Tag Archives: Lucas Papademos

The Last Optimist – Alive and Kicking

There’s an old saying amongst investors that claims that the market bottom is reached only when the last optimist turns pessimistic. Former Goldman Sachs European analyst, now UniCredit chief economist, Erik Nielsen, is a natural-born optimist. And he’s still hanging on, still looking for something positive to tell his clients… God bless his soul!

“While few people like to see their individual benefits being cut, or their individual taxes hiked, the broader sentiment in Southern Europe is that people want core-European quality-institution and stability.”

Erik Nielsen

“Big political changes are now sweeping through the euro zone, putting, at least for now, the many skeptical political observers to shame.  I can’t tell you how often I have been told by investors and economists during this crisis that its only a matter of time before Southern Europe refuses the adjustment medicine and brings into power radical political forces which will eventually take them out of the euro zone, and that Germany will soon refuse to lend any further money to the south.  Interestingly, some 90% of those having predicted this outcome happen to be residing outside the euro zone,” Nielsen points out.

Here’s the rest of Mr. Nielsen’s commentary, published at www.eurointelligence.com today:

The Case for Optimism

Well, so far it is moving in the opposite direction: In Greece, Lucas Papademos was sworn in as prime minister, and Italy is about to hand power to Mario Monti.  And next Sunday when Spain goes to elections, and assuming the opinion polls are remotely accurate, Spain will elect the conservative Partido Popular with a wide absolute majority.

What’s the common picture in these three countries? People want more Europe, not less.  While few people like to see their individual benefits being cut, or their individual taxes hiked, the broader sentiment in Southern Europe is that people want core-European quality-institution and stability. 

Meanwhile, in Germany, Stern magazine rewarded Angela Merkel‘s performance during recent weeks by putting her on the front page – her picture tattooed onto the bicep of a strong arm and with a sub-title of “how Merkel runs Europe”.  Stern’s weekly ranking of politicians sent her top of the group, followed by – equally important – other pro-European opposition politicians, with the more sceptical ones (the Left and FDP) way down.

For us believers in the European project, this is clearly good news. 

But will the market appreciate it?  Well, one day it will, but I am not completely sure that it will get it quite yet.  At the end of the day, we are living through this highly peculiar period where investors will rather buy bunds or gilts with a virtually guaranteed erosion of real wealth, than being paid 6%-7% for an equivalent Italian bond with a virtually certain better outcome in two years.  But with leverage and mark-to-market and a year of generally poor performance, two years is a long time.

Everybody in the asset management industry seems preoccupied with career risk. 

It is a sad reality, sad because when the collective guardians of our savings prefer negative real return rather than maximizing return on capital, then this will come with a cost to long run growth.

What should be the policy response this bizarre state of affairs? 

So far, the European response has been out of the good old text-book, to which I still subscribe:  When you have an excessive fiscal imbalance, then you adjust it as fast as you can, accepting the short-term pain for the longer term gain.  And until very recently, the market subscribed to the same philosophy, discounted the future benefits of the tougher policy, and rewarded the faster adjustment over the slower one.  

Now, however, markets seem to like slower, or no, adjustment over the fast adjustment, predominantly because investors have turned themselves into pseudo political scientists, predicting a demise of the politics in the countries undertaking tough reforms.

So far, the common political “wisdom” on Europe on Wall Street has been wrong.  Will it change now on this latest evidence?  I don’t know.

If it doesn’t, then I would propose the following: if markets do not properly reward fundamentally good adjustment policies in a country, which the Troika deems sufficient and therefore eligible for a credit line, then it would be only reasonable for the ECB to draw a line in the sand and announce a maximum funding cost for that country for a period of time. 

For example, if Italy puts into law the required structural reforms, and the market does not bring funding costs down sufficiently on the back of the prospect for better growth in the future, then – with a Troika approved credit line – the ECB ought to tell the market that during the next year (or two) and so long as those policies remain in place, the 2-5 year sector of the Italian curve shouldn’t be above, say, 4%. 

