(cont'd from above) Question of Choice Was there really a choice? Did Speece make these mistakes acting alone or because of "venality of its leaders". Pettis answers ... Blaming Nations Because German capital flows to Spain ensured that Spanish inflation exceeded German inflation, lending rates that may have been "reasonable" in Germany were extremely low in Spain, perhaps even negative in real terms. With German, Spanish, and other banks offering nearly unlimited amounts of extremely cheap credit to all takers in Spain, the fact that some of these borrowers were terribly irresponsible was not a Spanish "choice". Couldn't Spain have refused to accept the cheap credit, and so would not have suffered from speculative market excesses, poor investment, and the collapse in the savings rate? Not really. Pettis explains ... "There is no such a decision-maker as 'Spain'. As long as a country has a large number of individuals, households, and business entities, it does not require uniform irresponsibility, or even majority irresponsibility, for the economy to misuse unlimited credit at excessively low interest rates. The experience of Germany after 1871 suggests that it is nearly impossible to prevent a massive capital inflow form destabilizing domestic markets." As German money poured into Spain, with Spain importing capital equal to 10% of GDP at its peak, the massive capital inflows and declining interest rates ignited asset price bubbles. Pro-Cyclical Feedback Loops Spain could not stop these pro-cyclical feedback loops of massive proportion because Spain did not have control over its own interest rate policy or currency. Instead, the ECB had an interest rate policy best described in my opinion as "one size fits Germany". The bubble-blowing feedback loop fed on itself until it blew up. Who is really to blame for that? Target2 No discussion of eurozone problems would be complete without a discussion of Target2, an abomination created by the eurozone founders and one of the fundamental flaws of the euro. Target2 stands for Trans-European Automated Real-time Gross Settlement System. It is a reflection of capital flight from the "Club-Med" countries in Southern Europe (Greece, Spain, and Italy) to banks in Northern Europe. Pater Tenebrarum at the Acting Man blog provides this easy to understand example: "Spain imports German goods, but no Spanish goods or capital have been acquired by any private party in Germany in return. The only thing that has been 'acquired' is an IOU issued by the Spanish commercial bank to the Bank of Spain in return for funding the payment." Also, if people in "Speece" no longer trust their banks, they pull their deposits and park them elsewhere. Channel for Capital Flight PIMCO explains Target2 as a Channel for Capital Flight. The EU’s loans to Greece, Ireland and Portugal are just the tip of the iceberg of a fledgling transfer system that is creeping into the eurozone via the back door. A far bigger and implicit subsidy is growing beneath the surface in the form of TARGET2. When the European Central Bank (ECB) creates money, as it currently is doing in grand style, it must end up somewhere. The allocation of TARGET2 balances among the seventeen national central banks, which together with the ECB make up the Eurosystem, reflects where the market allocates the money created by the ECB. The fact that the Bundesbank has a large TARGET2 claim (asset) on the Eurosystem, while national central banks in southern Europe and Ireland together have an equally large TARGET2 liability, simply reflects that a lot of the ECB’s newly created money has ended up in Germany. Why? Because of capital flight. Countries in southern Europe generated persistent current account deficits since joining the euro in 1999, some of them large. A current account deficit means a country spends more in total than it earns. That extra spending is financed by borrowing from abroad. The source for such borrowing comes from a current account surplus country, like Germany. Since the euro eliminated exchange rate risk among its member states, Germany has invested a substantial portion of its savings in Europe’s current account deficit countries. Some of those savings are now returning home. That’s the capital flight. Enter the ECB. The ECB stepped into the void left by foreign investors pulling their savings out of these current account deficit countries by lending their banks more money. TARGET2 balances thus reflect intra-Eurosystem credits among the national central banks sharing the euro. When large capital flight to Germany occurred before the euro’s introduction, the deutschemark would appreciate against other European currencies. While pegged against the deutschemark, these exchange rates were still flexible. That flexibility disappeared with the euro. When