m fairly surprised at the solidarity of the Eurozone in this bailout package. I never thought the Germany / France / Belgium / Austria / Finland branch of the EU would really be willing to strap themselves to the white whale of Greece, Portugal and Spain. (Everyone else seemed to be using movie references so I thought I’d play along)

    But I still believe political realities will trump economics in the medium term. We have major political dislocation in this country vis-a-vis the bailouts / Wall Street Etc. but at least we’re all one country. It’s our tax dollars bailing out our system for good or ill. I don’t know how long the people of Austria will stand by and watch their currency devalued and growth stymied so they can bail out the Greeks – and I don’t believe the Greeks or Portugese have the political will to make the actual cuts that will be required. They may take swings at it, but at the end of the day I doubt they will happen.

    I’m still waiting for the end of the Euro – this may have just pushed back the date a few months.

  45. Strip away the complexity and this is just a refinancing with the refinancing spread a tiny bit differently among the same player banks. Next week the Greeks get a loan from ECB & Company. That same money pays back the & Company part of ECB & Company. Each participating bank that had payoff’s coming due was paid off. In the place of the paid off loan on their books they have a brand new performing receivable that is senior . That is laughable in sovereign owned debt. The balances are probably quite close to being equal on any given bank holding Greek Debt over time. But not for awhile yet. The consortium shuffles the deck. Over time the value is the same.

    They were paid off when due which is all that matters to the system. My receivables aging report look good as the collection manager of the bank. No delinquincies.

  46. The ‘Nuclear Option’

    May 10 – ABC News

    “It could turn out to be expensive breathing space…

    Of potentially greater significance, however, was the European Central Bank decision to begin buying government bonds issued by euro zone members, abandoning long-held resistance to such a move. The move, dubbed the “nuclear option” by some analysts, is aimed at helping out troubled states should they run into problems refinancing their debts.”

    http://tinyurl.com/2w54h9b

    “ If they go further and buy bonds, we could see the euro go a lot lower……”

    http://tinyurl.com/3388ab5

  47. A view from Europe: We currently have more details about the ‘taking off the hook’ of the bank system ( sort of shadow bail-out II ( following Greece Shadow-bail-out I ) than any details about the structural reforms the UE was meaning to addrees: W.Münchau calls it “the UE buying time”, must be the last version of the American ‘kicking the can’, liquidity vs solvency..Wonder who’s backstopping the BCE…

    The only detailed information available this morning
    ECB PRESS RELEASE
    10 May 2010 – ECB decides on measures to address severe tensions in financial markets

    The Governing Council of the European Central Bank (ECB) decided on several measures to address the severe tensions in certain market segments which are hampering the monetary policy transmission mechanism and thereby the effective conduct of monetary policy oriented towards price stability in the medium term. The measures will not affect the stance of monetary policy.

    In view of the current exceptional circumstances prevailing in the market, the Governing Council decided:

    1.To conduct interventions in the euro area public and private debt securities markets (Securities Markets Programme) to ensure depth and liquidity in those market segments which are dysfunctional. The objective of this programme is to address the malfunctioning of securities markets and restore an appropriate monetary policy transmission mechanism. The scope of the interventions will be determined by the Governing Council. In making this decision we have taken note of the statement of the euro area governments that they “will take all measures needed to meet [their] fiscal targets this year and the years ahead in line with excessive deficit procedures” and of the precise additional commitments taken by some euro area governments to accelerate fiscal consolidation and ensure the sustainability of their public finances.
    In order to sterilise the impact of the above interventions, specific operations will be conducted to re-absorb the liquidity injected through the Securities Markets Programme. This will ensure that the monetary policy stance will not be affected.
    2.To adopt a fixed-rate tender procedure with full allotment in the regular 3-month longer-term refinancing operations (LTROs) to be allotted on 26 May and on 30 June 2010.
    3.To conduct a 6-month LTRO with full allotment on 12 May 2010, at a rate which will be fixed at the average minimum bid rate of the main refinancing operations (MROs) over the life of this operation.
    4.To reactivate, in coordination with other central banks, the temporary liquidity swap lines with the Federal Reserve, and resume US dollar liquidity-providing operations at terms of 7 and 84 days. These operations will take the form of repurchase operations against ECB-eligible collateral and will be carried out as fixed rate tenders with full allotment. The first operation will be carried out on 11 May 2010.

  48. You watch, they will ‘modify’ the Bush Tax Cuts(rather than let them expire), meaning typical Obamian ‘Give you a sniff, we’ll take the barrel’.
    Then they will say the VAT is absolutely necessary to ‘solve’ our fiscal problems(medicare, social security, er..’entitlements’.)
    All = more regressive taxes, the wealthy’s gains(said cuts, no inheritance tax, captial gains tax now minimal, no transaction tax,etc.) will be codified. And all losses(‘toxic’) will be effectively transferred to the citizens.

