Fundamentals Will Stop Euro Recovery In Its Tracks

Wednesday, March 31, 2010

The recent 2% snap back from 2010 lows at $1.3270 to $1.3445 may be the end of Euro strength indicated by new record unemployment of 10% in February. It was 8.3% in February 2009.
The Euro digested this kick in the stomach and even survived another one in the groin, this time ratcheting inflation being the cause without pain so far. Eurostat's flash estimate for inflation shot up to 1.5% in March from 0.9% a month earlier.
As if that were not enough, Germany reported an unprecedented 2009 record budget deficit of €105.5 billion on 6.7% higher expenses of €1.12 billion. In 2008 the deficit was a mere €5.2 billion.
It appears highly unlikely that Germany will manage to stay within the planned €80 billion deficit in 2010. None of the problems - rising social expenses, slashed tax receipts - has been solved neither in Germany nor the rest of the Eurozone.

GRAPH: The Euro is on the way to a new 1-year low against the US dollar for very fundamental reasons that have yet to be tackled on the old continent.
Media attention immediately switched from the Greek tragedy to Ireland

PBOC To Fill 4 Top Posts - 3 Economists and 1 Goldman Sachs Banker

Is China getting ready to tighten credit? In a most pragmatic move 3 rather hawkish economists have been added to the monetary policy committee of the People's Bank of China (PBOC), according to a report on chinadaily on Wednesday. The 3 academics replace leaving scholar Fan Gang, indicating that China may begin to tighten runaway credit rather sooner than later in a least painful way. Xia Bin, Li Daokui and Zhou Qiren are all on the record earlier this year, favoring a timely withdrawal of stimulus.
Goldman Sachs could gain the most advantageous position in the investment banking world

Geithner to Ron Paul: "I Completely Agree With You"

Wednesday, March 24, 2010

I do not know in which kind of Capitol Hill meeting the following exchange was recorded by Youtube channel CongressmanRonPaul, but it is truly amazing that Treasury Secretary Tim Geithner began his answer with the words, "Congressman, I agree with much you said," followed by another "I completely agree with you" at 4:00 minutes.
Geithner also acknowledged that years of easy money, ahem, low interest rates, contributed to the financial crisis. Ron Paul reminded Geithner that he had warned of the unsustainable housing bubble already in 2002 in a bill and the Treasury Secretary also agreed that easy money had fuelled moral hazard.
Which leaves me with the question, why did the then Fed NY board member not act?
All this is especially hilarious as Ron Paul correctly claims that this could not have happened if Austrian economics would have been applied in the first place.
Take 5 minutes time, it's worth it.

It is also amusing to hear Geithner say

It's Getting Absurd: Greece Speculated Against Itself

Tuesday, March 23, 2010

Is Greece the bad boy in the Euro club? It very much looks like it. A report from Greek website ekathimerini.com may fuel the ire of its Eurozone buddies. After cheating its way into the Euro the Hellenic Republic has speculated against itself by buying CDS on Greek sovereign debt through state controlled Hellenic Post Bank (TT) in 2009, pocketing a profit of €35 million, it was reported(Hat tip Edward Hugh):
State-controlled Hellenic Post Bank (TT) spent nearly 1 billion euros last year to secure its positions against the possible bankruptcy of the Greek government, according to documents seen by Kathimerini.

Victory for Transparency: Bloomberg Wins Fight Against Fed

Monday, March 22, 2010

I am too sick to write more on Bloomberg's victory against the Fed, but in order to complete the story with a happy end, here are the links to a Bloomberg video, a Bloomberg report, and my earlier postings.

  1. Bloomberg Picks a Fight With the Federal Reserve
  2. Fed Won't Tell Who Got The $2 Trillion
  3. 2:1 for Bloomberg Against Secretive Fed
  4. Fed Fights Request to Disclose Who Got $2 Trillion in Bailouts

We can expect a lot of surprises, I am confident.

