http://www.acting-man.com/?p=17286
http://www.atimes.com/atimes/Global_Economy/NF05Dj04.html
SPENGLEROpen letter to Chancellor Merkel: Sacrifice SpainBy Spengler
Dear Federal Chancellor:
Friedrich Schiller wrote of the Thirty Years War that history had brought forth a great moment, but the moment encountered a mediocre people. The world today finds itself by contrast in a mediocre moment, but it still may find adept leadership.
No-one would have expected that Germany would decide the fate of the world financial system. International financial institutions - the International Monetary Fund, the Bank for International Settlements, and the European Central Banks - used to formulatethe consensus of major governments and elite opinion. For understandable reasons, Germany was content to take guidance from the international financial community and act as a member of Europe rather than as a national power.
Now the international consensus has collapsed, elite opinion is confused and Germany has become the arbiter of the European financial crisis. The US administration's economic policy has produced poor results and the American president wants to blame his problems on you. Your neighbors, the IMF, and the Obama administration are trying to persuade you to extend Germany's credit to paper over the indebtedness of the rest of Europe. Yet common sense makes clear that Germany's resources are finite, while German voters fail to understand why they should put their future in jeopardy to support countries plagued by corruption and inefficiency.
It is impossible to prevent the destruction of large amounts of nominal wealth, but it is indispensable to preserve the functioning of the banking system. Germany cannot bail out everyone, but it must create a firewall in the right location. This is a practical rather than an ideological matter. There are two questions: where should Germany provide support, and how? It is not enough to refuse the unreasonable demands of your partners, for example, to issue so-called eurobonds (guaranteed de facto by Germany but spent by Europe's laggards). You also must make clear to the markets what the worst-case scenario might be.
At present, Germany appears to respond to events rather than anticipate them. That increases uncertainty and the risk of a major financial crisis. If Germany acted with clarity, though, the outcome would not be a crisis, but rather the deliberate amputation of gangrenous parts of the financial system in order to salvage the whole. Source: Eurostat
This distortion in Spain's real economy - the massive misallocation of resources to the construction sector-is reflected in an enormous expansion of the banking sector. Spanish banks' debt on the international bond market grew twice as fast as in the United States during the past decade, and several times as fast as in Germany.
Exhibit 2: Bank debt grew much faster in Spain than elsewhere
Source: Bank for International Settlements
Exhibit 3: Financial institution debt as % of GDP
Source: Bank for International Settlements, IMF What is this 109% of GDP, the debt of Spanish financial institutions, actually worth? According to Spain's own data, delinquent loans amount to nearly a fifth of GDP, or 184 billion euros (US$228 billion). That would wipe out all the remaining shareholder value attached to the Spanish banking system.
It seems obvious from the data, however, that Spanish banks' bad loans are far in excess of the reported 184 billion euros. Alone in the world, Spanish banks drastically increased their lending after the 2008 crisis - by nearly two and a half times - while overall bank lending in the United States and the eurozone barely changed due to weak economic conditions. It is widely reported that Spanish banks are piling new loans of bad old loans in order to avoid reporting losses that now probably exceed two-fifths of GDP.
Exhibit 4: Capitalizing interest on bad loans - Spanish bank assets rise sharply since the crisis
Source: Banco de Espana
Spain's economy is dominated by a real estate bubble with an economic weight three times as great as the American real estate bubble at its height. At great cost, and with considerable pain, America has reduced leverage. As the McKinsey Global Institute reported in its January 2012 report on global deleveraging:
Nonetheless, the deposits and other short-term obligations of the Spanish financial sector (and all European banks) must be guaranteed. Once its equity and $1.6 trillion in debt is reduced to zero, the Spanish financial sector will become a desirable investment for an outside investor with ready cash - the Chinese, or Canadians, or sovereign wealth funds. Maintaining the day-to-day functioning of the financial sector must be preserved in anticipation of the intervention of an outside buyer; it is an investment that will be repaid. The Spanish won't like having foreigners take over their finances, but they will have only themselves to blame. All of this will make clear to the Italians why reform is a much better idea than bankruptcy. Italy's condition is much better than Spain's. It never had much of a real estate bubble; it has relatively little private debt; it has hundreds of first-rate companies with secure niches in world export markets; and it has valuable national assets whose sale could reduce its sovereign debt considerably. What Italy lacks is political clarity. The appropriate handling of Spain will provide the required object lesson.
You should ignore pressure from the Spanish government and the international institutions to support the debt of Spanish banks. It is worthless, and there is no point impairing Germany's credit to support a $1.6 trillion pile of worthless paper. The international institutions will tell you that a Spanish bankruptcy will compromise the French and British banking systems, because French banks are massively invested in the public and private debt of other European nations. The old capital coverage rules for commercial banks made it prohibitively expensive to own subordinated debt, but very cheap to own senior debt.
