Pretty good, Detailed Summary of the Eurozone Debacle

[mshan]

Just stumbled across what appears to be a good detailed summary of the whole Eurozone Debacle, I think from perspective of someone in money management business (some granular detail, but not so technical so a layman like me can still understand it): http://seekingalpha.com/article/309118-eurozone-print-or-perish

Merkel and Germany are playing a very high-stakes game with France in particular and the rest of Europe in general. Let me first say that it would be absurd for Germany not to be thinking about all its options. One of those options most assuredly must be how they would go about allowing European banks and government to fail and what might be the consequences, whether or not they have any real intention of doing so. To not think about that would be irresponsible for a government. After thinking about it, they could decidedly reject it, but to not think about it? Somewhere in Germany I will bet you there is a memo on what it would take for Germany to leave the euro and who would go with them. Just saying…

(Likewise, someone in Greece must be thinking about what it would take to leave the euro, whether or not they have any intention of doing so. Someone, albeit very privately and behind closed doors, has to look at the options.)

Germany is in a game where the costs of leaving the euro, or a real euro break-up, are extremely high. But the costs of bailing out the profligate members of the eurozone are also extremely high. Either way the cost is formidible. It is not a choice of whether they will bear a huge cost burden, but just what form that burden takes.

The Germans would like the rest of Europe to get their budgets and deficits under control BEFORE they have to accept those costs. Not getting those agreements means that there will be no end to the amount of money Germany will have to pay. It will all too soon be enough that it would put their own credit rating at risk. They can envision how that works out. Without real spending controls, what disciplines a nation to not spend as much as it can get away with?

What Germany wants is for some mechanism to insure (and assure their voters) that the rest of Europe will control their deficits. And that means some type of European-wide control on spending and for governments to give up their sovereignty in exchange for the backing of Germany and/or the ECB. Otherwise, go ahead and default and see how that works out for you.

That is a perfectly rational position. But it is a huge gamble, as allowing the crisis to go a “bridge too far” would mean an economic crisis of biblical proportions, from which the recovery would be long and brutal.

But what does Germany have to lose by pushing it? Simply giving in without some sort of real controls in place for national deficits is not a solution from the German taxpayer point of view. Allowing the ECB to print without real fiscal guarantees from the various beneficiary governments simply postpones the inevitable and means a great deal of cost in the meantime.

"The game that Merkel and Sarkozy are playing is a very serious one. The markets are right to be focused on Europe, because the Europeans could bring the whole thing down on our collective heads. We must hope they get it right and that someone really decides what to do, instead of bluffing."

Other interesting links:

- http://www.bbc.co.uk/news/business-15693340 (same game of chicken laid out in layman's terms)

- http://www.bbc.co.uk/news/business-15748696 (interactive pie chart of who owes how much to which other countries)

- link provided by The-Noid below: http://blogs.reuters.com/felix-salmon/files/2011/09/09-06-11-EOTM-European-Minifigure-Union.pdf

- Spanish Housing Bubble (animated YouTube video): http://www.youtube.com/watch?v=xWrbAmtZuGc&feature=channel_video_title

- How to efficiently loot a central bank... (U. S. in 2008, Germany in 2011?):

"The way to rob a central bank efficiently is to be a bank executive so skilled in financial engineering that I take my bank to the edge of extinction. I can then swap all my unpriceable, illiquid, engineered credit instruments for good central bank cash and Treasuries. That’s larceny without risk, making the central bank a complicit partner in the looting of its vaults, and earning gratitude and bonuses instead of audits and indictments.

Since the credit crisis was first diagnosed last fall, the Federal Reserve has advanced more cash and Treasuries than the entire five year cost of the Iraq war – over $400 billion. It has plundered more than half its holdings of US Treasuries, taking impaired asset-backed securities collateral in their place. It has overseen the devaluation of the dollar to third world levels of instability and inflation. And all of this debasement has as its objective the re-financing of those bank and shadow-bank executives who have so looted their own institutions that they hold the global financial system hostage to their incompetence, malpractice and greed. Without consultation or review, the Federal Reserve was able to chuck out decades of transparency and accountability in favour of secret facilities, secret loans favouring secret beneficiaries of secret largesse.

