http://hat4uk.wordpress.com/2013/08/14/global-looting-the-numbers-that-all-point-to-imminent-bank-bailins/
The amusing news overnight was that following slightly better than expected Q2 GDP data out of Germany (0.7% vs 0.6% expected and up from 0.0%) and France (0.5% vs 0.2% expected and up from -0.2%), driven by consumer spending and industrial output, although investment dropped again, which meant that the Eurozone which posted a 0.3% growth in the quarter has "emerged" from its double dip recession. The most amusing thing is that on an annualized basis both Germany and France grew faster than the US in Q2. And they didn't even need to add iTunes song sales and underfunded liabilities to their GDP calculation - truly a miracle! Or perhaps to grow faster the US just needs higher taxes after all? Of course, with the all important loan creation to the private sector still at a record low, and with the ECB not injecting unsterilized credit, the European depression continues and this is merely an exercise in optics and an attempt to boost consumer confidence.
GLOBAL LOOTING: The numbers that all point to imminent bank bailins
Unpaid Greek bank loans exceed total Greek bank recapitalisation budget.
€4 trillion hole in the EU banking system
US Fed ships €1.3 trillion of prop-up money into eurozone
French debt is 174% of gdp
ClubMed debt is now mathematically unrepayable
“Ignore what they tell you,” a famous Wall Street trader once told Mark J. Grant, “just look at the numbers”. This was always the advice I gave to trainee advertising strategists: most people are bored by tables…decide not to be bored by the tables, and you will rule the Kingdom of the Blind.
As you’ll have seen from yesterday’s comment thread here, the Chairwoman of the EU Parliament’s Economic & Monetary Affairs Committee wrote to The Slog yesterday and denied there was any law on the Statute to enable a legal bailin. She did, however, admit that some existing legal instruments “are an issue”. I pointed out that they had no legal right to subordinate Greek bondholders or rape Cyprus, but they did it anyway. As to the Rapid Response Mechanism(RRM), she had no answer. It was however a very polite letter: it had an air of concern to it, in that MEPs were having to “insist” on this, that and the other thing. The truth is, it’s already too late for concern; as my original source asserted, all the mechanisms are in place.
We must now turn to more evidence supporting the proposition that speed is of the essence in the minds of Brussels-am-Berlin and the ECB….and even Washington/Wall Street. You see, the Americans have done the numbers too. The ‘unlikely eventuality’ always referred to in EC proposals is a racing certainty. So, here are some key facts….and a lot of numbers:
* A German opposition SPD spokesman said on Monday, “By disputing the need for additional aid for Greece, the Chancellor is lying to the People before the election.” Well, fair enough, he would say that…there’s an election on. But the numbers here are very clear: last month’s approval of a new loan to Athens of €5.8 billion is a pee in the Pacific compared to the shambolic situation there. Non-performing bank loans in Greece now total €88 billion. These loans exceed the total funds set aside for the recapitalization of the Greek banks, €80.5bn. People contacted in the US and Europe over the last week provided a median capital shortfall estimate in the European banking system (that includes the UK by the way, a not inconsiderable part of it) of around €3 to 5.5 trillion. US investment veteran John Embry offered an uncannily similar figure at the weekend – $4trillion.
* Probably because of this widely held view, in July this year alone the US Fed deposited some €1.3 trillion in unspecified “European banks”. That’s €48bn more than they have committed to U.S. banks.This isn’t the first time the Americans have refilled some of Mario Draghi’s insane pit of debt. But this is bigmoney, pop pickers. It might also explain why Uncle Ben’s Mice are keen to taper off the free money aka QE to the US markets.
* Italy’s situation is rapidly spiralling down the plughole: government debt rose to a new record €3trillion earlier this week. But that’s no problem, because the economy grew 0.3%, so that’ll fix it, hmm? And 0.3% of not very much is…have to hurry you…
* Portugal is desperately close to default. Its deficit has narrowed considerably, but it’s way behind on the debt payments. The debt to GDP for this year is forecast to be 123%. More to the point, the country is almost out of cash. If Portugal goes, Spain goes.
* One suspects that all this maraca-rattling about Gibralter is, as with Argentina and the Falklands, a handy diversion. Spanish bankruptcies are up 45%. Its economy contracted again in Q2, unemployment remains at 26%, and debt to GDP is running at 92%….up from 85% last year.
* Greek debt will reach 175% of GDP by the end of this year, according to data in the Economist. Two years ago the idea was for it to be 118% by now. Just a fraction out there, Ms Lagarde. Situation normal.
* The disaster that still dare not be mentioned very much in the media is France. France is very big, right? What do you think its debt to GDP ratio is – 85%? 115%.Try 174%. And its economy is contracting….just at the time Francois Hollande decides to, um, put up personal and corporate taxes. Novel, you have to hand that to the bloke.