I suspect that the ECB would not have to spend much money getting that result, if any. 

The parallel is the Swiss National Bank’s decision to change their exchange rate policy “from leaning against the wind” with a clear and defendable floor of 1.20 Swiss Francs against the euro. 

It was a gutsy call by the SNB, which suddenly  everyone agreed with once implemented and successful.

I suspect the same would be true if a member of the European Central Bank‘s executive board were to propose a temporary ceiling on yields of 4%.

This would quickly put to an end the current phase of the crisis – and, almost certainly, the build-up of sovereign debt on the ECB’s balance sheet.

By Erik Nielsen, chief economist of UniCredit.

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Filed under International Econnomic Politics, Laws and Regulations, National Economic Politics, Philosophy

The European Meltdown Begin

The European economy seems to have entered the meltdown phase, as prime ministers in both Greece and Italy are leaving their posts and rumors of a euro zone break-up in a matter of few days are emerging. The financial markets continues to tumble, as the euro zone is now subject to an unconstrained panic attack from financial markets, with Italian spreads at 5.6%, Spanish spreads over 4% and the French spreads creeping to 1.5%.

“The market meltdown signifies the effective collapse of the notion of a leveraged EFSF and other technical quick fixes.”


The euro zone’s latest “comprehensive solution” collapsed yesterday, as all the technical quick-fixes did before. We have now reached the bifurcation point in the crisis where the euro zone will, within days, have to make a choice between debt monetization, which is hardly feasible without a political commitment to a fiscal union, and a break-up. The latter will happen if no decision is taken.

According to Reuters, citing unnamed EU sources, French and German officials have been discussing a radical systems change, involving a smaller and more integrated euro zone.

Eurointelligence.com comments in today’s morning brief:

“We believe this story is true, but likely to make the crisis much worse. A break-up followed by ringfencing the core would, in a first stage, cause the total collapse of the financial system in Europe, including in Germany and France. We are not talking about crisis resolution here, but about the resurrection of Europe from the rubble.”

In others words: The political leaders are about to give up on a rescue operation of Europe, and are changing focus towards saving whatever is possible to save.

At the same time; government  leaders are staring to resign, with Italian Berusconi and Greek Papandreau leading the way, leaving the euro zone in complete  chaos.

Robert Shrimsley of the Financial Times makes the point that there is now a possibility of technical government – led by Lucas Papademos in Greece, and Mario Monti in Italy, both former high ranking EU officials.

While European officials may find this reassuring, it is not solving what is fundamentally a political problem in those countries. The problem with technocrats is that they have avoided the traditional routes to power. Shrimsley  concludes the best politicians are also experts – they know what is politically possible.

“We agree with this. It is another one of these quick fix ideas. The EFSF did not work. Leveraging did not work. The next delusion is technical government. The euro zone crisis is a major political crisis at heart. This is why the financial markets are panicking,” http://www.eurointelligence.com writes.

As a result of the Italian crisis and the large exposure of Austrian banks to Italy ,Austria’s AAA rating may be in danger, Financial Times Deutschland reports.

In two weeks the analysts of Moody’s will visit the country and economists think that they decide to place the country on a negative outlook. In order to calm markets, the government now wants to quickly imitate the German example and introduce a constitutional debt break.

Personally, I’m quite stunned that a scenario I once (back in 2007) described as a “worst case,” is unfolding before my eyes, with the politicians repeating the same mistakes that others have done before them in almost every major crisis i history.

Anyway – here’s a postcard from our humorous friends at versusplus.com – a slightly different version of the famous “A Christmas Carol”  by Charles Dickens.

“In The Greek Midwinter”

See also: New Econparody Song About “Guess Who”

“Split-Rated” – New Econo-parody Song



Filed under International Econnomic Politics, Laws and Regulations, National Economic Politics, Philosophy