Monthly Archives: April 2010

Europe's Destiny Left To Greek Street Justice

The Greek Prime Minister, George Papandreou, is now starting to sell the EU/IMF rescue package to the Greek people as the county’s workers unions denounce what they see as “unjust” budget cuts. If Papandreou fails, Greece will be back to square one of its fiscal disaster. And the European debt crisis will probably spread further,  faster and with no mercy.

“We find ourselves before the most savage, unprovoked and unjust attack. The answer will be given in the street.”

Spyros Papaspyros

While there are still ongoing negotiations about the details of the rescue, the main components of the package were leaked last night to the Financial Times. The main components is said to be tax hikes, freezing and cutting wages, raising retirement age,  privatization of state corporations and sale of state-owned properties.

Still, several prominent experts believe the measures won’t be enough to save the Kingdom of Greece from bankruptcy.

The question about the package – and probably about any other upcoming rescue packages – is whether it can stave off insolvency.

As for Greece, we will have to see what the growth assumptions are before any solvency calculations can be done.

The details are expected to be announced over the weekend, including what exactly the headline number of €24bn refers to.

But rough estimates and comments by financial experts suggest that the overall size of the package will be sufficient to produce a primary surplus sufficiently large enough to stabilize the debt-to-GDP ratio.

In an interview with Die Welt, Moritz Kramer of Standard & Poor’s,  defended  the decision to downgrade Greek debt to junk status, adding that the bailout, while welcome, does not change the rating agency’s medium-term perspective on the country.

“Even if the aid will be increased, EU and IMF give away any money.  Rather, the loans to Greece in the future must still repay further.  It may be that the longer financing even mean that the government puts less discipline in the necessary consolidation of public finances in the day, though in the case of Greece so far indicates little to such a development,” the S&P chief economist says.

Based on past experience, there is a 14% chance that investors lose 50-70% over their investments over 10 years, Mr. Kramer says.

But past experiences is definitely one of the things that investors NOT should relay on in this unprecedented situation for the euro zone.

Rough Justice

Prime minister George Papandreou is now starting his attempt to sell the package to the Greek people as unions denounce “unjust” budget cuts, Bloomberg writes.

“We find ourselves before the most savage, unprovoked and unjust attack,” head of the ADEDY civil servants union, Spyros Papaspyros, says.

“The answer will be given in the street.”

The Greek newspaper Kathimerini have more on the unions reaction to the measures.

While signs of an accord ended a bond market sell-off in Europe yesterday, Moody’s Investors Service warns that Greece could be vulnerable to a “multi-notch” downgrade if measures don’t go far enough.

Such an action is likely to make the European debt crisis to spread even further.

E.U. Banks Unable To Borrow Money

The first signs of the next stage of this contagious disease is already beginning to show.

According to The Financial Times, it has the potential of developing into a whole new crisis.

“Many European banks have become shut out of the international lending markets because of continuing concerns over Greece, sparking fears that some could collapse as they run out of cash.  Greek and Portuguese banks cannot borrow in the international money markets, while weaker European banks are also struggling to raise money as fears of counter-party risk have grown sharply,” the FT reports.

Even French and German banks have difficulties because of their exposure to Greek debt. German, French and Spanish banks have had to pay higher premiums for short-term debt.

Portugal To Test The Markets

Meanwhile, Portugal is working on additional austerity measures.

The capital gains is raised to 20% and applies not only to investors residing in Portugal, but also traders and investors who sell Portuguese company shares, Jornal de Negocios reports.

An article in Jornal de Negocios reports that the Portuguese government will test the public debt market next Monday, announcing that it will hold an auction of repurchase about €5.6bn in 10y obligations that expires May 20.

Markets seem also willing to  give Spain a truce, according to El Pais, but investors expects more reforms, especially in the labor market.

If the government cannot deliver results soon, speculation against Spain will start again.

“The big problem of Spain is unemployment and that requires decisions,” the Spanish newspaper writes, adding that more collaboration between social partners and the government also will be needed.

Need A Plan B, Perhaps?

In a commentary written before the latest agreement, Nouriel Roubini and Arnab Das argue that the austerity approach to the sovereign is fought with risk, likely to produce deflation, and may ultimately fail.

They kindly suggest to pursue a plan B with the following characteristics:

“This would involve a pre-emptive debt restructuring for Greece; a strengthened fiscal adjustment plan in the euro zone periphery; far-reaching structural reforms; a larger IMF/European Union programme to help Greece and prevent contagion to others; further monetary easing by the European Central Bank; fiscal and domestic demand stimulus in Germany; and a co-ordinated effort to address the institutional weaknesses of Europe’s economic and monetary union.”

