Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.
Wednesday, January 2, 2013
Eurozone watch for 2013 - Greece ( how long before their need for a fourth bailout due to their still insolvent banking system becomes discussed ) and Spain naturally have the potential for disaster - but keep your eyes on France as Hollande's stubbornness with his tax scheme has the potential for havoc !
Curious how Europe's insolvent peripheral countries, where the government is increasingly the only source of demand (if not funding), have managed to avoid falling into a primary budget deficit abyss? Simple: instead of paying their outstanding bills, Europe's insolvent nations are simply not paying them. And with the entire European bond market now a central bank controlled policy mechanism, meaning there are no longer any checks and balances to keep governments honest, there is no pressure on said countries to actually pay. Hopefully those companies on the other end of these unpaid invoices have as generous a benefactor as the ECB to fund their now persistent and growing undercapitalization.
Overdue payments have long been a bigger problem in southern Europe than in the north. The debt crisis that has restricted lending to peripheral euro-zone governments is aggravating the problem, which is rising in Greece and Italy as well. Spain's crisis, set off by the collapse of a real estate boom nearly five years ago, is particularly acute in areas where declining revenue from real estate taxes pummeled municipal and regional finances.
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Suppliers are depleting their cash reserves, forgoing investments and postponing payments to their own providers.
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Many have dismissed workers, pushing up a national unemployment rate that exceeds 25%. A growing number are filing for bankruptcy—27% more through September of this year than in the same period in 2011, according to Spain's judiciary.
And the stunning graphic that shows why Europe is still #1 in football, and can kick the can the farthest of all:
Lending in Spain has all but dried up. Banks don't want to (or cannot) lend because they are capital impaired and there are too few creditworthy risks.
In such an environment, lending is not wise. It will lead to more losses. But that is not how government bureaucrats think. Prime minister, Mariano Rajoy is preparing measures to 'desbancarizar' save the economy and SMEs
He acknowledged President Mariano Rajoy in balance the first year of government: the main problem of the economy to start recovery is the lack of financing for SMEs [Small and Medium Enterprises]. With that goal-getting liquidity regrease economic system, the government last a number of measures to facilitate the financing of small and medium enterprises. Or what is the same, it is 'desbancarizar' the Spanish economy far too dependent on credit institutions in granting loans or other financing of productive activity.
The Government is considering the creation of new instruments for SMEs operate with the State guarantee, which is considered key to boost economic activity. At the same time, they want to boost mutual guarantee societies, an instrument in the hands of the regions that did not just start with all its potential. In parallel, the Ministry of Economy is betting big on the credits of the ICO for SMEs, about 22,000 million euros in 2013 for self-employed and SMEs.
The result of this 'banking' of the Spanish economy is lethal. There are no corporate funding mechanisms that provide a continuous flow of resources, which is an additional difficulty facing Spanish companies in a recessionary environment. With the addition of that full financial restructuring-dunk entities to restore its solvency levels, can not allocate funds to finance productive activity. To this we must add that the public sector is eaten much of the credit to finance their high fiscal deficits, the so-called crowding out effect, which involves the removal of private economic agents in funding.
Spain Beyond Repair
"Spain hopes to boost small business access to finance outside of the banking world by encouraging the market to accept paper of smaller businesses, by guaranteeing debt, and via the official credit office", writes reader Bran who lives in span and forwarded the above link.
Regardless of the precise translation of "desbancarizar", I am certain it will fail. Quite literally Spain is beyond repair, at least within the eurozone.
