duminică, 13 februarie 2011

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

Irish Bailout Falls Short; Irish Debt Rating Cut to Junk by Moody’s; Power of the "Trump Card"

Posted: 13 Feb 2011 04:09 PM PST

In the wake of the collapse of the Irish government, finance minister Brian Lenihan suspended capital injections for Allied Irish Bank, the Bank of Ireland, and EBS Building society until elections are held on February 25.

Fine Gael leader Enda Kenny said Anglo Irish Bank will not get another cent if his party is elected. However, the Chairman of Anglo Irish Bank said Anglo needs another €15bn.

In response, Irish Debt Rating Cut to Junk by Moody's
Moody's cut the ratings of Irish banks to junk status on Friday following Dublin's decision to defer previously agreed capital increases until after this month's general election.

This follows similar action by Standard & Poor's last week.

Moody's said recent announcements "call into question the government's willingness to provide additional support to the banks beyond that which has already been provided to date, and reflect the increasing risk of some type of burden-sharing with senior creditors."

Moody's acknowledged the "huge fiscal burden faced by Irish taxpayers" as a result of the banking sector bail-out. But as a result it said there was an "increasing risk that this burden could be shared not only by subordinated creditors but by senior creditors, most likely through distressed exchanges."
Fine Gael stretches lead in Irish election campaign

The Financial Times reports Fine Gael stretches lead in Irish election campaign
Ireland's opposition centre right Fine Gael party has stretched its lead ahead of the February 25 general election with an opinion poll giving it an outside chance of an overall majority.

A poll by Red C for the Sunday Business Post newspaper put Fine Gael on 38 per cent, up 3 points, ahead of Labour on 20 per cent, with the governing Fianna Fail party on 15 per cent.

The most likely outcome is Fine Gael will seek to form a government with Labour, its traditional coalition allies.

But analysts say as a party approaches 40 per cent of the first preference votes under Ireland's complex proportional representation system there is a chance of securing the 83 seats needed for an overall majority in the 166-seat Dail or lower house of parliament.

The latest poll confirms momentum is behind Fine Gael, a party traditionally supported by big farmers and urban professionals and business.

With Fianna Fail blamed for the humiliating bail-out by the European Union and the International Monetary Fund, and with all the opposition parties pledged to renegotiate the deal, the election campaign has switched to other issues.

The issue that has caught the public's attention is Fine Gael's pledge not to increase taxes just as this month households see their pay packets cut by the tax hikes announced in the December budget.

Michael Noonan, the party's finance spokesman, has attacked Labour as "the high tax party".

Even before the campaign opened, Labour dropped its plan for a 48 per cent top rate of tax, a policy adopted by Sinn Fein, which in the latest poll has seen its support slip from 13 per cent to 10 per cent.
Ireland Should tell IMF and ECB "Go to Hell"

It seems like voters are fed up with taxes everywhere. From this side of the Atlantic I certainly understand a low-tax, renegotiate-the-bailout approach.

I also approve the talk "Anglo Irish Bank will not get another cent". That is exactly the correct starting point.

Thus, Ireland should tell the IMF and EU and especially Jean-Claude Trichet at the ECB where to go, and bondholders can eat 100% of the loss. Whether or not Fine Gael can pull that off remains to be seen.

Irish parties pledge to re-negotiate EU-IMF bailout

The Montreal Gazette reports Irish parties pledge to re-negotiate EU-IMF bailout
As Ireland's election campaign heats up, the prospects of success in a battle to ease the terms of a massive EU-IMF bailout have become a key issue, even as Brussels insists it is non-negotiable.

To a humiliated nation, the opposition parties are holding out the hope that they can re-negotiate the terms of the 85 billion euro ($115 billion) bailout package if they gain power after the February 25 vote.

Candidates are meeting the full force of the hostility to the bailout terms and the question of why taxpayers have to pay for the mistakes of bankers as they canvas door-to-door.

An IMF review last week appeared to recognise there are difficulties, saying that while the public response to the bailout has remained favorable "a lingering domestic perception of inequitable burden sharing persists."

The republican Sinn Fein is offering the most radical solutions for the economy and the bailout, although it has little chance of being elected.

It wants no further drawdown of IMF/EU funding, the reversal of many budget cuts and the "burning" of bondholders who lent to reckless banks whose lending plunged Ireland into economic purgatory.

But Bloxham stockbrokers sounded a warning to politicians on Friday about their anti-European rhetoric.

"Throwing down ultimatums to Brussels and rubbishing 'Frankfurt's way' might win votes... but it could make life difficult for the next government and cement anti-EU sentiment as a potent political force in a country with a history of putting the brakes on EU ambitions," its analysts said in a note.

