Tag Archives: Europe

LOTS OF FROTH, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

A brand new development in the history of the ECB has occurred: leaks yesterday revealed the broad outlines of its new sovereign debt securities’ purchase programme. One cannot help thinking that it was necessary to prepare the ground in advance, with the ECB decisions falling well short of some of the mounting speculation.

According to Mario Draghi, there will be no limit to the amount of bond purchases on the secondary market – but the scope of the announcement needs to be put into perspective. They will in fact be decided on a case by case basis, and not as soon as a specific threshold has been crossed: based on interest rates or spread for example. It has also been confirmed that it will concern securities with a maturity of between one and three years, something already anticipated recently by the market, judging by the result of the issues which have occurred.

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BEHIND THE SCENES, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

There are some sinister goings-on behind the scenes of the European financial system, which are hardly being proclaimed from the rooftops! Even Mario Draghi himself is preoccupied by it, drawing attention to vague manifestations of “fragmentation” which are developing at the heart of the Eurozone. What was he alluding to?

It is occurring in three stages: an ongoing capital flight from countries on the verge of the abyss, leading to their banks becoming increasingly dependent on ECB loans, with the liquidities then supplied by the latter being used to buy state-issued debt, in order, for the time being, to prop up the whole edifice.

The way to put an end to this ultimately destabilizing process would be to renew confidence in the continuity of the Eurozone. This explains the plan to put together a fiscal union, then a banking one, and finally a political union. But all this takes time, and there is precious little of that available. All the more so as the regulators themselves are pushing for a reduction in these financial establishments’ cross-border exposures so as to reduce systemic risk, thus accentuating a process that people are trying to stop elsewhere ….

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THE ONLY REMAINING MEANS OF SAVING THE EURO

Translated from the French by Tim Gupwell

In my articles here, I generally address myself to anyone who wants to read me, but just this once, I would like to direct my address to my fellow financial engineers, and moreover in a tone – also just this once – of provocation which is blatant but, let us hope, efficient as well.

Here we go: a monetary zone has to be able to default in its entirety and restructure its debt (namely, to be able to say, “I can only pay back X centimes for every Euro I have borrowed”) and it also has to be able to re-evaluate its currency, and, in particular, to be able to devalue it.

The Eurozone has deprived itself of these two medicines. Hardly surprising then that today it is terminally ill.

The Solution: next Sunday evening (before Tokyo opens), the entire debt for all 17 countries in the Eurozone will be re-baptized Eurodebt (French OAT bonds, German Bunds, etc.) and the following minute, the Eurozone as a whole will default.

On Monday morning, the Eurodebt will be restructured (in one go) and the exchange rate between the Euro and other currencies will be allowed to adjust naturally.

The Eurozone will have carried out its metamorphosis. It will now be able to function like any other ordinary monetary zone. It will have been saved.

PS. Would all those commentators who are likely to say that we would be better off not saving the Euro please take your comments elsewhere; I am not talking here of either a ‘for’ or an ‘against’.

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FIRST IT WAS THE AGENCIES, NOW ITS THE FORECASTERS’ FAULT, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

“I can’t see any time soon when…the pressure will be off” replied David Cameron, the British Prime-Minister, in an interview with The Daily Telegraph. He continued, “this is a period for all countries, not just in Europe but I think you will see it in America too, where we have to deal with our deficits and we have to have sustainable debts”. In conclusion, his austerity policies are likely to continue beyond 2020, as the situation is “a lot tougher than the forecasters were expecting”. Georges Osborne, the Chancellor of the Exchequer, has already extended to 2017 the austerity plan of 2010, which was initially intended to last five years.

The prolongation of the schedule which is taking shape is now being referred to, in veiled terms, within the Eurozone, a good example being Jérôme Cahuzac, the French Budget Minister, when he announced that “ I’m afraid that reducing the debt may take a little longer” in reply to a journalist who was talking of one, two or three years.

In its annual report, the IMF has just outlined a road map for the Eurozone, advocating – when it actually makes any concrete proposals – measures which focus on pooling the debt, an issue which radically divides politicians. The continuing crisis, it now says, is raising questions about the viability of the monetary union because “its root causes remain unaddressed” and “the adverse links between sovereigns, banks, and the real economy are stronger than ever”.

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GUILTY PARTIES WANTED !, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

In accordance with the predictable script, the bond market is under pressure again. The cost of servicing Spanish and Italian debt has continued to increase as their financing plans move forward in little measured steps. The effect of all this is to place an additional burden on the budgets, undermining those measures which are intended to reduce the deficits.

The statistical institutes INSEE (France), IFO (Germany) and ISTAT (Italy) all agree: Europe is sinking into a recession which they describe as ‘technical” in an attempt to make it sound innocuous, but which, regardless of what they call it, amounts to the same thing. This is why the ECB has, unsurprisingly, just decided to cut its main interest rate.

It explained that it was trying once more to encourage banks to develop credit in a bid to restart the economy. With the markets having anticipated the move, there is no guarantee of success. Success is assured, on the other hand, for the Eurosystem in its role of bad bank, the central bank having once more lowering the bar for the collateral guarantees it will accept from banks in return for this operation. Once again, the hidden purpose is to ease the pressure on the banks.

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THE WINDOWS MUST REMAIN CLOSED, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

By rejecting the quartet’s plan, (which has, moreover, already been watered-down) before the summit has even been held, the German deputy foreign affairs minister, Michael Link has placed himself in the avant-garde of all those opposing any attempt at a compromise. The “iron chancellor’s” hard-line approach has not changed: political union first, but not yet, and possibly the rest after that. There is a risk that the only thing left of the elaborate construction, already proposed only in its broadest outlines (even for that of the banking union component) is the transfer of Eurozone banking supervision to the ECB. There remains only one way out: an application of the German strategy which is based on a debt reduction of the public sector in priority.

