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Posts tagged ‘Italy’

A European Solution to the Eurozone’s Problem

By  Gorge Soros

My objective in coming here today is  to discuss the euro crisis. I think you will all agree that the crisis is far  from resolved. It has already caused tremendous damage both financially and  politically and taken an extensive human toll as well. It has transformed the  European Union into something radically different from what was originally  intended. The European Union was meant to be a voluntary association of equal  states but the crisis has turned it into a creditor/debtor relationship from  which there is no easy escape. The creditors stand to lose large sums of money  should a member state exit the union, yet debtors are subjected to policies that  deepen their depression, aggravate their debt burden and perpetuate their  subordinate status.

This has created political tensions  as demonstrated by the stalemate in Italy. A majority is now opposed to the euro  and the trend is growing.   There is a real danger that the euro will destroy  the European Union. A disorderly disintegration would leave Europe worse off  than it was when the bold experiment of creating a European Union was begun.  That would be a tragedy of historic proportions. It can be prevented but it can  be prevented only with Germany’s leadership. Germany didn’t seek to occupy a  dominant position and has been reluctant to accept the responsibilities and  liabilities that go with it.  That’s one of the reasons for the crisis. But  willingly or not, Germany is in the driver’s seat and that is what brings me  here.

What caused the crisis?…………………………………………….

Read full article  at http://www.project-syndicate.org/blog/a-european-solution-to-the-eurozone-s-problem#6mMv7wyQVcBL8cGj.99

The Problem with the Spailout

By: Money_Morning

First off, last weekend’s 100 billion euro ($126 billion) Spanish bailout has staved off the inevitable for now.

What most people don’t realize, though, is that it actually spells disaster for the euro — there simply isn’t enough liquidity in the system and never has been. 100 billion euros is chump change.

A trillion euros is more like it. Probably more, to be quite candid.

Let me lay out the math that European politicians, whose skill set apparently consists of saying “present,” rather than developing real solutions, can’t be bothered to do.

According to the latest data, the European Stability Mechanism (ESM) and the European Financial Stability Fund (EFSF) have a combined lending capacity of 700 billion euros. If Spain requests the full 100 billion euros it approved last Saturday, this leaves 386.7 billion euros in excess capacity. The EFSF has already committed 213.3 billion euros.(700b euros minus 213.3b euros minus 100b euros equals 386.7 billion euros).

The problem is that Spain and Italy have combined total needs of 620 billion euros in the next two years alone.If you’re doing this math in your head, you’ll quickly realize that’s 233 billion euros more than the total bailout mechanisms now in existence.

Oops.

Call me crazy, but under the circumstances I don’t understand how European leaders can pursue the same course of sorry-assed lending in Spain that they did in Greece and expect different results. It’s simply irrational.

Don’t get me wrong, I understand why they are trying to pull the wool over everyone’s eyes. But in reality, who’s kidding who?!

The markets know the politicos can do nothing to stem the tide of money flowing out of Spain any more than they could stop money from leaving Ireland, Italy and Greece.

The only practical consideration is preventing an all-out bank run through the front door – never mind that it’s already well underway out the back door.

Frankly, I think they’ve failed on both counts. Deposits in German banks are up 4.4% year over year to 2.17 trillion euros as of April 30th, while deposits in Greece, Ireland and Spain fell 6.5% over the same time frame.

Swiss bank sight deposits have reached five-month highs of 252 billion francs as of June 1, according to the Swiss National Bank. CNBC is reporting that up to 800 million euros ($1 billion) a day is being pulled out of Greek banks alone. Data from Spanish banks related to withdrawals is being closely guarded, but I can’t imagine it’s that much different.

full article at source:http://www.marketoracle.co.uk/Article35152.html

How tiny Finland could bring euro crisis to end

English: Various Euro bills.

English: Various Euro bills. (Photo credit: Wikipedia)

By Matthew Lynn

LONDON (MarketWatch) — The most pressing question about the euro crisis is also the hardest one for anyone to answer. It is easy to analyze why the single currency has gone so badly off the rails, pick apart the flaws in its construction, and identify the mistakes made in the endless bailout packages. But how will the saga eventually resolve itself?