capital flight occurs today, the Bundesbank effectively ends up with loans to the other national central banks that are reflected in the TARGET2 claims on the Eurosystem. Target2 Imbalances Chart courtesy of Euro Crisis Monitor. As of January 15, 2015, the Target2 numbers look like this, in billions of euros: CountryJan-15 Belgium-13.525 Germany 515.266 Estonian.a. Ireland-19.431 Greece-75.994 Spain-191.917 France-64.700 Italy-164.474 Cyprus-2.543 Luxembourg106.722 Malta-1.546 Netherlands-7.127 Austria-37.375 Portugal-47.504 Slovenian.a. Slovakian.a. Finland12.500 Latvia-2.735 Key Target2 Numbers Germany has a Target2 surplus of €515 billion. Greece has a target2 deficit of €76 billion. Spain has a target2 deficit of €192 billion. Italy has a target2 deficit of €164 billion. The ECB treats all of these surpluses and deficits as if they were equal and as if they don't matter. Clearly they are not equal, and they do matter. Role of Attitudes It's not entirely true that attitudes played no role in this mess. Germans tend to view things quite differently because of their experience with hyperinflation in the 1920s. Today, socialists rule France, Greece, Spain and other countries. Greece has a history of defaults. To completely dismiss such items is wrong. But who bears responsibility? The Germans, the Greeks, the Spaniards? Speece? The answer is the eurozone founders and the eurozone aggregate members. Greece lied to get into the eurozone. But every country knew Greece lied. If they didn't, they should have. And if Germany knew Greece lied, who gets the bigger share of the blame? More fundamentally, the eurozone founders knew full well there were serious productivity differences, work rule differences, pension differences, etc., etc., between countries. The eurozone founders mistakenly assumed that all the countries would get together and solve these issues. Oops. That is damn near impossible now because rule changes require consent of every eurozone country. The more countries that are added, the more difficult it is to get rule changes. Currently a mass of rule changes are sorely needed on agricultural issues, work issues, pension issues, and literally dozens of issues. Any country can block reform. (cont'd below)
(cont'd from above) Gold Standard Of all the laughable analogies made about the euro, at the top of the list is the notion the euro acts likes the gold standard. One can find many writers making such claims. For example, please consider Actually, There Is A Gold Standard Today, And It's Causing An Economic Catastrophe. The post is fatally flawed, yet it does reflect conventional wisdom. Here is a short rebuttal: Only in the superficial sense, that countries cannot debase their currency in isolation, does the euro remotely resemble a gold standard. On a practical and far more important basis, Target2 and the common interest rate policy are the opposites of what would happen on a gold standard. Prior to Nixon closing the gold exchange window, countries running perpetual currency account deficits would see an outflow of gold they would eventually need to do something about. In the eurozone, the ECB set interest rate policy (primarily for the benefit of Germany) and Target2 said the deficits of Speece do not matter. Under a gold standard, no one would have lent his own hard-earned gold to Speece, without much higher interest rates and good collateral to secure the loan. This of course would have dampened appetite for borrowing. Simply put, the eurozone setup was the exact opposite of what would have happened under a gold standard. Still No Enforcement Mechanism, Anywhere Because there were no trade imbalance enforcement mechanisms, Speece imbalances grew until they blew up. And until they blew up, the IMF had nothing but praise for Spain! And every step of the way, the IMF underestimated the problems Greece faced. We are headed into the third Greek bailout, and the IMF remains clueless about Greece's ability to pay back "bailout" money. Worse yet, there still is no "enforcement" mechanism anywhere in the world, and the structure of the euro is such that imbalances in Europe are even harder to fix than elsewhere. ZIRP to NIRP In the US, we see chronic trade imbalances with China, Japan, and oil producers. We also see constant bickering as to whether or not to label China a "currency manipulator". Every country is manipulating currency now, one way or another. China does so with pegs, most countries manipulate via interest rate policy. The mad race to ZIRP has now gone to NIRP. Zero interest rate policy has morphed into negative interest rate policy in a global beggar-thy-neighbor scheme. EFSF and ESM - Short Term Stabilizing, Long Term Destabilizing The European Financial Stability System (EFSF), was created in 2010 as a "temporary" crisis