Will Austrian Bank Woes Be Again the Catalyst for a European Kondratieff Winter?
Sad affairs have been heating up in the tiny Alpine republic in the center of the European Union. While Austria experiences record unemployment at record growth rates and tax revenues have fallen behind optimistic projections, the looming bankruptcy of a mid-sized regional bank, Hypo Group Alpe Adria (HGAA), may propel the country to the disdained position of being the catalyst for a new round of bank failures due to interwoven banks risks on both the domestic and the international level.
Austrian politicians are up in arms since a third-party expert opinion that recommends to wind down the bank at a cost of €18 billion has been leaked to the media, but keep on marching on the most fatal route that will not dissolve the problems: They keep flogging the dead horse HGAA with taxpayer's millions in a monthly money injection routine that has cost so far around €4.5 billion.
Current talks involving politicians appear to be more adequately suited for the Vienna opera house, but not for a rolling high finance train wreck that needs more than montlhy band aids.
On Monday Austrian financial market authority FMA publicly said what the official Austria never wanted to hear as it is now confronted with a widening public discussion on a problem it had surrealstically hoped to brush under the carpet. FMA head Harald Ettl warned that any further delay would make the – in this blogger's humble opinion doomed HGAA – an incalculable risk and that Austria should consider no option as a taboo anymore.
Nothing could be more true. An unorderly liquidation of HGAA will not only push Austria from the throne of the best economy in the Eurozone, pushing its public debt to GDP ratio well over 100%, but will also have continent wide reverberations.
A 'Flood of Good News'
As der Spiegel recently reported, the Greek government is intent on smothering its reluctant creditors with good news (in order to be able to accumulate a reasonable amount of such, the last 'troika' assessment has apparently been subject to numerous delays):
“A SPIEGEL report that German Finance Minister Wolfgang Schäuble is considering a third rescue package for Greece has electrified the struggling nation. Athens wants to impress its creditors with a stream of good news. But it still has a long list of unkept promises. New loans are welcome, but don't ask us for any new austerity measures. This pretty much sums up Athens' reaction to Germany's reported willingness to approve further loans to Greece to cover the country's multi-billion euro projected financing gap in 2015-2016.
Although there was no official reaction to SPIEGEL's report, published on Monday, government sources say that Berlin's intentions were known to Prime Minister Antonis Samaras, adding that Germany will not pull the rug from under Greece's feet, especially with the European election due in May.
But the Greek government has also made clear that it will not accept a new round of measures or a continuation of what are perceived by many in Greece as the asphyxiating and humiliating controls by the troika of European Commission, European Central Bank and International Monetary Fund.
Finance Minister Yannis Stournaras is preparing Greece's position ahead of the troika's arrival. With a fresh round of bargaining looming on the new loans, he promised an avalanche of "impressively good news" in the coming days to show that Greece doesn't need any further belt-tightening. It only needs to press on with its structural reforms, he said.
According to a Greek Finance Ministry official, the good news will include the first increase of retail sales in 43 months, and the first rise in the purchasing managers' index in 54 months. The "super-weapon" in Stournaras' arsenal, however, is the hefty 2013 primary budget surplus, now estimated at €1.5 billion, well above the official budget forecast of €812 million.
The same official said the expected good news was the reason why Athens doesn't want the troika to return earlier to conclude a much-delayed round of inspections that started in the autumn. Stournaras is expected to present Greece's accomplishments to German officials when he visits Berlin later this week. The final details of his trip are still being worked out. Athens also plans a return to the markets by the end of 2014 in what it believes will be a definitive sign that the Greek economy is out of the woods.
With the leftist opposition alliance Syriza leading most opinion polls, some observers say the Greek government needs to be able to show success soon. Athens was therefore quick to react to the reports about new loans, telling the public it should not fear a new wave of measures.
Spain to Include Prostitution, the Drug Trade and 'Other Illegal Activities' in GDP
We only noticed very recently that after including various 'intangibles' in GDP a few years ago (similar to what the US has recently done), a number of European countries have added the estimated value of criminal activities to GDP as well. We have noticed this because a friend pointed out to us that Spain is going to add prostitution, drug dealing and smuggling activities to its GDP from 2014 onward. A link to a Google translation of an article in the Spanish press announcing this change can be found here.
Government Spending and Growth
French president Francois Hollande seems to have realized that something needs to change in France, as the economy continues to remind one of an overcooked vegetable – limp, soggy and all around unappealing.
