More Meetings Are In The Works
In what could by now be termed a European tradition, the summit inflation seen last year seems set to continue. In 2011 the people involved in the attempt to curb the euro area's still evolving debt crisis lurched from one emergency summit to the next, providing an unexpected boon to euro-land's catering industry.
The is scheduled between Angela Merkel and Nicolas Sarkozy, these two unlikely captains of the euro ship, on January 9. It will be about discussing 'rules' – namely the rules that will, so it is said, help to 'enforce budget discipline in the euro area'. Needless to say, this hardly addresses the not inconsiderable problem that a number of countries in the currency union have seen their competitiveness eroded during the boom, remain mired in depression and continue to depend on a public sector vendor financing scheme via the famed 'TARGET2' balances between euro-system central banks.
Moreover, whenever a eurocrat invokes budgetary 'rules' a not unimportant question immediately suggests itself: if the old rules didn't work, why should the new ones?
It remains inconceivable that the new framework will be better in this regard than the existing one. Any surrendering of fiscal sovereignty by member states of the euro area will be conditional only, contingent on future developments. 'Papier ist geduldig' as the German saying goes (literally, 'a piece of paper is patient') – which is to say, the value of the signatures on any forthcoming pact consists mainly in the possibility that they may help with pretending that a new era of fiscal discipline has dawned. The pressures of political and economic reality are bound to intrude on any such agreement in short order.
But fear not: as , once the January 9 meeting is concluded, more opportunities to meet over bowls of shrimp will immediately follow – surely something will emerge from those. Even if it is only (insert term of your choice for things that emerge after the process of digestion):
„Finance ministers from the EU's 27 members will meet on January 23 before their leaders hold a summit a week later. They will be under intense pressure to find a definitive solution to the crisis which threatens the very survival of the single currency, 10 years after it came into circulation.“
Well, they have been under 'intense pressure' to come up with something for quite some time now. It hasn't really led anywhere, except in directions that must be regarded as highly dubious. If the 'centralizers' and 'harmonizers' succeed in pushing through their demands, it will be akin to a death sentence for economic freedom in the euro area.
Yet one more meeting is in store shortly:
„Italy's Prime Minister Mario Monti, who is still battling to shore up confidence in the Italian economy, will also meet the French and German leaders this month as well as British Prime Minister David Cameron.
All European Union leaders except Cameron agreed at an emergency summit on December 9 to draft a new treaty that would implement tougher rules on budget discipline, including automatic sanctions for deficit offenders.“
Phew! We already feared they had forgotten about Italy and Mario Monti. Alas, even more meetings are already assured, since it has been noted with respect to the new treaty that its 'finalization' won't be easy:
„However a new treaty could take some time to finalize.“
Catering firms in Brussels will be happy to hear it.
Financial markets may however be somewhat less enamored by the prospect, given the record of past eurocrat meetings of producing fresh worries and uncertainties and waves of selling of 'risk assets' in their wake.
Deceptive Calm as a Massive Wave of Debt Rollovers Awaits
At the moment, the sense of immediate crisis has seemingly passed, but that may merely signify that we are in the eye of the hurricane. When CDS spreads and bond yields blew out to their extremes late last year, we opined that the 'parabolic' character of the move called for a pause in the crisis, a period during which the markets would exhale, so to speak, and have a little time to reassess the situation in light of new developments emerging late last year.
The most important of these developments was the one that is surprisingly still widely regarded as ineffectual, namely the ECB's massive intervention via lowering of interest rates, 36 month LTRO's and the alteration of collateral eligibility rules.
There continues to be an intense debate over what this inflationary push will actually achieve. As we pointed out last week, an important problem is that the more collateral the banks encumber (see the chart on 'collateral damage' in last week's missive) – whether with private sector funding sources or the ECB – the less incentive there is for anyone to buy their unsecured debt. The reason is that unsecured lenders will have fewer and fewer assets they can tap in the event of a default – since they are all subordinated to the central bank and other liquidity providers.