    It is safe to assume, and easy for our brains and arguments to say, that whatever Obama suggests, the opposite is what should be done-just like GW.

  49. If the EU packages really ARE senior to existing creditors, that triggers the CDS of every nation that accepts a bailout. I don’t think you are right on this though, I think the EU and IMF already spelt out that their aid would rank pari passu to existing bond holders. I could be wrong, but I don’t think I am.

  50. This is a Chartist & Technician 200-DMA for Europe { (UK ^FTSE)(Germany ^GDAXI)(France ^FCHI)},and Asia {(China ^HSI)(Japan ^N225)} as of the close today. Prior to today, had all broken through the 200-DMA or were on the (note:US Markets S&P, NASDAQ all on the cust) cusp as of friday in which all the European’s,and Asian’s markets sliced through the 200-DMA like a hot knife through butter. Note: Don’t really care about the nice “Short-Squeese” bounce today or how long the rally last,its nice that were above the 200-MDA. But,…this “Shock and Awe” crap (best word I could find to describe my frustration) doesn’t work,period! The hired hunter/predator known only as “Mr Austerity” is being let loose to play (as a cat to a mouse before the boring kill) the pathetic gamebird…this hopeless flightless “Ostrich” (as it grudgingly decapitates itself with its complacent sheepish dirge call) as the continents will dine on it’s carcass this brief period of time. PS. I’m getting really confused by these magical illusionist moving this…one only, “Cash Entity Cow” all over the world,and no one still seems unable too figure out the scam,…for sahme! Thanks Simon :^)

  51. Really, I’m starting to feel like the bartender on the Titanic watching two old coots bitch about who’s going to pic up the bar tab. No one…and I mean no one is addressing the only solution to this death spiral. The only way out of this mess is debt forgiveness on a massive scale, that addresses both governmental and consumer debt.
    No one likes it. No one comes away unscathed.
    The only alternative is perhaps twenty years of utter economic stagnation. Add up the human cost of that.

  52. Late last night ,the Federal Reserve issued a press release on activating Central Bank Dollar Liquidity Swaps.

    http://www.federalreserve.gov/newsevents/press/monetary/20100509a.htm

  53. SO the world’s banksters are happy again, ECB hands out a trillion officially and probably a couple trillion more unofficially.

    Banksters 2
    World 0

    The longer this looting continues, the more violent the wreck when it comes. The shadow banking system has broken the world’s central banks ability to cope, and now it’s just wholesale looting by the banksters.

  54. and then there is this seldom-mentioned connection : drugs, be they cocaine, heroin or marijuana, have been around a long, long time, and often little used except medically. When they become epidemic in ‘recreational’ uses, you can be sure society is sick and in psychic pain.

  55. Nurse: “That’s a nice like bandage doctor, but it’s not going to stop the internal hemorrhaging.”

    Doctor: “I know, but the patient’s family is very ignorant, they won’t know the difference. Go ahead and release him, we’ll get them for more later.”

    Nurse: “Okay……..”

  56. middle world guy

    Simon,

    In your narrow escape plan last week, you mentioned talking down the Euro as point #1. Where would that fit in with the latest developments? Is this an implied part of the current intervention? Seems for the moment at least the Euro has stabilized.

    Somehow, the ECB authorities have to publically imply that devaluation is an essential part of the mid to long-term strategy for renewed mediterranean region competitiveness.

  57. The wreck will not affect the people who know how to game the system. They have already dispersed and insulated their assets in various safe-havens worldwide. Even after a global meltdown, the gangsters will still be calling all the shots.

  58. mondo pinion

    ya . . when he said “growth” I knew he was on the wrong track. You are dead on, Russ, Simon is too far into the game to see it is insane. The planet cannot sustain infinite growth but our powerful elite are totally committed to growth-addicted money games. And Simon never goes there.

  59. I’m just an undergraduate student so apologies if this is a stupid question but I learn a lot from this blog and your comments, and I am confused about why ECB is SO worried about inflation. Your point is that inflation would make it easier for Greece to pay of its (fixed) debt right? Why would this, in the eyes of Trichet et. al. be so bad? Is it fear of escalation to hyperinflation? And if so wouldnt there be “signs” before something like that would happen that the ECB could respond to?

    On another note this whole debacle has also again sparked debate in my country (Denmark) about euro membership. The DKK is pegged to the euro but to me it seems preferable to at least have the option to devalue if the need should arise at some point. And yet all the important Danish policymakers (finance minister, foreign minister, CB head and others) even today (literally today – in response to the recent bailout package) are saying that Denmark should really adopt the euro. Most of what I have read about the recent crisis highlights the problems of euro-members not being able to pursue individual monetary policies and devalue. And in general smart people seem to question the whole idea of having the common currency at the moment. Does the arguments for and against euro-membership change a lot if one is a (very) small open economy like the Danish and not a PIIG country?