You should ignore these warnings. If necessary, bail out the French banks after Spain's bank debt has been written down to an appropriate valuation, which probably will be close to zero.
Exhibit 5: Net direct exposure to debt of Greece, Italy, Ireland, Portugal and Spain by banks participating in ECB stress test
Source: European Banking Authority, McKinsey Global Institute
The subordinated debt of French banks may not survive. But that is owned by households directly or through pension funds and insurance companies, and is mostly in French hands. If the French banks' subordinated debt is valued at zero, the French people will be poorer, but there will be no systemic consequences. French savers will be angry, but that is a matter between them and President Francois Hollande. The senior debt of the French banks, though, is viable - because the French economy is viable - and supporting the French banks' senior obligations is required to prevent a financial crisis and economic collapse.
It would be something of a revolution in world affairs for Germany to ignore the international consensus and undertake to resolve the crisis on its own initiative. I submit to you, Federal Chancellor, that it is time for such a revolution.
You are the most experienced and best qualified among the leaders of the Free World. America is led by a man who was a first-term state senator in Illinois when you were in your second year in office; France is led by a man who has never held high government office; Italy is led by a technocrat with no political base; it doesn't matter who leads Japan, and one can only have sympathy for whomever governs Spain. For the time being the head seat at the table is yours by default. It is in your power to avert this crisis, if you act decisively.
mitvorzuglicherHochachtung,
IhrSpengler
Official Panic Hymn Intoned by Famous Out-of-Tune Choir
In Europe, everybody seemed eager to get his 2 cents in as the crisis once again intensified.
Alexis Tsipras again promised his followers the impossible – namely that he alone could square the circle and deliver both more spending by the government by 'canceling the bailout' and let Greece retain the euro – whereby it should be noted that no-one can be 100% sure if he will or won't be able to blackmail the rest of the euro-group, but our guess remains that the answer is actually no.
If he stops hewing to the bailout conditions unilaterally, he can probably at best hope to be able to negotiate the precise conditions of Greece's exit. Note that it is certainly true that Greece remains as bankrupt as it was prior to the 'PSI' deal. However, recognizing this fact is one thing, while SYRIZA's political program is quite another. Let us not forget that it isn't the 'Coalition of the Radical Left' for nothing – nomen est omen in this case.
Meanwhile, Spain's finance minister de Guindos (the first Spanish minister of finance who has attained such a degree of international fame and recognition) insisted that Spain and Italy are the battleground on which the euro's fate is going to be decided. This is no doubt correct. Bloomberg reports that the IMF saw fit to deny that it is getting in on the act as the extent of recent capital flight from Spain came to light:
“Spanish Economy Minister Luis de Guindos said the euro’s future will be played out in the coming weeks in Italy and Spain, as data showed record levels of capital leaving his country.“I don’t know if we’re on the edge of the precipice, but we’re in a very, very, very difficult situation,” he told a conference in Sitges, Spain, yesterday. Spain and Italy are where the “battle for the euro” is being fought, he said.The International Monetary Fund denied that it was preparing financial aid for Spain, as data yesterday showed that 66.2 billion euros ($81.8 billion) of net capital flows left the country in March.Spain is at the crux of the debt crisis now in its third year as Prime Minister Mariano Rajoy’s government tries to shore up the country’s banks amid a recession and the highest unemployment in Europe. The crisis has exposed the disparities in the 17-nation euro region’s economy, with Spain’s extra borrowing costs overGermany’s rising to the highest in the euro’s history this week.”
(emphasis added)
March was an eternity ago in financial market terms. How much more capital has fled since then? This doesn't sound very reassuring, that much is certain.
* * *
Speaking of Italy, Uncle Silvio is apparently still among the living – and he's talking to the press too. A friend referred to him as 'Burlesquoni' upon hearing of his latest proposal. He has discovered how to save Italy from Monti's austerity regime: simple, print money! And having correctly identified Germany as standing in the way of this grandiose idea, he recommended it should simply leave the currency union (which it eventually actually might).