Note here that the MF Global affair has proved beyond a shadow of doubt that margin collateral can not be clawed back by unsecured creditors and that even the allegedly segregated accounts of customers can disappear and be forever out of reach of their presumed owners if they have been used as collateral to fund an insolvent firm's proprietary speculations.
It is obvious that these facts mitigate strongly against the so-called 'carry trade', this is to say the idea that banks will lever the liquidity provided by the ECB anew by buying high yielding Italian and Spanish government debt.
And yet, even if we disregard for a moment that there probably exist sub rosa agreements between banks and their sovereigns regarding a quid pro quo, especially in view of the circular arrangements by which governments 'guarantee' bonds issued by commercial banks so that they can be pawned with the ECB in the first place (this is especially relevant for Italy), then we must at the very least acknowledge that the massive LTRO funding means that banks won't necessarily have to compete for scarce unsecured funds with sovereign debt issuers in the first quarter of this year.
There can be little doubt that this will lower the pressure on sovereign bond markets somewhat. That will really be necessary, as worldwide, $ 7.6 trillion in sovereign debt are set to mature in the course of 2012 among the G7 and the 'BRIC' nations alone – excluding interest. Including interest, the amount rises to over $ 8 trillion. Note here that of this total, $ 3 trillion must be rolled over by Japan and $ 2.8 trillion by the US. In that sense there are probably a few people who are secretly hoping that the crisis in euro-land keeps steering investors' funds elsewhere.
„Investors may demand higher compensation to lend to countries that struggle to finance increasing debt burdens as the global economy slows, surveys show. The International Monetary Fund cut its forecast for growth this year to 4 percent from a prior estimate of 4.5 percent as Europe’s debt crisis spreads, the U.S. struggles to reduce a budget deficit exceeding $1 trillion and China’s property market cools.
“The weight of supply may be a concern,” Stuart Thomson, a money manager in Glasgow at Ignis Asset Management Ltd., which oversees $121 billion, said in a Dec. 28 telephone interview.“
Mr. Thomson displays a certain knack for understatement.
Three Card Monte, Greek Version
Demonstrating the absurd circularity of the Three Card Monte our modern-day monetary system represents (with debt serving as the theoretical 'backing' of a currency of which unlimited amounts can be created from thin air), the € 1 billion in preferred shares issued by the National Bank of Greece – so that the bank can survive the coming write-off of Greek government debt.
You simply couldn't make this up.
“NBG said that a sale of preference shares to the government brought in one billion euros ($1.3 billion) as part of wider efforts to bolster the banking system so it can help drive the recession-hit economy.
The move should increase NBG's Core Tier 1 capital ratio — a key measure of how much money it holds in reserve as a proportion of assets — to more than 11 percent from 9.5 percent at end-December.
In December, NBG said it would raise the money from the state support fund set up in 2008 at the height of the global financial crisis and which closed at the end of the year.
NBG last month said it lost 1.346 billion euros in the first nine months of the year after factoring in a write-down of its Greek government bond holdings, part of a second rescue package for the debt-stricken country.”
Shares of National Bank of Greece (NBG) at the NYSE, post-split – i.e., if you compare this chart to our previously posted charts of NBG, note that it really trades at 19.5 cents in pre-split terms, not $1.95. The reverse split was necessary to continue to fulfill listing requirements – click for better resolution.
Meanwhile, the Greek debt restructuring talks (the allegedly 'voluntary' reduction in the claims of private sector bondholders by 50% or more) continue to drag on with no end in sight yet. If this debt exchange can not be effected in time, a hard default will become inevitable.
Mind, we happen to believe that Greece should actually allow a hard default to occur unless the public sector lenders also agree to a 'haircut'. Nowhere is the problem of suddenly subordinating unsecured debtors more vividly demonstrated as in the case of Greece. The decision of the eurocracy to create two distinct species of creditors with vastly different rights – the 'troika' of IMF, EU and ECB on the one hand, and private sector lenders to Greece on the other hand – has contributed greatly to the intensification of the sovereign debt crisis in 2011.