As a reminder, when Hollande ran for the presidency, he was trying to pass himself off as the coming 'growth president'. The growth miracle was going to be achieved by adopting an 'anti austerity' stance, so in essence, Hollande propagated the theory that deficit spending by government creates economic growth. This economically illiterate position is also held by many prominent economists, so one can probably not blame a professional bureaucrat-politician for believing it. The vagaries of the market are unknown to him – he has been a government apparatchik throughout his career.
Aggregate economic statistics make it appear as though government consumption contributes to growth, but that is mainly a case of 'garbage in, garbage out'. Just because a nonsense number is added to some other numbers, one cannot assert that the resultant new nonsense number represents 'growth'. Imagine for a moment that government could only spend what it receives in tax revenue. It would be perfectly clear to everyone in that case that government can only spend what it first takes from someone else, who in turn can no longer spend it. If one looks at it that way, the argument is immediately reduced to its essence: namely the question, who is more likely to allocate the funds in a manner conducive to growth: government bureaucrats or the private sector?
The New Yen! Quelle Horreur!
The euro's recent strength has been met with a mixture of incredulity and trepidation. No wonder, considering a full 83% of the world's largest fund managers were bullish on the US dollar (according to the quite comprehensive Merrill fund manager survey) as of late July this year. So they were certainly not positioned for a stronger euro at the time, although the mantle of 'most hated major currency' has been handed over to the yen since late 2012. Given where the dollar was trading at the time and given the continued popularity of 'taper' fantasies, sentiment has probably not changed all that much.
The WSJ has recently reported that the 'euro could be the new yen', or if you like that comparison better, the equivalent of Bruce Willis in the 'Die Hard' movies:
“It’s a currency equivalent of Bruce Willis in the Die Hard movies. Whatever bad news gets thrown at the euro, it keeps bouncing back, stronger than ever. Unfortunately, what’s a crowd pleaser in the cinemas doesn’t work so well for flagging economies. As, in fact, a 1990s Japanese version of the same script shows. The euro is up 8% on where it was twelve months ago and up 14% from lows hit during the summer of 2012, on a trade-weighted basis. Some of that gain represents relief that the euro zone seems to have survived its sovereign debt crisis and that recession is finally over. But the currency’s upward trend is hard to square with the worries that remain.
The region’s wider economy may no longer be contracting, but it’s barely growing and, based on very weak October industrial production data, is vulnerable to a relapse. Resolution of key matters, not least a banking union–never mind a fiscal union–remain a long way off. Throw in issues like very high unemployment rates in Greece and Spain, current account imbalances and the lack of obvious sources of stable growth and it’s not hard to see why some continue to question the single currency’s viability.
True, euro-zone countries’ efforts to export their way to growth, a la Germany, partly underpins the single currency. The region’s overall current account had broadly been in surplus in the years before the financial crisis, but has since become an ever larger surplus. But there’s another reason the euro been so persistently strong. In a word: deflation.”
They're Not Taking It Anymore
France's socialist president Francois Hollande, the 'welfare State incarnate' (h/t Gaspard Koenig), is in trouble. Not only has he has become the president with one of the lowest ever recorded approval ratings at a mere 15%, he apparently even feels it necessary to dispatch jackbooted goons to oppress those who are expressing their disapproval of him publicly. Incredibly, if one demands Hollande's resignation, one seems to be guilty of the crime of insulting the president as Mish reports.
Nevertheless, the French have never been known to take any unpopular policies dished out by their politicians lying down. Few people are as quick as the French to take to the streets to make their displeasure known. This is both a blessing and a curse, as it sometimes stands in the way of unpopular, but necessary reforms.
However, this time, the French are demonstrating over an issue that is well worth their displeasure: namely the relentless increase in regulations and taxes Hollande's government has subjected them to. According to a recent Bloomberg report, farmers are but the latest group to rise up in protest:
“French farmers snarled traffic into Paris as they drove tractors onto highways to protest against taxes and new regulations.
A total of seven roadblocks were up in the Paris region, according to the website of DiRiF, which runs the area’s road network, and which advised commuters to take public rail transport. Television news channels showed long lines of blocked traffic under rainy skies and near-freezing temperatures.
“I don’t think this is the right way to express one’s views,” Agriculture Minister Stephane Le Foll said in an interview in Le Figaro newspaper. “We are always open to dialogue.”