“Much time has been lost in denial, but if the following steps are taken it might not be too late to avoid a disorderly outcome. First, use the experience of earlier emerging market “test cases” for sovereign debt restructuring. Second, prepare an exchange offer with a menu of options for the range of private creditors. Third, use some of the planned official support to provide credit enhancements for the new public debt; use the rest to provide financing for the ongoing deficit at reasonable interest rates. Fourth, use the time lent by the stretched maturities and reduced net present value of the debt to implement a comprehensive structural reform programme to boost competitiveness,” they write.

Absence Of Political Leadership

Philip Stephens writes in his latest FT column that the E.U’s pitiful handling of the crisis suggests that the future of the European Union can no longer be easily ascertained.

“Europe no longer carries the stamp of inevitability. Quite suddenly, it has become almost as easy to foresee a future in which the Union fractures. The risk is not so much of a great rupture – though if Greece defaults the immediate shocks will be profound – but of the atrophy that flows from the absence of political leadership.”

You might also be interested in reading the latest commentary on the Greek situation by chief economist David Rosenberg with Gluskin Sheff at Zero Hedge.

(Money) From Europe With Love

And here’s a little greeting from all the major European banks to the government of Greece:

“One time you were my favorite chicken – now you’ve grown into a fox”

Related by the Econotwist:

Panic Hits Germany – Europe On Fire

Euro Area Under Massive Speculative Attack

Merkel To Push The Euro Zone Off The Cliff

86% of German Citizens Oppose To Greek Bailout

Euro Collapse As Greek, Portugese And Spanish Spreads Widen

Europe’s Debt Crisis Now Spreading To Portugal

“Germany Is Unfit For The Euro”

Greek Crisis Force Germany To Put Help For Unemployed On Hold

The Great Greek Soap Opera

Markets Still Don’t Trust Europe’s Greek Aid Pledge

Germany Forced To Accept Greek Bailout

Greece: Here’s The Deal (Well, sort of…)

Greek Crisis: Confusion And Paranoia

Here Comes Another Greek Bank Meltdown

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Panic Hits Germany – Europe On Fire

German chancellor Angela Merkel’s extraordinary complacency abruptly ended yesterday, when the European “Brothers In Arms,” Jean-Claude Trichet and Dominique Strauss-Kahn, persuaded her that further procrastination would add dramatically to the cost of the crisis, and that the future of the euro zone is now at stake.  But it might be too late as the European debt crisis is dramatically spreading.

“This is like Ebola. It’s threatening the stability of the financial system.”

OECD

The seriousness of the situation was underlined by a credit downgrade of Spain, from AA+ to AA with negative outlook, by Standard & Poor’s. The rating agency concluded that Spain’s would be facing years of private sector debt deleveraging and low growth, which would lead to a significant deterioration in the quality of public finances.

It also became clear that Spanish banks were no long able to borrow on capital market, which saw their share prices drop sharply, the eurointelligence.com writes.

Standard &Poor’s shocked the financial markets Wednesday, when they estimated that bondholders will ultimately only recover between 30-50% of their investments in Greece – which is tantamount to a very serious default.

However, most estimates for haircuts have been  significantly lower.

Putting Out Fire With Gasoline

Having risen briefly to the level of 26%, Greek two-year bonds recovered on the news that the IMF is preparing a full three year package.

In a conversion with German MPs, that was already being leaked while it was taking place in the Bundestag, Dominique Strauss Kahn outlined some of the details:

· The package would be in the order of €100-120bn for three years, during which Greece would be taken off the market. (Germany ‘s economics minister said that Germany contribution would be €8.4bn each year for three year running, with a risk on the upside. The Germans had apparently thought that the €45bn would be the total size of the package)

· The package will contain no element of restructuring and rescheduling

· The loans will be junior to those of the existing bondholders.

These are three extremely tough pills to swallow for MPs who were preparing to vote on a much smaller package of super-senior loans with a haircut from the bondholders.

The opposition parties announced yesterday that they would reject the package on the grounds that Merkel had misled the German people throughout this entire process.

And there is also opposition within the coalition about the size of the plan.

