Good translation of the Eurozone Economic Crisis for those of us without ECON degrees

[The-Noid]

European banks are starting to have solvency problems because of their huge exposure to European govt bonds that are dropping value, causing write downs and weakening their capital base and forcing them to raise capital again. They already had weakened balances because of all this USA submortgage toxic crap. ECB could step in and stop this spiral by massively buying these Italian and Spanish bonds. Dexia is a special case, it was basically a very healthy Belgian bank based on classic deposits and a French part that was basically a hedge fund with zero deposits. The Belgian healthy part has been nationalised and all the crap is in a bad bank kept afloat by a liquidity infuse from Belgian and French national banks. I agree with the shrinking down but you can not do that in 6 months, it takes years to clean the balances, all European banks were doing this after the submortgage crisis but they are all taken now by the European debt crisis. Dexia would have survived if it was not for this last crisis. They were shrinking their balance but history caught up with them

European banks have huge exposure to everything. Bank loans, covered bonds, mortgages, corporates, etc. The government bonds just aren't supposed to lose money. These banks have had problems since 2008 and are yet to recover. They are going to need capital or they are going to need to be run off. Freezing sovereign prices where they are still does not solve the fact that Europe is going into a recession and balance sheets are very weak in that environment, EVEN IF SOVEREIGNS ARE CARRIED AT PAR. European banks carry huge leverage to the economic cycle and it has been less than two years of expansion. They simply haven't had time to rebuild from the financial crisis and if the recession is sharper than people expect will need capital.

 

[The-Noid]

murky "cds transmission lines" is a term David Faber on CNBC has used.


Graph in this Felix Salmon article on liquidity seems to indicate that quantitative easing, not TARP per se, was our bazooka (?):

http://blogs.reuters.com/felix-salm...ordinated-statements-central-banking-edition/

http://blogs.reuters.com/felix-salmon/2011/11/14/europes-liquidity-crisis/

Is that correct interpretation? (bazooka to break immediate crisis*, but not recapitalize banks?)




* I forgot where I read or saw it, but I think logic was Fed buying up bad debt put a floor in asset prices, allowed banks to undergo stress tests, and then raise capital)

For every person that says it was QE there is another that says it was TARP. You have multiple variables, as you learned in 6th grade science, two independent variables is going to cause problems. Also even in that graph, wouldn't you then expect that the bank index would continue to increase as the Fed has continued to buy securities and increase the balance sheet. Besides the short pop prices have been stagnant to down even under expanding balance sheet conditions.

The Federal reserve popped the stock market off the 666 lows, but TARP saved the banks as entities. Share prices != solvency in a sense. Share prices also dictate confidence, behavioral finance etc. The solvency of the bank imo was saved by TARP. As the ship went up from the lows of 2009 because of the MBS program the rising tide that was the stock market increased bank stock prices.

 

[Darwin333]

The Germans (and the Dutch) are keeping the ECB on the leash. Sarkozy has been trying to massage Merkel for weeks now trying to convince her that the ECB needs a bigger role. France official position is that they are onboard with Germany but in reality they are trying to pave the way for a bigger role for the ECB. Sarkozy doesn't have to worry about this playing a role in elections, the French socialist party wants to unleash the ECB bazooka right now so they are on the same page, in that respect it doesn't matter, the French home front will backup whoever is going to be the next president on this. In Germany it's very different, the population is being fed constant stuff by the media that all Greeks, Italians, .. are all lazy bums so Merkel is in a very tough position. Helping the lazy Greeks is not a very popular policy in German politics right now. What is see happening is the following

- German will first impose more European oversight on EU countries national budgets. This is already in the making. The EU commission will have a final say in the budget every year from every country and can even impose huge fines. (my own country Belgium was on the hook this week for a 700 million euro fine because we didn't have an approved budget that had a deficit that was less then 3% GDP)

- Once Germany has more control on other nations budgets (imposing austerity measures), they will allow the ECB to step in and intervene massively to support these countries and prevent a collapse of the Euro.

In the end it's very possible when all is said and done, we will have more European integration, not less

Damn. That sounds like a lot of sovereignty lost. Are most European countries really ready to give up that much sovereignty to Germany (which is REALLY ironic too)?