  60. Potter just got the bank..(He’s not selling, he’s buying’…)

  61. French and Euro banks are “bailed” by this market participant threat. The French banks are biggest movers today per your debt pictorial.

    http://www.google.com/finance?q=OTC:SCGLY

    Now that the money is one the table, the guns will come out and direct where it goes. This is how it works. My opinion….this is an exit plan for private capital even though it’s being sold as an entrance.

  62. Hillbilly Darrell

  63. There is a “short” answer here. Most central bankers in their fifties and on up have an ideological fixation about inflation. My own view is that their beliefs constrain their entire thinking. They are truthers. These people cannot instantly change their beliefs to comport with changed current and probable future facts.

    These people are prisoners of their education and position. They cannot bring together a total picture. That is, a combined look at how their civilization responds to shocks from all perspectives right now. They are embedded in their ideological should be’s which are meaningless in future terms. Past beliefs do not determine the future. If one were to look at the totality of today in the eyes of Adam Smith or even Marx back then, would they not find the totality they view as incomprehensible? Overpopulation they might get a glimmer of. The effects of electronics would be incomprehensible. Central bankers framework is the system they were taught exists:not necessarily the system that actually exists. Future shock is demonstrated here. The elites did not have a comprehensive clue about the financial reality they lived in. The American Maestro even admitted it. Ten years ago Greenspan was the accepted genius central banker. Look at him now. In varying degrees the entire high tech leadership role players suffer the being behind blinders of their own choosing.

  64. Hillbilly Darrell

    Methamphetamine, check.
    108 octane racing fuel, check.
    Downshift to peg the RPMs at 8 or 9 Grand, check.
    Grab 4th gear, and keep the accelerator on the floor, check……

  65. not surprisingly, Marc Faber and Jim Rogers aren’t too pleased with the European rescue package either:

    http://www.goldalert.com/stories/Dow-Jones-Roller-Coaster-Continues

  66. Re: @ Ted K____Nurse to doctor: “are you sure he will live long enough to come back for his next scheduled visit”. Doctor: “oh, gosh….thankyou for reminding me of my fiduciary responsilbility regarding this fiscal oversite (doctor is overwhelmed with fiscal epidemic,…so much money to be made in such a short period of time?), reschedule for tomorrow”? Nurse;”tomorrow”…isn’t that to soon?” Doctor: absolutely not…just tell-em he needs a bigger bandage.” PS Best laugh I’ve had lately…just thought I add to it,…ya know laughter is the best medicine._____:^) NOTE: Anybody notice that “13 Bankers” is now ,” #5 on NY’s Best Seller ” Wow!

  67. Trap wrote:

    “Is it fear of escalation to hyperinflation? And if so wouldnt there be “signs” before something like that would happen that the ECB could respond to?

    It’s like steering the Titanic in a field of icebergs at night, you can’t always steer the ship rapidly enough to avoid hitting one. They still don’t have enough lifeboats.

  68. Don’t forget Mr. Taleb.

    Nations Must Cut Debt to End Crisis, ‘Black Swan’ Author Says

    May 10, 2010, 7:32 AM EDT- excerpts

    May 10 (Bloomberg) — Governments will only bring about an end to the credit crisis through the “blood, sweat and tears” of cutting the amount of public debt, “Black Swan” author Nassim Taleb said. The crisis came from debt and you don’t escape it with more debt,” Taleb said in an interview on Bloomberg Radio’s “Bloomberg Surveillance” today.

    “We’re in a situation where we had a patient who we discovered had cancer a year and a half ago and all we’ve been giving the patient is painkillers. The tumor is getting worse because we are transforming private debt into public debt and public debt is not manageable.

    My fear is if we don’t stop them now they’re going to create hyperinflation,” Taleb said. “Nobody has confidence in a guy like Bernanke.

    “If I were a politician I’d say you need blood, sweat and tears,” Taleb said. “The first thing you need to do, Obama, is to transform debt to equity. I don’t understand why your great, great grandchildren should have to pay for it. That’s immoral.”

    http://tinyurl.com/387o25v

  69. Hi Everyone, great blog, great comments.I have only rudimentary understanding of economics so I am interested in comments: -

    The big picture seems to be that the only way out of the mess is (high) double digit inflation. This bailout is a big step in that direction. Austerity measures etc are fine in textbooks, but politically unrealistic. We need a quite a few years of high inflation before the electorates will swallow that pill.

  70. NKlein1553

    Great, just what the Federal Reserve Board needs; more exposure to questionable assets on its balance sheets.

