Europe’s Plan To End the Debt Crisis Can’t and Won’t Work – Part 2

Author: Satyajit Das · November 2nd, 2011 · RGE EconoMonitor

Without Wings, Sans Prayers…The initial market response to the EU proposal was positive, with major stock markets and bank shares rising sharply. Unlike equity markets, debt traders were cautious. On Friday 29 October, an Italian debt auction met with lack lustre demand falling short of the full amount offered for sale. The debt markets registered their doubts by pushing up 10 year interest rates on the bonds of both Italy (up 0.14% per annum to 6.01% per annum) and Spain (up 0.18% per cent to 5.49%). Greek rates remained high at 22.35% for 10 years while comparable Portuguese rates were 11.48% and Irish rates were 7.98%.

Implementation of the plan faces significant risks. Many elements of the plan are works in progress and are yet to be agreed with affected parties.

The players also seemed to have left the summit with different song sheets. ECB council member and head of the German Bundesbank Jens Weidmann expressed doubt about proposals to increase the capacity of the EFSF through leverage: “The leverage instruments that have been tabled are similar in their design to those that helped to cause the crisis.” He also observed that: “it [is] very important that all aid extended to member states under threat should only be in the form of loans.” Portugal asked Mexico to tell fellow G20 members at an upcoming meeting that the United States should offer “financial help”.

Germany’s Finance Minister Wolfgang Schäuble and retiring ECB President Jean-Claude Trichet pointedly cautioned that the crisis was far from over.

Volksabstimmung in Griechenland: Anleitung für den Euro-Crash

Handelsblatt.com, 2/11

von Gerd Höhler, Andreas Niesmann, Hannes Vogel und Jan Mallien

Griechenlands Premier Papandreou setzt darauf, dass sein Volk der Euro-Rettung zustimmt. Doch die Ablehnung im Land ist heftig. Banken-Beben, Börsen-Panik, Euro-Crash – was ein Nein der Griechen bedeuten würde.

Düsseldorf/Athen. Müde verkündeten Angela Merkel und Nicolas Sarkozy vergangene Woche am Morgen nach dem Euro-Gipfel historische Beschlüsse: Schuldenschnitt für Griechenland, Banken-Rekapitalisierung, neue Finanztricks für den Euro-Rettungsschirm – alles sah nach einem Durchbruch in der Euro-Krise aus. Doch kaum eine Woche später heißt es zurück auf Los: Griechenlands Premier Giorgos Papandreou will sein Volk über die Beschlüsse abstimmen lassen, alle Rettungspläne liegen damit zunächst auf Eis.

Mit seiner einsamen Entscheidung setzt Papandreou alles auf eine Karte. Er spielt dabei mit dem Feuer, denn nun heißt es alles oder nichts: Bereits Freitag um 23 Uhr könnte für Griechenland die letzte Stunde geschlagen haben. Dann nämlich stellt Premierminister Papandreou im griechischen Parlament die Vertrauensfrage. Sollte seine Regierung scheitern oder die Griechen sich auch noch gegen den Schuldenschnitt und die Sparpolitik aussprechen, droht nicht nur Griechenland, sondern der ganzen Euro-Zone ein Desaster.

Austerity Faces Test as Greeks Question Their Ties to Euro

Date: 02-11-2011
Source: The New York Times

PARIS — The crisis of the euro zone has finally hit the potholed road of real politics, with the Greeks now openly questioning whether their commitment to Europe and its single currency still matters more to them than control over their own future and economic well-being.

During the two-year financial crisis, the wealthier countries of northern Europe, led by Germany, have insisted that their heavily indebted brethren in the south radically cut spending in return for emergency loans. They have stuck to that prescription even though austerity has undermined growth and increased unemployment in Greece, Spain, Portugal and now Italy, betting that people in those countries will swallow the harsh medicine because their only alternative is to default and possibly leave the euro zone altogether.

The turmoil in the government of Prime Minister George A. Papandreou means that Greece is about to call that bet. Many Greek politicians appear to be calculating, at this late stage, that they have more to lose by sticking to Germany’s terms than by risking a messy default, and even going it alone with their old currency, the drachma, outside the euro zone.

Europe’s Economy Is Falling Apart

Author: Yves Smith · October 31st, 2011 · RGE EconoMonitor

Yves here. Note the comment at the end, that Sarkozy’s sales pitch to China on the levered up EFSF did not go so well. If the Chinese don’t relent, this greatly reduces of this scheme working, even in the short term. And further note that the flagging European growth is the result of the austerity hairshirt being imposed on highly indebted economies. Ambrose Evans-Pritchard has a pointed article on the consequences of the beggar-thy-neighbor German stance.

By Delusional Economics, who is horrified at the state of economic commentary in Australia and is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from MacroBusiness

Angela Merkel has been warning for quite some time that Europe’s economic woes will take up to a decade to fix and that it is time for Europe to rethink its economic strategy after years of living “beyond its means”. It seems fairly obvious from those statements that the rest of the world is going to have to get use to Europe moving into a slow growth phase while it attempts to adjust away from what it considers to be unsustainable debt.

Europe’s Rescue Plan Meets Reality. Which Will Win?

Author: Fabius Maximus · November 1st, 2011 · RGE EconoMonitor

Summary: The dream of the latest Euro-rescue plan lasted for one week. Already painful reality emerges to confront the bold but baseless claims of Europe’s leaders. Only with exceptional skill and determination can they make this work.Content

1. Greece introduces democracy into the rescue process
2. Red lights on the dashboard
3. The BRIC rescuers sound wary about their assigned role
4. Market-based solutions fail if investors refuse to play
5. Deductions and guesses

(1) “Papandreou says new Greek plan must be put to referendum”. The creditor nations of Europe have put severe stress on their debtor neighbors. So far the people have accepted these measures with remarkably little fuss. For example, Spain has an unemployment rate of 20%+ and rising.

But there are limits to what external pressure can accomplish, and the recent strikes and riots suggest that limit may be near. Asking the people for their consent is a logical and bold step. They may approve — large majorities favor staying with the Euro. They might not (Iceland’s voters rejected assuming their bankers’ debts). It introduces yet another uncertain element to a process in which time is the scarcest element.

(2) What is best market-price indicator of stress in the euro-zone?

Europe’s Plan to End the Debt Crisis Can’t and Won’t Work – Part 1

 

Author: Satyajit Das · November 1st, 2011 · RGE EconoMonitor

The most recent summit failed to reach even the lowest expectations. Euro-Zone leaders displayed poor understanding of the problems, confused strategies, political bickering and infighting as well as inability to take decisive steps and stick to a course of actions. This summit follows the 21 July 2011 declaration of a definitive grand plan to solve the problem. Like the ones before it, the 26 October meeting yielded a plan to have a plan to have a plan etc. There’s no reason to believe that this summit will be the last.

The actions need to try to stabilise the European debt crisis are well recognised. Countries like Greece need to restructure its debt to reduce the amount owed – an euphemism for default. Banks suffering large losses as a result of these debt write-downs need to be stabilised by injecting new capital and ensuring access to funding to avoid insolvency. A firewall needs to be erected to quarantine Spain and Italy as well as, increasingly, Belgium, France and Germany from the further spread of the debt crisis. Steps must be taken to return Europe to sustainable growth as soon as possible.