European Wildfire

The news, and the figures, have been getting more dramatic overnight. European policy makers may need to stump up as much as €600bn if they are to stamp out the region’s spreading fiscal crisis,

Bloomberg quotes economists at JPMorgan Chase and Royal Bank of Scotland. The economists urge policy makers to come up with unprecedented measures.

“It is perhaps time to think of policy options of the last resort in the current sovereign crisis,” says David Mackie, chief European economist at JPMorgan in London. “It may now be time for the euro area to do something much more dramatic in order to prevent the stress from creating another broad-based financial crisis which pushes the region back into recession.”

“This is like Ebola,” Organization for Economic Cooperation and Development Secretary General Gurria told Bloomberg Television yesterday. “It’s threatening the stability of the financial system.” The World Health Organization calls Ebola “one of the most virulent viral diseases known to humankind.”

Other steps could see governments guaranteeing bonds and the ECB abandoning collateral rules or reviving unlimited lending to banks.

A front-page editorial in FT Deutschland launched a severe attack on Merkel, criticizing a total loss of reality by ignoring the problem, and saying that her procrastination is adding to the cost of the crisis.

Martin Schulz head of the Socialists faction in the European Parliament said that the aid should have been decided a long time ago. He accused Merkel of Greek bashing, as she tried to benefit politically from the rising anti-Greek sentiment in Germany.

The Italian economist Tito Boeri said that each days of this crisis would cost the German taxpayer dearly.

A Collapse of Confidence

Yves Smith, of Naked Capitalism, made the important point that if government are being seen insolvent, their bank guarantees are no longer credible, as a result of which customers are withdrawing funds. Greece is now effectively subject to a quite bank run.

Probably one of the most concise observation of this crisis, is being presented by the Financial Times’ Lex column.

“The interminable agonizing over a rescue package for Greece has allowed a severe but manageable peripheral crisis to morph into a wider crisis of confidence for the bloc itself. The lack of solidarity among euro zone leaders has reached the point where only the International Monetary Fund now has the credibility to lead the bail-out.”

Greek Protests – Portuguese Surprise

The Greek newspaper Kathimerini reports that IMF/EU/ECB sought to cut the 13th and 14th salary, but labor minister Andreas Loverdos says that this is not acceptable to the Greek government.

Pushing retirement age and job cuts in the public sector are other sensitive issues.

The government still expects to end negotiations on Sunday and to get aid by May 19.

Strikes are likely to continue until the summer, but the hard part only starts later.

Portuguese employers expressed surprise over the downgrade of Portugal, though admit that the economic situation is not good for Portgual, Jornal de Negocios reports.

They call on restraints in wage negotiations, cuts in public investment and if necessary tax increases.

Many consider the downgrade as unfair, exaggerating the verdict over Portugal.

Yesterday, Prime minister Socrates met with opposition leaders to agree on deficit reduction measures including changes in unemployment and social benefits.

European Markets Snap Shots

EUR/USD:


EUR/GBP:

EUR/JPY:

German Stock Market

DAX Index:

GOLD:

Related by the Econotwist:

Euro Area Under Massive Speculative Attack

“Germany Is Unfit For The Euro”

Greek Crisis Force Germany To Put Help For Unemployed On Hold

The Great Greek Soap Opera

Markets Still Don’t Trust Europe’s Greek Aid Pledge

Germany Forced To Accept Greek Bailout


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"We Stand At The Brink Of The Next Great Crisis"

Former Wall Street trader, author and founder of research firm SmartKnowledgeU, J.S. Kim, is out with another quarterly update on his view on the global economy. Although little have changed about Mr.Kim’s basic bearish attitude, it seems like a proper time to repeat some of the highlights. You can agree or disagree with him as mush as you like, but history proves him right in at least one thing; it’s in the times of great crisis the big fortunes are made.

“I  see nothing in the present situation that is either menacing or warrants pessimism. I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress.”

Treasury Secretary Andrew Mellon (1929)

At the end of 2008, all the pundits stated that the worst of the crisis was over, the dollar was strengthening, prolonged deflation was here, and gold was no longer a “safe haven” when gold dropped to nearly USD 700 an ounce from a high of more than 980 several months prior. As it turned out, every single one of those “experts” predictions were wrong.

“In November 2009 all the experts were spreading the same disinformation,” J.S. Kim writes in his quarterly update to his clients.

Mr. Kim’s great accuracy in calling the procession of this global financial crisis for 3 years running on his investment blog, his subscription services, and a series of YouTube videos has led to a high level of interest in his future predictions, with many of his articles reprinted online by Reuters, the New York Times, USA Today, the Wall Street Journal, the Financial Times & the International Business Times.