  71. Cutting deficits kills the patient from ever growing enough to pay debs. Taleb must join the truth movement, cutting lenders expectations and restructuring the debt. Lenders must share the pain. They and their central bank partners caused this. It was their idea, yield curve and mistake. Not to mention the investment bank fraud and political fraud in hiding the debt from the “people” of Greece. RESTRUCTURE THE DEBT

  72. It’s a creditor bailout, my friend. Look at the bank stocks in Germany and France in particular today. This isn’t a bailout of Greek people! This is a bank bailout of the core powers. The core powers in Europe are core banks. They’re happy today. They have time to avoid a default, which was RATIONAL as ever. The French, German and Greek PEOPLE all agreed with DEFAULT. The BANKS in all those countries did NOT. Ignore the nations and countries…only see BANKS (creditors) and PEOPLE (debtors), then it all makes sense. Germany and France got the long knives out on the ECB and got what they needed to avoid a default. The funds were taking swaps out on Fr and Fr banks like crazy last week!

  73. Anonymous Jones

    There is an entire multi-part documentary called “The Ascent of Money” that is a testament to how inaccurate your “eloquence” and “cleverness” propositions are. Perhaps you meant “good looks.” Precision with words is not Niall’s strong point (if he in fact has one).

  74. Denmark should not adopt the euro. It was wise to keep its own currency. The euro is doomed. If the power elite are STILL hungry for the euro, they should get their heads examined.

  75. The WAS a core bank bailout. If you watches the swap market last week, France and French banks (core creditors to Greece) were under siege! That’s the true systemic risk everyone was worried about. See what happens when rich people and banks get sieged? You get action, in the form of a bank bailout. If anyone believes this was done for S. Europe, I have a bridge to sell you. This was done for rich, core, creditor Europe. They realized just how rational default was appearing, to punish them for their bad and unwise loans. Default was very rational esp if you can manage current deficits. The core banks didn’t want to pay the price, thus this action to shore up the flow of payments.

    It can’t last. If they don’t take this time to reevaluate their loans and restructure with long term goals in mind, it’s gonna crash. It all comes down the psychology of people. Can these bankers take the short term loss of lifestyle for long term gain?

    I doubt it.

  76. There are a few possibilities:

    1) cognitive (jerry hits this above)

    2) social peer pressure (concerned about their professional reputations, so even if they believe more monetary expansion is better, they would rather stay in the closet)

    3) they are plain stupid (sometimes it really seems this way)

    4) they are egomaniacal (they love strong currencies, and everyone wants to be the reserve currency top dog – the crude Machiavellian interpretation)

    5) they are cowardly (they live in fear of the markets, in particular the bond/FX/CDS markets, and are afraid that if they do the rational thing then the markets might get too excited and overreact – as Anonymous says above)

  77. You’re right and I’ve been saying that for 18 months

  78. When all is said and done in unsecured debt collections, the only way to collect a portion is to restructure. But this is a sovereign debt and if Greece is, in fact, a sovereign,it can adjudicate it’s own bankruptcy. Every political act has consequences of choosing the act. What is going on here is that all sides desire to avoid consequences or to unload the consequences on others. Sooner or later the consequences game runs out. At that point Greece and every other state with strong leadership will opt out. Recreate the debt in your own currency and give the creditor a choice. Take literal currency now or be paid funds on a vastly lower principle over time. Either way, they take it out in trade in Greece or lose even more. Modern states no longer are in the predicament of the Khedive of Egypt in 1882. THe creditors cannot occupy the country and take charge of state fiscal affairs as happened in Egypt. Still, there are consequences , you suddenly live without sources of foreign credit and you lose your own foreign assets seized by creditors.

    The credit losses have been incurred, only the final extent is not known and who gets stuck with non payment.

  79. “They have to go through a pretty tough period. We – the other member states, have saved them from bankruptcy and so they can’t go on living their lawless lives.” that’s my translation of an interview with the Danish finance minister. ( Danish article here: http://epn.dk/okonomi2/global/europa/article2064143.ece )

    And by “them” he is referring broadly to all the troubled southern european countries, not just Greece. It seems that he genuinely believes that “they” will just somehow magically solve their budget problems by internal budget cuts alone despite low growth prospects.

    In another article from today he makes the case for Denmark to join the Euro so we can support Germany as a paragon of fiscal discipline. (Apparently we can all be net-exporters if we just try hard enough.)

    I wonder what planet these guys are living on…

  80. Indeed. I at least expected that the euro-supporters would stay silent. But somehow their interpretation of these events is that it shows exactly why Denmark should adopt the euro. It’s just surreal.

  81. does anyone know if the ecb will buy the swaps?

  82. One month of good job growth doesn’t show or prove much of anything.

  83. morgan welch

    In fairness to Ireland, not that the problems aren’t big, that NYT graphic seems to include foreign bank liabilities held via Ireland’s IFSC – a sort of financial free port – and the number for Ireland is thus hugely exaggerated. By what I’m not sure, tho I read a piece by Rossa White of Davys over a year ago about the inaccuracies that can follow from relying solely on BIS data, as the NYT graphic does, and putting adjusted numbers for the true Irish liabilities. Can’t find a link for it at the mo.