Saving its Own Skin, Germany OK's Greek IMF Move

Friday, March 19, 2010

Greek tragedy, next part: Germany has reversed its position and said it is comfortable if Greece turns to the International Monetary Fund (IMF) for assistance to avoid the country's bankruptcy. The 180-degree turn is understandable as direct German loans could set a precedent for the PIIGS who will need help going into the Trillions of Euros. Germany cannot save the whole Eurozone and Chancellor Angela Merkel is in the mid of parliamentary discussion about Germany's record budget deficit of €80 billion.
euobserver.com has a good round up:

Will the Pan-European Idea Get Buried Under Debts?

Watching the rapid deterioration of unity in the Eurozone, this blogger begins to wonder whether the hardest crisis since WW2 will deepen the rifts in a culturally diversified region where the biggest common denominator has become debt. Only a few months after the ratification of the Lisbon Treaty - despite initial no-votes in France, the Netherlands and Ireland where the voters will was overridden by governments - the helplessness of EU bodies to tackle the economic plunge resulting from irresponsible monetary policy by the ECB during the last decade, the unwillingness of EU citizens cannot be overlooked anymore.
Protests and strikes have erupted. A strike of French refinery workers uncovered the thin pillow of European prosperity: 10 days and France would have been out of fuel.
Greek protest have been going on for months, first about police brutality and now escalating as the sovereign discovers the enormous size of the disaster. Greece is bankrupt and needs a lifeline. Meanwhile the country is crippled by one general strike after the other.
In Germany Lufthansa airline pilots bang the drum for another strike, while the UK, bankrupt as Greece, only in a much bigger dimension, tries to avert a strike of cabin staff at British Airways.
Europe is also not short in internal separatist movements.

It's Now HardBall Between Germany and Greece

Thursday, March 18, 2010

In a new twist in the ongoing Greek debt tragedy Germany's chancellor Angela Merkel has stepped up the war of words, saying the Eurozone must be able to expel members that repeatedly break the club's fiscal rules in the future in a speech to the Deutscher Bundestag (parliament) on Wednesday. Merkel is beleaguered at home, trying to push through a record budget deficit of €80 billion that threatens the current conservative-liberal coalition.
Merkel's hardball was picked up in Greece by Prime Minister George Papandreou, who reminded other Eurozone members that they had not yet come up with a viable alternative.
According to The Times Papandreou sent a thinly veiled threat to the EU he might consider turning to the International Monetary Fund for help:

North Korea Executes Head of Finance After Currency Reform Led to 50% Devaluation

A botched currency reform that led to a 50% devaluation of the North Korean Won and ignited inflation cost the top official responsible for it his head.
The execution by firing squad in Pyongyang last week of Pak Nam-ki, Labour Party chief for planned economy, was for the crime of "a son of a bourgeois conspiring to infiltrate the ranks of revolutionaries to destroy the national economy", South Korea's Yonhap news agency said, quoting sources.
French website RFI has the details:
Pak had been purged in January and was executed for "deliberately ruining the national economy" as a "son of a big landowner", South Korean media say.

US and UK Move Closer to Losing AAA Debt Rating, Moody’s Says

Monday, March 15, 2010

This blog's first post was concerned about the sustainability of the US AAA rating back in April 2005. 5 years later, Moody's follows suit.
From Blooomberg:
The U.S. and the U.K. have moved “substantially” closer to losing their AAA credit ratings as the cost of servicing their debt rose, according to Moody’s Investors Service.

The governments of the two economies must balance bringing down their debt burdens without damaging growth by removing fiscal stimulus too quickly, Pierre Cailleteau, managing director of sovereign risk at Moody’s in London, said in a telephone interview.

Under the ratings company’s baseline scenario the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K., and will be the biggest spender from 2011 to 2013, Moody’s said today in a report.

“We expect the situation to further deteriorate in terms of the key ratings metrics before they start stabilizing,” Cailleteau said. “This story is not going to stop at the end of the year. There is inertia in the deterioration of credit metrics.”