He recently authored the timely book, Confessions of a Wall Street Insider, A Zen approach to making a fortune from the coming global economic crisis“, and actively maintains a blog, The Underground Investor where he strives to bring the retail investor timely global investment news that rarely receives mainstream coverage – the “real” news behind the headlines.

He founded his research firm SmartKnowledgeU in 2006.

According to J.S. Kim, and those who shares his view, it’s not possible to fix the worlds economy and solve the systemic debasement of the U.S. dollar, the U.S. Federal Reserve’s implementation of unsound monetary and fiscal policy for the past three or four decades in three months, 6 months or even a year.

A new U.S. President, despite all the hope that will accompany him into office, he can NOT solve a crisis that has been brewing for more than two decades, Mr. Kim argues. Adding; “Unless he re-institutes the gold standard.”

“This is why we find all the chatter about the worst of the financial crisis being behind us so amusing,” he continues.

Here’s The Deal

“The introduction of a perpetually growing Term Auction Facility, unprecedented interest rate cuts, an unprecedented Primary Dealer Credit Facility that allowed banks to use near worthless assets as collateral to solve liquidity problems, a bailout of Wall Street firm Bear Stearns,  perpetually growing bailout money for AIG, Fannie Mae and Freddie Mac (soon to be followed by bailouts of the U.S. auto industry and bond insurers like MBIA and Ambac), and perpetual lies from governments about unemployment and GDP statistics will not solve decades of poor fiscal policy.”

Here Are The First Two Pieces of Advice From Mr. Kim:

* Beware of anyone that tries to discuss an inevitable highly inflationary environment in terms of rising prices (a disingenuous argument designed to distract you from the true cause of inflation, that of fiat currency debasement).

* Beware of any investment professional that quotes inflation in the U.S. to be 3% to 4% today and know that such a person is not to be trusted.

Here’s The History Lesson

“Are you aware that immediate before the Great Depression hit the United States in 1929, U.S. stock market had skyrocketed straight up for nearly a decade and that unemployment was at an all time low of less than 1% ?”

“Did you know that immediately prior to the 1997 Asia Financial Crisis, South East Asian economies (in particular Indonesia, South Korea and Thailand) were booming with high single to low double-digit growth rates as foreign investment flooded these markets?”

“During the height of these two crisis, though a great many people lost massive amount of wealth, an extremely small minority, the most savvy of investors, along with crooked banksters and their politician friends, actually built great wealth during these times.”

“And just like during past economic crisis, this coming and unfolding monetary crisis will undoubtedly offer one of the best opportunities of our lifetime to build great wealth as well.”

“Unfortunately, the vast majority of investors, just as in the prior two instances, will participate only in the downside while banksters once again laugh their way to the bank – literally.”

Here’s Some Explaining

“If you wonder why the mainstream median was silent regarding this crisis until they could be silent no more, you need only remember that news of an imminent crisis never preceded The Black Monday in 1987, never preceded the 2000 Nasdaq-crash in the United States, and never preceded the 1997 Asian Financial Crisis.”

“However, simply stated, great crisis such as these never develop overnight.”

“At SmartKnowledgeU, we had been warning about this Peak Investment Crisis since 2006 on our investment blog. We recently called the September/October crash publicity on our blog April 23, 2008, even as U.S, media was plastering the predictions of Wall Street and U.S. banking icons all over their front pages stating; The Worst Is Over”.

“The structural signs of such crisis are still evident in late 2009, simmering below the surface, and warn us of great risk in the stock markets and the greater economies in 2010 and beyond.”

“But how have the media and politicians reacted to this still clear and present danger in the global economy in late 2009?”

“They do what they do best – lie.”

The Similarities

“They call every bear market rally in stocks and the U.S. dollar as the beginning of a multi-year bull market instead of its last gasp before an even deeper crisis develops.”

“Recall this quote from Andrew Mellon the U.S. Secretary of Treasury in 1929, just a couple of months after the 1929 U.S. stock market crash: I  see nothing in the present situation that is either menacing or warrants pessimism….I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress.”

“Of course, after Mellon issued this statement of confidence, the global economy plunged into the Great Depression for an entire decade.”

“Politicians and bankers are telling the same lies today. If you can’t learn from history, you will never learn.”