  84. Well said.

  85. Danny wrote May 10, 2010 at 6:18 pm:

    “One month of good job growth doesn’t show or prove much of anything.”

    Temporary Census Hires Boost March Jobs Number

    Apr 6, 2010

    http://tinyurl.com/28swem6

    A good observation Danny.

  86. “The other problem is a lot of jobs are coming from government, Greta, and you know which agency they’re coming from is the Census.

    The Census bureau counted about one third or one quarter of all the new jobs in the last report.

    And in the months ahead, there’s going to be anywhere from a half a million to a million new Census workers that are going to be part- time workers.”

    http://tinyurl.com/28swem6

  87. Yes, this is all about TBTF. By friday, the richer european nations will have a massive hangover and the euro will resume its decline. Watch for capital flight. The swiss franc and gold will gain.

  88. MOORE: ” … We’ve got eight million people who’ve lost their jobs in the last two years since this recession started, Greta. So it takes a long time to get Americans back to work. We got to be starting to generate (INAUDIBLE) twice as many jobs as we did in this last report to start bringing this unemployment rate down.

    VAN SUSTEREN: And indeed, that’s what we hope to do and want to do. Steve, thank you.

    MOORE: That’s for sure. Thank you.

    VAN SUSTEREN: All right, in two minutes, Tiger Woods in his own words. The golfer talks about his stint in sex rehab, his mysterious car accident just a few feet from his mansion at 2:25 AM and whether his wife is with him at the Masters tournament. Tiger talks next.

    And then an “On the Record” special guest…..”

    http://tinyurl.com/28swem6

  89. It looks like the euro bailout won’t really buy time like the dollar bailout did. The dollar is even sicker than the euro but is hanging on only because of its reserve currency status. Read about what comes next for the euro:

    http://www.businessweek.com/news/2010-05-10/euro-rally-temporary-will-resume-decline-ubs-says-update2-.html

  90. Anonymous wrote May 10, 2010 at 5:10 pm:

    “Cutting deficits kills the patient from ever growing enough to pay debts.”

    At some point the tumour/Cancer has to be cut out/neutralized for any chance for survival, before the irrevocable force of hyperinflation takes hold and the financial metastasis spreads. It is as night follows day.

    Spinning Wheel

    ” What goes up
    Must come down
    Spinning wheel
    Got to go around

    Talkin’ ’bout your troubles
    It’s a cryin’ sin
    Ride a painted pony
    Let the spinning wheel spin

    You got no money
    You got no home
    Spinning wheel
    All alone

    Talkin’ ’bout your troubles and you
    You never learn
    Ride a painted pony
    Let the spinning wheel turn

    Did you find
    Your directing sign
    On the straight and narrow highway

    Would you mind a reflecting sign
    Just let it shine
    Within your mind
    And show you, the colors
    That are real …”

    Blood Sweat & Tears
    by David Clayton-Thomas / 69

    -excerpt

    http://www.twin-music.com/azlyrics/b_file/songs/bst/spin.html

  91. steve wrote:

    “The big picture seems to be that the only way out of the mess is (high) double digit inflation. This bailout is a big step in that direction. Austerity measures etc are fine in textbooks, but politically unrealistic. We need a quite a few years of high inflation before the electorates will swallow that pill.”

    Steve you hit it bang on, but lack a dash of depression, to cleanse the pallet.

  92. Forecast for turbulence ahead. Here’s another article discussing the euro’s immediate prognosis:

    http://www.businessweek.com/news/2010-05-10/euro-package-leaves-governments-out-of-ammunition-matthew-lynn.html

  93. Great post Russ. I’ve been thinking the exact same thing. What does more growth mean anyway? More consumption? Packaging more worthless securities? The talk of inflating our way out of debt by printing more money is unsustainable in the long run, it will eventually come crashing down. This financial game is so disconnected from the natural world and exists in its own paradigm, removed from 99 percent of the world’s population. I’m starting to think it would be a good thing if it all fell apart so we could get away from talk of growth and focus on sustainability.

  94. Hi JerryJ,

    I’ve recently learned that Adam Smith was, perhaps, foremost a moral philosoper. This is why his Theory of Moral Sentiments precedes and is the basis for the Wealth of Nations. The problem with the rational markets hypothesis is that it abdicates moral judgement to the market fundamentalism as arbitrator of the highest goods. Thereby unleashing a flood of irrational animal spirits of the worst sort.

    I’ve thought about making Adam Smith my summer reading (lol) but some how I’m not sure I have the dedication. Perhaps, a more formal setting is needed to parse the text.