The stockbroker said that with the interest rate on the IMF's portion of the loan tied to a fixed formula, opposition parties are focusing their ire on the EU, which at Germany's insistence added a three-percent margin on the rate it is charging for 45 billion euros worth of loans.

"However, giving voters false hope about how much Ireland could save from a reduction in the EU bailout interest rate may come back to haunt both parties and hasten a new government's early demise," Bloxham said.
Preposterous IMF Statements

The statement by the IMF that "public response to the bailout has remained favorable" is one of the most preposterous lies I have ever seen.

What's with this nonsense by Bloxham Stockbrokers?

To be sure there is little to be gained by a reduction in interest rates. That's why Ireland should default if the ECB and IMF will not restructure.

Please note who is in control here. It certainly is not the IMF or ECB. All Ireland needs to do is tell Jean-Claude Trichet to "Go to Hell". That would set the appropriate tone for "negotiation".

If Bloxham thinks that will cost votes to any party, they are sadly mistaken.

Irish Bailout Falls Short

The New York Times reports Irish Bailout Hits Snags
Bank Losses Could Outstrip Rescue Funds; Political Threats



On Wednesday, Ireland's departing finance minister postponed an injection of cash into the banks that was planned for the end of February, saying a new government should make the decision. Top opposition officials are far less keen to bolster banks.

While the next government appears eager to get a better bailout deal, talks with its primary funder, the European Union, will be delicate. Other EU countries, particularly France, are keen to extract a pound of flesh by eroding Ireland's low corporate-tax rate. The major Irish parties are united in their zeal to preserve it.

A spokesman for the European Commission, the EU's executive arm, maintained that the deal wasn't up for negotiation. It was "decided with the state of Ireland," Amadeu Altafaj said Friday. "It's not, let's say, a program that has been agreed with a particular government and is subject to changes because of that."

Ireland's main leverage in the talks will be threatening to impose losses on holders of Irish banks' debt. At the insistence of the European Central Bank, which fears such "haircuts" would spook investors and worsen the euro zone's crisis, Ireland's government refrained from such a move last year.

But Fine Gael hopes to use the threat of a "haircut" to extract concessions from the EU and International Monetary Fund.

"The only card we have to play is the bondholders," a senior Fine Gael official said Friday. "If we can't get a better deal … we're going to be left with no options but to restructure the debt of the banks to protect the sovereign."

Anglo Irish Bank's chairman, Alan Dukes, fanned the flames. Speaking that evening at a conference, Mr. Dukes predicted that Ireland's banks need "somewhere in the region of €50 billion of new capital" to absorb their losses. Officials from Ireland's two main political parties said Mr. Dukes was overestimating the carnage.

Moreover, the plan provides just half of the €133.9 billion Ireland would need through 2013 to recapitalize banks, pay its bills and pay back its borrowings, including short-term debt, according to estimates released this past week by the European Commission.
Power of the Trump Card

When you have a trump card, you do not threaten to play it, you simply play it.

Ireland need not pay a "pound of flesh" as the Times suggests. There is no need for Ireland to bargain away its corporate tax structure. After all, if France does not like Ireland's advantage, France is free to change its corporate tax structure.

Agreeing to reduced interest rates in exchange for corporate tax changes would be a horrible deal for Ireland. Its tax rate advantage is its only way to grow out of this hole.

Magic Words

When you have a trump card, the magic word is not "Please". The magic words are "Go to Hell". Unfortunately most politicians are far too polite to say those words. Yet, Jean-Claude Trichet and the IMF need to be put in their place, and those three words will do it nicely.

After that, negotiations would go much more smoothly, with the ECB, the IMF, and Ireland negotiating an appropriate haircut. The alternative for the ECB is a 100% haircut - a simple default.

That is the power of a trump card, and Ireland has it, not the ECB, and not the IMF.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

German ex-Finance-Minister Bows Out of ECB President Race; Still More Goldman Sachs Tentacles

Posted: 13 Feb 2011 11:15 AM PST

Another German contender for ECB President has bowed out of the race. First it was Axel Weber, long thought to be the frontrunner. Now German ex-minister Steinbrueck rules out taking ECB job.
Ex-finance minister Peer Steinbrueck said he was not interested in the role as he shared the same views as outgoing Bundesbank President Axel Weber.

Both men oppose the ECB policy of buying government bonds from countries with high debt levels. Mr Steinbrueck said he would have had a "minority" view at the Bank.

"I am not available for this job," he told Sueddeutsche Zeitung.

The ECB has been buying risky government bonds if international investors have either shied away from buying government debt, or demanded too high a rate for it.

The bank bought Portuguese government bonds last week after yields rose to record highs in early trading, sparking renewed fears about Portugal's ability to raise money on the international markets.