After all, given that the eurocrats have broken every single promise they have made w.r.t. Greece since 2010, their latest promise that the Greek case will definitely remain a 'one off' is no longer believed by anyone calling more than two brain cells his own. This has thoroughly sabotaged the chances of other stricken sovereign debtors to return to the markets for their financing needs.
Allegedly, '' in recent days in the debt exchange talks, but one Spanish hedge fund walked out of the talks a week earlier and so far all reports of 'progress' have turned out to have been hot air. In related news, it that 'Germany is studying the imposition of an even bigger haircut on private sector lenders'.
“Germany's government declined to comment on a report that it may push for creditors to accept bigger losses on Greek debt than previously agreed upon, saying only that talks on lowering Greece's debt level may end soon.
Germany is studying a proposal to write down 75 percent of Greek government bonds held by private creditors as part of a planned debt swap to ensure greater debt sustainability, Greek news website Euro2day.gr reported today, without citing anyone.”
Since the 'troika' will not accept any haircuts on its Greek credit claims, it is obvious that the private sector haircut will do next to nothing to alleviate Greece's debt problem. Hence the constant pushing for even bigger concessions. It evidently hasn't dawned on the eurocrats yet that market participants don't like being played for fools by politicians. They seem not to have realized that with every broken promise they are worsening the situation of the remaining sovereign euro-land debtors.
Meanwhile, the Greeks have finally realized that time is running out. As a government spokesman admitted, unless Greece can fulfill the conditions attached to the second bailout, it will likely default and subsequently drop out of the euro area.
“The bailout agreement needs to be signed otherwise we will be out of the markets, out of the euro," Pantelis Kapsis told Skai TV. "The situation will be much worse."
EU, IMF and ECB inspectors are expected in Athens mid-January to flesh out the new bailout plan agreed in principle by EU leaders in October.
Greece needs to push ahead with a series of unpopular reforms to pensions, privatisations and the labour market in the next couple of weeks otherwise talks with the "troika" of EU, IMF and ECB inspectors could run into trouble.
Opinion polls show voters want the government to do all it takes to stay in the euro even if they disagree with austerity reforms, and top officials have warned in the past days that a return to the drachma would be hell.
Greece's citizens are somewhat confused at this stage: they understandably do not want to return to the 'hell of the drachma', but when it comes to 'doing what it takes', they are not very happy with what this involves.
Be that as it may – the markets continue to reflect the belief that a hard default is inevitable. Once such a hard default occurs, Greece will likely ditch the euro involuntarily, as it will only be able to finance its deficits with the help of the printing press. The alternative – namely to spend only as much as the government takes in in revenue – is not considered a palatable alternative by any political party in the modern regulatory democracies of the West. That would only come later in Greece's case, once the 'new drachma' has been destroyed in a hyper-inflationary conflagration.
The mercurial prime minister of Hungary, Victor Orban, continues on his populist path of destroying Hungary's economy piecemeal. As a friend from Hungary pointed out to us, while they are populist, Orban's policies have by no means made him popular. However, as his FIDESZ party enjoys a 68% parliamentary majority, it has been able to alter Hungary's constitution without the opposition's assent (the constitution was predictably not improved by this meddling – a number of democratic checks and balances introduced after the overthrow of communism have been removed), it has been able to 'transfer' (read: steal) private pension fund assets into the government's hands and has been able to revoke the property rights of creditors regarding foreign currency denominated mortgage loans. Whether the most recent agreements struck with lenders can be relied upon remains widely doubted.
The resulting climate of legal uncertainty is slowly but surely driving Hungary's economy to the wall. The latest twist in the saga is that Orban – in his understandable desire to not come under supervision by the IMF – is emasculating Hungary's central bank by essentially revoking its independence. This will eventually allow him to get his mitts on the central bank's foreign exchange reserves.
“Hungary’s chances of obtaining a bailout receded after lawmakers approved new central bank regulations that prompted the International Monetary Fund and the European Union to break off talks this month.
