Ma'as Salaama,  Mubarak!

At first he was a bit slow to catch on….he didn't quite realize yet he was a goner. At first he held another one of his droning, patronizing speeches, addressing Egyptians as his 'children', once again swearing he would die on Egyptian soil, insisting that he had to stick around to 'safeguard the constitution' while promising that he would fiddle with this or that paragraph of said constitution to make it more palatable to his unruly 'children'.


Maybe it was just a test, along the lines of, if we let him say all that, how are the people in Tahrir Square going to take it? They took it as expected. No sooner had he finished, than they began waving their shoes in his general direction, in the traditional Arab 'consider your behind kicked' gesture.

One day later – poof! – no more Mubarak. He's gone –  and with him, his loot. As some enterprising journalists and bloggers have in the meantime found out (estimates for the total he 'earned' for his family have by now been raised to 'between $62 and $72 billion', which seem nicely spread over all the places where tinpot dictators these days like to keep their plunder), the total amount appropriated by the Mubarak clan is roughly similar to the entire US 'aid' Egypt has received in the period since it has become a US client state, courtesy of  unwitting US tax cows.

Phew! What a relief! Dear US tax cows, you may breathe easier now. Your money did not, after all, finance a tyrannical regime of torture and terror. Instead you merely financed Mubarak's personal piggy bank! They did the rest all by themselves. Any disquietude that may have invaded your minds, any slight stirring of the conscience upon hearing that Egypt was not the nice place you thought it was – it can all be safely sent back to the deep slumber it was in previously.

Meanwhile, Egypt's military has taken over the State apparatus in Egypt, has suspended the constitution entirely and is promising elections within six months. We'll see what becomes of that, won't we? As we related previously, the Egyptian army is in the main a business. It runs resorts, it has its fingers in manufacturing, in fact it has business interests all over the show. Whatever happens next, the army will want to protect these interests.

The relationship between the army and the protesters in Tahrir Square meanwhile is already growing more tense. Initially the army tended to be viewed as a kind of neutral arbiter between the people and the tyrant. It remains a venerated institution in Egypt, untainted by the excesses perpetrated by the police and secret police. Now that it has grabbed power this may change, since its neutrality is no longer so obvious. As Reuters notes:


“Egypt's military delivered an ultimatum on Monday to dozens of committed protesters in Tahrir Square, nerve center of a movement that toppled Hosni Mubarak, to leave and let life return to normal or face arrest.

Soldiers had scuffled with demonstrators the day before as they reopened the central Cairo square to traffic. Some protesters insisted on staying, determined to see through their demands for civilian rule and a free, democratic system.

"We are cordoned by military police. We are discussing what to do now," protester Yahya Saqr told Reuters, adding that a senior officer had told them they risked arrest if they stayed.

Protest leaders say Egyptians will demonstrate again if their demands for radical change are not met. They plan a huge "Victory March" on Friday to celebrate the revolution, and perhaps to remind the military of the power of the street. Egypt's generals, who played an important role in the anti-Mubarak revolt by making no effort to crush it, are asserting their control following Mubarak's overthrow.

Egyptians generally respect the 470,000-strong military, which receives about $1.3 billion annually in U.S. aid and was shielded from public criticism or scrutiny in the Mubarak era, but some in the opposition still mistrust its intentions.”


So there remains a sense of fluidity to the situation, even if the main casus conversionis, the aging dictator and his claque, have left the scene. The 'daddy of all Egyptians' now rests his weary bones in the Red Sea resort of Sharm el-Sheikh, which means he's still on that Egyptian soil he's so eager to die on. The question of 'what's next' remains up in the air, but almost no matter what happens, it can hardly be worse than Mubarak's regime was. 'We' in the West have supported his tyranny for decades –  an embarrassing fact that is bound to strain relations with whatever government is elected should the military hand over power as currently promised.



The self-anointed 'Daddy of all Egyptians' finally bugs off. Good riddance.

(Photo credit: AFP)



The 'Forgotten' Crisis – About to Make a Comeback? 

With the focus shifting away from Egypt, we would remind everyone that there is another slight problem that keeps on simmering in the background. Namely, the euro area's debt crisis. Lately the euro itself has come under some pressure again, which is actually not really logical given that money supply growth in the euro area has tapered off mightily compared to money supply growth in the US. However, the current main 'problem child' of the periphery, Portugal, remains very much in the market's cross-hairs. In addition, Germany's West LB bank is back in the news – and not in a good way. As the WSJ reports:


“The euro fell to a three-week low against the dollar in Europe as worries about German bank WestLB added to renewed euro-area sovereign-debt concerns.