ECB Predicts 16 Years Until Eurozone Sovereign Debt Recedes to Treaty Level of 60%

Sunday, March 14, 2010

Sit down before you read this and don't faint. Bury any optimism that hopes for a speedy recovery from the world's biggest financial and economic crises ever. Well hidden on page 89 of the European
Central Bank's (ECB) Monthly Bulletin for March the ECB's economic staff predicts it will take 16 years until Eurozone government debt levels return to the Lisbon Treaty level of 60 %.
Mind you, this is the best case scenario of the ECB based on the theory that the Eurozone governments will enact stringent - and hurting - fiscal discipline, coupled with the hope of an economic recovery sometime.
The ECB explains chart A to the left:
"Fiscal developments as of 2011 are determined by three alternative scenarios shown in Chart A. Scenario 1 assumes a rather rapid fiscal consolidation process, with the primary balance improving by 1.0 percentage point of GDP per year until an overall balanced budget is reached (in 2018). Thereafter, the primary surplus is assumed to decline slightly in order to maintain the budget in balance until the end of the simulation period (i.e. 2030). Scenario 2 assumes a less ambitious consolidation path, with the primary balance improving by only 0.5 percentage point of GDP per year until an overall balanced budget is reached (in 2025). Primary surpluses compatible with a balanced budget are then assumed until 2030. Finally, Scenario 3 assumes that no consolidation efforts are made. The primary balance remains at -3.7% of GDP, i.e. constant at the forecast value for 2010, over the whole simulation period."

Scenario B and C: Eurozone Will Remain Highly Indebted for Decades
The developments of debts under these 3 scenarios reach from bad to horrific as chart B reveals. If nothing is done, debt:GDP ratios may climb to an unmanageable 150%.
In the ECB's own words:
The results of these scenarios for euro area debt are shown in Chart B. The government debt ratio in Scenario 1 peaks at 89.3% of GDP in 2013 and in Scenario 2 at 97.2% of GDP in 2017. Subsequently both these scenarios lead to a gradual decline in the government debt-to-GDP ratio. The 60% of GDP reference value is reached within the next two decades (i.e. in 2026) only in Scenario 1. Scenario 3 would lead to a steady rise in the government debt ratio to over 100% of GDP in 2015, 120% in 2020 and 150% in 2026.

GRAPH: Once the ECB gets so pessimistic/realistic in its ultra long term outlook it is time to get prepared for the toughest of all times since WW2.
The ECB economists add more warnings

United Debts of Europe (UDE) and a Stillborn Named EMF

Tuesday, March 09, 2010

Word has probably spread that the European Union now attempts to solve the debt crisis with the creation of a European Monetary Fund (EMF). This shows one more time the fierce commitment of the EU to fight debt with new debt - which never worked in history - instead of developing a radical banking reform that would curb derivatives and impose strict rules on off-balance sheet risks while tackling soaring budget deficits aggressively.
As with most "important" announcements these days - of which most are vaporizing overnight in a EU where governments begin to mutually shoot broadsides against their Pan-European fellows - the EMF "plan", initiated by German Finance Minister Wolfgang Schaeuble, is maybe a headline-grabber, but lacks among all details the most important one: Where will the money come from???

Crisis Everywhere: ECB Profit Falls 15% in 2009

Friday, March 05, 2010

We will have to wait for the annual report on April 19 to check the balance of higher expenses to see how much inflation the European Central Bank (ECB) experiences itself.
According to first results published on Thursday, the ECB's expenses rose a stunning 4.4% in 2009, while inflation receded below 1% in the Eurozone. Representative of the worldwide crisis the second biggest central bank in the world reports a 15% cut in it's 2009 profit.
The ECB issued the following preliminary figures for the last year:
The ECB earned a surplus of €2,218 million in 2009, compared with a surplus of €2,661 million in 2008. Following a technical adjustment to its risk provision, the ECB’s declared net profit for 2009 amounted to €2,253 million.

Mind the Capital Gap: No Relief for Austria's Banks

While clueless politicians and bankers have still not come up with decisions that could turn around the economy, Mr. Market may soon force them into action. Greece may dominate headlines these days, but this buys other equally distressed Eurozone economies time to fly under the radar. Market talks center around the PIIGS (Portugal, Ireland, Italy, Greece, Spain) these days. While they fill headlines there is one Eurozone country that may be a stealth ticking bomb: Austria.
Weeks of relative silence after some first hiccups last year that culminated into Europe's first bank nationalization in this millennium, Hypo Alpe Adria, last December, have given way to a hectic succession of gloomy events this year
First ripples in 2009, when banking giant #2 Raiffeisen withdrew a capital note exchange offer for lack of investor interest, now turn out to have been a sensitive telltale of the grave problems engulfing the country.


