- Sep 12, 2008
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The EU is a set of laws and treaties regarding the shipment of goods. Politicans come and go, but the basic principles just keep going on regardless
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For that is what it often feels like what we do here at The Automatic Earth: we watch dreams die. Only, we see them die -mostly- before the people do whose dreams we watch. That may sound convoluted, but it really isn't. While it may be hard to predict and see what stone may fall next, it is very obvious that the large majority of them will indeed topple over. There are big dreams, like that of a unified Europe, a dream that is age old, and has been shattered as often as it's been dreamt. This time will be no different. And neither will the consequences be any more bearable.
The German Federal Constitutional Court passed a judgment this week that seems to let Angela Merkel and her people off the hook: all EU bailouts to date passed the threshold of legality. For Merkel though, this is as Pyrrhic as it comes, and the same goes for the financial markets. The court, even as it condoned past actions, put very strict limits on future ones. Future bailouts will be very hard to pass, there will no longer be any last minute grand gestures, and a fiscal union for Europe was swept off the table in one fell swoop.
In case anyone still feels even this can be overcome, Slovakia of all places threatens the Euro project with imminent demise. The chairman of the parliament in Bratislava has said there will be no vote on the lift of EFSF funds until probably December. So even if there's a yes vote, no funds will be available until February 2012. Which is more than Europe can bear at this point in time. There are so many leaks in the system, it's already running out of fingers. Dutch Finance Minister De Jager sent a letter to his parliament yesterday saying the next chunk of Greek Phase 1 bailout funds will be delayed from mid September to end September at the earliest. Greece is not living up to the conditions put on the bailouts. Not enough austerity. Firing 20% of civil servants is apparently what it will take. Not enough austerity in Italy either, or so we hear.
We could go on for a long time pointing out signs that paint the inevitable picture, but it should be clear by now that Europe is a dream we see die before our very eyes. Swiss bank UBS has an idea what that will likely lead to: "We note that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war." The cause of the downfall of the Eurozone? Too much debt. It's no different from that of the people the Reddit commenter evicts from their homes. Too much debt. It's everywhere, and it will devour our societies.
Read more: The Automatic Earth: September 8 2011: Watching Dreams Die
Is the EU going to collapse?
All they really need to do is design a new currency and not let the greeks or Italians or Spaniards have the plates.
England changes over its currency on a regular basis. I think most european countries did likewise. It will be no more than business as usual. If the Greeks, Italians and Spaniards want to continue with a hyper inflating southern euro, let them.
Did anyone think the Spaniards or the Greeks were going to live up to their commitments?
All they really need to do is design a new currency and not let the greeks or Italians or Spaniards have the plates.
England changes over its currency on a regular basis. I think most european countries did likewise. It will be no more than business as usual. If the Greeks, Italians and Spaniards want to continue with a hyper inflating southern euro, let them.
Did anyone think the Spaniards or the Greeks were going to live up to their commitments?
If the world's third largest economy falls apart, how will that effect the world's largest economy?
All they really need to do is design a new currency and not let the greeks or Italians or Spaniards have the plates.
England changes over its currency on a regular basis. I think most european countries did likewise. It will be no more than business as usual. If the Greeks, Italians and Spaniards want to continue with a hyper inflating southern euro, let them.
Did anyone think the Spaniards or the Greeks were going to live up to their commitments?
Huh?! Baruch, our currency, known as Sterling, is the world's oldest currency still in use! It hasn't changed in centuries.
All they really need to do is design a new currency and not let the greeks or Italians or Spaniards have the plates.
England changes over its currency on a regular basis. I think most european countries did likewise. It will be no more than business as usual. If the Greeks, Italians and Spaniards want to continue with a hyper inflating southern euro, let them.
Did anyone think the Spaniards or the Greeks were going to live up to their commitments?
Nervous investors unloaded equities amid concerns that Greece's problems would spread across Europe, and headed for safer havens like bonds and the Japanese yen. The euro hit a 10-year low against the yen Monday. European shares plummeted in early trading. Britain's FTSE 100 2.2 percent at 5,100.41. Germany's DAX fell 3 percent to 5,034.71 while France's CAC-40 plunged 4.5 percent. Wall Street also was headed for a sullen start to the trading week, with Dow Jones industrial futures 1.5 percent down at 10,789 while S&P 500 futures sank 1.5 percent to 1,135. "Greece basically has its back against the wall," said Tom Kaan, head of equity sales at Louis Capital Markets in Hong Kong. "Having said that, the concern I have is no longer Greece. Greece has to default."
The bigger concern, he said, was whether other European countries like Italy would follow. "We'll see still more sludge on the downside before things get better," Kaan said. Trading in Asia wasn't any better. The Nikkei 225 stock average in Tokyo lost 2.3 percent to 8,535.67 its lowest closing level since April 2009. Japan's powerhouse export sector was hit hard amid the strength of the Japanese currency, which makes products more expensive overseas. Honda Motor Co. tumbled 3.8 percent while Nissan Motor Corp. lost 3 percent. Electronics giant Sharp Corp. slid 5 percent.