Mike "Mish" Shedlock
and Greece is beyond repair as well..... http://www.zerohedge.com/news/2013-01-02/happy-new-year-germany-greece-needs-new-bailout
Happy New Year Germany: Greece Needs A New Bailout
Submitted by Tyler Durden on 01/02/2013 20:34 -0500
When it comes to the main sovereign story of 2011 and 2012, namely the endless bailout of Greece, now in its third iteration, the conventional wisdom is that courtesy of the near elimination of the country's private sovereign debt and the fact that its official foreign debt held by benevolent taxpayer funded globalist powers (IMF, ECB, EFSF) has been mostly converted into a zero-coupon, perpetual piece of paper, the country is fine. After all it has no debt interest expense to finance, and the only shortfall it has to plug is that created by its primary budget deficit (which as we showed earlier is "improving" on a year over year basis not because the economy is improving, but because the Greek government is simply refusing to pay its bills). So there is nothing more to do but sit back and wait while the economy slowly recovers, the unprecedented internal imbalance with Germany is gradually aligned, are the unemployment rate drops, (while hoping that the population does not die out first) right? Wrong.
What everyone is forgetting is that the heart of the Greek problem is not the Greek sovereign debt, and certainly not the rate of interest, but the fact that Greece's financial system, i.e. its banks, are utterly insolvent: and with the private banking system no longer creating money by handing out loans to a just as insolvent broader population (and the ECB certainly no longer injecting direct liquidity into the Greek economy) there is little that supports any form of economic growth (the Austrians out there will immediately recognize the problem: if money is not being created, the economy is not "growing", period). After all there is a reason why of the countless billions in Greek bailouts, of which the majority was used primarily to fund interest and maturity payments to other banks such as Deutsche Bank, the biggest portion that remained on the ground in Greece never made it to the actual people, but served to prop up the Greek banks, some €50 billion.
What was this money used for? Simply said, to plug capitalization shortfalls arising from one of two things: i) a gigantic outflow of deposits from the local banking system, as Greek lost all confidence their money was safe in the local banks, which meant Greek banks had to promptly find the money to pay their depositors lest a countrywide bank run developed which would then result in a Europe-wide financial panic, and ii) the soaring notional amount of non-performing "bad" loans, which remained as placeholders on the bank balance sheets, market at whatever mythical number the local accounts let the banks mark them at, but which generated zero inbound cash flows. Which, incidentally, would mean that deposits were undercollaterialized, and the realization that NPL levels are stratospheric and going higher, would lead to i) and the appropriate dire consequences.
Which brings us to the topic of today's post.
Moments ago Kathimerini reported that in 2012, the amount of non-performing loans has exploded by a laughable amount, rising some 50% from December 2011, when it was "only" 16% and stood at a gargantuan 24% last month (indicatively, in the US this would mean that some $1.7 trillion in loans was nonperforming). And therein lies the rub, because as Kathiermini prudently notes, the "bad loans come to a considerable 55 billion euros. This means that the sum of NPLs already exceeds the total funds set aside for the recapitalization of the local credit system,which amounts to €50 billion."
Oops.
This means that not only every single euro allotted for the bailout of the Greek banking sector has been used up to plug a gaping NPL shortfall, but already Greece is €5 billion short.
Sure enough, the last thing Kathimerini would want to do is give people the impression that, once again, their deposits are effectively impaired with the soothing proclamation that "there has been a notable improvement in economic conditions that is reflected in the significant slowdown in the rate of creation of new bad loans."
So 16% to 24% is a slow down? Maybe the fact that Greek unemployment is rising at "just" 1% of total each month is also a "notable improvement."
No, we doubt Kathimerini would be so audacious to proclaim the above chart of Greek unemployment as "notably improving". But that's a problem, because the level of NPL, the level of unemployment, and the general state of the economy (whose Q3 GDP imploded by 7.2%, the worst quarterly drop following a 6.7% GDP decline in Q1, and 6.3% in Q2) are closely linked, and one can't improve without the other. And usually the catalyst the drives an overall bounce in the economy is some endo- or exogenous source of money demand and creation (usually for nations in depression it involves war).
Absent that, there can be no improvement.
Which, following the preceding optimism, is precisely what the Kathimerini author admits: "However, unless the growth of new NPLs is contained, banks may need yet another recapitalization process at the end of 2013, the same sources say."