The action is the latest in tax revolts in France, which in recent weeks has seen horse-riding clubs, truckers and small retail outlets protesting against increased levies by President Francois Hollande’s government. Hollande, who’s seeking to narrow the government’s budget gap, has become the least popular French leader since 1958.
Today’s protest was called by farming associations in the Paris region. In addition to nationwide issues such as a proposed trucking levy and a higher value-added tax on fertilizer, the farmers are angry about anti-pollution laws that would limit tractor use on certain days. They’re also opposing changes to the European Union’s Common Agricultural Policy that will increase spending on livestock to the detriment of cereal farms, which predominate in the Paris basin.”
A 'Bought Deal' Refinancing for the Government
In late October, the IMF warned that Slovenia must recapitalize its insolvent banks 'immediately'. The governor of the country's central bank countered that the result of 'stress tests' had to be awaited first (due in late November).
In the meantime, the current government (a diverse and somewhat unruly coalition) led by Alenka Bratusek has survived a confidence vote in parliament and has managed something of a financing coup, namely the sale of €1.5 billion in new government debt to a single, anonymous investor. It is quite a generous investor to boot, who has accepted a yield way below recently prevailing market yields. In other words, it is a 'bought deal' financing:
“Slovenia's government won a confidence vote and raised 1.5 billion euros in a bond issue on Friday, offering the euro zone country some hope it can still steady its finances and avoid an international bailout.
The dawn vote, by 50 to 31 after a marathon debate, shores up political backing for Prime Minister Alenka Bratusek's disparate alliance as the republic struggles with its worst crisis since seceding from Yugoslavia 22 years ago.
The country later said it had made a private placement of three-year notes worth 1.5 billion euros ($2 billion) to a single investor at a yield of 4.7 percent. "This issue shows that the financial markets are open to Slovenia," Bratusek told a news conference, saying she did not know the identity of the investor. Her foreign minister, Karl Erjavec, said: "Today it is absolutely clear that the government can succeed.”
What the Ice Cream Scooper Told Me in Venice
I’m blessed to be able to travel to Europe once or twice a year. I use the trips as an opportunity to see how the economies are faring over there. And I can tell you this first-hand: the economic situation in Europe is much worse than what we’re hearing from the mainstream media in the U.S. economy.
Here’s just one small story that paints the picture…
A couple of weeks back, while in Venice for four days, I walked into my favorite ice cream store for my daily fix of Italian ice cream. I’m chatty wherever I travel, as I want to get the locals talking so I learn what’s going on.
After engaging the store’s only employee in conversation (I’m fluent in Italian), the young man, who was between 25 and 30 years old and educated, told me how happy he was to have his job as an ice cream scooper at this particular location of a well-known chain of Italian ice cream stores. “Jobs in Italy are very hard to come by,” he told me.
But what he said next really got me thinking …
Martin Wolf Complains About Germany
Few writers produce erudite-sounding nonsense with such unwavering regularity as Martin Wolf, an establishment-approved scribbler for the Financial Times. When he is not screeching for more money printing, he is belly-aching about 'trade imbalances', which allegedly condemn the world to economic hell. The latest example is his article 'Germany is a Weight on the World'.
This was written after the misguided Mercantilists apparently still populating the US treasury department (after decades of US trade deficits that have somehow completely failed to matter all this time) decided to complain about Germany's allegedly unconscionable trade surplus.
So here we are, more than a century after the fallacies of Mercantilism have been disproved by a plethora of economists, and people still allege that there is something evil in trade that requires even more government intervention than there already is.
“The criticisms that hurt are those one suspects might be fair. This might explain the outrage from Berlin last week over the criticism by the US Treasury of Germany’s huge and vaunted trade surplus. But the Treasury is to be commended for stating what Germany’s partners dare not: “Germany has maintained a large current account surplus throughout the euro area financial crisis.” This “hampered rebalancing” for other eurozone countries and created “a deflationary bias for the euro area, as well as for the world economy”. The International Monetary Fund has expressed similar worries.”
Mortgage Delinquencies Swept Under the Rug
Back in August of 2012 we wrote about “Spain's Curiously Low Mortgage Defaults” and noted that the CEO of Santander essentially accused doubters of being retards. Here is how he explained the phenomenon at the time:
“JPMorgan Chase & Co. (JPM), the world’s largest bond underwriter, predicts that Spanish mortgage arrears will surge as unemployment rises. That’s also the view from the international debt market, which has driven up yields on Spain’s bonds in a bet the country will have to bail out banks.