Parliament in Budapest stripped central bank President Andras Simor of his right to name deputies, expanded the rate- setting Monetary Council and created a position for a third vice president. A separate law approved earlier today makes it possible to demote the central bank president if the institution is combined with the financial regulator.
Hungary received its second sovereign credit downgrade to junk in a month when Standard and Poor’s followed Moody’s Investors Service in taking the country out of its investment grade category on Dec. 21. The forint has fallen 15 percent against the euro since June 30, making it the world’s worst- performing currency in the period.”
“The approval of the central bank law shows the government isn’t serious about obtaining an IMF loan,” Gabor Orban, who helps manage $2.5 billion at Aegon Fund Management in Budapest, said in a phone interview. “The government is floating the possibility of an IMF deal but in reality it’s playing for time, hoping the global economy will improve and make a bailout unnecessary.”
In our opinion it is more than just 'playing for time', which won't work anyway. The new central bank law has likely far more sinister implications.
The confidence of lenders has been thoroughly shaken as it were:
“Hungary raised less than half the planned amount at a debt auction yesterday as borrowing costs surged to the highest in more than a year and the state rejected all bids for three-year notes. The 2022 bond’s yield was at 9.7 percent.
European Commission President Jose Barroso plans to be “constructive and avoid any escalation of the situation” after the passage of the central bank law, commission spokesman Joe Hennon said by telephone in Brussels today. “We will be assessing the legal scope of the new laws,” Hennon said today in Brussels. “We have reiterated our concerns to the Hungarian authorities in the past few days.” Earlier, Barroso sent a letter to Prime Minister Viktor Orban outlining the commission’s views, Hennon said.
The new central bank regulations “seriously harm” the country’s national interests, allow for political intervention in monetary policy and threaten economic stability, the Magyar Nemzeti Bank said today. The laws have led to the “indefinite postponement” of talks on a financial aid package, the central bank said in a statement posted on its website.
While a possible Hungarian agreement with the IMF and the EU on an assistance package would boost confidence, the Cabinet can do without it, Orban told MR1 radio in an interview today. “If we have an IMF safety net, then we face the coming period with greater self-confidence and greater security,” Orban said. “If we don’t reach an agreement, we’ll still stand on our own feet.”
Yes, perhaps they can 'stand on their own feet', but how exactly? Below you can see the current situation in Hungarian government bonds. The crisis is rapidly escalating (we also refer you to CDS spreads on Hungary, which will be posted later along with our euro area chart update – not surprisingly, those are exploding as well).
Hungary's 10 year government bond yield – rocketing to a new high above 10% in Tuesday's trading – click for better resolution.
Hungary's 2 year note yield ended at over 8% on Tuesday – click for better resolution.
It appears to us that Orban altogether overestimates his ability to poke a stick into the Western financial and bureaucratic establishment's collective eye.
Charts by: Bloomberg
It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
Most read in the last 20 days:
- A Striking Chart
The Economy and the Stock Market As long time readers know, we are always paying close attention to the manufacturing sector, which is far more important to the US economy than is generally believed. In terms of gross output it is the largest sector of the economy, and it should of course be obvious that saving, investment and production are the only ways to create wealth. What's left of the Brooklyn Domino Sugar Refinery. Photo credit: Paul Raphaelson Contrary...
- Trump and Putin Narrowly Escape Assassination Attempt
The Gloves are Coming Off First a little bit of recent history. Readers are probably aware that some questions about the occasionally malfunctioning Deep State android... no, wait, we'll start again. Questions have recently been raised about the health of presidential candidate Hillary Clinton by various “alt-right” tinfoil hat-wearing conspiracy theorists, such as this one. The monsters are normally hiding under Hillary's bed, but lately they have come out into the open...
- US Economy - Curious Pattern in ISM Readings
Head Fake Theory Confirmed? This is a brief update on our last overview of economic data. Although we briefly discussed employment as well, the overview was as usual mainly focused on manufacturing, which is the largest sector of the economy by gross output. Pepsi factory in Baltimore, 1956 Photo via pinterest.com Readers may recall that we have pointed out for some time that there was quite a large gap between the data reported in regional Fed manufacturing...