For the summit Angela Merkel is rejecting all the ‘magic formulas’ and seeking to stick to the “strong message” sent out by the growth plan which was decided in Rome and which was immediately dismissed as insignificant. François Hollande will have to content himself with this to make a good impression. “It’s about finding lasting solutions, not quick and easy ones”, she added. “Structural reforms will be at the top of the agenda”, she proclaimed to the Bundestag, as if there still remained any doubts; even if it means making use of the quartet’s document for her own ends.

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DO YOU KNOW WHAT SCHMILBLICK IS ?, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

We recently touched on the quartet engaged in drawing up a composite motion, in order to faire avancer le schmilblick (= to move the schmilblick forward, or in other words to make a limited contribution to solve a complex problem). Before describing their efforts it may be helpful to recall the definition (*) given to it by its creator, Pierre Dac.

Mario Draghi, Jean-Claude Juncker, Herman Van Rompuy and José Manuel Barroso (in no particular order) may not be aware of the schmilblick. Nonetheless, this has not stopped them from searching for it in the form of a bold compromise formula destined for the next summit, with the aim of exchanging debt pooling measures in return for the reinforcement of the budgetary union held so dear by the German Government. Because this is how the bidding is likely to pan out. But where is the happy medium? Sensibly, this question will be put back to the end of the year.

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AFTER THE WORDS, THE MAGIC FORMULA…, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

What can you say when you are in total disagreement? You can always assert, with one voice, the need for a union! This is this perspective that the quartet composed of José Manuel Barroso, Mario Draghi, Jean-Claude Juncker and Herman Van Rompuy (in alphabetical order) continues to work on.

A new magic word has been discovered and is going to be proclaimed with all its variations, to push for the implementation of four unions: banking, fiscal, economic and political. With the fiscal union already in the pipeline, the next stage which urgently needs to be reached is that of the banking union. According to a leaked document, it is supposed to be ready in a year – reverting back to a new season of this tactic of putting out feelers to see how people react.

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A BIG BANG, OR NOTHING , by François Leclerc

Guest post. Translated from the French by Tim Gupwell

With the G20 meeting being held in Mexico at the start of the week, our perspective will find itself altered, falsely accustomed as we are to only seeing the debt crisis from a European angle. On the 18th and 19th June, the greats of this world are going to gather in Los Cabos, a tourist resort in Southern Lower California, under the double auspices of debt and global recovery.

To avoid standing idly by whilst confronted by a disaster of its own making, the British Government has just announced a plan to relaunch the economy with banking credit, funded by a Bank of England liquidity programme. In the context of an overall 80 billion programme, there are plans for monthly injections of around 5 billion Pounds (6.1 billion Euros). But the question that needs to be asked is whether the results will be as inconclusive as those obtained from the ECB’s massive injections, or indeed the tireless pursuit of zero-rate loans (from 0% to 0.1%) by the Bank of Japan – still without any further success – and whose 700 billion Euro acquisition programme of private and corporate securities is still in force.

The British Government wants to make these banking loans conditional on the latter making specific commitments, but hasn’t this been heard before? The monetary policy instruments of the Central Banks merely allow more time to be bought, and do not resolve any of the unanswered questions.

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THE RAMIFICATIONS OF THE SPANISH BANKING BAIL-OUT, by François Leclerc

Guest post. Translated from the French by Tim Gupwell.

Some important details are still lacking with regard to the Spanish banking bailout plan: its final amount, which is going to depend on the results of the audit commissioned by the government; its rate, which we will be coming back to; and the stabilizing measures for the banks which will be associated with it. These will include massive lay-offs in the banking sector and will further worsen the unemployment situation.

One other aspect has, however, not been highlighted enough. The funds will have to be paid out – at least initially – by the EFSF, which itself will borrow them on the financial markets using the guarantees of its members (which include that of Spain itself). It remains to be seen under these conditions, at what rate the EFSF will be able to borrow in order to then lend on to Spain. The whole of the edifice will be further weakened, with the guarantees relying de facto on an increasingly limited number of countries.

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DIFFERING DELUSIONS, by François Leclerc

Guest post. Translated from the French by Tim Gupwell.

Worried by the sight of the Europeans entrenched in their respective positions, Barack Obama reached for his telephone. The day after the G7 videoconference between the Finance ministers and the central bankers, of which nothing came, he successively called David Cameron, Angela Merkel and Mario Monti. With this latter, the strengthening of the discussions centered on the Euro zone and growth. With David Cameron, who is going to meet Angela Merkel in Berlin, it was about the need for an “immediate plan”. Of the conversation with Angela Merkel no details have emerged. All promised to keep in contact with Barack Obama over the coming days, before meeting up on the 18th and 19th June at the G20 in Mexico, a sign that there is still plenty of work to be done before an agreement is found between them.

Expecting nothing from the governments, tensions on the stock and bond markets eased off all the same, bearing witness to their hopes of a renewal of central bank interventions. A meeting of the Bank of England is due on Thursday, as well as the expected appearance of Ben Bernanke, the chairman of the Fed. While the ECB, which met today, is keeping its cards close to its chest in order to force European leaders to assume their responsibilities, the Bank of England may well reactivate its debt purchasing programme, which has only been temporarily suspended. Looking further ahead, the possibility of a reduction in the key ECB interest rate, and an eventual third wave of massive loans to banks, continue to raise hopes, though Mario Draghi clearly stated that they are not ready to take these steps at the current time. By opting to not renew his purchases of Spanish debt on the secondary market, he sent a clear signal that the ball is in the court of the governments.

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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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