Euro-Sclerosis Will Spread

Wednesday, March 03, 2010

Europe has reached the modern day version of the 7 plagues.
  1. Hurricanes, snowstorms and floods are ravaging France, Germany Portugal (Madeira) and the UK, creating new billion bills to rebuild the damaged infrastructure.
  2. Strikes and protests shake the streets of Greece, Spain, Italy, Germany, Belgium.
  3. Fiscal deficits balloon to historically unprecedented levels.
  4. Unemployment remains at the 10% level (and no EU member counts them properly!)
  5. Demographics worsen with every day and Europe will collapse under 100 million pensioners in this decade.
  6. There are NO signs for economic improvement anytime soon.
  7. We haven't seen anything of the banking crisis yet in continental Europe and yields WILL rise due to higher risks.
Except for the natural disasters and demographics central and commercial banks are responsible for all other crises listed above.
I have lost count how often I heard the promise of an upcoming solution to the financial crisis that  now mutates into a prolonged economic slump. Browsing this blog's archive for official statements I am unable to find one single admission of guilt - or at least error - by a member of the banking industry or supervisory authorities.
Since August 2007 banksters have been busy telling the rest of the world that consumers should not worry as the crisis would be contained.
Since August 2007 they have been wrong.

Fed Vice Chairman Kohn Resigns, Now 3 Vacancies at FRB

Tuesday, March 02, 2010


While the rest of the US labour market is still in free fall, job openings at the world's biggest money printer become abundant. The resignation of old hand Federal Reserve Vice Chairman Donald Kohn raises the number of open slots at the monetary policy setting Federal Reserve Board to a stunning 3 out of 12 available fireside chairs. In a letter to the Fed Kohn announced his intention to leave the Fed after a 40-year career by June 23.
While other FRB members like "Easy" Alan Greenspan have always been defending themselves, stating that bubbles could only be recognized after they start bursting, Kohn is on record with bubble warnings and dissent since June 2005 with one of the most impressive speeches ever given by a central banker when he warned bankers to prepare for the
"unexpected (that) inevitably happens."
Alas, his cautioning was totally ignored until the (not so) unexpected housing bubble began to burst and has crashed America into the biggest debt crisis of all times.
Kohn's resignation is another blow to the beleaguered Fed whose chairman Ben Bernanke refuses to accept the concept of bubbles through too easy credit, worsening the situation with the Fed's ZIRP with every passing day.
As Kohn's resignation leads to a 75%-Fed where only 9 persons decide the fate of Federal Reserve Notes and the Fed's wilingness to monetize the debt, US President Barack Obama confronts another pothole on the road of his presidency as there are seemingly no takers for 3 of the most interesting - but nowadays also most challenging - jobs in the world.
Isn't it astounding that a quarter of the FRB is vacant and no experts want to tackle the job?
We may witness a selection of the negative: I have been highly inconfident into "helicopter" Bernanke since his nomination because of his infamous speech from 2002 where he hallucinated about "money at virtually no cost."
3 vacancies, 2 of them open since years, at the most powerful board in the world of fiat money lead to one conclusion: If nobody with the required expertise wants to do the job it is most certainly because they see what the blogosphere sees since many years. The US path of ballooning deficits is unsustainable and unbacked Federal Reserve Notes (FRN) will go down the drain as ALL fiat currencies did in the last 300 years.
Current woes in the Eurozone (Greece is not California) may delay the end of the dollar a little, but Kohn's prediction may have even reached to the point where the unexpected demise of the world's biggest Ponzi scheme - called US dollar - will inevitably happen.
Kohn does not appear to hope for a wonder, taking it from his letter, says the LA Times.
In a letter to President Obama announcing his intention to resign from the board, Kohn didn't say why he planned to retire at this juncture, but noted that the last several years have tested the ability and dedication of the Fed to maintain financial and economic stability.
"I am confident that history will judge the Federal Reserve, under the leadership of Chairman Ben Bernanke, to have met these challenges with great speed, imagination and effectiveness," he said in the letter dated March 1.

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