Central Perk: Mish's Global Economic Trend Analysis

joi, 6 ianuarie 2011

Mish's Global Economic Trend Analysis

Rosenberg on the Non-Double-Dip; A Look Ahead to Second Half-2011 and 2012
Portuguese, Spanish Bonds Smacked on Sovereign Debt Financing Concerns; Euro Flirts with December and Mid-September Lows
Japan's Finances "Approach Edge of Cliff", Prime Minister Calls For Sales Tax Hike
EU Commission Plans Haircuts on Bank Debt; Greek Yields Hit New Record; China Buys Spanish Debt; German Courts to Decide Bailout Constitutionality

Rosenberg on the Non-Double-Dip; A Look Ahead to Second Half-2011 and 2012

Posted: 06 Jan 2011 07:39 PM PST

The "Double Dip" for 2010 did not happen and one for 2011 now seems unlikely as well. However, a recession in 2012 is not out of the question. Dave Rosenberg explains in Breakfast with Dave

Can We See 4% GDP Growth For Q1? Yes, But Look For Air Pockets Thereafter

This is not a forecast as much as something that should be on the radar screen. Nor should this be considered a change in our fundamental view for 2011 as a whole — as a year of overall disappointment on the macro front. Be that as it may, the probability of a much stronger Q1 economic outcome has risen very recently.

Yes, you read that right. But why would that come as a surprise? We had near 4% GDP growth in the first quarter of last year (the consensus was little more than 2.5% going into that quarter) and by summer everyone was still talking about a double-dip recession and the stock market was beginning to price one in.

The points below show what it would take to get 4% GDP growth for Q1 — believe it or not, it is not a stretch to get there. With consumer spending at 3.5% (perhaps even higher), it doesn't take much. The consensus right now is less than 3% (taken a month ago), but I would expect to see it revised up very shortly:

Consumer spending 3.5% (the impact of the payroll tax cut)
Residential investment 2% (the monthly construction spending numbers have risen modestly off the lows)
Non-residential spending 5% (the architectural billing index is consistent with this)
Capex 10% (still solid but moderating as the latest core orders data are predicting)
Net exports swing from $470 billion to $460 billion (net addition of 0.4%)
Inventories from $73 billion to $68 billion (drag of 0.2%)
Government 1.5%

Even if government is flat, the number for Q1 would still be 3.7% seasonally adjusted annual rate.

What is important is what happens in the second and third quarter when we see the U.S. economy hitting an important air pocket. In Q2, there is a loss of fiscal support at the margin. Moreover, we will be deeper into this renewed leg of the downturn of home prices, with negative implications for the household wealth effect, confidence, and spending. We will be seeing the peak impact from the runup in energy prices too. The inventory cycle has pretty well run its course as well (it was responsible for half of the GDP growth in 2010). It would also likely be prudent to assume that some risk aversion will resurface from the renewal of European debt concerns in March after the Irish elections (if the opposition party wins, expect the EU deal to be renegotiated and the debt to be restructured, and if that happens, look for other countries to follow suit). Of course, we have the debt-ceiling issue to contend with in March-April and the GOP are dangling $100 billion of spending cuts in front of the White House in order to get a deal done. This is not last year's lame duck Congress. And this doesn't add to uncertainty and possible disappointment in the second and third quarter?

The Fed is not going to be able to embark on more balance sheet expansion unless things were to get really ugly given the new Congressional oversight and the longer list of "hawks" that are FOMC voters ― this comes to a head in June and remember what happened last year when Mr. Market hit a pothole as the Fed contemplated its elusive exit strategy. It would be irresponsible to ignore these risks.

All we know about Q4 is that we should see a decent pickup in capital spending ahead of the end of the bonus depreciation allowance, which will merely create another problem for 2012 but the story here is (i) consumer-led first quarter, followed by (ii) air pockets in both Q2 and Q3, and then (iii) a capex-led fourth quarter. Moreover, a 2012 recession cannot be ruled out. In fact, elections are great years to have recessions: 1960, 1970, 1980, 2000 and 2008! How about that Mr. Potter?

The Real Cause For The Recent Exuberance

Personal income was revised up $46.3 billion in the second quarter. This was huge ― the Commerce Department found $46.3 billion for the consumer that it thought wasn't there before. This made the difference between income being up at nearly a 6% annual rate that quarter and 3%. The newly found income carried some important spending momentum with it into the third quarter and this was really big in terms of influencing people's perceptions of how the economy was performing.