 

[bfdd]

yeah i find it kind of funny that Germany is seizing so much control of Europe through financial means. covert war!?!? NEXT REICH!? lols can't wait for the conspiracy theories here.

 

[freegeeks]

Damn. That sounds like a lot of sovereignty lost. Are most European countries really ready to give up that much sovereignty to Germany (which is REALLY ironic too)?

There is no other way then more European integration if the Euro wants to survive. As a Belgian, I welcome our new German overlords, I rather have competent, disciplined Germans vetting the Belgian budget then some local politician giving handouts to his likely voters. I don't give a damn who is making sure that my tax euro is wisely spend, for my part he/she can be a green alien from Mars.

 

[mshan]

- Second bump up of green line looks like it correlates with quantitative easing 2 (?)
- Wasn't that targeted jump start economy through wealth effect, rather than continue fixing banks at that point? I would guess downward slope of banking index then might reflect deterioration of housing market more than originally anticipated.


Also, do you think the sequencing Merkel et. al. is using (quantitative easing once they get some sort of fiscal constraints agreement, new round of believable stress tests, then some sort of bank recapitalization (Euro-bonds?) over next 2 - 5 years or so correct and proper way to proceed?


And, in retrospect and as politically unpalatable as it is, do you think Paulson's original conception of TARP (I think he was just going to buy up bad debt from banks with $700 billion TARP funds (?), rather than how it was changed because of political uproar) would have ultimately been more effective, or at least cheaper in terms of ultimate costs, to taxpayer? http://londonbanker.blogspot.com/2008/10/financial-eugenics-paulson-plan-for.html

 

[The-Noid]

Also, do you think the sequencing Merkel et. al. is using (quantitative easing once they get some sort of fiscal constraints agreement, new round of believable stress tests, then some sort of bank recapitalization (Euro-bonds?) over next 2 - 5 years or so correct and proper way to proceed?

QE needs to come quickly to stabilize bond prices. Anything less than Euro1T will probably be seen as a failure to the market. Shock and Awe is how QE works (look at how long it took the Japanese when they started small).

For the stress tests to be believable capital raise has to be north of E500B. Anything less and they will keep going back to the same non-believable status. Dexia passed 6 months ago, lol. Even the 100B or so from the last round of stress tests is not seen as believable. The amount needs to be north of 300B to even gain confidence, 500B in new capital would imo fix a lot however. European banks would rather continue to delever and sell assets which isn't going to work in the mark to market era. The European stress tests from the start haven't been seen as even the least bit believable and to salvage them, they are going to have to push them to the max a scenario people can't imagine. When they factor push the banks this hard the amount of capital that needs to be raised is going to be huge. Just have a quick play around here (http://graphics.thomsonreuters.com/11/07/BV_STRSTST0711_VF.html) that doesn't even include what is going to happen on the bank loan side, the capital markets side and retail banking side. The numbers get gigantic in a hurry.

2-5 years is too long. They won't have a banking system by then. 18 months maybe. QE + 500B in equity would do a lot to calm the markets. Make no mistake on paper debt ratios in Europe look fine but including bank debt that is going to end up being nationalized Europe is extremely over leveraged. Whereas the US is becoming over leveraged on the national government debt, Europe is over leveraged on the bank debt side. Conservatively if things go badly in France and Germany because of the European debt crisis, national sovereign debt loads will go up 10-12% of GDP bringing in the needed capital (putting the DE/FR close to comparable to the US for debt/gdp). France will get hit worse than Germany. Remember a 700B TARP was for 8T in big bank assets (which turned into a bit more because little banks were allowed in). Europe has more bank assets than the 8T and GDP that is similar. As the majority of European countries are locked out of the capital markets if equity needs to be raised by GermAAAny/FrAAAnce/AustriAAA/NetherlAAAnds all of them will become GermAny/FrAnce/AustriA/NetherlAnds or worse. To make a comparable TARP EU1T needs to be raised and that is how Goldman came up with the number in their now famous report.

On that note I will leave you guys to yourself. I should have stayed out, I do have an economics degree!