No one can know for sure. There are so many actors on the stage and so many conflicting ambitions and pressures on each of them that every prediction has to be hedged with uncertainty.But here’s how it might come to a head over the summer: a “Spanic,’ followed by a “Quitaly,” followed by a “Fixit.” A fresh panic in Spain, might be followed by rising demands for Italy to quit if it doesn’t get the same terms its Mediterranean neighbor has been offered, followed by a Finnish departure from the euro

full article at source: http://www.marketwatch.com/story/how-tiny-finland-could-bring-euro-crisis-to-end-2012-06-13?link=MW_popular

Euro zone lacks engine for growth

By Dr.Constantin Gurdgiev

In my previous postings here, I have suggested that by mid-year, Greece will be back in the market’s crosshairs. Now, time to look beyond that which consumes the media space once again.

The latest data on first-quarter GDP growth shows that the euro area economy has now trifurcated into a slow-growth core (Germany and Finland, plus Estonia and Slovakia), a Titanic-like periphery (Italy, Spain, Greece, Cyprus, Portugal and the Netherlands) and a no-growth pool containing all the other member states. The only uncertainties remaining at this stage are the smaller countries yet to report their figures for the quarter: Ireland (in an official recession since the fourth quarter of 2011); Luxembourg (which was still expanding at the end of 2011), Malta (which registered quarter-over-quarter contraction in the last three months of 2011); and Slovenia (which had a third consecutive quarterly contraction in GDP

full article at source: http://www.theglobeandmail.com/report-on-business/international-news/global-exchange/international-experts/euro-zone-lacks-engine-for-growth/article2433566/

Challenge to Austerity

Deutsch: Bundeskanzlerin Frau Dr. Angela Merke...

Deutsch: Bundeskanzlerin Frau Dr. Angela Merkel beim Tag der Offenen Tuer im Garten des Bundeskanzleramts English: Chancelor of the Federal Republic of Germany Dr. Angela Merkel on the open door day at the Bundeskanzleramt in Berlin, Germany Français : Dr Angela Merkel, chancelière de la République Fédérale d’Allemagne, lors de la journée portes ouvertes de la Bundeskanzleramt à Berlin, en Allemagne. (Photo credit: Wikipedia)

BERLIN—Europe’s voters delivered another rebuke to their leaders Sunday for failing to overcome a debt crisis that has thrust much of the region into an economic tailspin.

Less obvious is what Europeans expect their governments to do differently. From Greece to France, incumbents lost power—joining a long list that includes the former leaders of Spain and Italy. But their successors will likely find it difficult to pursue policies that deviate much from the austerity-focused course championed by Germany, Europe’s paymaster.As Europe’s only healthy large economy, Germany’s support would be essential for any change. And Chancellor Angela Merkel and her government, fearful of popular resistance in Germany, have made clear in recent weeks that they wouldn’t soften their austerity demands, no matter who won Sunday’s elections.

full article at source:http://online.wsj.com/article/SB10001424052702303630404577388360846621648.html?mod=rss_most_viewed_day_europe?mod=WSJEurope_article_forsub

Over Their Dead Bodies

International Money Pile in Cash and Coins

International Money Pile in Cash and Coins (Photo credit: epSos.de)

By Bill Bonner

The more things don’t change…the more they remain the same. You can quote us on that.

On the surface, very little changed in the 2 months we were away.

The Dow was about 13,000 in mid-Feb. It’s still about 13,000.

The yield on the 10 year US note was about 2%. No change there either.

The euro was about $1.30. It’s $1.30 today.

Gold is a little lower. Big deal.

But down deeper….did anything more substantial change…evolve…develop?

Apparently not. Back in the winter, the Europeans were pretending to fix Greece. Now they’re pretending to fix Spain.

But wait…here’s something that might be changing…now nobody believes the fixes will stay fixed.

“Europe’s Rescue Plan Falters,” says the front page of The Wall Street Journal.

Yesterday, widely reported was the fact that Spanish banks held more delinquent loans than at any time since 1995. The world seemed to be waking up too to the realization that when you pour bad money after good money you end up with no money.

The ECB’s $1.3 trillion worth of loans to banks was supposed to put a stop to liquidity problems. After all, investors know that borrowers can get more money. The ECB lends to the banks. The banks lend to the governments. You can’t go broke that way. Not as long as the money keeps flowing.

But wait again… “After months of using that cash to buy their government’s debt,” reports the WSJ, “banks in Spain and Italy have little left.”

Let’s look at this more closely.

full article at source:http://dailyreckoning.com/

Comparing Italy’s and Spain’s yield curves

 


Here are some facts:
1.The target bond sales for Italy and Spain in 2012 are given here.

Reuters: Experts estimate Spain needs to raise about 177 billion euros gross in 2012. This compares with Italy’s plan to raise 450 billion euros in gross terms, including bills and bonds.

