Tag Archives: debt

THREE STRATEGIES FOR REDUCING THE DEBT, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

Whenever monetary creation, or the famous concept of printing money, is alluded to, the idea of hyperinflation is never far away. Subsequently, reference is made to history to predict a return to these episodes that left such an indelible mark in people’s memories. The conclusion immediately drawn is that the same cause will have the same effect.

However, the crisis we are living through might well lead us to a more nuanced picture. The first thing that needs to be considered is that we are seeing an inflation of financial assets, not of the prices of consumer products. The next remark that needs to be made is that this latter type of inflation has not been seen in the United States, in Japan or in Great Britain, all countries whose central banks have not held back when it comes to monetary creation.

Of course, it can always be countered that it is only a matter of time, and that the next flurry of snow will trigger the avalanche. But is this really a satisfactory argument? Looking at it another way, it seems that the liquidities lavishly distributed by the central banks do not actually trickle down into the real economy and are notoriously used to other ends, which do not lead to an increase in consumer prices. The heavy downward pressure on wages constitutes an additional obstacle to the appearance of the dreaded phenomenon.

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SPAIN : THE MARKETS ARE EXPECTING NEW DEVELOPMENTS SOON

Translated from the French by Tim Gupwell

Exceeding 6% on 10 year debt is already dangerous. According to the terms of the balanced budget rule, this signifies that a nation will require growth of around the same amount, whereas in fact Spain has registered a negative growth since the beginning of the year! So, 7.567% at 10.15  this morning! As the German 10 year Bund stands at 1.255%, this means that for Spain over 10 years there is a risk premium (for the possibility of the debt not being repaid) which can be reckoned at 6.312%.

© Bloomberg

Welcome to a world of mistrust! Moreover, when the risk premiums in rates for shorter term maturities reach, or even exceed, those maturing at later dates, it signifies that the capital markets presume that something is going to happen soon, and something not very pleasant. This morning the rate for 5 year Spanish debt is rivaling the rate for 10 year debt: 7.543% at 10.16. The 5 year German rate stands at 0.334% ; which means that in this case the risk premium for Spain is 7.209%. Translation: the danger over five years is considered as being greater than over ten. In other words, according to the capital markets, there will soon be new developments.

© Bloomberg

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THE RESULT OF UNRAVELLING A BALL OF WOOL… FROM THE WRONG END, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

François Hollande has confirmed that the Government is going to propose for adoption an organic law (which a simple law cannot undo) in order to have the balanced budget rule adopted, on the advantageous pretext that it is provisional. There have been many occasions in recent French history when special measures have been adopted for their presumed importance, without ever leaving good memories behind.

At the same time, the debate in Europe continues to move on, focusing once again on the reduction of the banks’ debts. Thanks to the Wall Street Journal, we have learnt that during their latest meeting, the ECB advised the European Finance Ministers to force the senior debt-holders to participate in the bail-out of the Spanish banks. A 180° U-turn which was not actually followed, since the draft of the memorandum which is supposed to be adopted during the next Eurogroup meeting on the 20th July makes no mention of it.

According to the newspaper’s sources, the ministers did not wish to follow Mario Draghi’s proposals at the meeting, as they were afraid of how the markets would react. It was also out of fear that the Irish government would demand equal treatment, since to save the European banks – in particular the British ones – the Irish Government had to borrow money to pay off the senior creditors of their country’s banks. Nor would the Greek and Portuguese Governments have failed to jump on the bandwagon.

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WELL SPOTTED, BRAVO!, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

As already highlighted the Spanish government is already benefitting from a de facto rescue plan under another name. To save appearances, the new austerity measures put forward for vote in parliament have not been the object of a memorandum jointly signed with those providing the funds, as had previously been the case for other countries. In fact, the announcement of these measures came the day before that of the banking bail-out!

One major difference with the preceding rescue plans can be observed: the entirety of the 100 billion Euros loans provided – whose planned repayment schedule is staggered until June 2013 – is destined for the banks. The State will merely pass on the funds, something which has not prevented the Government from imposing austerity measures on the Spanish, even though the two things are not strictly connected.

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WHEN THE WISE MAN POINTS AT THE MOON… (I), by François Leclerc

Guest post. Translated from the French by Tim Gupwell.