When double-dip risks were at their peak, it was when Q3 GDP was released initially and it showed a mere 1.6% annual growth rate, which was even weaker than the 1.7% print in Q2 (which was less than half the growth rate of Q1). Then Q3 GDP was revised up to 2% and then all the way to 2.6% and that is all she wrote as far as the double dip for 2010 was concerned. And it now looks like we are going to see something closer to 3.5% for Q4. So what happened was that consumers had more income than was thought previously.

This is a nice story. It explains why we were wrong on the Q3/Q4 double-dip scenario, but going forward, this income revision and its impact on spending can be considered yesterday's story. As we said, there is the current payroll tax effect, but this will be contained to the first quarter and the one thing history teaches us is that tax cuts that are temporary in nature carry with them virtually no multiplier impact into the future. Look for Q2 of this year ― and likely Q3 as well ― to turn out to be as disappointing for the market, as was the case for these exact same quarters in 2010. In other words, look for a repeat except this time around we don't have a Fed and a Congress that is going to pull another rabbit out of the hat during the summer and fall.

Change of Tune

I too thought a double-dip in 2010 or 2011 was likely. I changed my mind some time ago and made it theme number seven in Ten Economic and Investment Themes for 2011

7. US Avoids Double Dip

The tax cut extensions and the payroll tax decrease will keep the US out of recession. However, growth estimates are still too high. The tax cut extensions do nothing more than maintain the status quo while the payroll tax deduction is just for a year. Most will use it to pay down bills. Look for GDP at 2.0-2.5%. That is the stall rate.

There is no reason to stick with a forecast that is not going to happen. When retail sales picked up in November and continued into early December, that was it for me. I had significant doubts even before that.

Robust Jobs

On Monday, January 3, before the ADP numbers came out, in Factories Expand 17 Consecutive Months, Jobs Don't I discussed the possibility for a couple months of good jobs reports.

The BLS report for December comes out on January 7th. The January report comes out on February 4th. Those reports could be robust because of retail and service sector hiring, especially the January report.

Everyone is now going gaga now because Wednesday's ADP National Employment Report "suggests nonfarm private employment grew very strongly in December".

ADP has private-sector employment at +297,000.

The pertinent question, assuming the report is correct (I'll take the way under) is "how sustainable is it?" On this score I am in agreement with Rosenberg. I suggest not very, although next month or two could be good as well.

Bear in mind we had strong employment reports early last year, only to see them fade in the second half. Given that headwinds are enormous, I see no reason to change what I said in Jobs Forecast 2011 Calculated Risk vs. Mish.

Nor do I see any reason to change my long-term forecast that the US slips in and out of recession or near-recession and deflation for a number of years, just as Japan did.

Little has changed except a massive amount of stimulus delayed the double-dip. What can't go on forever won't and I doubt if this Congress is very accommodating to states in trouble.

Economic forecasts for 2010 ranged from hyperinflation to strong growth and strong inflation, to weak growth and strong inflation, to weak growth and minimal inflation, to weak growth or double-dip accompanied with deflation (my call), to outright economic Prechter-like collapse.

Those in the hyperinflation and strong inflation camps missed the mark by a mile. Mid-year it looked like the US was headed back into deflation but QEII forestalled that.

Giving credit where credit is due, those in the weak growth and minimal inflation camp got the 2010 call right. There were not many in that camp, but Calculated Risk was one of them.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Portuguese, Spanish Bonds Smacked on Sovereign Debt Financing Concerns; Euro Flirts with December and Mid-September Lows

Posted: 06 Jan 2011 12:19 PM PST

Portuguese and Spanish 10-year bonds are getting smacked hard as refinancing needs mount. Greek yields are at all-time highs and a milder (for now) selloff continues on Belgian and Italian bonds as well. A flight to safety on German bonds is again in play, with German 10-year yields dropping slightly. The Euro once again flirts with December and Mid-September lows.

Bloomberg reports Portuguese, Spanish Bonds Decline Amid Debt-Auction Speculation

The extra yield investors demand to hold Portuguese securities rather than benchmark German bunds widened to the most in a month as the IGCP debt office announced the sale of 2014 and 2020 debt, scheduled for Jan. 12. Belgian bonds tumbled after the nation's political leaders failed to restart seven- party negotiations to form a government. German bunds rose.