The Term Auction Facility (TAF), the Primary Dealer Credit Facility (PDCF) and the Treasury Securities Lending Facility (TSLF) are all ill-transparent conduits funnelling central bank cash to bankers in the private sector free of oversight, audit or scrutiny. The recent liberalisation of collateral by the Fed means that it is now officially the market maker of last resort for securities which are unmarketable in the private sector."

http://londonbanker.blogspot.com/2008/12/re-post-from-150508-looting-vaults-of.html

"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

 

[Herr Kutz]

How can these European companies have so much debt? They don't even have real militaries.

 

[biostud]

How can these European companies have so much debt? They don't even have real militaries.

we spend it on welfare instead of military

 

[Murloc]

France has a strong enough military presence. Not nearly as much as the US, but that doesn't make it immaginary.

 

[Zebo]

How can these European companies have so much debt? They don't even have real militaries.

If you work for 25-30 years and retire for 30 years getting same salary math does not work. Our cops, firefighters and other pensioners are about to find this out too and we only do it for a minority of the population, they do it for everyone..

 

[Dari]

It has long been known that Europe's labor market was too rigid and special interests too entrenched. If Germany can come up with and successfully implement Agenda 2010, the lazy southern Europeans (this includes France) can do so as well. I'm with Germany on this one. Fix your fucking economy you lazy freaks. Too many lazy airheads in the south.

 

[cybrsage]

It is interesting to note that France's healthcare system is slowly edging towards either total collapse or a major overhaul. Each year, it takes more and more of the nations GNP. Let unchanged, it will eventually exceed the GNP of the nation.

Expect a major upheaval in France sooner than later.

 

[Dari]

It is interesting to note that France's healthcare system is slowly edging towards either total collapse or a major overhaul. Each year, it takes more and more of the nations GNP. Let unchanged, it will eventually exceed the GNP of the nation.

Expect a major upheaval in France sooner than later.

Source (in English)?

 

[The-Noid]

I prefer JPMorgans version as explained by Lego characters.

http://blogs.reuters.com/felix-salmon/files/2011/09/09-06-11-EOTM-European-Minifigure-Union.pdf

 

[mshan]

Any insight on JP Morgan's current projections on U. S. stock market going forward?

From their CNBC appearances, it seems they were very bullish, though that seems to be tempered down more recently.

e. g. Thomas Lee was previously using Asian Financial Crisis as template for current situation and projecting 1475 by year end, then 1450, and I think last appearance he seemed to be pulling back further (SP500 1425 year end?).

This strategist, also using Asian Financial Crisis as template, I think was saying something like 30% up in a year to 18 months: (link is on another computer; I'll add later; edit: unfortunately I can't find link to CNBC video clip) He said then that 30% of world gdp went off line, but U. S. stock market still rallied hard into year 2000.

Goldman, from what I've seen on tv, seems bearish, though Abbey Joseph Cohen was on Bloomberg several weeks ago and I think was projecting 30% up in 1 year or 18 months (edit: did quick google search and looks like they were saying SP500 1300 in one year, so I must have remembered this wrong)

At least before market really started considering that Germany might be willing to just blow everything up, less bullish talking heads who believe in year end "Greed Trade" were looking for run at year's previous highs (SP500 1350 - 1370), though that seems to have been damped down to 1320 or less more recently.

(obviously, what their spokespeople say on tv, vs. what they say to their high net worth clients, might be very different).

 

[spidey07]

If you work for 25-30 years and retire for 30 years getting same salary math does not work. Our cops, firefighters and other pensioners are about to find this out too and we only do it for a minority of the population, they do it for everyone..

This. Socialism is great until you run out of other people's money to spend.

 

[Dari]

If you work for 25-30 years and retire for 30 years getting same salary math does not work. Our cops, firefighters and other pensioners are about to find this out too and we only do it for a minority of the population, they do it for everyone..

The math could've worked if they were expecting to die by 80 (not 95 if they're retiring at 65), had a growing population, and 50% (or more) of their income was being taxed.

 

[mshan]

The FT's Martin Wolf provides an on point summary of Iceland's response and quick rebound from the financial crisis. Depositors were protected, managements sacked, shareholders wiped out, and bondholders left to fight for their scraps in bankruptcy proceedings. "The contrast with what happened elsewhere - particularly in Ireland - is striking. Iceland let the creditors of its banks hang, Ireland did not. Good for Iceland!" (this quote copied and pasted from Market Currents at Seeking Alpha website).

http://blogs.ft.com/martin-wolf-exchange/2011/11/21/how-iceland-survived-the-fire/#axzz1eLTyO5v1

Kind of wonder if that is what Germany is really thinking, or at least bluffing right now...

