Tag Archives: Euro

Round and Round the Mulberry Bush…

il_340x270.480855993_30qp (1)Pop goes the Weasel.

In olden times those down on their luck would pawn their coats or their tools on Monday and hope to redeem their pawn by Sunday when they needed to turn up in church properly attired.

Richard Fernandez, writing at PJ Media, talks about the musical chairs of the Greek Crisis:

Eventually the physical world starts to change to reflect the payments that have to be made to the players. Trade begins to contract, stores start to close and desperate individuals start to riot. In the naive days of the 20th century, when faith in angels and demons began to wane, it was fashionable to regard matter as primary. Wars were fought by burning actual buildings, killing physical people. But today we know that information has physical force. Computer programs, genetic instructions, memes — and financial data — are to all intents and purposes actual things, rather than airy nonsense.

Unfortunately we still live in a world governed by ancient 19th century Marxian ideas, where politicians regard information as infinitely corruptible, in a world where lies are not only common, but the stuff of power, the very sinews or privilege.  A financial crisis occurs when information goes so far out of whack with the physical world the music has to stop, and those without a chair must be booted off. belmont club

Greece is not a big deal. 2% of the EU economy. The entire place could sink into the Aegean and the world would be little worse off.

China is a bigger place. The factory of the world and its stock markets are in the process of collapse. A lot of companies which we have never heard of have shed 2.5 trillion dollars in market cap in the last three months. Unlike the Greeks, the Chinese have lots of hard currency with which to intervene and there is every reason to believe that the possibility of a Chinese crash will be averted. For now.

Infinitesimal interest rates and overbought markets are, at the moment, haunting the US, the UK, Europe, Japan and China. Fernadez thinks that “the players” have figured it all out and have comfy armchairs waiting when the music stops.

I am not so sure. The players have always counted on governments to step in when there is a cash crunch. When the derivatives have been drawn against busted counter-parties, when the “too big to fail” surprise us by failing. To date, that assumption has been true. It has been true because the governments have had the means – usually the printing press – to literally paper over the flaws in the system. At the moment the Greeks do not but the EU does and I suspect will. At the moment, the Chinese market is in free fall but the Chinese government has the cash to bail them out. But cash, however abstracted, is a finite resource. If you print more than your economy can sustain your cash begins to lose its value against real assets, against food, against bills of lading which must be settled on arrival.

The music is still playing and only the smallest children have been denied seats; but now the scramble is on to secure a seat for the next round.

The one thing which the world seems incapable of doing right at the moment is making more chairs.

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Apparently, today, Greece is to have an ultimatum, or is it a prenultimatum. No matter, the EU and the IMF and the Germans are really serious now and they are not prepared to put up with any more waffles. Or are they?

The biggest problem the Greeks and the Eurozone face is the fact that neither side is willing to really draw that line in the sand. The Greeks keep spinning and the EU types keep backing away from the possible calamity of Grexit.

The Greeks are counting on the theory that the Eurozone and the EU cannot withstand the possibility of Greece defaulting. Are the Greeks right? On the numbers almost certainly not. Greece is 2% of the overall Euro GDP. They owe something on the order of 150 billion Euros which sounds like a lot but much of that debt is hedged and much of it will be repaid. The European banking community has managed to transfer a lot of the Greek debt to the assorted government and quasi-governmental institutions. Sure, they will take a hit, but not a balance sheet busting one.

From the European perspective losing Greece would be sad but not quite on the order of losing Spain or Italy. The EU will continue, the Euro will survive.

In world terms, the Greek exit/default/bankruptcy is a buying opportunity. Mr. Cook has denied that Apple will buy Greece but that will not stop any number of hedge funds and sovereign wealth funds from stepping up and buying bits of it. And, if the Grexit results in a drachma worth pennies on the Euro it is a dandy bet that plenty of Germans, Brits and French people will be only too delighted to buy that Greek villa they were priced out of previously.

A fire sale is not likely to be politically popular in Greece, but there is not a lot which a government can do to prevent private transactions between consenting adults. Especially in a country where the law is breaking down.

From the world wide perspective, Greek default is unfortunate but a long way from tragic. From a Greek perspective, it is probably the only way out. The only people who are likely to suffer really nasty consequences are the Eurocrats whose mantra of “ever closer” will lie broken at the side of the road. I shall try to work up a tear, but I doubt I will succeed.

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Swiss reaction

The Swiss unpegged the franc against the Euro.

Do they know something the rest of world doesn’t.