"The underlying story behind this slide in Portuguese government bonds is supply-related," said David Schnautz, a fixed-income strategist at Commerzbank AG in London, who said he had heard speculation about the Portuguese sale before it was announced. "Next week we will keep on running at full steam in the primary market with supply from Spain and Italy," he said.

The yield on 10-year Portuguese bonds jumped 26 basis points to 7.17 percent as of 4:40 p.m. in London. The yield premium to bunds widened to 404 basis points, the most since Dec. 1. The 4.8 percent bond due in June 2020 fell 1.57, or 15.70 euros per 1,000-euro ($1,301) face amount, to 84.12.

Portugal is raising taxes and cutting wages to convince investors it can narrow its budget gap after the Greek debt crisis led to a surge in bond yields for euro nations last year. The Portuguese government said today it met its target for a budget deficit of 7.3 percent of gross domestic product in 2010.

The nation, which intends to sell as much as 20 billion euros in bonds to finance its budget and redemptions this year, auctioned 500 million euros of bills yesterday at a yield of 3.686 percent, up from 2.045 percent at a sale of similar- maturity securities in September.

Spain is due to sell debt maturing in 2016 on Jan. 13, the same day as Italian bond auctions for 2015 and 2026 securities. The Spanish 10-year yield rose 16 basis points to 5.49 percent. The equivalent-maturity Italian yield increased 11 basis points to 4.77 percent.

Belgian bonds tumbled, sending the 10-year yield 13 basis points higher to 4.07 percent, after politicians failed to break the political deadlock in Europe's third-most-indebted country. The extra yield over German bonds widened to 115 basis points, the most since Dec. 1. The spread, a gauge of the risk of investing in Belgium, has risen from 79 basis points before the nation's June 13 election.

The yield on German bunds, Europe's benchmark debt securities, fell three basis points to 2.91 percent.

Sovereign Debt Yields Greece, Portugal, Spain, Belgium

That chart is as of yesterday. The Portuguese 10-year yield has since widened to as much as 7.17% (quite a sharp selloff). Spanish 10-year yields are now 5.49% and Belgium 10-year yields are 4.07%.

Euro Weekly Chart

click on chart for sharper image

The sovereign debt crisis in Europe as well as recent job reports in the US are both US dollar friendly. For more on the European debt crisis including a look at a pending German court review of the constitutionality of the bailouts, please see EU Commission Plans Haircuts on Bank Debt; Greek Yields Hit New Record; China Buys Spanish Debt; German Courts to Decide Bailout Constitutionality.

For a look at the mess in Japan, please see Japan's Finances "Approach Edge of Cliff", Prime Minister Calls For Sales Tax Hike.

The potential for a substantial US dollar rally is staring dollar bears and US hyperinflationists smack in the face.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Japan's Finances "Approach Edge of Cliff", Prime Minister Calls For Sales Tax Hike

Posted: 06 Jan 2011 09:43 AM PST

Japan, which spent itself into oblivion fighting deflation (and losing), now needs to raise taxes in the midst of that deflation.

Please consider Sengoku Says Japan's Finances Near 'Edge of a Cliff'

Japan's top government spokesman said the country's fiscal situation is "approaching the edge of a cliff," underscoring Prime Minister Naoto Kan's call for a national debate on raising the 5 percent sales tax.

Kan is "expressing his deep sense of crisis and resolution about the sustainability of social security as the aging population increases under a low birth rate," Chief Cabinet Secretary Yoshito Sengoku told reporters today in Tokyo. "The supporting fiscal conditions don't allow for any delays, it's finally approaching the edge of a cliff."

The prime minister last night said in an interview with TV Asahi that he would "stake my political life" on addressing Japan's rising social welfare costs and increasing public debt. The day before he said "now is the time" to face these problems.

Japan's public debt is set to exceed twice the size of the economy this year and reach 210 percent of gross domestic product in 2012, both estimates the highest among countries tracked by the Organization for Economic Cooperation and Development, according to the group's forecasts.

Keynesian, Monetarist Deflation Cures Fail

The Keynesian cure for deflation is government spending. The Monetarist cure for deflation is quantitative easing. Japan tried both and the only visible result is government debt to the tune of 200% of GDP.

As Japan's aging work force heads into retirement, retirees need to draw down on their accumulated savings but they can't. Government buffoons fighting deflation spent it all and 100% more. So now, Japan stands at the edge of a cliff and needs to tax those retirees enough to pay their retirement pensions. Those pensions were squandered building bridges to nowhere, allegedly to end deflation.