The chaotic ups and downs of the deleveraging process continue inexorably, affecting not only the debt of the member states but also a European banking system which is now in the same mess. What it had been concealing has now been revealed: it is in a very sick and feeble state.

In order to subdue and contain this gradual process, new bail-out instruments have had to be put in place – which are the subject of much debate; their effectiveness is limited since they are part of a debt-reduction strategy which relies predominantly on the staggering of its financing with public funds that are more or less mutualised. What is new about all this is that, as the amount required increases, it is becoming increasingly difficult to raise the funds. This is prompting a consolidation of the private sector (in order to limit the damage and to share the costs), which is, in turn, destabilizing this sector as well.

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THE TOWERING MOUNTAIN, SWAYING FROM SIDE TO SIDE, by François Leclerc

Guest post. Translated from the French by Tim Gupwell.

“There is a first assessment, then a second, a third, a fourth…..It’s the worst possible way of doing things because everybody ends up doing the right thing but at the highest possible cost and price”. Who was it speaking so harshly yesterday of banking losses and of the policies of the European leaders? Answer: The ECB president, Mario Draghi, in the course of a hearing before the European parliament.

With his colleagues from the governing council, he drove home this same point, supporting the creation of the “European banking union” proposed by the Commission, starting with the constitution of a deposit guarantee fund. He was supported by the governor of the Bank of Italy, Ignazio Visco, who is getting ready to lead the charge. Rising Spanish bond rates have driven Italian rates higher; according to sources, the recession is estimated to be between -1.4% and -1.7% for this year, and the official unemployment rate exceeds 10%.

At one moment or another it becomes necessary to face up to reality, and this moment has arrived, manifesting itself in the massive outflows of capital from Spain, calculated by the Bank of Spain at 66.2 billion Euros (according to the latest available figures) for the month of March alone. The withdrawal of deposits is not a fantasy taking the form of long queues at cash machines (which could always occur): it is people with capital and businesses which are fleeing the country.

Added to the collapse of an entire swathe of the Spanish banking system, this phenomenon has suddenly come to dominate the public debt crisis and its corollary the fiscal discipline pact which had aimed to resolve it. Sidestepping the issue, Angela Merkel has declared that the Spanish situation is not the result of the strategy of austerity that she has advocated, but the outcome of the burst property bubble which occurred before its implementation. As if the former did not feed the latter.

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SPAIN: A WEAK LINK, OR A VICTIM OF DEBT TRANSFER AND OUTRAGEOUS CONDUCT ON THE MARKETS?, by Sébastien Bano

Guest post

A few days ago, I was contacted by a friend of mine, in New Zealand, who was concerned about the bad news affecting the economy and, particularly, Spain, where I currently work. In answering the two questions he asked me, I have tried to describe what seems to be the main problem of this country (and many others, but Spain is indeed a glaring example), and in doing so, hope to provide an alternative insight to counter the facile accounts of idle Mediterranean workers and “Club Med resorts lifestyle”, frequently advanced as the logic for Spain’s demise. As a regular reader of Paul Jorion’s blog, I asked him if he would do me the favour of reading my text. Not only did he kindly agree to do so; he also proposed that I publish it.

First Question : “It would be very interesting to hear your views on the economic situation in Spain.”

Answer : Well, in reality, it is a question of sorting through the views presented in the media. To go straight to the most covered subject, employment, one has to consider that there’ve always been a lot of “under the table” jobs in Southern European states, but this is not what can drive the public deficit to a critical point. Of course, tax inflows are reduced that way, but this didn’t prevent Spain from having a positive balance before the crisis, i.e. no deficit! On the contrary, this black market means the authorities still have some room to manoeuvre. In spite of this, many analysts say that this is too bad, that 20 % unemployment is unbearable. Well, shall I remind them that the unemployment in the USA is officially over 9 %, but if you add the part-time jobs of only a few hours per month, then you reach… 20 %! The only difference is that in Spain these part-time jobs are often undeclared. Gosh, this is such a “tradition” in the Mediterranean, that if what the mass media say were true, then Spain and consorts should have already collapsed at least ten times in the last 50 years!

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Healthy / destructive system of capitalism (2d version), by Lambert de Haas

Guest post. Taking advantage of my interview with Caroline de Gruyter in NRC Handelsblad, Lambert de Haas has put this all together. He’s expecting your remarks to make further improvements.

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