  95. On the ferry to Seattle to here the presentation this evening. So where is Simon?

  96. 60 Minutes on Walking Away

    5/10/2010

    “Here is a 60 Minutes piece on Walking Away, aka ‘Strategic Defaults’ and as ‘ Ruthless Defaults’ by lenders.”

    http://tinyurl.com/35kp3bd

    http://www.cbsnews.com/video/watch/?id=6470184n&tag=related;photovideo

  97. I’ve recently learned something interesting facts about the Greek debt crisis.

    Most Greeks do not pay taxes due to a quirk of history. At one time Greece was occupied by the Turks, and tax evasion was a form of protest and nationalist spirit. That being said, the average monthly income in Greece is about 750 euros a month, so ordinary Greeks cannot afford to repay the debts incurred by their governments.

  98. cosmicinsight

    Well said the same predominant thought that propogates financial status quo stresses change by bombing Iran.

  99. Top of the day and bad news. The euro bailout already losing steam?? Check out what the business news is saying this morning.

    http://www.businessweek.com/news/2010-05-10/euro-erases-gains-spurred-by-near-1-trillion-loan-package.html

  100. mondo pinion

    Forgiveness won’t fix it either. We have to stop basing our economy on the need for perpetual growth. How do we do that?

  101. Bayard Waterbury

    In its simplest terms, this is the ultimate “rob Peter to pay Paul.” What is happening, now, on a worldwide scale, is just that. The various plutarchs, in the developed countries (with, perhaps, minor exceptions, maybe) is that the elite in all areas are continuing to steal from the ordinary people to finance the global economic ruse. If that can’t be seen, it’s because the viewer isn’t watching. This Eurozone bailout, much like our TARP, is lots of money (printed or stolen, take your choice) paid (actually, or in meaninglessly ultimately guarantees) to forestall collapse. But the real fuel to economic growth is the victims of the ruse, the common people, who no longer can spend enough to support the declining economies. Oh, this game can go on for a while, but for how long, really. It reminds me that the TARP was, according to how it was sold, to be used to buy up toxic assets. It wasn’t. It was used to support Paulson’s banker buddies, much like the ECB and the IMF are supporting theirs in Europe. The toxic assets are not only still where they were (except the ones owned, bogusly now, by the FED), but the various bonds in the weaker EU nations are still selling weakly, if at all. The TARP allowed trillions and trillions of toxic assets to stay in place (because of a change in accounting rules which have truly made the TBTF balance sheets into a myth), the new ECB and IMF funding will NOT resolve the absurdly weak fundamentals of the EuroZone economy, because, like the TARP, they won’t resolve in underlying problem. The ugly day of reconing is coming. It would only take one more mid-major economic downturn to collapse the entire world’s financial structure.

    As usual, today, the markets improved because of the positive news, but that’s because the oligarchs and their affiliates are the only ones really spending money there. I am going to be fascinated to watch as things unfold over the next year or so, what will happen next. There are so many things that could tip us over here, and globally. The world’s economy is now officially in the ICU, and the coroner is awaiting the outcome.

  102. Brad Thrasher

    Surprising to me how many here seem to enjoy unsupported declarative rhetoric. I would remind you that the only difference between self-proclaimed moralists on the left and right is who’s ox is gored. The ox is still dead.

    One chap I’ve read today, gets it. John Hussman applies game theory, specifically backward induction to the issue. Enjoy:

    http://www.hussmanfunds.com/wmc/wmc100510.htm

    You’re back already? By now you appreciate it’s a fools game because the markets, dealing on margin, can create more shorts than the central bankers can create currency, printing one unit at a time.

    Eventually we return to John Kenneth Galbriath’s 1955 observation in the Great Crash;

    “Of all the mysteries of the stock exchange there is none so impenetrable as why there should be a buyer for everyone who seeks to sell.”

  103. Brad Thrasher

    The numbers don’t lie. Debt exceeds the currency available to service it, let alone pay it. Printing more currency doesn’t balance the books, only default will balance the accounts.

    So who’s next? England? China? Perhaps the USA initiates another round of qualitative easing.

  104. You mean reminiscent of the largely sensationalised rhetoric you easily see in the mainstream press? I prefer to get a dose of speculation from the blogosphere more often than the print media.

    “Surprising to me how many here seem to enjoy unsupported declarative rhetoric.”

  105. Pure lack of faith! In minute 55:50 of the following conference you hear Joseph Stiglitz saying: “What rate of return do we need to get on our investments in order for the tax revenues that we get from the short run growth and from the long run growth lead to an actual reduction in the national debt in the long run?; and the answer is a very low return, only about 5 to 6 percent return on public investments will lead to a long lower long term national debt; and the evidence is that the returns from investments for instance in public technologies are much-much higher…. so we should encourage expenditure that yield returns.”

  106. “At the expense of taxpayers” ??? Who are going to pay taxes for this?