In Spain, Banco Santander SA Chief Executive Officer Alfredo Saenz said yesterday that’s nonsense. “Mortgages get paid in good times and in bad,” he said in a news conference at the bank’s headquarters outside Madrid. “Anyone raising this problem as one of the issues for the Spanish financial system is saying something stupid.”
Not everyone was taken in though. As one observer noted:
“There does seem to be a strange contrast between the high level of unemployment and the surprisingly low level of delinquencies on mortgages,” said Georg Grodzki, who helps oversee $515 billion as head of credit research at Legal & General Plc in London. “This raises the issue of whether loans have been amended to make them look current when in fact they are distressed.”
Winners and Losers
In a recent editorial at German newspaper Frankfurter Allgemeine Zeitung (FAZ), Hans-Werner Sinn, president of Germany's IFO Institute and a prominent critic of the ECB and the euro area bailouts, revisits the topic of the euro-systems payment imbalances that are expressed in TARGET-2 claims and liabilities.The reason why Sinn felt compelled to write this editorial is that another economist, Marcel Fratzscher of the DIW in Berlin (another economic research institute), recently asserted that 'Germany is the big winner' in the events surrounding the TARGET system.
The main reason why there is even a debate over the euro-system's payment procedures is in fact that Sinn pointed out two years ago that the system was abused as a 'stealth bailout' mechanism for the euro area periphery and that Germany was exposed to huge risks because of it.
This provoked angry reactions from courtier economists and even the Bundesbank, who tried in vain to put the genie back into the bottle by arguing that it all didn't matter. It was merely an accounting artifact, and no further implications were to be inferred. Naturally, even people who don't understand how exactly the system works were compelled to ask: if it 'doesn't matter', then why does the chart look like this?
TARGET-2 imbalances in the euro-system – click to enlarge.
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Too Much Government? Not In Paul Krugman's World
From his perch at the NYT, Paul Krugman informs us that he has detected a 'Plot Against France', because credit rating agency S&P has dared to downgrade the government's debt to 'AA' from 'AA+'. Keep in mind here that in France, government has the largest share of spending in the economy of all industrialized nations: it amounts to 57% of GDP. One might well say that it is on the verge of becoming a full-scale command economy. Admittedly that would be a bit of an exaggeration, since GDP omits all spending on raw and intermediate capital goods, with the exception of 'durable' capital. It therefore ignores a huge chunk of economic activity.
However, it is not an exaggeration to state that under the Hollande government, France has begun to adopt features of a 'Zwangswirtschaft' (literally: a 'coerced economy'), in which the government decides who may produce what, when, how, in what amounts, and so forth. The most recent evidence in this regard is that the government is now forcing companies to operate at a loss rather than fire workers, thereby further tightening what is already the most sclerotic and repressive labor legislation in Europe. Regime uncertainty in France has never been higher, and it is therefore no surprise that the country is in a seemingly inexorable economic downward spiral.
Krugman's solution to this problem is apparently that the government should increase its size even more by adding to its already out-of-control spending. Anyone doubting the wisdom of such a course is held to be “using debt fears to advance an ideological agenda.” Krugman of course is a completely impartial observer, who has no ideological agenda at all. He writes:
Coalition Agreement May Lead to Legislated Minimum Wage
Back when the German election results came in, we wrote an article entitled 'Germany Elects Mama – The Real Winner is Socialism'. We tried to clarify why, in spite of a 'conservative land-slide victory' in Germany's election, more socialism was likely on its way. We mentioned the broader historical context of the post-war German relationship with free market capitalism, as well as the fact that unfortunately, not one of the parties that can be regarded as embracing a classical liberal (or libertarian in US terminology) outlook managed to garner enough votes to enter Germany's parliament, due to the inane 5% hurdle.
Since the conservative CDU/CSU block (the pro free market credentials of which are very much open to question anyway) didn't gain enough votes for a parliamentary majority, it is therefore forced to hold coalition talks with one or more leftist parties. Among those, the SPD (Germany's social democrats) was always the most likely choice. We actually doubt the CDU/CSU is unhappy about having to enter a grand coalition with the SPD. Since the euro area's economic and fiscal crisis is far from over, its leadership surely reckons that both the right and the left should take responsibility for future hard decisions (which will be unavoidable).
The Original 'Crisis Architect' Speaks Up
When the euro was introduced, socialist EU commission president Romano Prodi said the following in an interview he gave to the Financial Times:
“I am sure the euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created.”