- A Convocation of Interventionists, Part 2
Pleas for More Deficit Spending We continue with our Jackson Hole post mortem – including remarks that were made by economists and monetary bureaucrats shortly before and after the pow-wow and seem to be connected to the discussions there. Assembled central planners (we're not sure if this picture was taken at the conference, but most of the people in it were there). Photo credit: Getty Images We should preface the following with a Mises quote, as the...
- Why the Fed Destroyed the Market Economy
What Have You Done for Me Lately? Swing voters are a fickle bunch. One election they vote Democrat. The next they vote Republican. For they have no particular ideology or political philosophy to base their judgment upon. The primacy of the wallet. They don’t give a rip about questions of small government or big government. Nor do they have any druthers about the welfare or warfare state. In effect, they really don’t care. What’s important to the...
- How is Real Wealth Created?
An Abrupt Drop Let’s turn back to our regular beat: the U.S. economy and its capital markets. We’ve been warning that the Fed would never make any substantial increase to interest rates. Not willingly, at least. Groping in the dark, Yellen-style Each time Fed chief Janet Yellen opens her mouth, out comes a hint that more rate hikes might be coming. But each time, it turns out that the economy is not as robust as she had believed... and that a rate hike isn’t...
- Janet Yellen’s Shame
Playing Politics In honest capitalism, you do what you can to get other people to voluntarily give you money. This usually involves providing goods or services they think are worth the price. You may get a little wild and crazy from time to time, but you are always called to order by your customers. In the market economy, consumers reign supreme. There is no such thing as a “lost” vote in the marketplace; every penny spent affects production. Mises noted: “Consumers...
- Get Ready for a New Crisis – in Corporate Debt
Imposter Dollar OUZILLY, France – We’re going back to basics here at the Diary. We’re getting everyone on the same page... learning together... connecting the dots... trying to figure out what is going on. The new three dollar bill issued by the Apprehensive States of America. We made a breakthrough when we identified the source of so many of today’s bizarre and grotesque trends. It’s the money – the new post-1971 dollar. This new dollar is green. You...
- A Convocation of Interventionists – Part 1
Modern Economics - It's All About Central Planning We are hereby delivering a somewhat belated comment on the meeting of monetary central planners and their courtier economists at Jackson Hole. Luckily timing is not really an issue in this context. Central bank headquarters: the Fed's Eccles building, the ECB's hideously expensive new tower in Frankfurt, and the BOJ's Tokyo HQ (judging from the people in the foreground, it may be a source of noxious fumes). When...
- Hanjin Marooning in San Pedro Bay
Global Trade Reversal Expansions and contractions in global trade have played out over long secular trends for thousands of years. The Silk Road, for example, was established by the Han Dynasty of China in 130 BC, and allowed for continuous trade between East and West for nearly 1,600 years. In addition to economic trade, the Silk Road was also a conduit for culture and knowledge among its network of civilizations. A map of the main ancient Silk Road - click to...
- John Maynard Keynes’ General Theory Eighty Years Later
The “Scientific” Fig Leaf for Statism and Interventionism To the economic and political detriment of the Western world and those economies beyond which have adopted its precepts, 2016 marks the eightieth anniversary of the publication of one of, if not, the most influential economics books ever penned, John Maynard Keynes’ The General Theory of Employment, Interest and Money. The mere fact that the book is lauded by TIME magazine on the cover should give everyone...
- The Economy, the Stock Market and the Fed
John Hussman on Recent Developments We always look forward to John Hussman's weekly missive on the markets. Some people say that he is a “permabear”, but we don't think that is a fair characterization. He is rightly wary of the stock market's historically extremely high valuation and the loose monetary policy driving the surge in asset prices. The S&P 500 Index and the NYSE advance-decline line. Most market internals weakened steadily until early February 2016, but...