  107. I am not sure this is complex. It looks quite simple to me. Complex is the climate change issue.

  108. All are just waiting for the Greek politician who is going to sell himself as Mr. Defaulter.

  109. You walk away from Athens to…. Frankfurt?

  110. Simon says: “north European banks (and implicitly, north American banks) who enabled their debt habit.”

    Why blame just the banks? It was very much the bank regulators, those who still regulate, who designed capital requirements for banks that required a 12.5 to one leverage when lending to small businesses and entrepreneurs, those on whom we depend so much on for jobs, but cannot afford being rated by the raters; but allowed a 62.5 to one leverage, five times higher, when banks were stocking on public debts like Greece’s, just because some human fallible credit rating agencies rated Greece as good

  111. Brad Thrasher

    Yeah pretty much the would be new new boss is the same as the old boss.

  112. trouserman

    Excellent rant!

    Time for the leaders (sic) of the Western nations to go cap in hand to Beijing and negotiate an orderly restructuring (ie. default) of debt. One concession they might think of making: Citizenship for half a billion of China’s most impoverished people.

  113. trouserman

    And don’t forget, financiers LOVE wars. Lots of government money flying around and lots of volatility in the markets.

  114. The American taxpayer might be on the hook for far more than the 17% of the $350m of the IMF. Just like TARP turned out to be the little brother to the Fed’s alphabet zoo of liquidity programs, I think the $1 trillion might well be the little brother to the dollar swap program between the Fed and the other central banks.

  115. Rene, liked your reference to Dr. Fromm–logotherapy
    rules! The man triumphed over every atrocious adversity and tragedy imaginable (the Holocaust) to become one of the very greatest psychiatrists (and philosophers) ever. Reading his first big selling paperback years ago saved me….and many thousands of others.

    Simon J and J Kwak really have all our best interests
    at heart, I feel certain, so I heed their advice. In matters of security here in the U.S., Richard Clarke seems to be a kindred spirit as well.

    Thanks for your comments.

    Best Regards,
    Best Wishes,

    Amber Ladeira

  116. The PIIGS definetely do not need to reduce wages to become competitive and hence export their way out of the problem. Lower wages means lower demand and this will contribute to lower economic activity, tax revenue and an increased dependance on the exterior for economic growth.

    A better approach IMO is to increase wages while adopting an independant currency (or sharing a currency with similar economies) and consequently domestic demand will increase and tax receipts.

    Trade should balance once a country has its independant currency not dominated by speculative global banking firms.

    The central bank should deal with the public not financial institutions in conducting monetary policy. Every person over 15 could have an account with the CB and when the money supply is expanded it should go directly to citizen accounts and not be credited as debt.

  117. Again is bankers’ and eurocrats’ fault. We are bailing out Greece to save banks which invested in sovereing bonds thinking they were “too safe to fail” assets. When will we stop such a ponzi scheme and money creation out of thin air in Europe?

  118. Since banks and governments owe each other many billions of euros I believe that it would really make more economic sense a) the issuance of EU bonds b) the taxation of financial transactions and banks, including the systemic risk created by the “Europe’s Web of Debt”.

  119. And you know the answer to that, they’ll continue lending more money, because ultimately if there’s no inflation it is good for Europe to have a Eur in the 1.25-1.30 $range, more exports=improve in the economy= proffit. As someone said we’ve entered the era of competitive devaluations. Guess where all that money, FED and ECB are printing, is going: China, they will have skyrocketing inflation soon.

  120. ” The PIIGS definetely do not need to reduce wages to become competitive….” Thanks Danny. Go the their web sites and see mega yachts. Why not increase dockage fees?

  121. Re: @ Per Kurowski____Good call,sir!

  122. Re: @ Harvey____I recollect that just last week they were arguing about $250bn euro’s being too (can’t afford such a large number?) much? But – in the time it takes for a “Monstrous ‘Black-Hole’ Flash Trade”, the IMF comes to the rescue to write-down bad debt, thus giving the ECB a new lease on life at the {taxpayer’s around the world ie)USA & Japan,etc.,etc.,} people’s expense once again. Yea,the $750bn euro’s the ECB, and entities have put up is intriguing to say the least,with the usual bravdo “Shock and Awe” and, we all know where (can anyone say perpetual war?) that’s gone? PS. Wars in Iraq & Afghanistan are bankrupting America!

  123. Re: @ Anonymous____Sounds like “Stagflation” to me? PS. Once an economic anomaly, now a “Standard Diviation” in neo-economic models!

  124. Re: @ morgan welch_____Good Digging! Ireland is better off than all of the “Great (Her Majesty,not)England”, which has some bad days ahead. “God Bless Ireland” – it tis good that their in the Eurozone. ;^) PS. Germany will do right by them.