Bold Super-Mario Strikes Deflation Bogey Down
Mario Draghi managed to surprise even us, although we are usually in the camp that argues that central bankers all over the show tend to err on the side of easy money. The ECB cuts its repo rate (as indicated in the title to this post) from almost nothing (0.5%) to nearly zilch (0.25%), in what was widely seen as a 'surprise strike'. Interestingly, the markets that usually benefit from such action reversed course almost immediately, leaving ugly looking daily candle sticks behind in the process. Judging from the commentary in the press it is all about the euro zone joining the 'currency war' and fighting the deflation bogey. Reuters reports:
“The European Central Bank cut interest rates to a record low on Thursday and said it could take them lower still to prevent the euro zone's recovery from stalling as inflation tumbles.
Underlining its support for the euro zone, the ECB said it would prime banks with as much liquidity as required until mid-2015. A Reuters poll of economists also saw the ECB offering banks a new round of cheap money within six months.
The 23-man Governing Council had faced intense pressure to act after a shock slump in euro zone inflation to 0.7 percent in October, far below the ECB target of just under 2 percent. The ECB cut its main refinancing rate by 25 basis points to 0.25 percent. It held the rate it pays on bank deposits at zero and cut its emergency borrowing rate to 0.75 percent from 1.00 percent. Draghi stressed the ECB still had room to act if needed.
"We have a whole range of instruments to activate before reaching the lower bound … in principle we could even cut further the interest rate," he told a news conference. "We may experience a prolonged period of low inflation to be followed by gradual upward movements towards an inflation rate of below but close to 2 percent later on."
Draghi said there was general agreement on the need to act but differences over when to act, with a "considerable majority" on the Governing Council seeing sufficient evidence of protracted low inflation to cut at Thursday's meeting. A source familiar with the discussions told Reuters that around a quarter of the Council members, led by Bundesbank chief Jens Weidmann, spoke out against a cut this month.
The International Monetary Fund and governments from across the euro zone welcomed the reduction in rates.
Italian Prime Minister Enrico Letta said the cut showed "the ECB cares about growth and competitiveness in Europe" and that it would allow a "rebalancing" of the euro-dollar rate. The finance ministers of France and Ireland echoed that sentiment. Euro policymakers have played down the threat of Japan-style deflation, which led to a "lost decade" there, but appear to be taking no chances.
All but one of the 23 money market traders polled by Reuters this week expected the ECB to keep rates on hold at Thursday's meeting, pending a clearer view about where euro zone inflation is heading.
Draghi stressed that the ECB still had an "easing bias" to its policy stance. By contrast, many economists expect the U.S. Federal Reserve to begin withdrawing stimulus next year. "This will give European exporters much-needed breathing space, with the euro currency finally falling back," David Thebault, head of quantitative sales trading at Global Equities in Paris, said of the cut.”
Stop the NSA by Taxing Your Own Citizens Some More …
Here comes another one from the 'you couldn't make this up' department, courtesy of the “welfare state incarnate” (h/t Gaspard Koenig), France's president Francois Hollande (Martin Armstrong pointed us to this bit of news in a recent post of his). The German business news magazine 'Wirtschaftswoche' has a story entitled “France's Answer to the NSA: Taxes on Emails Sent Abroad”.
No need to check your calendar. It is actually not April Fool's Day. As the article informs us:
“France has the solution to intensive surveillance by US secret services: President Hollande plans to introduce a tax on data that are transferred abroad. Paris apparently regards this as the most effective method to end the spying.”
France wants to push through a tax on data transfers from the EU. Moreover, the EU is supposed to alter tax regulations for internet companies until spring 2014. These have to be taxed more heavily in the EU, France demands. The tax revenues are supposed to be distributed among EU member states.
The French minister of innovation Mrs. Fleur Pellerin has submitted the respective proposals to her ministerial colleagues in the EU according to a report by Tax News.”
The tax proposed by France is supposed to be gathered every time data are transferred via the internet from the EU to other parts of the world. It won't matter if data are transferred within the same company or to another company outside of the EU. The documents don't say how high this tax is supposed to be.
Due to current complicated tax rules, companies like Google or Amazon barely pay any taxes in most EU countries, in spite of making profits in the hundreds of millions there. Google pay its taxes in Ireland, where corporate taxes are relatively low.
NSA, CIA and FBI so far pay no taxes at all. Paris hopes that this measure will sap the notoriously tightfisted Americans' enthusiasm for spying.”