Now the plan is to raise taxes enough to pay the retirees. Is that really supposed to work? For how long?

Raising taxes in the midst of deflation hardly seems right, but the alternative is default or further escalation of government debt. Compounding the problem, rising interest rates would crucify Japan as interest rates on the national debt already consumes most of government revenues.

At some point the Yen will sink to reflect this reality. In an extreme case, hyperinflation is possible. Yes dear reader, in spite of all the talk about hyperinflation in the US, the odds of it elsewhere are far greater. Note that "greater" means just that. It is not an explicit call for hyperinflation.

The Prime Minister's statement "Japan is approaching the edge of a cliff" is a sure sign Japan has already fallen off a cliff. Politicians do not admit problems until it is too late to fix them. Thus, we have official admission that Japan's demographic time bomb has just gone off. The only question now is how quickly the problem escalates.

One might think that economists would learn something from this, but they would be wrong.

Keynesian clowns think Japan failed to defeat deflation because government did not spend enough fast enough. In other words, Keynesian clowns think the way to get out of a hole is to dig deeper, faster.

Meanwhile, Monetarist clowns feel the central bank did not ease enough fast enough. They think if you just print enough money someone will spend it. In Japan, all printing money did was artificially suppress interest rates as the money went into government bonds.

Question of the Day: Do economists (in general) somewhere along the line acquire an inability to reason, or does an innate inability to reason lead one to a career as an economist?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

EU Commission Plans Haircuts on Bank Debt; Greek Yields Hit New Record; China Buys Spanish Debt; German Courts to Decide Bailout Constitutionality

Posted: 06 Jan 2011 12:47 AM PST

A European commission has come up with a new proposal to shield taxpayers from the banking crisis via haircuts in senior bank bonds. The proposal only covers bank debt, not sovereign government debt, and supposedly it applies to some mythical time in the future, not now.

However, sovereign yields have hit new record highs in Greece, and are close to record highs in Portugal, Spain, and Ireland, I fail to see how the crisis can possibly be contained, and I fail to see why it takes a commission to decide that bank bondholders need a haircut. It should be perfectly obvious there is no other possible solution. The big fear is haircuts spread to sovereign debt.

It's time to put the fears away and concentrate on the reality. Sovereign debt haircuts are coming. With that backdrop, please consider the Telegraph article EU plans for bondholder haircuts unsettles debt markets by Ambrose Evans-Pritchard.

Michel Barnier, the single market commissioner, will publish a "consultation paper" outlining ways to shield taxpayers from banking crises. It is the first stage of what will almost certainly become a binding law.

"We are pursuing the idea of a debt write-down or conversion to help stabilise a failing bank and reduce the need for public funds," said an EU source.

Fears that this could evolve into a crusade against bondholders set off fresh jitters on EMU debt markets yesterday, pushing yields on 10-year Greek bonds to a record 12.59pc.

Portugal managed to sell €500m (£425m) of debt at a crucial auction but had to pay 3.67pc on six-month bills, double the rate in September. "It is an unsustainable dynamic," said Lena Komileva from Tullett Prebon.

Credit Default Swaps on Irish bonds jumped 16 points to 620 after Switzerland's central bank said it would no longer accept Irish debt as collateral.

The Commission paper refers only to bank debt, unlike Germany's proposals for sovereign "haircuts". Mr Barnier hopes to restrict burden-sharing to future debt only, fearing that a catch-all approach risks setting off a fresh EMU crisis.

Commission's Vote Is Irrelevant

The idea that haircuts can be limited only to bank bonds, and not even the existing ones, but mythical bonds at some mythical time in the future is preposterous. You know it, I know it, and the bond market knows it. Why else would Greek bonds yields be at fresh all time record levels?

I find it amusing that a commission has gotten together to vote on such matters. It is not up to the commission to decide. The market has already cast its vote. Unless Germany decides to pony up more cash, the market wins.

The Telegraph continues ...

However, Brussels may lose control once the process is unleashed. A populist backlash is gathering strength in most EU states, and regional elections in Germany may sharpen demands for retribution against cossetted monied elites.

"It is no coincidence that Chancellor Angela Merkel lost her majority in the Bundesrat two days after the Greek bail-out," said Andrew Roberts, credit chief at RBS. "Peripheral debt woes have not gone away. This will go on until Germany chooses whether to dilute its own credit rating by funding the system, or decides 'enough is enough'."