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President Hollande’s reaction does raise a key issue in relation to debt repayment. It’s often ignored by the clever folks because it doesn’t use phrases like Open Bank Reconciliation via European Stability Something or Other Mechanism. It’s this: sod the debt, look at the revenues available to pay it off.
This is the Eurozone’s core problem: debts are rising, and revenues are falling.
Some of this is thanks to the Herman van Schäuble-Merkel Congolese school of econo-fiscal management, but the vast majority of it is down to the inability of debt holders, Sovereigns and banking firms to write off debt. This is turn is a function of the average very stupid person’s inability to extrapolate the effect of ever-more unmanageable debt. Oddly enough, the debt simply gets bigger. But to couple this with the Congolese approach to economic growth was a master stroke that doubled the rate at which debts got worse: because in this game, it’s all about the debt v revenue trends. Not rocket science, just the sort of mathematics accessible to most 12 year olds.
The simple truth is this:
1. The European banking system is nowhere near solvent.
2. The ECB is being propped up by the US Fed.
3. The Fed is tapering off support for the US economy, whose ‘recovery’ is a mirage, and still overshadowed by gigantic debt.
4. The entire ClubMed area is underwater with no hope of ever repaying debt based on the existing economic ‘model’ being applied to it. After Labor Day early next month, the Dow folks are back at their desks. I suspect their general view won’t be positive, about either the US or the EU. Shortly after that, Merkel will probably be re-elected. Always beware the politician who just got back in: that’s the very time they’re most likely to do something drastic.
5. In the next year or so, bank failures in both regions are a near-certainty. It is possible that the entire Spanish banking system could collapse.
6. The EC already has mechanisms in place that could railroad bail-ins through in the EU as a whole. In his Budget speech two months ago, Osborne directly referred to this as “the future model” for handling bank defaults. Either an emergency session of the E&MC or the invoking of the RRM in the eurozone could legalise a bail-in in the eurozone tomorrow.
To suggest in this context that Sovereigns and central bankers won’t come after the cash in bank accounts and pension funds is to be like the Jew who decides to sit tight in Vienna as the Nazi troops march in. The idiotic thing is that there is nowhere near enough cash lying about among ordinary squeezed middle savers to pick up the tab for the mad banking and borrowing practices that have been allowed to become the norm over the last fifteen years.
The only sensible and logical conclusion would’ve been to write off that EU sovereign debt which was obviously unrepayable two years ago. But instead, the facade of sustainability has been maintained, and scorched-earth economics applied. Now we are going to be asked to pay for it.
We should not. Here in Britain the Co-operative rape has already begun. Next in line, I predict, will be RBS. The time to resist this was three months ago. So I suggest we start yesterday.
Europe Returns To "Growth" After Record 6-Quarter Long "Double Dip" Recession; Depression Continues
Submitted by Tyler Durden on 08/14/2013 - 07:18
The amusing news overnight was that following slightly better than expected Q2 GDP data out of Germany (0.7% vs 0.6% expected and up from 0.0%) and France (0.5% vs 0.2% expected and up from -0.2%), driven by consumer spending and industrial output, although investment dropped again, which meant that the Eurozone which posted a 0.3% growth in the quarter has "emerged" from its double dip recession. The most amusing thing is that on an annualized basis both Germany and France grew faster than the US in Q2. And they didn't even need to add iTunes song sales and underfunded liabilities to their GDP calculation - truly a miracle! Or perhaps to grow faster the US just needs higher taxes after all? Of course, with the all important loan creation to the private sector still at a record low, and with the ECB not injecting unsterilized credit, the European depression continues and this is merely an exercise in optics and an attempt to boost consumer confidence.Wednesday, August 14, 2013
German growth leads the eurozone out of recession but can it really lead the eurozone out of its crisis?
As has been widely covered today, the eurozone exited recession in the second quarter of this year, growing by 0.3% (over expectations of 0.2%).
We posted our thoughts on this expected ‘turnaround’ in the eurozone a couple of weeks ago, so we won’t rehash them. Needless to say the figures are a positive but there is still plenty of negative data around (unemployment, bank lending to real economy, consumer confidence), so European leaders should refrain from getting overexcited.
The key point for us remains this issue of divergence. It’s worth noting that Germany and France played a significant role in pulling the eurozone average growth up. There also seems to be a prevailing logic that German growth can play a big role in pulling the eurozone out of its crisis. As we have noted before we’re fairly sceptical of this idea for a couple of reasons.
There are two mechanisms through which German growth could in theory help boost struggling eurozone countries:
(Data up to end of 2012, however imports from eurozone countries have continued to decline in 2013)
As we have discussed before, and as the graph above shows (click to enlarge), German imports from peripheral eurozone countries have decreased substantially with only Italy featuring as one of Germany’s top ten trading partners. Furthermore, imports from other EU countries have declined to 56% of total imports – with the eurozone accounting for approximately 38% of this and peripheral eurozone states a small part of this.