In Hong Kong, meanwhile, the benchmark Hang Seng index shed 4.2 percent to 19,030.54 as worries about Europe's massive debt problem as well as a possible recession in the United States weighed on investors. Hong Kong-listed shares of the Industrial and Commercial Bank of China, the world's biggest bank by market value, tumbled 5.3 percent. China Overseas Land & Investment Ltd., a blue chip property developer, plummeted 7.5 percent.
In Australia, the S&P/ASX 200 plunged 3.7 percent to 4,038.50. Losses were broad-based, with energy, materials and financial shares slumping. BHP Billiton Ltd., the world's largest mining company, fell 3.9 percent. Rival Rio Tinto Ltd. slid 4.3 percent. "After escalating concerns that a Greek default was inevitable caused a precipitous plunge across European and US markets on Friday, it is of little surprise to see our market getting hammered today," said Ben Potter, market strategist with IG Markets in Melbourne. "No one really has any idea where this whole situation may end up."
Benchmarks in New Zealand and Singapore also retreated. Financial markets in South Korea, mainland China and Taiwan were closed Monday for national holidays. Wall Street sustained heavy losses before the weekend following the surprise resignation Friday of a key European Central Bank official. The decision by Jergen Stark revealed deepening rifts over how to solve Europe's economic problems and heightened concerns that the continent's heavily indebted economies could collapse.
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Stocks markets in Europe and the United States plunged. The euro sank 1.6% versus the dollar. Yields on U.S. Treasuries and German bonds fell to record-lows as investors took shelter in safe-haven assets. The market turmoil was driven by fears that Athens may not get its next installment of bailout money from the European Union, International Monetary Fund and European Central Bank.
Concerns about Greece had eased somewhat after the EU agreed in July to provide a second bailout for the debt-stricken nation. But the 109 billion euro package, which must be approved by the individual governments of all 17 nations that use the euro, has been called into question over the last few weeks. The sell-off on Friday "is a continuation of an ongoing process of decay," said Carl Weinberg, chief economist at High Frequency Economics.
Last week, IMF and EU officials unexpectedly left Athens during a review of the government's progress on its debt reduction program. That gave rise to speculation that Greece may not be able to hit certain fiscal targets that are a condition for its bailout loans from the so-called troika. Greece received the final installment of its first bailout in July. The $17 billion it received was expected to keep the nation afloat for three months. "The concern now," said Weinberg, "is that having been declared unfit in previous reviews, Greece might not get the money it needs this time, and that would put them into a default situation."
In addition, investors are worried that Greece may not go through with a proposed bond swap with private sector investors if the participation rate falls short of expectations. "There is still uncertainty over whether sufficient private sector investors have been incentivised to participate in the debt swap arrangements involving Greek debt," economists at Nomura Securities wrote in a research report.
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Listen to many European leaders especially, but by no means only, the Germans and youd think that their continents troubles are a simple morality tale of debt and punishment: Governments borrowed too much, now theyre paying the price, and fiscal austerity is the only answer. Yet this story applies, if at all, to Greece and nobody else. Spain in particular had a budget surplus and low debt before the 2008 financial crisis; its fiscal record, one might say, was impeccable. And while it was hit hard by the collapse of its housing boom, its still a relatively low-debt country, and its hard to make the case that the underlying fiscal condition of Spains government is worse than that of, say, Britains government.
These countries are facing something very much like a bank run, except that the run is on their governments rather than, or more accurately as well as, their financial institutions. Heres how such a run works: Investors, for whatever reason, fear that a country will default on its debt. This makes them unwilling to buy the countrys bonds, or at least not unless offered a very high interest rate. And the fact that the country must roll its debt over at high interest rates worsens its fiscal prospects, making default more likely, so that the crisis of confidence becomes a self-fulfilling prophecy. And as it does, it becomes a banking crisis as well, since a countrys banks are normally heavily invested in government debt.
Now, a country with its own currency, like Britain, can short-circuit this process: if necessary, the Bank of England can step in to buy government debt with newly created money. This might lead to inflation (although even that is doubtful when the economy is depressed), but inflation poses a much smaller threat to investors than outright default. Spain and Italy, however, have adopted the euro and no longer have their own currencies. As a result, the threat of a self-fulfilling crisis is very real and interest rates on Spanish
and Italian debt are more than twice the rate on British debt.
The end of the euro would not mean the end of the EU.
But the euro isn't ending, though in five years it will probably look different than today. It's untenable as is.
Late Friday, European leaders pushed a decision about the next installment of Greece's bailout to October. "Time is running out," wrote Marc Chandler, global head of currency strategy for Brown Brothers Harriman. "The two day meeting between European finance ministers ended without substantial progress on Saturday." Later Monday, EU leaders and IMF officials are scheduled to hold a conference call to discuss what steps Greece is taking to solve its budget issues. The DAX (DAX) in Frankfurt led the declines, with a drop of nearly 3%, followed by a decline of 2.5% with the CAC 40 (CAC40) in Paris and a drop of 2% with the FTSE 100 (UKX) in London.