“Italy should start printing fresh euros and Germany should leave the currency union, former Italian Prime Minister Silvio Berlusconi said Friday, MF-Dow Jones reported."Here's my crazy idea; Let's start printing euros ourselves," Mr Berlusconi told an assembly of his center-right People of Liberty party's parliamentary deputies."Germany should leave the euro if it doesn't agree with the European Central Bank serving as a lender of last resort," he added, MF-Dow Jones said. If the ECB doesn't take on that role, Germany's role in Europe should be reviewed, he said.Mr Berlusconi resigned last November to make way for a technocrat government led by former European commissioner Mario Monti. Senior officials in government and at Italy's central bank have since said the country risked being unable to pay state employees due to trouble issuing sovereign debt.While no longer in power, Mr Berlusconi remains the founding leader of the party with the most parliamentary seats and hence his support for Mr Monti's government is considered crucial. The current legislature is due to end in the spring of 2013.Mr Berlusconi said he had no intention of being a candidate for prime minister or the head of state but that he was "at the service of his party as a coach."Mr Berlusconi, owner of the AC Milan soccer team, has long called for the ECB to serve as a lender of last resort, shorthand for urging it to buy government debt when private investors will not. Last summer he sought policy help from the ECB but was surprised to receive in exchange a letter from the central bank demanding that Italy speed up its budget consolidation, push through tough pension reforms and make it easier for companies to fire employees”
(emphasis added)
Now he's sniping from the sidelines, but it's probably a shrewd move from a political perspective. Let's call it early electioneering and a reminder to Monti as to who's who in the zoo.
The next Italian to lob a few verbal hand grenades into the proceedings was Mario Draghi, in his speech to the European parliament. In fact, both Marios criticized Germany, executing a kind of double-Mario tackle.
German Chancellor Angela Merkel was besieged by critics for letting the euro crisis smolder, with the leaders of Italy and the European Central Bank demanding bolder steps to stabilize the 17-nation economy.Italian Prime Minister Mario Monti and ECB President Mario Draghi pushed Germany to give up its opposition to direct euro- area aid for struggling banks. Monti further antagonized Germany by urging a roadmap to common borrowing.[…]Draghi told a European Parliament committee in Brussels that without more aggressive action by policy makers the euro “is being shown now to be unsustainable unless further steps are being undertaken.”He said it wasn’t his job to make up for the failures of policy makers. “It’s not our duty, it’s not in our mandate” to “fill the vacuum left by the lack of action by national governments on the fiscal front,” on “the structural front, and on the governance front,” he said.
(emphasis added)
Meanwhile, the Ostrogoth hordes decided to let leniency prevail in the case of Spain's ever more fantastic looking deficit target. As Henry the Fifth already knew, “when lenity and cruelty play for a kingdom, the gentler gamester is the soonest winner”.
Besides, what else can they do?
* * *“The German government shifted ground on Friday, supporting a European Commission proposal to give Spain more time to reduce its budget deficit, in a sign Berlin is prepared to take a more flexible approach to tackling the euro debt crisis.The European Commission called this week for Spain to be given an extra year to make the cuts demanded of it, because it is forecast to be in recession this year and next. Until now, Berlin has been cool to any measures that dilute austerity drives."Spain presented a stability programme in which it stated its clear intention to reach the 3 percent threshold in 2013," German finance ministry spokesman Johannes Blankenheim told a news conference when asked about the Commission proposal."We support Spain in its efforts to implement the necessary measures. But we also recognise that because of negative economic developments it will be difficult for Spain to reach its goals."Asked if this meant that he supported giving Spain more time, he replied: "I think that's what I've been saying."(emphasis added)Der Spiegel reported that even in far-away Washington, in the hallowed halls of the World Bank, the sense of panic was growing ever so slightly. This report had also more complete data on deposit money flight from Spain, showing an unhealthy progression. There was also a little more color on the Mario double-tackle.“Is it time for Europe to break the glass and pull the alarm? World Bank chief Robert Zoellick certainly thinks so. In an editorial for the Friday edition of the Financial Times, Zoellick wrote that "while those living in the euro-zone building, especially those on the executive floors, will not want to hear an alarm, they had best read the instructions. Events in Greece could trigger financial fright in Spain, Italy and across the euro zone, pushing Europe into a danger zone."Such sentiments about the dangers currently facing the European common currency are hardly new. But this week, concern at the highest levels appears to be slowly morphing into panic. Several senior European leaders have urged speedy action to prevent the situation in Greece and Spain from spiralling out of control — amid increasing indications that that is exactly what might be happening.European Central Bank head Mario Draghi provided what was perhaps the most urgent appeal to euro-zone political leaders on Thursday in comments delivered to the European Parliament in Brussels. He said the structure of the euro as it stands now is "unsustainable unless further steps are taken" and also criticized European heads of state and government for not being clear about their common currency strategy. Leaders, he said, "must clarify what is the vision … what is the euro going to look like a certain number of years from now?" Draghi also said that the ECB was unable to save the euro on its own and could not "fill the vacuum of the lack of action by national governments."Italian Prime Minister Mario Monti also got into the act on Thursday by demanding that the euro backstop fund, the European Stability Mechanism (ESM), be allowed to provide fresh capital directly to struggling European banks, a move that Germany has strictly opposed thus far. In a video-taped presentation for a conference in Brussels, Monti challenged Berlin to "think deeply yet quickly" about further instruments to combat the crisis facing Europe's currency. The focus of such cogitation, he said, should be the Continent's banks.The most immediate cause of concern this week is Spain. The country's central bank on Thursday released data indicating that some €97 billion — equivalent to 10 percent of the country's gross domestic product — had been pulled out of the country in the first three months of 2012 as people seek safer places for their money. Fully €66.2 billion fled the country in March alone, double the December figure, which had been a record to that point.”(emphasis added)Read the instruction manual? Not at too leisurely a pace, one hopes. As to what the euro will look like in a few years, the following image immediately suggested itself to us:
So outflows from Spain have basically gone 'parabolic' between January and March. No wonder then that the TARGET-2 liabilities on the books of the Bank of Spain have shot up especially sharply since the beginning of the year.