I seldom agree completely with Pritchard but I think he has this one stone cold. It is not even clear the German courts will find bailouts constitutional. A crucial vote is coming up next month.

German Bonds Lose Luster

Bloomberg reports German Bunds Lose Allure for Europe Fund Managers.

Germany has pledged more cash than any nation to bail out debt-ridden states such as Ireland and the country's fixed- income market is vulnerable, assuming Deutsche Bank AG analysts are right and the European Central Bank starts to increase interest rates as soon as June.

"When you look at the whole setup, Germany seems to be the ultimate guarantor of the whole region," said Robin Marshall, director of fixed-income at London-based Smith & Williamson Investment Management, which oversees $20 billion for customers. "You have to ask yourself why bund yields are so substantially below other countries. They aren't fully reflecting the risk."

"Bund yields may continue to fall in an early part of next year," said Rainer Guntermann, an analyst at Commerzbank AG in Frankfurt. "People are likely to continue to seek safety that German bonds represent as credit deterioration drags on."

Andre de Silva, the Hong Kong-based head of Asia-Pacific interest-rate research at HSBC Holdings Plc, isn't so sure. German bonds may lose their status as "the golden benchmark," he said.

"The more we go the bailout route and the more Germany, as a large contributor, has to stump up, the less German bonds can be claimed as a risk-free asset," de Silva said. "We are not saying Germany will lose its top credit rating, but the allure of its bonds is tarnished."

While Germany has one of the lowest deficits in the 17- member euro region, it has earmarked 119.4 billion euros to the European Financial Stability Facility for countries in need of bailouts. The contribution, the biggest by any nation, amounts to 27 percent of the fund.

"It's a difficult situation for Germany," said Kind of Frankfurt Trust. "Credit dilution, perceived or real, will push yields higher. It's no longer the case of the majority bailing out the minority in the euro region, but the other way round."

China to Buy More Spanish Debt

Please consider Top Chinese official promises to buy Spanish debt

Chinese Vice Premier Li Keqiang vowed to buy more of Spain's government debt on a three-day visit to the country, delivering a significant vote of confidence in the battered economy.

The visit came as Spain battled market concerns that it may need an Irish or Greek-style international rescue because of a debt refinancing crunch this year.

"We believe Spain, with its government and people working together, will surely overcome current economic and fiscal difficulties," Li reportedly told Spanish Finance Minister Elena Salgado after his arrival on Tuesday.

The above deal was announced on Monday, ahead of the trip. The Euro rallied for a day then sold off as did Spanish bank stocks.

Spanish Bank Stocks on Funding Costs

Bloomberg reports Spanish Bank Stocks Drop on Funding Cost

Spanish banking stocks fell, led by Banco Bilbao Vizcaya Argentaria SA, on concern raising funds will become more difficult in European nations with large budget deficits.

Raising money is getting more costly for banks in indebted euro nations as investors demand a higher return for taking the risk of holding their debt. Ireland in November followed Greece by seeking a bailout, while investors remain concerned about the growing debt burden in Portugal, Spain and Italy.

"The signals from the bond market are not very encouraging," said Daragh Quinn, a banking analyst at Nomura International in Madrid. "It's clear the next couple of months are going to be very tough for the Spanish banks."

Only 41% of Germans Want to Stay on the Euro

Deutsche Welle reports Survey finds half of Germans want Deutschmark back

German daily Bild commissioned a survey by Cologne's YouGov-Institute that found that 49 percent of Germans want the deutschmark back. Only 41 percent of those surveyed don't.

Some 77 percent of the 1,068 people questioned by YouGov said they personally had not profited from the adoption of the euro.

Would they adopt the euro today?

If the country were currently not part of the eurozone, only 30 percent of those asked would today vote to adopt the euro and 60 percent would vote against such a move.

Will Chancellor Angela Merkel Lose Control?

With those kind of numbers, to suggest Angela Merkel needs to walk a fine line is an understatement. The German courts have to be aware of those numbers as well.

Literally everything that the German anti-Euro crowd said would happen years ago has now happened, and they are not too happy about it.

Major Constitutional Court Cases Coming Up

Euro Maverick Edin Mujagic discusses the court battles in Stop blaming the Germans

December 21, 2010

Karlsruhe, a pretty little town on the German-French border, is the home of German Constitutional Court. It can destroy the euro even if the troubles on the euro area periphery are to be resolved in a structural way (which is not very likely).