Also wonder if that could have been done in U. S. (too many politicians in Washington on Wall Street's payroll), and don't know what unintended consequences would have been in that time where there really may have been fear that Western civilization as we know it was about to disintegrate (I remember some story on tv about some super uber billionaire taking his money and spreading it in banks all around the world because he was so scared of what would have happened on that Monday October 2008 if TARP had not passed on second try)

I think back then yield on a very short term US Treasury went negative temporarily, because people were so concerned about return of their capital that they were willing to pay a little interest to park it in US Treasuries, and that doesn't seem to be occurring now (or at least not yet)

Hank Paulson's original TARP proposal was 3 pages!!!

"All of three pages, the proposal seeks carte-blanche access to $700 billion in government funding to buy up troubled mortgage assets at the root of the financial crisis - with scant details on how or where the money will be spent.

Just as galling, Paulson includes a provision in the bill that will exempt his spending from court challenges. Congress axes the legal cloak, prompting Rep. Barney Frank to quip, "We have disexempted him."

http://money.cnn.com/galleries/2008/fortune/0812/gallery.dumbest_moments_2009.fortune/3.html

🙄

 

[Zebo]

Way too long.

Bottom line it's all a ponzi scheme.

@ government level promises were made that can't be kept.

@ bank level all investors are about to get Maddoffed as deposits arent there and they are all broke.

Same here.

Just look at MF Global hosed investors and our cities/states going broke.

 

[Zebo]

Germany, a huge net exporter many times larger than China on a per-capita basis, should just split from these dead beats and take their loses for the bailouts they given so far. Go back to DM.

Notice how he says your only hope of paying down debt is being a net exporter. Only Germany is. Only they have a chance. If you produce like crazy you can be semi socialist. All the others are headed for a train wreck.

 

[momeNt]

Germany, a huge net exporter many times larger than China on a per-capita basis, should just split from these dead beats and take their loses for the bailouts they given so far. Go back to DM.

Notice how he says your only hope of paying down debt is being a net exporter. Only Germany is. Only they have a chance. If you produce like crazy you can be semi socialist. All the others are headed for a train wreck.

Reminds me of an article by Charles hugh smith, "a government can only spend what it [the country] produces in surplus"

I'll go find it.

http://www.oftwominds.com/blogjuly11/dependency-self-reliance6-11.html

This is a matter of accounting: no nation can spend more than it generates in surplus real output forever. What goes unremarked is the intrinsically destructive nature of our rising dependence on a Savior State.
.
.
.
Perhaps it is time to think of the government not as our Savior but as the guarantor of the Constitution.

 

[Zebo]

Indeed. I don't know his background but scanning some articles over there he's a genius. Thanks.

http://www.zerohedge.com/news/guest...gical-financial-system-necessary-and-positive

 

[LegendKiller]

This. Socialism is great until you run out of other people's money to spend.

Says the guy who is proud that his wife makes money that is taken from other people.

 

[Saracen]

Reminds me of an article by Charles hugh smith, "a government can only spend what it [the country] produces in surplus"

I'll go find it.

The critical bit, though, is the single word at the end of the first sentence in the quote that you missed out in your paraphrase .... "forever".

I dislike the credit card analogy because there are significant differences between government finance and credit cards, but it's pretty apt in this limited context - no individual can spend more on his credit card forever than he earns.

Running a deficit, for a period, is acceptable, providing you can service the debt, and that what you spent on was necessary or justifiable. Individuals do it, companies do it and countries do it.

The problems start when you either can't finance it, and that's currently true of parts of the eurozone, or when you blew it on stupid things, which is also true of parts of the eurozone ..... and elsewhere, for that matter.

 

[LegendKiller]

Germany, a huge net exporter many times larger than China on a per-capita basis, should just split from these dead beats and take their loses for the bailouts they given so far. Go back to DM.

Notice how he says your only hope of paying down debt is being a net exporter. Only Germany is. Only they have a chance. If you produce like crazy you can be semi socialist. All the others are headed for a train wreck.

Germany can't. One of the main reasons they have a net export is that the Euro has kept borrowing cheap for Greece and others. Germany has effectively provided trade financing to southern europe.

Remember, for anybody who runs a systemic trade surplus somebody has to run a systemic trade deficit. The natural result is that one currency appreciates and another depreciates in relative value, reaching an eventual equilibrium. As the equilibrium is reached the net importer begins to produce goods cheaply internally. Balance is reached.

The problem is, since there's only one currency, there cannot be an equilibrium. Same with the USD/Yuan. China created a hybrid Euro by pegging the Yuan to the USD.