 

[mshan]

"On that note I will leave you guys to yourself. I should have stayed out, I do have an economics degree!"

Understandable, and, seriously, thank you for trying to share your insights; it is very much appreciated.

 

[Fern]

The Germans (and the Dutch) are keeping the ECB on the leash. Sarkozy has been trying to massage Merkel for weeks now trying to convince her that the ECB needs a bigger role. France official position is that they are onboard with Germany but in reality they are trying to pave the way for a bigger role for the ECB. Sarkozy doesn't have to worry about this playing a role in elections, the French socialist party wants to unleash the ECB bazooka right now so they are on the same page, in that respect it doesn't matter, the French home front will backup whoever is going to be the next president on this. In Germany it's very different, the population is being fed constant stuff by the media that all Greeks, Italians, .. are all lazy bums so Merkel is in a very tough position. Helping the lazy Greeks is not a very popular policy in German politics right now. What is see happening is the following

- German will first impose more European oversight on EU countries national budgets. This is already in the making. The EU commission will have a final say in the budget every year from every country and can even impose huge fines. (my own country Belgium was on the hook this week for a 700 million euro fine because we didn't have an approved budget that had a deficit that was less then 3% GDP)

- Once Germany has more control on other nations budgets (imposing austerity measures), they will allow the ECB to step in and intervene massively to support these countries and prevent a collapse of the Euro.

In the end it's very possible when all is said and done, we will have more European integration, not less

Sounds like Germany may end up conquering Europe after all, just not in the manner they thought.

Edit: bfdd beat me to it.

Fern

 

[Fern]

also, ING released a study today what would happen if the Euro collapses and it ain't pretty. We can expect a 12% contraction the first year alone in the eurozone dragging the world in a big recession. The Drachme, Lire, Peseta will be devaluated as much as 80% compared to the new Deutsche mark causing mayor problems for German economy which is heavily dependant on exports. My own Belgian franc will devaluate around 15%. The situation for the US dollar would be dramatic. Investors would flock to the only liquid investment left, the US dollar pushing it to astronomical heights causing massive deflation in the USA (which is a disaster, ask the Japanse who have been in a deflatory spiral for more then a decade now). Basically, it's a financial armageddon that would look Lehmann brothers like a futile blimp. I don't think that the Germans want to risk that...

Investors flocking to the dollar sounds like just what our govt needs. They sure as heck can't cut spending so they'll need to float all the cheap Treas bonds they can.

Everybody knows there's a lot of money to be made when things are moving up. But I think there's a lot to made when they're moving down too. I.e., it's the act of moving, and not the direction that provides opportunities. Wish our govt was smart enough to figure out to profit form Europe's implosion. Apologies to the Euro's here if that seems cold, but I'm a cold/objective financial type.

Fern

 

[mshan]

Some really interesting commentary by Kyle Bass (start around 12:20 mark):

http://www.youtube.com/watch?v=5V3kpKzd-Yw :thumbsup:



Bullet Points:

- solvency of Greece (interest payments over 10% of central government revenue = insolvency)
- origins of IMF and White being Russian spy who gave U. S. printing plates to Russians
- U. S. losing veto power in IMF
- Barney Frank comment about funding IMF
- we need to reduce spending by 5% and increase revenue around 2.5%
- long-term housing market projection (around 27 minute mark)
- GFEs didn't charge enough points for risk taken (after 28 minute mark)
- what does actual Greek default look like (don't know if Greece already received tranche of bailout funds to cover payments from Dec. 19 - Dec. 30 mentioned in video clip; Japanese are going to lose 1/3 of their savings) (30 minute mark)
- his Japan scenario, including how U. S. benefits from both legal and illegal immigration (~ 34 minute mark)

"Unlike Italy where foreign bondholders would pay for a default, Japan can't allow itself to default. A steep price will nevertheless be exacted from the Japanese people. It will come in form of higher taxes on income and consumption (in the works), higher costs (happening), and lower wages (continuing). Entitlements will be whittled down. Some will disappear. Meanwhile, companies will be subsidized or get bailed out (happening). But these measures will only kick the can down the road—though kicking a can on the road is precisely what you don't do in Japan." http://www.testosteronepit.com/home/2011/9/21/how-long-can-japan-play-the-endgame.html