At the beginning of next year the judges of that Court will look into quite a few cases brought forward vis-à-vis the German participation in saving Greece and Ireland.

The German government wants to proceed with those operations and is ready to save other euro countries as well. But Berlin wants the emergency euro-shield, which is now only temporarily (until June 2013), replaced by something more permanent. In order to do that, European Treaties will have to be rewritten, a time-consuming and very uncertain endeavor as there is a risk that not all EU member states will ratify it.

Time is of the essence

Nevertheless, for Berlin time is of the essence too. The new mechanism should be in place before the judges in Karlsruhe sit down to look at at least five complaints that have been brought before the Constitutional Court. The plaintiffs claim that saving those two countries from defaulting constitutes a breach of both the European Treaties and the German constitution and want the Court to order immediate stop of German participation in the rescue.

The German Constitutional Court has some experience with these matters. In 1993 and 1998 it looked at two similar cases. Plaintiffs tried to prevent the euro to be introduced at all (in 1993) and wanted it delayed (in 1998). Back then the Constitutional Court threw the charges out. But that should not be taken as guarantee than it will do so again this time.

In its verdict from 1993 the Court acknowledged that economic stability must be the basis of German participation in a monetary union at all times. In case the judges decide that economic stability of the monetary union can no longer be guaranteed, that could be interpreted as the cessation of the basis for German participation in the euro zone, making the German participation in it illegal.

Abandonment

Whatever the ruling however, the damage to the euro and the European monetary union will be significant. It is highly likely that in the future many more cases will be filed at the German Constitutional Court. That will cause great uncertainty about the future of the euro. At the end of the day, any currency is as strong as it has support of the people actually using it every day. The euro was never really loved by many Europeans and that is increasingly unlikely to even become the case. Uncertainty about the survival of the euro in the long run is the last thing a currency that wants to be an alternative to the dollar needs.

P.S. Just to add one last-minute development. In a recent interview, French Economy Minister Christine Lagarde said that euro zone policymakers deliberately chose to "violate" the bloc's rules in rescuing Greece and Ireland. The Greek and Irish bailouts and the creation of a temporary European rescue fund had been "major transgressions" of the treaty, according to Lagarde. "We violated all the rules because we wanted to close ranks and really rescue the euro zone," Lagarde was quoted as saying.

Nice, this is just what German politicians needed, weeks from the moment that Karlsruhe-judges convene to look at the complaints.

Thoughts on the Outcome

My friend "HB" who lives in Europe offers these thoughts on the lawsuits:

The most likely outcome is a compromise. The court will probably not stop the bailouts, but may well proscribe the government's freedom of action with regards to what it may contract for and what it may not contract for from here on out.

I expect some admonishment that the government must not overstep constitutional bounds.

The EU is not allowed to become a 'transfer union'. Karlsruhe has already given Gauweiler a partial victory in his suit against the Lisbon treaty by opining that no parts of the treaty may conflict with the constitutions of the federal states ('Länder') or that of the Republic.

We don't want no transfer union

Rounding out the discussion at long last, please consider The Economist article We don't want no transfer union

Although the IMF and European Union are acting as co-rescuers of Ireland and Greece, Germans see themselves as rescuers-in-chief—and they resent it. "Will we finally have to pay for all of Europe?" asked Bild, a tabloid.

German behaviour is guided by more than petty politics. In adopting the euro the Germans thought they were joining a condominium, in which every member would keep order on their own property, and not a messy commune. Now the crisis threatens that understanding. The Greek bail-out and the €750 billion ($980 billion) war chest created in May to defend the euro look to many Germans like a violation of the "no-bail-out clause" in the Maastricht treaty that created the euro. The government insists it is not, because the aid is voluntary and temporary. The constitutional court is evaluating this claim. The proposed successor, a permanent facility plus procedures to impose losses on creditors of insolvent countries, needs a treaty revision to pass constitutional muster.

Assuming the "compromise" call comes in, another crisis is all but assured when Greece and Ireland default. That might take a while. In the meantime, eyes are on Spain and Portugal.

Italy is the unseen elephant, simmering in the background. Should a huge crisis erupt before the court makes a ruling, all bets could be off on what the court decides.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

joi, 6 ianuarie 2011

Mish's Global Economic Trend Analysis

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joi, 6 ianuarie 2011

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