In other words, dear Germans, the country that you, and everyone else, though is now saved and needs no more bailouts, at least according to the current Finance Minister, not the previous one who now it appears was avoiding paying his taxes like the plague (ah yes, the Greek tax collections "issue" - a fun topic for another day), is already down €5 billion and in need of bailout Number 4.
Expect this news to be sprung on a witless Germany in the coming months, but most likely not before the Merkel reelection. After all the last thing Germany needs to understand is that the hundreds of billions "invested" to preserve the Eurozone have achieved precisely nothing, and the gaping black hole is bigger and blacker than ever before.
But at least the hedge funds who bought worthless Greek bonds at 15 cents on the euro and made three times their money in three month, are happy.
Everyone else, i.e. the Greek people, good luck. For the fourth time.
The war of words between the coalition government and SYRIZA over the alleged doctoring of the Lagarde list of Greek depositors with Swiss bank accounts intensified on Wednesday, with government spokesman Simos Kedikoglou accusing the leftist opposition of “political opportunism” and SYRIZA officials suggesting that a parliamentary probe should not be restricted to former Finance Minister Giorgos Papaconstantinou.
The comments by Kedikoglou, who also accused SYRIZA of “trampling over the fundamentals of rule of law,” came amid rumors that the party’s proposal for the creation of a parliamentary committee would look to the indictment of socialist PASOK chief Evangelos Venizelos, who succeeded Papaconstantinou, as well as the latter. The leftists, who are expected to unveil their proposal tomorrow, are also expected to criticize current Prime Minister Antonis Samaras and Finance Minister Yannis Stournaras. Questioned by reporters on Wednesday, Stournaras sought to play down the prospect of attempts to implicate him, noting that he had been the one who had arranged for Greek authorities to get another copy of the original Lagarde list. “In a democracy, everyone can do what they want,” he said. “If SYRIZA wants to put me on the spot, let it do so. I have no objections,” he added.
Earlier in the day, Eleni Papaconstantinou-Sikiaridis, a first cousin of Papaconstantinou and one of the three names removed from the original list given to Greek authorities in 2010 by the then French Finance Minister Christine Lagarde, tendered her resignation from the state privatization fund (TAIPED). A corporate lawyer, Papaconstantinou-Sikiaridis noted in her resignation letter that the money held at HSBC in Geneva is “the legal wealth of myself and my husband.” “The public references to my name are groundless and my career path is well-known,” she wrote, adding that she was resigning to avoid creating problems for TAIPED’s operation. Prosecutors are expected to summon Papaconstantinou’s three relatives to offer explanations regarding the source of their funds and whether or not they have been taxed. They are also expected to summon the former
secretaries of Papaconstantinou, to whom the ex-minister claims to have given the list once he received it from Lagarde.
Some 2,500 civil servants who have been put on a so-called labor reserve scheme on reduced pay are to be transferred to understaffed parts of the public sector during the course of next month, Kathimerini understands.
A circular, expected to be signed by Administrative Reform Minister Antonis Manitakis as soon as Thursday and distributed to ministries and state bodies, is to seal the transfer of the 2,500 employees and to provide a “guide” to the authorities as regards the scheduled transfer of another 25,000 staff until the end of the year. There are currently 7,500 vacant spots to be filled in the civil service. Competition is expected to be fierce, with ministries and state organizations submitting their demands to a special committee that will decide who the jobs will go to.
In a related development, two regional authorities on Wednesday appealed to the Council of State, the country’s highest administrative court, to annul Greece’s second debt deal with international creditors which foresees the abolition of management and administrative positions at local authorities as part of a broader scheme to streamline the bloated public sector. The regions of Western Greece, based in Patra, and the Southern Aegean, based on the island of Syros, claimed that the provisions of the country’s second memorandum were “a blatant violation” of the Constitution.
Predictions that the Greek unemployment rate will rise to 30% as austerity budget cuts imposed as part of the recession hit economy's bailout take effect at the end of this month.
On 31 January pensioners and civil servants will experience their first real wage cuts – on top of ever growing taxes and utility prices – in more than a year.