- owning physical gold (42 minute mark)
- social unrest / Occupy Wall Street comments (around 44:50 mark)
- killing the dollar (around 47:40 point)

"The cost would be inflation and devaluation. As in the US, inflation would fluctuate between 2-5% a year, or 30-50% every decade. As in the US over the last twelve years, it would entail the gradual impoverishment of the middle class whose wages would rise more slowly than inflation. So that governments could fund their deficits with free money, the ECB, just like the Fed, would force yields below the rate of inflation. This form of financial repression would devastate fixed-income investors, pension funds, and savers. By taking control of the credit markets through printing money, the ECB would shield Eurozone governments from the harsh discipline that markets can impose. Unrestrained, deficits would skyrocket." http://www.testosteronepit.com/home/2011/11/21/euro-schizophrenia-in-germany.html

- more Freddie / Fannie / GSE comments - raise basis points from 20 to 70 to pay back government (around 52 minute mark)
- we should try Switzerland private bank model LOL! (if you are an officer or director of private bank in Switzerland, you have personal liability for assets of banks, so once cap structure of bank is exhausted, you are on hook) start around 59 minute mark

 

[freegeeks]

On that note I will leave you guys to yourself. I should have stayed out, I do have an economics degree!

don't know why this matters in this discussion, the guys and gals dreaming up CDO en CDS consisting of submortgage crap all had a Phd in Economics and Mathematics

No offense but it's not exactly like you guys have a stellar reputation the last few years

 

[freegeeks]

Investors flocking to the dollar sounds like just what our govt needs. They sure as heck can't cut spending so they'll need to float all the cheap Treas bonds they can.

Everybody knows there's a lot of money to be made when things are moving up. But I think there's a lot to made when they're moving down too. I.e., it's the act of moving, and not the direction that provides opportunities. Wish our govt was smart enough to figure out to profit form Europe's implosion. Apologies to the Euro's here if that seems cold, but I'm a cold/objective financial type.

Fern

we are not actually talking about a strong dollar here, in the ING report they are talking about a dollar that would rise to Nepalese mountain hights. It would devastate US exports

 

[KAZANI]

Helping the lazy Greeks is not a very popular policy in German politics right now. What is see happening is the following

- German will first impose more European oversight on EU countries national budgets. This is already in the making. The EU commission will have a final say in the budget every year from every country and can even impose huge fines. (my own country Belgium was on the hook this week for a 700 million euro fine because we didn't have an approved budget that had a deficit that was less then 3% GDP)

- Once Germany has more control on other nations budgets (imposing austerity measures), they will allow the ECB to step in and intervene massively to support these countries and prevent a collapse of the Euro.

In the end it's very possible when all is said and done, we will have more European integration, not less

First of all, Greeks are not lazy. Furthermore, the punitive budget-tightening dogma that Germany is so tenaciously preaching on for the PIGS, is catastrophic to their economies to the point that brings into question not only the ability but also the moral motives behind a german fiscal hegemony in the eurozone. More integration in essence means treaty changes and gaining the required electoral approval for them in 27 countries is not going to be an easy task, if at all possible. Euroscepticism and populism are dominating the political landscape in Europe at the moment. This means public opinion is more likely to be goaded towards the "sovereignty preservation" camp than to the "more Europe" one. By the time "all is said and done" there won't be an EU to "integrate" anymore.

 

[The-Noid]

don't know why this matters in this discussion, the guys and gals dreaming up CDO en CDS consisting of submortgage crap all had a Phd in Economics and Mathematics

No offense but it's not exactly like you guys have a stellar reputation the last few years

Mathematics more or less. Problem is they had no financial or economics background whatsoever. Wall Street brought in math guys and engineers and all the US banks bitched like crazy about their anti-competitiveness to the European banks because of Glass-Steagall. As soon as Glass-Steagall ended the whole world went on an orgy of leverage because they could. The math guys told them they were fully hedged on all these positions and since the models had told them in the past nothing ever goes down in tandem it will work!

Common sense and finance and econ guys would have fixed a lot.