Therefore, even if GDP and consumption are growing quickly in Germany it’s not entirely clear that this would have a significant knock on effect on the countries that need it most. The Netherlands, France and Italy are the most likely to see some boost. The IMF itself noted recently that using fiscal policy to boost Germany GDP would provide limited help for the eurozone. It ultimately also depends where Germany’s economic growth comes from, if driven by its own exports or government spending the impact would be even further limited.
2. Providing space for the periphery to boost exports
The theory here is that Germany ‘reflates’ allow wages and unit labour costs to grow and focuses its economy more on domestic consumption and investment rather than exports. This allows for the other eurozone economies to step in and export more, not least because they look relatively more competitive.
However, as the graphs above show (via UBS, click to enlarge), in many cases the struggling peripheral countries do not export the same goods as Germany (transport equipment, electrical equipment, chemicals), although there is some overlap on food and financial services. In any case, it’s far from clear that the struggling peripheral countries would be able to step into any breach left by Germany (particularly with heavy competition from emerging markets). Furthermore, many German exports used component parts from elsewhere in the EU, so decreasing them could actually have negative knock-on impact in certain sectors.
Another point worth keeping in mind is that a rapidly growing Germany would put added strain on the one-size-fits-all policy of the ECB. With the ECB now forecasting that interest rates will stay low for some time, if Germany continues along this growth path it may not be too long before the Bundesbank becomes concerned about the monetary policy being too lax.
It almost goes without saying that strong German growth is a good thing for the eurozone generally (breeds confidence and helps encourage investment) and strong economic growth should be the target for all countries. However, as the points above demonstrate, this does not mean it will be enough to drag the eurozone out of its crisis (i.e. it may be necessary but it is far from sufficient) and is certainly no panacea. The key issues to address remain the structural flaws in the eurozone and the lack of competitiveness within many of the peripheral economies.
We posted our thoughts on this expected ‘turnaround’ in the eurozone a couple of weeks ago, so we won’t rehash them. Needless to say the figures are a positive but there is still plenty of negative data around (unemployment, bank lending to real economy, consumer confidence), so European leaders should refrain from getting overexcited.
The key point for us remains this issue of divergence. It’s worth noting that Germany and France played a significant role in pulling the eurozone average growth up. There also seems to be a prevailing logic that German growth can play a big role in pulling the eurozone out of its crisis. As we have noted before we’re fairly sceptical of this idea for a couple of reasons.
There are two mechanisms through which German growth could in theory help boost struggling eurozone countries:
- Firstly by boosting German demand for imports from these countries significantly.
- Secondly by moving Germany away from its export model (possibly through decreased competiveness) allow these countries to fill that gap and export more.
As we have discussed before, and as the graph above shows (click to enlarge), German imports from peripheral eurozone countries have decreased substantially with only Italy featuring as one of Germany’s top ten trading partners. Furthermore, imports from other EU countries have declined to 56% of total imports – with the eurozone accounting for approximately 38% of this and peripheral eurozone states a small part of this.
Therefore, even if GDP and consumption are growing quickly in Germany it’s not entirely clear that this would have a significant knock on effect on the countries that need it most. The Netherlands, France and Italy are the most likely to see some boost. The IMF itself noted recently that using fiscal policy to boost Germany GDP would provide limited help for the eurozone. It ultimately also depends where Germany’s economic growth comes from, if driven by its own exports or government spending the impact would be even further limited.
2. Providing space for the periphery to boost exports
The theory here is that Germany ‘reflates’ allow wages and unit labour costs to grow and focuses its economy more on domestic consumption and investment rather than exports. This allows for the other eurozone economies to step in and export more, not least because they look relatively more competitive.
However, as the graphs above show (via UBS, click to enlarge), in many cases the struggling peripheral countries do not export the same goods as Germany (transport equipment, electrical equipment, chemicals), although there is some overlap on food and financial services. In any case, it’s far from clear that the struggling peripheral countries would be able to step into any breach left by Germany (particularly with heavy competition from emerging markets). Furthermore, many German exports used component parts from elsewhere in the EU, so decreasing them could actually have negative knock-on impact in certain sectors.
Another point worth keeping in mind is that a rapidly growing Germany would put added strain on the one-size-fits-all policy of the ECB. With the ECB now forecasting that interest rates will stay low for some time, if Germany continues along this growth path it may not be too long before the Bundesbank becomes concerned about the monetary policy being too lax.
It almost goes without saying that strong German growth is a good thing for the eurozone generally (breeds confidence and helps encourage investment) and strong economic growth should be the target for all countries. However, as the points above demonstrate, this does not mean it will be enough to drag the eurozone out of its crisis (i.e. it may be necessary but it is far from sufficient) and is certainly no panacea. The key issues to address remain the structural flaws in the eurozone and the lack of competitiveness within many of the peripheral economies.
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