Finally, at least one eurocrat decided he had to take serious steps to save the currency. None other than Olli Rehn entered the fray with a dire warning crossing his lips. Given the fact that he's the world's most reliable contrary indicator, he may have singlehandedly saved the euro by choosing this moment to speak up:
“The 17-nation euro area is in real danger of disintegrating unless policy makers revamp the bloc’s fiscal and economic ties, Economic and Monetary Commissioner Olli Rehn said.“The way things are going and under the current structures, the euro area has a significant risk of breaking up,” Rehn said in a speech at a European Commission event in Helsinki. “We’re either headed for a deterioration of the euro area or a gradual strengthening of the European Union.”
(emphasis added)
We're saved!
Olli Rehn, his eyes presumably fixed on the Bloomberg ticker. He looks appropriately stricken as well.
(Photo via Bloomberg)
* * * *http://www.atimes.com/atimes/Global_Economy/NF05Dj04.html
SPENGLEROpen letter to Chancellor Merkel: Sacrifice SpainBy Spengler
Dear Federal Chancellor:
Friedrich Schiller wrote of the Thirty Years War that history had brought forth a great moment, but the moment encountered a mediocre people. The world today finds itself by contrast in a mediocre moment, but it still may find adept leadership.
No-one would have expected that Germany would decide the fate of the world financial system. International financial institutions - the International Monetary Fund, the Bank for International Settlements, and the European Central Banks - used to formulatethe consensus of major governments and elite opinion. For understandable reasons, Germany was content to take guidance from the international financial community and act as a member of Europe rather than as a national power.
Now the international consensus has collapsed, elite opinion is confused and Germany has become the arbiter of the European financial crisis. The US administration's economic policy has produced poor results and the American president wants to blame his problems on you. Your neighbors, the IMF, and the Obama administration are trying to persuade you to extend Germany's credit to paper over the indebtedness of the rest of Europe. Yet common sense makes clear that Germany's resources are finite, while German voters fail to understand why they should put their future in jeopardy to support countries plagued by corruption and inefficiency.
It is impossible to prevent the destruction of large amounts of nominal wealth, but it is indispensable to preserve the functioning of the banking system. Germany cannot bail out everyone, but it must create a firewall in the right location. This is a practical rather than an ideological matter. There are two questions: where should Germany provide support, and how? It is not enough to refuse the unreasonable demands of your partners, for example, to issue so-called eurobonds (guaranteed de facto by Germany but spent by Europe's laggards). You also must make clear to the markets what the worst-case scenario might be.
At present, Germany appears to respond to events rather than anticipate them. That increases uncertainty and the risk of a major financial crisis. If Germany acted with clarity, though, the outcome would not be a crisis, but rather the deliberate amputation of gangrenous parts of the financial system in order to salvage the whole. Source: Eurostat
This distortion in Spain's real economy - the massive misallocation of resources to the construction sector-is reflected in an enormous expansion of the banking sector. Spanish banks' debt on the international bond market grew twice as fast as in the United States during the past decade, and several times as fast as in Germany.
Exhibit 2: Bank debt grew much faster in Spain than elsewhere
Source: Bank for International Settlements
Exhibit 3: Financial institution debt as % of GDP
Source: Bank for International Settlements, IMF What is this 109% of GDP, the debt of Spanish financial institutions, actually worth? According to Spain's own data, delinquent loans amount to nearly a fifth of GDP, or 184 billion euros (US$228 billion). That would wipe out all the remaining shareholder value attached to the Spanish banking system.