"A lot of people especially in the middle class are going to find they have no salaries at all as reductions, ranging from 15 to 20%, are applied retroactively," said Kyrtsos, an opponent of the growth through austerity policies that lenders have placed as the prize of further aid. "All the measures we have been talking about for the past six months," he said referring to the budget reforms the governing coalition has been forced to draft since its election in June, "will have to be implemented and that will create all kinds of side-effects. Unemployment will rise to 30%. No civilised society can function like that."
Supporters of Leader of the Greek conservative party New Democracy Antonis Samaras wave flags during a pre-election speech in Athens on May 3, 2012. Photograph: ARIS MESSINIS/AFP/Getty Images
Updated
Greek debt crisis 'far from over'
Country faces year of destiny, with doubts about survival of government and of its eurozone membership as austerity bites
Greece's finance minister, Yannis Stournaras, has said Greece still faces the possibility of bankruptcy. Photograph: Yorgos Karahalis/Reuters
In the three years that Greece has been engulfed by the drama of its debt, crises have come and gone. But the next 12 months are likely to be more critical yet with politicians and pundits predicting that 2013 will ultimately define whether Athens remains in the eurozone. For once, Greeks are in accord with the German chancellor, Angela Merkel, who, adding to the prevailing pessimism, emphasised in her new year address that the worst crisis to ravage Europe since the second world war "is far from over".
Few doubt that the continent's most powerful leader had Greece – the country she recently confessed to thinking more about than ever before and not "without a certain inner involvement" – in mind. The uncertainty that has enveloped the nation since the debt drama erupted beneath the Acropolis has not been alleviated by the passage of time.
After five straight years of recession, the eurozone's weakest link moves into 2013 with an economy set to further contract, unemployment at a record 26%, one in three living on or below the poverty line, and the worst of austerity yet to come. In the runup to Christmas, even the Greek finance minister, Yannis Stournaras, felt fit to admit that despite being the recipient of €240bn in EU and IMF rescue funds – the biggest bailout in global history – Greece could still default on its massive pile of debt, a move that would result automatically in exit from the 17-nation bloc.
"We still face a possible risk of bankruptcy," he told the FT, adding that Athens's fate would undoubtedly be determined by the ability of the prime minister, Antonis Samaras's fragile coalition to survive the unrest that will inevitably erupt with enforcement of cuts worth €9.2bn in the new year alone.
Much would depend on whether the debt-stricken country meets the expectations of international creditors keeping insolvency at bay. And whether Greeks have the stamina, and their government the resolve, to accept and enact painful reforms.
"We can make it [in 2013] if we stick to the programme agreed with the EU and IMF," said Stournaras. "What we have done so far is necessary but not sufficient to achieve a permanent solution for Greece."
Analysts speak of a year of two parts, with the German general elections in September expected to play a pivotal role. Only then, say observers, will a newly installed government in Berlin – the main bankroller of bailout funds to date – be prepared to take the potentially costly decision of endorsing an official sector writedown of Athens's staggering €340bn debt load.
For while the fiscal adjustment made by Greece is by far the biggest of any OECD country in modern times, there is no one who believes that its debt load is anywhere near managable. "By about June everyone will be talking again about the inability of Greece to perform economically," said Giorgos Kyrtsos, a rightwing political commentator. "If the economy is to function again and the country to remain in the eurozone it has to be absolved of at least 50% of its debt. Currently, the situation is hopeless with debt at 180% of GDP."
On 31 January pensioners and civil servants will experience their first real wage cuts – on top of ever-growing taxes and utility prices – in more than a year.
"A lot of people, especially in the middle class, are going to find they have no salaries at all, as reductions, ranging from 15 to 20%, are applied retroactively," said Kyrtsos, an opponent of the growth through austerity policies that lenders have placed as the price of further aid. "All the measures we have been talking about for the past six months," he said, referring to the budget reforms the governing coalition has been forced to draft since its election in June, "will have to be implemented and that will create all kinds of side-effects. Unemployment will rise to 30. No civilised society can function like that."