resolution mechanism. The EFSF provided financial assistance to Ireland, Portugal and Greece. The ESM is supposedly a "permanent" crisis resolution mechanism. The ESM has provided loans to Spain and Cyprus. Risk is shared by all eurozone member states in proportion to their share in the paid-up capital of the European Central Bank. That risk sharing is in clear violation of Maastricht Treaty no-bailout provisions, but few care about rules in time of crisis. The problem with "risk sharing" is that every county is partially responsible for problems elsewhere. In short, Spain is partially responsible for Greece, and vice versa. This can lead to cascade effects if a country defaults on bailout obligation. Dr. Eric Dor, director of IESEG School of Management in Lille, has an update on exposure to Greek debt liabilities. The details are interesting. IESEGBilateral loansGuarantees on the borrowings of EFSF to fund its loansImplicit share of TARGET2 claims of the EurosystemImplicit share in the SMP holdings of bonds by the EurosystemTotal Austria1.5554.2351.1980.5747.562 Belgium1.9425.2911.5120.7259.470 Cyprus0.11-0.0920.0440.247 Estonia-0.390.1180.0560.564 Finland1.0042.7350.7670.3684.873 France11.38931.028.6514.14855.209 Germany15.16541.30810.9815.26672.72 Greece----- Ireland0.347-0.7080.3401.395 Italy10.00827.2597.5113.60248.380 Latvia--0.1720.0830.255 Luxembourg0.140.3810.1240.0590.704 Malta0.0510.1380.0400.0190.247 Netherlands3.1948.6992.4431.17115.507 Portugal1.102-1.0640.5102.676 Slovakia-1.5030.4710.2262.200 Slovenia0.2430.7170.2110.1011.272 Spain6.6518.1135.3942.58732.744 Total52.9141.841.70920256.409 The above table is from Exposure of European Countries to Greece by Dr. Eric Dor, IESEG School of Management. Note: The above table was produced at a different time than the Target2 balances that preceded it. There may be slight differences. Spain which is in its own ESM bailout agreement is supposedly liable for €32.744 of Greek exposure. How is that going to work, besides not? Some disagree (or more likely say they disagree because it suits their short-term needs), but these bailout agreements as structured are in clear violation of the Maastricht Treaty. At some point, this will come back to haunt those who dreamed up those schemes. Problem is Not Virtue vs. Vice Let's return to a statement Pettis made much earlier: To the extent that the European crisis is seen as a struggle between the prudent countries and the irresponsible countries, it is extremely unlikely that Europeans will be willing to pay the cost. Blame Assignment Hopefully it is now clear the problem is not virtue vs. vice, but something far more complex. With that in mind, the question of the day is "how do we assign blame for problems in Speece?" In rough order, I propose .... No enforcement mechanisms ECB Target2 Eurozone founders and eurozone rules Eurozone member states ignoring rules Attitudes Most have attitudes at the top. I have attitudes at the bottom. I suppose one could summarize points 1-5 simply as the "eurozone flaws" or the "euro" but each is worth discussing separately. Debt Dynamics Pettis says "Even if the question of who is to blame, Greece or Germany, were an important one, the answer would not change the debt dynamics." True enough. In the end, Greece will not pay back, what cannot be paid back. Indeed, two haircuts have already been taken. The bickering now is whether or not there will be another bailout, and still further haircuts. How do we know Greece cannot pay back the existing debt? The market tells us so. Ironically, by the time the market makes it clear there is a huge problem (yields soar for example), it's too late to do much of anything but assign costs. Said Pettis, "My friend Hans Humes, from Greylock Capital, has been involved in more sovereign debt restructurings than I can remember, and he once told me with weary disgust that while it is usually pretty easy to guess what the ultimate deal will look like within the first few days of negotiation, it still takes months or even years of squabbling and bitter arguing before getting there. We cannot forget however that each month of delay will be far more costly to Greece and her people than we might at first assume." (cont'd below)