 

[LegendKiller]

Indeed. I don't know his background but scanning some articles over there he's a genius. Thanks.

http://www.zerohedge.com/news/guest...gical-financial-system-necessary-and-positive

It makes a lot of incorrect assumptions, not to mention blaming everything on banking, yet ignoring a lot of other issues not even related to the financial system. There are tons of good things that have come out of the securitization and derivatives systems in the last 50 years, including a great reduction in the cost of borrowing due to the elimination of inefficiencies.

The first mortgage securitization was 40+ years ago, it was fine until 8 or so years ago.

 

[mshan]

If the European banking system does implode, would main risk to U. S. economy be because of these murky CDS transmission lines to U. S. banks (MS, GS, C among others?) David Faber on CNBC always refers to?

Or would fallout be because of some type of worldwide recession, rather than direct financial contagion to U. S.?

Or is it still at all possible the recession / depression could still be confined to Europe only even in this worst case scenario?

(some talking head on CNBC said US exports to Europe were only something like 10% of GDP (and most of those exports re-exported elsewhere from Europe), and most of those exports originating from New York, New Jersey, and eastern Pennsylvania (which I think was reflected by recent weak Empire report of some sort or another)

 

[Jhhnn]

It makes a lot of incorrect assumptions, not to mention blaming everything on banking, yet ignoring a lot of other issues not even related to the financial system. There are tons of good things that have come out of the securitization and derivatives systems in the last 50 years, including a great reduction in the cost of borrowing due to the elimination of inefficiencies.

The first mortgage securitization was 40+ years ago, it was fine until 8 or so years ago.

Reducing the cost of borrowing, or at least the illusion of it, was what sent prices skyrocketing and ultimately crashing.

Obviously, risk pricing models haven't worked nearly as well as we've been led to believe- if they had, we wouldn't be here.

Mortgage securitization does go back a long ways, but it wasn't bolstered by the illusions of derivatives, which have exploded in the last 10 years, precisely the timeframe where we got into trouble.

40 years ago, middle class share of income was much greater than today, meaning they had much greater ability to save down payments and to pay mortgages. Part of the reason lending standards got so lax is because they had to for real estate to sell at all, the great illusion of the Ownership Society of the Bush years.

Guess what? The middle class doesn't own more, they owe more.

 

[LegendKiller]

Reducing the cost of borrowing, or at least the illusion of it, was what sent prices skyrocketing and ultimately crashing.

Obviously, risk pricing models haven't worked nearly as well as we've been led to believe- if they had, we wouldn't be here.

Mortgage securitization does go back a long ways, but it wasn't bolstered by the illusions of derivatives, which have exploded in the last 10 years, precisely the timeframe where we got into trouble.

40 years ago, middle class share of income was much greater than today, meaning they had much greater ability to save down payments and to pay mortgages. Part of the reason lending standards got so lax is because they had to for real estate to sell at all, the great illusion of the Ownership Society of the Bush years.

Guess what? The middle class doesn't own more, they owe more.

Sorry, but borrowing costs had been going down for decades, not because ridiculous CDS structures or CDOs, but because the industry had been able to streamline the process and isolate borrowing costs. It had plenty of benefit. That it got out of control wasn't securitization's fault.

That may have been true (income) 40 years ago, but greater leverage isn't the reason for the issue of the last 8 years, at least not for the same cohort of people. It was the desire for ever larger homes as "investments" coupled with general greed in the banking sector. Conflating one with another isn't correct.

 

[Jhhnn]

Sorry, but borrowing costs had been going down for decades, not because ridiculous CDS structures or CDOs, but because the industry had been able to streamline the process and isolate borrowing costs. It had plenty of benefit. That it got out of control wasn't securitization's fault.

That may have been true (income) 40 years ago, but greater leverage isn't the reason for the issue of the last 8 years, at least not for the same cohort of people. It was the desire for ever larger homes as "investments" coupled with general greed in the banking sector. Conflating one with another isn't correct.

Please. Extreme leverage is what made the whole edifice so fragile, and the rake-off so stupendous. Leveraged at 40:1, even the slightest breeze spells collapse. We and the financial community all knew that from the LTCM collapse in 1998.

Mortgage default stretches across the entire price spectrum, and we both know it, making your observation about bigger homes a non-sequiter.

http://www.washingtonpost.com/busin...viral/2011/10/31/gIQAXlSOqM_story.html?sub=AR