With the country so dependent on cash handouts from foreign creditors, Samaras is acutely aware that there is no room for relaxation. The government is hoping that a long-delayed €34bn package of rescue loans, disbursed in December, will finally help energise Greece's near lifeless economy. "But," says Aliki Mouriki, a sociologist at the National Centre for Social Research, "the money that will be thrown into the Greek economy will take a very long time to trickle down to the people. Joblessness will continue to grow, the recession will get worse, more businesses will close. The big question will be who will survive?"
With many predicting a backlash by austerity-weary Greeks, there is speculation over whether the ruling alliance will last longer than the spring. An opinion poll released by the Kapa research group this week showed 77.3% were unhappy with the coalition.
Last year's double elections took the heat out of a population that long ago reached boiling point, pundits say.
"It delayed the expression of unrest," said Mouriki. "But unless people see a way out of this deplorable situation there will be an explosion. Anger and despair are building up. The explosives are there."
Many believe a clampdown on tax evasion and the perceived privileges of the rich, as well as a successful privatisation campaign and foreign direct investment will be critical to keeping chaos at bay. "In June the tourist season will begin and that will help," added Mouriki. "But until then we will have to hold our breath."
French president François Hollande makes his new year address in Paris. Photograph: Lionel Bonaventure/AP
François Hollande on Monday vowed to press on with his super-tax on the rich, despite a damning decision by France's top court to throw it out as unconstitutional. But it is uncertain when a new version of the tax will be introduced and whether it will be watered down.
In his televised new year's address, the French president deliberately did not mention the figure of a 75% tax on incomes over €1m (£800,000), leaving the way open for his deeply symbolic measure to be changed.
"We will still ask more of those who have the most," said Hollande. He added that the exceptional tax on France's wealthy would be "adjusted without changing its objective" but did not provide details of any new proposal.
The president, who is at record unpopularity levels in the polls as he faces a grim year of further economic gloom in France, suffered a major personal blow over the weekend when France's highest court threw out his tax proposal.
The temporary tax, which Hollande had described as an act of "morality" and "patriotism" by the wealthy, now faces a delay of at least a year, if not a mortal blow.
The measure was rejected as unconstitutional on the basis of a technical issue, leaving France surprised that the government could have overlooked the fine detail of its flagship measure. The embarrassed government was attacked for amateurism by political opponents to the right and left of Hollande.
France's constitutional council ruled that the 75% tax was unfair because it flouted the law in France that taxes are set per household, not per individual. For example, if one member of a couple earned €1.2m and the partner earned nothing, they would face 75% tax on €200,000. But a couple who earned €900,000 each, €1.8m between them, would not be subject to the super-tax.
It is not clear whether the tax could now be made to apply to households that jointly earn over €1m, which would increase the number it affects from around 2,000 people to some 15,000.
Or the income threshold could be raised to €2m, so the tax affected far fewer households.
The government's lack of haste to force through a revised measure has underlined how the 75% tax, which would have brought in only €200m out of €20bn of new taxes next year, was more symbolic than effective in bringing in revenue. But it had become a crucial political marker for Hollande in terms of his support on the left. Dropping the measure altogether would be seen as very damaging to his political credibility.
Hollande also used his new year's address, a setpiece in French politics, to reiterate what he has called his "great battle for employment".
He has promised to stem France's constant rise in joblessness and ensure the numbers start to drop by the end of 2013."All our efforts will be aimed at a single objective: reversing the unemployment trend within a year, whatever the cost,"he said.
This task now looks extremely difficult after France saw its 19th month of rising unemployment. The new year could soon see France breaking its own 1997 record of 3.2m unemployed.
Hollande said he did not underestimate the "serious difficulties" facing the government, admitting "this march forward has not been without bumps or setbacks" but insisting his reforms would get France "out of this crisis faster and stronger".
Submitted by Tyler Durden on 01/02/2013 07:47 -0500
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