  125. Re: @ Brad Thrasher____The good ole USA is so well positioned,regarding the protracted problems in Europe,that we could be on top of the world once again, and stay there if Washington heeds Simon,and James words of wisdom. PS. Just think if the Dollar reaches parity with the Euro ,which is pegged to the Yaun, and how much weakness too the Oil Energy Import drain on our Import/Export deficit imbalance comes simultaneouly in line. Walla,…something we haven’t seen in 20yrs.!

  126. Good earle, check Danny’s post at the end of comments.

  127. Brett in Manhattan

    Mark Twain said the same thing in way fewer words:

    “Most men lead lives of quiet desperation”

  128. jony wrote:

    “Guess where all that money, FED and ECB are printing, is going: China, they will have skyrocketing inflation soon.”

    Some pundits suggest that when the Chinese commercial real estate bubble bursts, they will need the major part of their foreign reserves to sterilize their domestic banking system. In that event, I suspect one of their major trading partners, Europe will feel the consequences.

  129. theotherguydidit

    They may be saving the de-militarization of Iran to push a Victory for America Tax, aka the VAT. It would tie in well with the next presidential election cycle.

    You might put that on your calander.

  130. Anonymous wrote: “Europe will feel the consequences (Chinese burst bubble).”

    Agreed. I figure 12-24 months from now.

  131. Fascinating reading, all of it.

    We are all in this mess, to some extent or another. So its’ rather important to find a viable way out of it.

    Any suggestions, anyone? For Greece, the PIIGs or the USA?

  132. Simon, apologies, I had forgotten that your FT piece suggested reform of the EU incentive arrangements.

    But that addresses potential future debt, not the current debt.

  133. What you mean, “we”?

    For me, slow food, slow money, everything as local as possible, including investment. Get off the grid as much as you can, so it doesn’t drag you down when it goes.

  134. What about the web? You mean you don’t have online accounts? Still write checks and depend on the mail system?

  135. Not mark Twain but Henry David Thoreau. There is such carelesness in not attributing quotes correctly.

  136. May 13 2010 – Gary Dorsch – excerpts

    “It takes a lot more time to safely extinguish a fire than it does to start it…

    What the ECB is doing is a 180-degree about-face,” declared Eurosceptic economist Joachim Starbatty on May 12th, noting Greek bonds were already rated at junk level by ratings agency S&P.

    “If a central bank buys bonds that international ratings agencies have declared are junk, then it should not be surprised that the Euros it produces are quickly seen as junk as well,” he said. Starbatty said the ECB is “rewarding speculators who are betting on higher inflation…

    The ECB’s shift to “nuclear-QE” is expected to usher in a steady devaluation of the Euro. Already, the German economy is getting a significant boost from the weaker Euro, with its exports surging 10.7% in March to 79.0-billion Euros, the biggest monthly increase since July 1992….

    The ECB is now actively engaged in rigging the stock markets, ready to massively increase the money supply, (QE), at the sight of a significant meltdown in the equity markets. In this regard, stock market indexes are utilized by many European traders as a hedge against monetary inflation and the Euro’s devaluation. ”

    http://www.kitco.com/ind/dorsch/may132010.html

  137. Fears Intensify That Euro Crisis Could Snowball

    6 minutes ago – New York Times – excerpt

    “In a sign of the depth of the anxiety, the euro fell Friday to its lowest level since the depth of the financial crisis, as investors abandoned the currency as well as stocks in favor of gold and other assets seen as offering more safety. And in an interview published Saturday, the president of the European Central Bank, Jean-Claude Trichet, warned that Europe was facing “severe tensions” and that the markets were fragile.

    Contagion, a loss of confidence that feeds on itself and leads investors to sell assets in one country after another, remained a possibility, he said.

    For Europe’s banks, the problems are twofold. Short-term borrowing costs are rising, which could lead institutions to cut back on new loans and call in old ones, crimping economic growth.

    At the same time, seemingly safe institutions in more solid economies like France and Germany hold vast amounts of bonds from their more shaky neighbors, like Spain, Portugal and Greece.

    Investors fear that with many governments groaning under the weight of huge deficits, the debt of weaker nations that use the euro currency will have to be restructured, deeply lowering the value of their bonds. That would hit European financial institutions hard, and may ricochet through the global banking system.”

    http://www.nytimes.com/2010/05/17/business/global/17fear.html?ref=global

  138. Sometimes you have no choice but to bite the bullet.

  139. Current debt situation worse than 2008: Nassim Taleb

    Fri, May 14, 2010

    Q: So what is the alternative? I understand your thoughts and feelings about the excess debt. What is the alternative method to address the underlying issue that will be more effective than what is happening now?

    A: (Nassim Taleb) Blood, sweat and tears. What we need to do is what we did to the Greeks, what we are trying to do Greeks.”

    http://tinyurl.com/28upvx8