“How can we be sure that the majority of investors will lose a great deal of wealth during this time? Because during every prior major financial crisis, only a small minority of people (outside of the corrupt bankers and politicians that created each crisis) had the foresight to plan and prosper during these times.”

“Today, we live in a very different world than our forefathers did. Today, governments are run by bankers that will try to hide knowledge of future developing crisis from you until you are financially ruined as their agenda of self-interest overrides any concerns they have for the citizens of the countries they live in.”

“These very leaders told you not to worry about the subprime problems in April 2007.”

“In fact, after Treasury Secretary Hank Paulson, called the U.S. subprime housing crisis “largely contained” at a mere USD 100 billion of losses, some 20 – 50 additional trillion dollars of capital were permanently destroyed.”

“Today, the same leaders are again seeking to deceive you about the severity of this very crisis.”

The Zen Strategy

“Markets are not free and constantly manipulated require constant strategic adjustments as well as sometimes nothing more than excessive patience.”

“Sometimes all that is required to profitable during a crisis is to know that you are on the right side of the equation and to wait for that equation to manifest itself. However, only knowledge can lead to patience and making the right decisions versus panicking as crisis deepens.”

“Other times it will be necessary to sell out or employ hedges to protect profits and doing nothing can be very harmful.”

“As this Monetary Crisis deepens, governments-led free market interventions will keep occurring, eventually losing their effectiveness. At this point and time, when the masses of investors realize what is happening, it will be too late to re-position your asset to protect yourself.”

You Must Be Ahead Of The Game.

“In July 2008, U.S Congress and the SEC instituted motions to limit oil future speculators and prohibit speculators from short-selling financial stocks.”

“When this happened, if you can recall this period, did you notice the stark absence of any talk to limit naked short-selling of any other sector besides the financial sector?”

“Again, The U.S. Federal Reserve will continue to punish and rob average American by taxing them to bailout and protect the moneyed elite.”

“Whether this tax is in the form of an invisible tax, like inflation, or a direct tax on your income, there is no doubt that American citizens will continue.to pay for the bailouts of Bear Stearns, Fannie Mae or whoever else the U.S. Federal Reserve decides is worthy of U.S. taxpayers money.”

Be Careful Who You Trust

“We have already seen numerous times when the most “trusted” financial figures in the world have been wrong multiple times regarding their very public statements. You can only draw two conclusions from these results.”

Either;

  1. These “experts” are the most incompetent financial analyst in the world,

Or;

  1. These “experts” purposefully lie to fulfill another ulterior agenda.

“Thus, as this crisis unfolds, many assets that are touted as “can’t fail”-investments will fail, and those that are slammed as terrible investments will evolve into shining stars.”

“Your beliefs will often be tested by directly opposing propaganda released by governments and financial institutions. Only those with intimate knowledge of why they are holding certain investments will have the fortitude to hang on during periods of corrections to eventually make a fortune.”

Do NOT Underestimate Psychology

“The vast majority of investors underestimate the importance of psychology in the wealth building process; however, the adoption of proper psychology can often be the one factor that separates’ the investor that knows what to invest in and make a fortune from the investor that knows what to invest in and makes a fortune from, but despite this knowledge, still loses a great deal of money. This is why we focus so much on knowledge.”

“As we experience steep corrections during this deepening crisis, investors should never own certain asset classes. Finally, with some asset, such as gold, there are multiple ways to buy gold, not just bullion and not just mining stocks.”

“Often guidance of commercial investment industry in regard to precious metals is the worst possible guidance you ever could receive, for their guidance is often based upon ulterior motives undisclosed to the unsuspecting investor.”

Related by the Econotwist:

Living In A Derivative World

Are Governments Producing Conspiracy Theories?

Wall Street: FED With A Fake Mustache?

Two Thirds of Americans Support Stricter Financial Regulations

Merkel To Push The Euro Zone Off The Cliff

The Truth, Some Truth And Something Like The Truth

AIG: What Did FED Bail Out and Why?

The Great Golden Lie

European Commission Warns Of “Lost Decade”

Italy Charge Foreign Banks With Fraud

Naked self-interest

77% of Senior Bankers Expect Another Financial Crisis by 2015

China: “Mother of All Black Swans”

Drug Money Saved Banks from Collaps

Organizing Financial Rebellion

Roubini: “The Worst Is Yet To Come”

Robert Schiller: – Recovery is just luck

The Banks Are Bursting

2010 Analysis: “11 Black Swans”

2010 Analysis: The Road to Disaster

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