Among a series of possible changes is the expansion of the European Financial Stability fund, which was created last year to facilitate low-cost loans for struggling EU members including Portugal and Ireland. Under changed proposed by EU leaders in July, the fund would be able to buy government bonds directly from banks and investors. But many analysts say there's not enough money in the fund to make it an effective tool. The euro was also under pressure against the U.S. dollar early Monday, falling more than 1% to $1.36, due to "negative European sentiment," wrote Deutsche Bank fixed income analysts Jim Reid and Colin Tan in a note to clients,
On the CAC 40, French bank Societe Generale fell more than 5%, BNP Paribas slide 3% and Credit Agricole edged down 0.5%. Signs of market queasiness spread to Wall Street, with stock futures selling off sharply. The biggest decliners were U.S. banks. Shares of Bank of America dropped 1.5% in premarket trading. Goldman Sachs, Citigroup, JPMorgan Chase and Morgan Stanley also declined between 1% and 2% in early trading. Concerns over European debt, particularly with Greece, weighed heavily on Asian markets, with the Hang Seng (HSI) in Hong Kong dropping 2.7%, and the Shanghai Composite (COMP), sliding 1.8%. The Nikkei (N225) in Japan was closed.
Dithering over Greek debt drags down world markets - Sep. 19, 2011
Evangelos Venizelos, the Greek finance minister, will discuss his country's plight with officials from the European Commission, the International Monetary Fund and the European Central Bank during a conference call Monday. The call comes on the same day that representatives from that so-called troika were originally scheduled to return to Athens to review Greece's progress on reforms needed to obtain its latest installment of emergency funding. After abruptly leaving the country earlier this month, officials from the troika delayed a decision on whether to pay out the next portion of Greece's loan until October.
The fraught negotiations have revived fears that Greece could default on its debts in a disorganized way, something that investors and economists fear could ripple throughout the global financial system. Greece is expected to run out of the cash it needs to fund all of its operations in about a month without more bailout money. The country is due to receive an estimated 8 billion from a 110 billion rescue package the troika set up last year as Greece came to the brink of default.
"The timing of a Greek default remains in the hands of the troika and it is difficult to believe that they will decide to pull the plug at this stage because of the potential impact upon the other troubled sovereigns and the banking sector," Gary Jenkins, head of fixed-income at evolution securities in London, wrote in a note to clients. "That said, who knows what contingency plans they have prepared behind closed doors." In July, European leaders agreed to provide an additional 109 billion bailout for Greece as it again came to the verge of default.
The second bailout has yet to be approved by all 17 nations that use the euro. But it was the immediate threat of a default that upset global financial markets and pushed the euro sharply lower Monday. Stock markets in London (UKX), Frankfurt (DAX) and Paris (CAC40) fell between 2% and 3%. The euro sank 1.1% against the U.S. dollar. "In the near-term, the market is speculating over the potential of the troika not releasing the sixth tranche of financing, which would leave the mid-October Greek coupon payment at risk," said Camilla Sutton, chief currency strategist at Scotia Capital.
How bad is it?
Pushing a stroller on a weekday afternoon, 29-year-old Lucas Sulej ran an ordinary errand: he took out money at a bank machine in eastern Paris. But these days Sulej no longer takes his French bank, Societe Generale, for granted - not since Moody's cut its rating last week, partly because of its large exposure to Greek debt. "I have money in Societe Generale and maybe tomorrow it may disappear. Because you know the problems of Societe Generale," said Sulej.
Analysts say banking insurance and governments will protect ordinary European savers like Sulej. But the young father is not the only one concerned about the health of Societe Generale and other European banks which have lent hundreds of billions of dollars to debt-strapped governments like Greece. At issue, says Thomas Klau, head of the Paris office of the European Council on Foreign Relations, is not the downgrading of banks like Societe Generale - which overall still has a good credit rating. "The trouble is that the loss of confidence within the financial markets - but also within the core parts of the financial industry themselves - has now reached such proportions that any negative move can have extremely bad consequences," he said.
Analysts say part of the problem is a lack of transparency within Europe's banking sector and that is deepening the alarm in the markets. Simon Tilford is chief economist at the London-based Center for European Reform. "They don't know which banks are sitting on which debt, so they are becoming increasingly loathe to loan to European banks," said Simon Tilford, chief economist at the London-based Center for European Reform.
In a move to restore market confidence, major central banks around the globe agreed last week to inject dollars into Europe's banking system to fight fears it is running short of cash. But Tilford says the move is not enough. "All it does really is provide liquidity and that's useful, but the underlying problem is essentially a solvency one, in that there is an awful lot of debt that's going to get written off in Europe and that is going to impose very, very considerable losses on financial institutions," he said.
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