It seems obvious from the data, however, that Spanish banks' bad loans are far in excess of the reported 184 billion euros. Alone in the world, Spanish banks drastically increased their lending after the 2008 crisis - by nearly two and a half times - while overall bank lending in the United States and the eurozone barely changed due to weak economic conditions. It is widely reported that Spanish banks are piling new loans of bad old loans in order to avoid reporting losses that now probably exceed two-fifths of GDP.
Exhibit 4: Capitalizing interest on bad loans - Spanish bank assets rise sharply since the crisis
Source: Banco de EspanaSpain's economy is dominated by a real estate bubble with an economic weight three times as great as the American real estate bubble at its height. At great cost, and with considerable pain, America has reduced leverage. As the McKinsey Global Institute reported in its January 2012 report on global deleveraging:
Since the end of 2008, all categories of US private-sector debt have fallen as a percent of GDP. The reduction by financial institutions has been most striking. By mid-2011 the ratio of financial-sector debt relative to GDP had fallen below where it stood in 2000. In dollar terms, it declined from US$8 trillion to $6.1 trillion. Nearly $1 trillion of this decline can be attributed to the collapse of Lehman Brothers, JPMorgan Chase's purchase of Bear Stearns, and the Bank of America-Merrill Lynch merger. Since 2008, banks also have been funding themselves with more deposits and less debt. Among US households, debt has fallen by 4% in absolute terms, or $584 billion. Some two-thirds of that reduction is from defaults on home loans and other consumer debt.In America, the tumor was operable - just barely. In Spain, where the tumor is three times the size in relative economic terms, it is inoperable. That is why Spain continues to increase leverage rather than reduce it. The patient (namely the Spanish banking system) must die with the tumor, and with it a very large part of Spanish private wealth, including Spanish bank debt held by Spanish households, pension funds, and insurance companies. Pensions and insurance payments will be reduced and the Spanish will be poorer.
Nonetheless, the deposits and other short-term obligations of the Spanish financial sector (and all European banks) must be guaranteed. Once its equity and $1.6 trillion in debt is reduced to zero, the Spanish financial sector will become a desirable investment for an outside investor with ready cash - the Chinese, or Canadians, or sovereign wealth funds. Maintaining the day-to-day functioning of the financial sector must be preserved in anticipation of the intervention of an outside buyer; it is an investment that will be repaid. The Spanish won't like having foreigners take over their finances, but they will have only themselves to blame. All of this will make clear to the Italians why reform is a much better idea than bankruptcy. Italy's condition is much better than Spain's. It never had much of a real estate bubble; it has relatively little private debt; it has hundreds of first-rate companies with secure niches in world export markets; and it has valuable national assets whose sale could reduce its sovereign debt considerably. What Italy lacks is political clarity. The appropriate handling of Spain will provide the required object lesson.
You should ignore pressure from the Spanish government and the international institutions to support the debt of Spanish banks. It is worthless, and there is no point impairing Germany's credit to support a $1.6 trillion pile of worthless paper. The international institutions will tell you that a Spanish bankruptcy will compromise the French and British banking systems, because French banks are massively invested in the public and private debt of other European nations. The old capital coverage rules for commercial banks made it prohibitively expensive to own subordinated debt, but very cheap to own senior debt.
You should ignore these warnings. If necessary, bail out the French banks after Spain's bank debt has been written down to an appropriate valuation, which probably will be close to zero.
Exhibit 5: Net direct exposure to debt of Greece, Italy, Ireland, Portugal and Spain by banks participating in ECB stress test
Source: European Banking Authority, McKinsey Global InstituteThe subordinated debt of French banks may not survive. But that is owned by households directly or through pension funds and insurance companies, and is mostly in French hands. If the French banks' subordinated debt is valued at zero, the French people will be poorer, but there will be no systemic consequences. French savers will be angry, but that is a matter between them and President Francois Hollande. The senior debt of the French banks, though, is viable - because the French economy is viable - and supporting the French banks' senior obligations is required to prevent a financial crisis and economic collapse.
It would be something of a revolution in world affairs for Germany to ignore the international consensus and undertake to resolve the crisis on its own initiative. I submit to you, Federal Chancellor, that it is time for such a revolution.
You are the most experienced and best qualified among the leaders of the Free World. America is led by a man who was a first-term state senator in Illinois when you were in your second year in office; France is led by a man who has never held high government office; Italy is led by a technocrat with no political base; it doesn't matter who leads Japan, and one can only have sympathy for whomever governs Spain. For the time being the head seat at the table is yours by default. It is in your power to avert this crisis, if you act decisively.
mitvorzuglicherHochachtung,
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