(cont'd from above) Rise of Fringe Parties Curiously, one of the biggest finger-pointers in this mess now is Spain. The Financial Times talked about it in Spain Keeps Hawkish Eye on Greece as Southern Solidarity Crumbles. "In its fear of Podemos, the Spanish equivalent of Syriza, and its determination to be one of the 'virtuous' countries, it strikes me that Madrid is probably moving in the wrong direction economically. Ultimately, by tying itself even more tightly to the interests of the creditors, Rajoy and his associates are only making the electoral prospects for Podemos all the brighter," said Pettis. Solidarity Where? On Monday March 2, acrimony took another huge step forward as Greek premier Alexis Tsipras accused Spain and Portugal of sabotaging negotiations. “We found opposing us an axis of powers ... led by the governments of Spain and Portugal which, for obvious political reasons, attempted to lead the entire negotiations to the brink,” Tsipras told party members on Saturday. “Their plan was, and is, to wear down, topple or bring our government to unconditional surrender before our work begins to bear fruit and before the Greek example affects other countries… And mainly before the elections in Spain.” Prime minister Rajoy responded "We are not responsible for the frustration generated by the radical Greek left that promised the Greeks something it couldn’t deliver on." Spanish Prime Minsiter Mariano Rajoy is making a big mistake. Spain can use debt relief. And the citizens of Spain want debt relief. By taking a hard stance in favor of Berlin, Rajoy adds fuel to the rise of Podemos. Siding with Germany is the wrong thing to do if Rajoy wants to win reelection. Playing with Fire Tsipras is a close friend and political ally of Pablo Iglesias, the former political science lecturer who founded Spain’s anti-establishment Podemos movement. Podemos is currently in the lead in Spanish polls. Elections are later this year. Rise of Extreme Parties Check out the rise of "extreme parties". Syriza in Greece Golden Dawn in Greece Podemos in Spain Five Star Movement in Italy National Front in France AfD in Germany New Fins in Finland In that group there are leftwing and rightwing parties, but all have one thing in common: They are sick of something. Spain is supposedly in recovery. What are Spaniards upset about? Greeks? Spanish Unemployment Spanish Youth Unemployment Greek Unemployment Greek Youth Unemployment Unemployment is a huge problem. Growth alone will not cure this problem. Both Spain and Greece are growing now. High unemployment rates in Speece will remain for a long time unless there is debt forgiveness or Germany turns its current account surplus into a deficit for the express benefit of Speece. Speece cannot become more like Germany, unless Germany becomes less like Germany and more like Speece. Third Bailout or Grexit I believe a third bailout and a third restructuring of Greek debt is necessary (See Third Greek Bailout? Another €53.8 Billion Needed? Primary Account Surplus Revisited). Will Greece go along? Slim chance, unless "bailout" truly means bailout, not more debt. Will Germany go along? The answer is almost certainly no. That means a Grexit or a default in June when this extension ends. Can the Euro Be Saved? Pettis says "Europe must decide if this [debt forgiveness] is a cost worth paying (and I think it is)." I do not believe it's that simple (and that is not by any means simple). Here's a better way of looking at things: "Is the euro so fundamentally flawed, and tensions so high that the euro cannot possibly be saved at all?" I believe the answer to that question is yes. If it is yes, then discussion better begin soon on how to exit from this mess. If the answer is no, then someone needs to explains what it will take to get Germany to forgive enough debt to allow Speece to grow without perpetually high unemployment rates. There are only three possible paths at this point. Three Alternative Paths Enough debt writeoffs to allow Europe to grow High unemployment and slow growth in Speece, with stagnation elsewhere in Europe Breakup of the eurozone There are no other realistic choices. Interestingly, none of them fixes the fundamental problem of "no enforcement mechanism" anywhere in the world. Let's turn now to the source of that particular problem. Nixon Closed the Gold Window The last semblance of enforcement mechanisms vanished when Nixon "temporarily" closed the gold window in 1971, refusing to let foreign central banks redeem their dollars for gold. What else happened at the same time? If you guessed debt soared as did income inequality, you guessed correctly. Income Inequality The above chart from The Rise and Fall of US Income Inequality (annotations in purple added with a hat tip to zero hedge for the idea). Gross Federal Debt Beggar Thy Neighbor Nothing is in place anywhere to stop "beggar thy neighbor", competitive currency debasement, competitive QE, negative interest rates, and all sorts of other amazing distortions brought about by central bank policies in general, not just in Europe. History suggests nothing will happen until there's a crisis. We did not use the last crisis well. Global debt went up $57 trillion dollars or so since 2007 (see Seven Years Later, Global Debt Keeps Piling Up, $57 Trillion More Than 2007) There was no deleveraging anywhere. And the leveraging