The euro traded recently at $1.3469, down from $1.3547 late Friday in New York. The dollar was at 83.35 yen, compared with 83.40 yen, while the euro was at 112.26 yen from 113.04 yen. Sterling recently fetched $1.5998, little changed from $1.6004 late Friday in New York.

Earlier in Asia, the euro advanced as investors welcomed upbeat Chinese trade data and President Hosni Mubarak's decision on Friday to step down as Egyptian president following weeks of protests

However, shortly after European trade got under way, the euro tumbled some 0.4% against the greenback to trade at $1.3453. Sources close to the situation said Sunday that WestLB, a troubled German lender, could be preparing to outline a government-supported restructuring plan, setting the groundwork for a breakup of the bank.

"Concerns about WestLB added to increasing doubts about EU officials' ability to reach an agreement to bolster the European Fiscal Stability Facility before April and that's hurting the euro," said Jane Foley, a currency analyst at Rabobank in London.

The euro was also facing pressure ahead of the meeting of Eurogroup finance ministers Monday afternoon, but while the meeting will be watched with interest, no new developments are expected before the meeting of euro-zone leaders at the end of March.

Last week, the European Central Bank bought Portuguese government bonds in the secondary market once again, after investors started demanding higher interest rates to hold weaker euro-area bonds compared with safe-haven German bunds. Yields spreads on Portuguese and Spanish bonds were wider again Monday.

"The current situation is everything but straightforward. There have been signs on the bond markets for some weeks that the yields of the peripheral countries have been rising again and only ECB intervention seems to have been able to prevent a notable rise," Commerzbank said in a note to clients.


(our emphasis)



Portugal's 10 year yield – this is so far the outcome with ECB intervention. So even with this artificial support from the lender with the bottom-less money-well, yields keep hitting new highs – click for higher resolution.




As we have noted previously, the demonstrated willingness of the EU to bail out wayward sovereign borrowers almost no matter what has led to a backing off of spreads in the CDS market – for the simple reason that a prospective default of sovereign borrowers seems to be a somewhat more remote possibility at present. This has however done nothing to alleviate the crisis as such, which can be ascertained by looking at the bond yields said wayward sovereign borrowers must pay. Anyone who owns these bonds seems to want to get out, with only the ECB and a handful of friendly Asian central banks left on the bid side. Meanwhile, the recent bounce in CDS is continuing, even though these spreads still remain far from their previous crisis highs. That may well change once Ireland's new government decides how to best abrogate the currently in place bailout agreement. We can already see in the widening of spreads on the debt of Bank of Ireland that the market is preparing for a less than friendly outcome for bondholders who have so far escaped the much dreaded 'haircuts'. This in turn means potential trouble for Europe's highly over-leveraged banking sector more generally.


CDS charts (prices in basis points, color coded)


5 year CDS spreads on Portugal, Italy, Greece and Spain. Still in 'bounce mode' – click for higher resolution.





5 year CDS spreads on Ireland, the senior debt of Bank of Ireland, France and Japan. It's noteworthy that spreads on Bank of Ireland are now almost back at their previous high – click for higher resolution.



5 year CDS spreads on Austria, Hungary, Romania and Belgium – as always, bouncing in sympathy with the spreads on the debt of the 'PIIGS' – click for higher resolution.



The Markit SovX Index of CDS on 19 Western European sovereigns – still beneath the recently broken trendline, but lateral support from the previous highs has held – click for higher resolution.



The euro – weakening, but still above lateral support. So far, MACD sell signals have been pretty reliable in the euro, so this recent signal may portend more weakness – click for higher resolution.


Portugal meanwhile is about to face more scrutiny this week on account of its impending new debt auctions.

According to the WSJ:


“Portugal faces a fresh test of its ability to raise cash after a weak post-sale performance of a major bond issue, together with confusion about rules for any future bailouts of euro-zone members, pushed its benchmark 10-year yield to a new euro-era high.

Weak sentiment toward Portugal and its planned sale of 12-month Treasury bills could affect Italy and Spain, both of which have bond auctions planned for next week. Unclear, of course, is how the departure of Egyptian ruler Hosni Mubarek will affect the demand for the euro zone's riskier assets.

Investors have long fretted about whether Portugal would be the next country to require a bailout, after Greece and Ireland, and a surge in yields to what many consider to be unsustainable levels, outpacing the jump in U.S. Treasury yields, has revived those fears. Although yields pulled back Friday, they remain well above 7%, the level at which analysts say the country can't repay its debts over the long term.