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The Pain in Spain

2-Year Yield + 36.5 basis points to 7.007%
5-Year Yield + 12.5 basis points to 7.717%
10-Year Yield + 2.7 basis points to 7.648%
Read more at http://globaleconomicanalysis.blogspot.ca/#j0IF5ghsbAo5Ay0p.99

Bond junkies will note a mildly inverted yield curve. The rest of us should be looking at the headline number of over 7%.

The Euro is, agonizingly slowly, unwinding. Sovereign debt is being priced in Greece (no sale), Portugal, Italy and Spain as if these nations were not in the Euro. Which strongly suggests  that the markets no longer believe that the Euro is going to last much longer.

Which, realistically, it shouldn’t. It was not a terrifically good idea in the first place to hitch disperate economies together in one currency.  Jane Jacobs once wrote that a single currency across a variety of regional economies was rather like one set of lungs shared between a person running, one sitting, one walking and one asleep – no one would be getting optimal performance.

The great thrust of the 20th century was towards ever larger units. The EU, the Euro, NAFTA, ASEAN and so on. In so far as these were trading units they might create efficiencies (though at what cost?). But closer integration makes less and less sense as high speed communications and increased computer power, reduce the need for the economies of scale promised by ever larger units.

I suspect that the thrust of the 21st century will be away from large units and towards small, efficient, states and regions. At smaller scales it is possible to innovate and experiment. Pushing power away from the “center” towards the edge means that it is much closer to the people and much closer to their specific concerns rather than the amorphous aggregate which somehow satisfies no one.

Ambrose on Spain

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This won’t last…

She hit out at Mr Hollande for blocking EU supervision of national spending and supporting eurobonds, which she warned would “mask” divergences between Germany and “mediocre” or declining eurozone economies, such as that of France.

If you look at the development of unit labour costs between Germany and France, differences have now been growing a lot more strongly, a topic that must be discussed,” Mrs Merkel said. telegraph

Mrs. Merkel is so mean. She insists on noticing a productivity divergence. That will not endear her to the French/Italian/Spanish/Greek cultures which reject the crazy Anglo-Saxon idea that you work for what you get.

In the end the Germans get to make a choice – do they let the kids keep the credit card for another year or two or do they cancel the account and tell the children they are on their own.

It is one thing to help the kids make rent for a short month, it is quite another to pay the rent year in, year out.

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Transfuse Yourself

via Kate

This would seem obvious. After all, Italy is on the hook for a chunk of the Spanish bailout and it means Italy will be lending Spain money at 3% that it – having no money in the Treasury and all – will be borrowing at 4%.

The Germans are, apparently, feeling a bit happier about a sinking fund solution where the debtors put up their gold as collateral and accept a super-tax administered by Germans to pay it down.

A solution more sensible than just – in the most literal sense of the metaphor – borrowing a deck chair to shuffle as the ship goes down.

Update: Nigel Farage puts a bit of stick about.

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Deadend Euro

“We can’t take part in things that lead us into an even deeper disaster,” she said. “We want more Europe, but a Europe in which joint liability and joint control go hand in hand. What is not acceptable is shared liability and control remaining in national hands.” the telegraph

Might make more sense to have rather less Europe.

Greeks have not become Germans, the Italians are not Dutch; this is not a surprise.

Unfortunately, one of the few things which might bring Europe out of its current slump is a sense of national pride and there is no nation of Europe.

Asking a Greek or a Spaniard to make sacrifices for Europe (read Germany) is not going to work. Sacrifices for Spain or Greece, much better chance of success.

The EU has always seen nationalism as the enemy of a civilized Europe. And the history of the 20th century underscores that point. However, nationalism, patriotism, love of country can be virtues as well as vices.

At the moment there are very few rallying points in Europe. Instead, the good and the grey keep coming up with alphabet soup transnational institutions and bailouts which resolutely constrain the sovereign authority of assorted debtor nations. The Irish found themselves voting in favour of great austerity in the face of the threat that their situation would be even worse if they voted against it. It is possible that the Greeks, this coming weekend, will make the same wicked choice.

The alternative might be penury; but it would at least be a penury which the Greeks (or the Irish) would be able to work their own way out of. Possibly by ditching more than a few of the directives of the EU.

People will work hard for their family, help their neighbours, support their town or even city: if the borders are roughly right and the society relatively homogeneous and linguistically intact, they may even be willing to sacrifice for their country. But it would astonish me if any German, Frenchman, Italian, Brit or Greek was willing to give up much for so nebulous a concept as “Europe”.

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