up was certainly not for the benefit of the 99%. Consumer Price Deflation vs. Asset Deflation In their inane attempt to prevent consumer price deflation, the world's central banks have spawned massive asset bubbles in equities, junk bonds, and housing. When those bubbles burst, they will spawn the extremely destructive asset deflation that central bankers ought to fear, but never do because central bankers never see the bubbles they create until they burst wide open. Currency Crisis Awaits Global imbalances are so extreme, interest rate policy so absurd, and unsound fear of consumer price deflation that a massive currency crisis is all but inevitable now. The currency crisis could start in Europe. But it could also start in Japan, the UK or anywhere. Meanwhile, as long as there is no enforcement mechanism on spending and on trade imbalances, the bubbles will grow and grow and grow until central banks can no longer stuff anymore debt into the system. Good luck when the bubbles pop. Let's hope the next crisis is handled better than the last one. Don't count on it, especially when ... Central banks do not see themselves as part of the problem The 1% want to keep the status quo The Keynesians believe more spending is the answer to too much debt The Monetarists believe more printing is the proper response to too much printing The academics blame the 1% instead of the Fed (central banks).
This is sure to send volly over the falls. Visaria, did you consult with Tsipras or something? Tsipras Slams “Crimes Of Third Reich And Hitler’s Hordes"; Threatens Seizure Of German Assets Earlier today, despite fears that it may not find enough cash to fund its latest T-Bill rollover, Greece was able to sell €1.3 billion of three-month Treasury bills, covering the amount it wanted to refinance a maturing issue, in what Reuters dubbed was an "auction that tested its ability to raise funds amid a cash crunch." The paper came at a higher cost as the T-bills were priced to yield 2.70 percent, up 20 basis points from 2.50 percent in a previous sale in February, the country's debt agency PDMA said. However, this latest funding appears to have brought Greek funds to a critical low level because roughly at the same time news broke that Greek Justice Minister Nikos Paraskevopoulos said he is ready to sign an older court ruling that will enable the foreclosure of German assets in Greece in order to compensate the relatives of victims of Nazi crimes during the Second World War. As Kathimerini reports, Greece's Supreme Court ruled in favor of Distomo survivors in 2000, but the decision has not been enforced. Distomo, a small village in central Greece, lost 218 lives in a Nazi massacre in 1944. “The law states that in order to implement the ruling of the Supreme Court, the minister of justice has to order it. I believe this permission should be given and I’m ready to give it, notwithstanding any obstacles," Paraskevopoulos told Antenna TV on Wednesday. “There must probably be some negotiation with Germany,” said Paraskevopoulos, who first announced his intention Tuesday during a Parliament debate on the creation of a committee to seek war reparations, the repayment of a forced loan and the return of antiquities. Some background on the story from Keep Talking Greece: On Tuesday, Greek Justice Minister Nikos Paraskevopoulos said that he was ready to sign an older decision issued in year 2000 by Greece’s Highest Court Areios Pagos that enables confiscation of German state property in Greece. The court decision confirmed the First Instance Court decision of 1997 that had ruled that Germany had to pay €28 million to descendants of the Distomo massacre. On 10 June 1944, Waffen SS killed 218 men, women and children of Distomo village, in reprisal for attacks by resistance fighters. “The confiscation of German property in Greece would affect the Goethe Institute and the German Schools in Athens and Thessaloniki,” Greek media report. Speaking to ANT1 TV this morning, Paraskevopoulos said that the court decision needs only the signature of the Justice Minister in order to go in effect. However he implied that this will not be done immediately. According to Greek media, already in 2000, PASOK Justice Minister had signed the court decision and a justicial clerk appeared at the door of Goethe Institute in Athens. “However, the Justice minister withdrew his signature. after a couple of days later Germany approved the entrance of Greece to the Euro zone,” notes Proto Thema. But the Justice Minister and every Justice Minister has to take into consideration the impact on bilateral relations. Also on Tuesday, deputy Defense Minister Kostas Ysichos said that the ministry has the so-called Wehrmacht- Archive, an archive of 400,000 records of the German occupation, that is currently in the