The government rejects the idea that it will need a rescue package.

"Our long-held conclusion has been that it is only a matter of time before the fundamental imbalances in the [euro-zone] periphery reassert themselves," said Steven Mansell, a strategist at Citigroup in London. When that happens, the yield gap between core markets such as Germany, the euro zone's de facto benchmark, and non-core markets should widen for a protracted time.

Portugal on Monday raised €3.5 billion of five-year funds after receiving more than €7 billion of offers. But the sale "was not well-digested," according to Nomura. The bond recently yielded 6.66%, up from 6.457% when it was priced, as investors struggled to interpret the outcome of the weekend summit of European leaders, which avoided any further decisions about the bailout fund, known as the European Financial Stability Facility.

The 10-year yield climbed to 7.51% Thursday before pulling back to 7.16% late Friday, still up from 7.05% late Monday, after the bond sale.

"The concern is that there will be nothing concrete that might reassure the markets as to the capacity to reform the euro zone" before European heads of state meet on March 25, Natixis analysts said in a note. If nothing is decided by then, Portuguese yields could continue to be pegged high by the markets at levels that are "simply unsustainable," they added.”


(our emphasis)

And that is precisely the problem. Portuguese officials may well be right when they assert that they expect no debt rollover problem or a failed debt auction – after all, the ECB is backstopping these events. The problem is the increasing cost of the debt – it already makes no longer commercial sense to refuse to accept an EFSF bailout, since the cost of ESFS debt would be about 150 to 200 basis points lower than what Portugal now has to pay in the marketplace. A similar problem is bound to crop up for the remaining peripheral sovereigns as well.

On the positive side of the ledger, Bloomberg reports that Spain's socialist prime minister Zapatero has experienced an 'epiphany' that will ensure that Spain comes out of its troubles unscathed. We hear on the other hand from friends based in Spain that Spain's politicians can not be trusted and that both a lot of the numbers and declarations of political intent have to be taken with a big grain of salt. The markets seem to have adopted a similar view, given where Spain's 10 year yield currently resides.

We don't really doubt the resolve of Zapatero's government all that much as it were. Clearly it has taken many positive steps. The problem on the political side of things is mainly how strong this resolve will remain after the next election,which Zapatero seems destined to lose. Political pressures will bedevil the attempts to impose austerity across the gamut of euro area sovereigns – and this in turn is bound to redound on the euro area's banking system. The vicious cycle remains very much alive in our view.



The yield on Spain's 10 year government debt – not far from its highs – click for higher resolution.




The Fight Against The 'Harmonizers'

In the meantime, the 'tax harmonizers' thankfully continue to run into resistance. They are trying to use the crisis to finally get their wish – namely to make all of the EU into a 'highest taxation as possible' zone. Nothing could be worse for citizens of the EU than this idea being realized. There would no longer be the possibility to escape the worst highway robbers by relocating within the EU.  As Bloomberg reports, Italy is now voicing its doubts :


“Europe is not ready to harmonise taxes and it is impossible to reach an agreement on such matters next month, Italian Foreign Minister Franco Frattini said on Tuesday.

He was responding to proposals by German Chancellor Angela Merkel, backed by French President Nicolas Sarkozy, for a "competitiveness pact" which provoked opposition among EU leaders when presented at an EU summit on Friday.

The proposals, meant to strengthen fiscal discipline in the euro zone and other EU states, included plans to align taxes, end wage indexation, raise retirement ages and lock debt limits into national constitutions across the euro zone.

"There are issues in the pact that Europe is not ripe to solve yet, this includes for example harmonisation of taxes and tax systems," Frattini told reporters during a visit to Prague.

Italy, which has the EU's second highest debt-to-GDP ratio after Greece, also dislikes the proposal to anchor binding debt reduction targets in its constitution.

Merkel made clear that agreement on the measures must be sealed in March before she will agree to strengthening the rescue fund for debt-stricken euro zone countries.

But Frattini said any such decisions needed a wider discussion and he could not see an agreement at an EU summit on March 24-25.”


(our emphasis)

Naturally, neither Italy nor Greece are especially eager to see debt ceilings and debt reduction made part of the EU's constitution. However, the debate over the tax harmonization issue is even more important in our view. The high tax countries want to make it impossible for their citizens and businesses to vote with their feet. Tax competition is an extremely important feature in support of economic liberty. Take it away, and the existing tax and red tape oppression will converge  at its worst imaginable level. Anyone in Europe with even a smattering of good sense should be up in arms over this planned additional step toward economic tyranny.


Charts by: Bloomberg,






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