Note that these are gross numbers including rolling short term bills more than once per year.
2. A large portion of that issuance is short term, (in particular Italy has a massive amount of short term bills to roll).
3. According to BNP Paribas, Italy has sold about a third of the paper targeted for this year. Spain on the other hand has managed to sell nearly half.
That means that in the short term, Italy’s bonds will dominate the supply (particularly bills), putting some upward pressure on short term Italian yields. But in the long run the market believes that Spain presents a materially greater risk than Italy.
Update: Please see some insightful comments by Rik  and Kostas Kalevras

 

full report at  SoberLook.com

Unsettling News on the Unresolved Eurozone Crisis

By Eric Fry

We are not entirely sure what a “resolved” Eurozone crisis is supposed to look like, but we are pretty sure it is not supposed to look like the chart below

A resolved crisis is not supposed to feature soaring Spanish bond yields and rising credit-default swap prices. In fact, the squiggles on this chart below may be the most disturbing images to emerge from Spain since Salvador Dali’s melting clocks.

 

Less than two months after the financial leaders of the Western World — you know who you are — informed the rest of us that they had vanquished the euro crisis, it has flared up anew in the “peripheral” credit markets of Europe. Peripheral is the polite term for the P.I.I.G.S. nations of Portugal, Italy, Ireland Greece and Spain.

 

In Spain, the yield on 10-year government bonds jumped to nearly 6% Tuesday — the highest level since early December. Meanwhile, the price of insuring a 5-year Spanish government bond against a default (i.e. the 5-year CDS price), jumped to within a whisker of a new record high.

full story at source:http://dailyreckoning.com/unsettling-news-on-the-unresolved-eurozone-crisis/

Default, Exit and Devaluation as the Optimal Solution

 

English: The European Central Bank. Notice a s...

Image via Wikipedia

This report was sent into us today :

Many economists expect catastrophic consequences if any country exits the euro. However, during the past century sixty-nine countries have exited currency areas with little downward economic volatility. The mechanics of currency breakups are complicated but feasible, and historical examples provide a roadmap for exit. The real problem in Europe is that EU peripheral countries face severe, unsustainable imbalances in real effective exchange rates and external debt levels that are higher than most previous emerging market crises. Orderly defaults and debt rescheduling coupled with devaluations are inevitable and even desirable. Exiting from the euro and devaluation would accelerate insolvencies, but would provide a powerful policy tool via flexible exchange rates. The European periphery could then grow again quickly with deleveraged balance sheets and more competitive exchange rates, much like many emerging markets after recent defaults and devaluations (Asia 1997, Russia 1998, and Argentina 2002)

KEY CONCLUSIONS

> The breakup of the euro would be an historic event, but it would not be the first currency breakup ever – Within the past 100 years, there have been sixty-nine currency breakups. Almost all of the exits from a currency union have been associated with low macroeconomic volatility. Previous examples include the Austro-Hungarian Empire in 1919, India and Pakistan 1947, Pakistan and Bangladesh 1971, Czechoslovakia in 1992-93, and USSR in 1992.

> Previous currency breakups and currency exits provide a roadmap for exiting the euro – While the euro is historically unique, the problems presented by a currency exit are not. There is no need for theorizing about how the euro breakup would happen. Previous historical examples provide crucial answers to: the timing and announcement of exits, the introduction of new coins and notes, the denomination or re-denomination of private and public liabilities, and the division of central bank assets and liabilities. This paper will examine historical examples and provide recommendations for the exit of the Eurozone.

> The move from an old currency to a new one can be accomplished quickly and efficiently – While every exit from a currency area is unique, exits share a few elements in common. Typically, before old notes and coins can be withdrawn, they are stamped in ink or a physical stamp is placed on them, and old unstamped notes are no longer legal tender. In the meantime, new notes are quickly printed. Capital controls are imposed at borders in order to prevent unstamped notes from leaving the country. Despite capital controls, old notes will inevitably escape the country and be deposited elsewhere as citizens pursue an economic advantage. Once new notes are available, old stamped notes are de-monetized and are no longer legal tender. This entire process has typically been accomplished in a few months.

> The mechanics of a currency breakup are surprisingly straightforward; the real problem for Europe is overvalued real effective exchange rates and extremely high debt Historically, moving from one currency to another has not led to severe economic or legal problems. In almost all cases, the transition was smooth and relatively straightforward. This strengthens the view that Europe’s problems are not the mechanics of the breakup, but the existing real effective exchange rate and external debt imbalances. European countries could default without leaving the euro, but only exiting the euro can restore competitiveness. As such, exiting itself is the most powerful policy tool to re-balance Europe and create growth.