process of digitilization. Clearly this would not set a favorable precedent for wealth redistribution within the European "Union." As KTG succinctly observes, "The decision comes amid a frozen atmosphere between Greece and Germany over bailout reforms and a series of insults spoken by German Finance Minister Wolfgang Schaeuble against his couPnterpart Yanis Varoufakis." During the same debate, Prime Minister Alexis Tsipras expressed his government’s firm intention to seek war reparations from Germany, noting that Athens would show sensitivity that it hoped to see reciprocated from Berlin. Then again, "sensitive" is hardly how one would characterize his speech: when speaking before Parliament, Tsipras accused Germany of using legal tricks to avoid paying reparations for the Nazi occupation of Greece and said he would support parliamentary efforts to review the matter. “After the reunification of Germany in 1990, the legal and political conditions were created for this issue to be solved. But since then, German governments chose silence, legal tricks and delay. And I wonder, because there is a lot of talk at the European level these days about moral issues: is this stance moral?” Tsipras said and added that "despite the crimes of the Third Reich and Hitler’s hordes, the German debt was written off". Germany has repeatedly rejected Greek calls for WWII reparations claiming that “war compensations to individuals was settled with the Agreement of 1960? and the “Agreement of 1990.” However, “the Agreement of 1960 covered only compensation for the individual victims of Nazi horrors, not the destruction wrought on Greece during the 1941-1944 occupation and the enforced loan,” Tsipras said. Why is Greece pushing for any recovery on the reparations front? Because the amount for the cash-strapped, and now desperate, country could be substantial: "according to some sources, the Greek claims from Germany are estimated €269 – €332 billion. In April 2013, after the investigation committee concluded its work, newspaper To Vima reported that the Greek claim was 162 billion euro." To Vima stressed to have seen the findings and reports that the experts found that Germany should pay Greece 108 billion euros for damage to infrastructure and 54 billion euros for a loan that the Nazi occupation forces obliged Greece to take in order to pay Berlin during the war. The reparations are equivalent to about 80 percent of Greek gross domestic product. Clearly this is merely the initial Greek ask. It would settle for anything. However, judging by the less than frosty German response, it will get exactly nothing: MERKEL HASN'T DISCUSSED GREEK REPARATIONS WITH TSIPRAS: SEIBERT JAEGER: WON'T NEGOTIATE ABOUT NAZI ERA-RELATED GREEK CLAIMS If anything, digging up old wounds will merely accelerate the (less than) amicable parting of ways, especially after a speech earlier by ECB's Draghi in which he said that ECB bond buying "may be shielding countries in the euro zone from any knock-on effect from events in Greece, ECB President Mario Draghi said on Wednesday." Which simply means that just because European government bond yields are on their way to 0% or below, the ECB is now convinced that any Greek leverage has been lost, and the more Greece pushes, the more likely the divorce finally takes place, even if a Grexit ultimately does open up a whole new can of worms because as Italy's Padoan said yesterday, a "Euro exit would show that the Euro is not irreversible." But we'll cross that particular bridge once we get to it.
Threatens Seizure of German assets? Lol, which German assets? He now wants to start robbing and looting some German backpackers crossing the country?
Greeks have already shot guns a couple of times to the german ambassador's residence in Athens if I recall properly, so why not robbing german tourists... Do germans still go there ?
No need of drachma, a few more weeks of euro slide and travelling anywhere in the euro area will feel like Thailand - cost of living difference is getting ridiculous with East Asia
its already dirt cheap in Germany for decades. Nowhere in the world can you buy cheaper food at guaranteed quality levels than in Germany. I would rather make a huge circle around Greece, food wise. Who knows what they put into visitors' food. Re cost of living in Asia (esp HK but also SGP), fully concur. The only changes I observed in HK as the result of "corruption crackdowns" in PRC was a few shut down jewelry and watch shops. Rents seem to still be sky high. And its telling that every wannabe TV food chef schmuck now opens restaurants in HK.
we shall see what the cheap Euro will do to Greek tourism, unless of course their exit in a few weeks is sealed. My bet is that it has zero effect. A shit product is a shit product even if you give it away for free.