> Peripheral European countries are suffering from solvency and liquidity problems making defaults inevitable and exits likely – Greece, Portugal, Ireland, Italy and Spain have built up very large unsustainable net external debts in a currency they cannot print or devalue. Peripheral levels of net external debt exceed almost all cases of emerging market debt crises that led to default and devaluation. This was fuelled by large debt bubbles due to inappropriate monetary policy. Each peripheral country is different, but they all have too much debt. Greece and Italy have a high government debt level. Spain and Ireland have very large private sector debt levels. Portugal has a very high public and private debt level. Greece and Portugal are arguably insolvent, while Spain and Italy are likely illiquid. Defaults are a partial solution. Even if the countries default, they’ll still have overvalued exchange rates if they do not exit the euro.

> The euro is like a modern day gold standard where the burden of adjustment falls on the weaker countries – Like the gold standard, the euro forces adjustment in real prices and wages instead of exchange rates. And much like the gold standard, it has a recessionary bias, where the burden of adjustment is always placed on the weak-currency country, not on the strong countries. The solution from European politicians has been to call for more austerity, but public and private sectors can only deleverage through large current account surpluses, which is not feasible given high external debt and low exports in the periphery. So long as periphery countries stay in the euro, they will bear the burdens of adjustment and be condemned to contraction or low gr

CONVENTIONAL THINKING ABOUT THE BREAKUP OF THE EURO: CATASTROPHE AHEAD

It would be like a Lehman-times five event.

– Megan Greene, director of European economics at Roubini Global Economics

A euro break-up would cause a global bust worse even than the one in 2008-09. The world’s most financially integrated region would be ripped apart by defaults, bank failures and the imposition of capital controls.

– The Economist, 26 November 2011

If the euro implodes, [the UK’s] biggest trading partner will go into a deep recession. Banks may well go under, so will currencies both new and old. Investment will freeze up. Unemployment will soar. There is no way the UK is going to escape from that unscathed.

– Matthew Lynn, MoneyWeek

A euro area breakup, even a partial one involving the exit of one or more fiscally and competitively weak countries, would be chaotic. A disorderly sovereign default and Eurozone exit by Greece alone would be manageable… However, a disorderly sovereign default and Eurozone exit by Italy would bring down much of the European banking sector. Disorderly sovereign defaults and Eurozone exits by all five periphery states… would drag down not just the European banking system but also the north Atlantic financial system and the internationally exposed parts of the rest of the global banking system. The resulting financial crisis would trigger a global depression that would last for years, with GDP likely falling by more than 10 per cent and unemployment in the West reaching 20 per cent or more.

– Willem Buiter in the Financial Times

Given such uniform pessimism on the part of analysts and the unanimous expectation of financial Armageddon if the euro breaks up, it is worth remembering the words of John Kenneth Galbraith, one of the great economic historians of the 20th century:

The enemy of the conventional wisdom is not ideas but the march of events.

– John Kenneth Galbraith

http://www.variantperception.com/February 2012

Comments from Eurocalypse, the resident BoomBustBlog credit trading guru…

 

By ReggieMiddleton:

Trendline broken in French bonds ,today again Italy coming in but France is still moving out… hardly surprising.  Just as i said… and stocks i think will break out up, even if that seems contradictory.

Update: I wrote this this morning. Markets react really fast. Huge move in French yields today. See charts on Mish blog. The declining trend line broken now 10yr 3.47. 3.75 or even 4.00 in a matter of few days. 4.80 is where France starts to spiral out like Italy, Greece, etc… Now the ECB monetizes massively or its massive defaults. Time is running out. My 2 cent guess is EFSF won’t even have time to do anything significant before the ECB steps in massively…

picsay-1319726495The most important development is that the Eurocalypse is in full panic mode and Italy blowing up. The inferno machine is now running full speed and there is little way back for it to now. When Italian bonds yields rise 70bp a day, roughly getting hit 4% in price, worse than stock indexes, its game over. VAR is too high, all traders, portfolio managers MUST exit, ECB is the only real bid in size (for how long ?); and sooner or later Italy has to show the white flag and ask for a bailout

full article at source: http://boombustblog.com/BoomBustBlog/The-Eurocalypse-Rant-The-Consequences-of-Foolish-Monetary-Policy.html

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