Yields fell quickly after the ECB's intervention.
We don't want no transfer union

Please consider The Economist article We don't want no transfer union
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.
Clearly Weber and Steinbrueck have sent a strong message they expect the Maastricht Treaty to be honored. Current ECB President Jean-Claude Trichet trashed the treaty with support of the rest of the board.

With Weber and Steinbrueck bowing out of the race, Mario Draghi Ex-Goldman Sachs Managing Director is Leading Candidate to Replace Trichet as ECB President.

Goldman Sachs Tentacles Everywhere

Inquiring minds are investigating the career details of Mark Carney governor of the Bank of Canada.
Before joining the Canadian public service, Carney spent thirteen years with Goldman Sachs in its London, Tokyo, New York and Toronto offices. His progressively more senior positions included co-head of sovereign risk; executive director, emerging debt capital markets; and managing director, investment banking.
Please consider the Canadian Association of Income Trust Investors article Mark Carney exempted Goldman Sachs from Flaherty's income trust tax


Flaherty's income trust was structured by Mark Carney in such a way that only the little investor was taxed and the big guys were given a free ride. Not only were the big guys given a free ride, this tax was imposed in such a way that the big guys were able to prey upon the small investor and expropriate wealth from the small investor in the amount of some $35 billion.

What would you expect from the architect of Flaherty's income trust tax, Mark Carney, who spent his entire career at Goldman Sachs and wouldn't have dealt with a single Canadian retail investor in his entire career and evidently doesn't give a hoot about them and probably perceives them as ripe for the picking.
I cannot discuss the merits of that Canadian case because I do not know them. However, it is clear that Goldman Sachs has tentacles slowly infiltrating every nook and cranny, including various Central Banks and the SEC.

SEC Names ex-Goldman Sachs Employee to Oversee Asset Managers and Hedged Funds

While on the subject of ex-Goldman Sachs employees turning up in high-power jobs, please consider SEC Taps Goldman Sachs Executive as Division Head
The Securities and Exchange Commission has named Goldman Sachs Asset Management Chief Investment Officer Eileen Rominger to head its division overseeing asset managers and hedge funds.

Rominger will come to the SEC after nearly 30 years in the investment management business, according to an SEC press release Tuesday.

She managed equity funds at Oppenheimer Capital and at Goldman before becoming Goldman's chief investment officer for its global portfolio management teams.
As I said a couple days ago, all we need now to complete the picture is for an ex-Goldman employee to run for president of the United States and for another ex-Goldman employee to replace Bernanke at the Fed.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Former Sun CEO on Jobs: "We aren't doing manufacturing; we aren't doing design; we aren't doing computers. It's all moving to Asia"

Posted: 13 Feb 2011 12:54 AM PST

Scott McNealy, ex-CEO of Sun Microsystems, is concerned about job prospects in Silicon Valley. However, what he has to say applies to jobs in general, not just high technology, and not just in California.

Please consider Former Sun CEO Worries About Region's Prospects
Even as Silicon Valley's unemployment rate eases and many local technology companies post positive financial results, Scott McNealy is pessimistic.

Santa Clara County's jobless rate fell to 10.4% in December from 11.3% a year earlier. But Mr. McNealy, the co-founder and former chief executive of computer maker Sun Microsystems Inc., doesn't think Silicon Valley's emerging sectors such as social networking and "green" technology are going to make up for jobs lost as sectors such as software and computers consolidate.

WSJ: When did you see Silicon Valley begin to recover from the recession, and how far along has it come?

Mr. McNealy: It's not a terribly job-filled recovery. Productivity gains continue to push the need to hire out.

I see a migration from the early days of the Valley. We aren't doing manufacturing; we aren't doing design; we aren't doing computers. It's all moving to Asia and other places where there are lots of technical engineers who are willing to work at a more reasonable salary because they don't have to spend $3.5 million on a home and pay half of it to taxes.

I think every new transition has created less job opportunity as technology has become very leveraged. I don't think our education system, our regulations, our government policies have kept pace with the changes that technology is driving.

Maybe I'm sounding like an old guy, but [Silicon Valley] ain't what it used to be. I, for one, don't think this is the best place in the world to start a company.

WSJ: What needs to change in Silicon Valley to foster job creation?

Mr. McNealy: It's not the Valley. It's the overhead and the overhang, the clouds brought in by Sacramento and Washington, D.C., the regulations, the deficit and the misallocation of resources. It's all of those things. Obviously, I'm a believer in the private sector and in personal responsibility.

The biggest issues with the Valley are local, state and federal governmental overreach and overregulation. It's over-pensioned, over-unionized and over the top.

WSJ: Are there any unconventional indicators that you watch to judge the health of the local economy?

Mr. McNealy: It's not very scientific, but my boys all play a pretty expensive, but middle-class sport: ice hockey. I see very clearly that there are a lot more financial strains on the families of the hockey teams here in the Bay Area. Families vote not to go to the tournament in Colorado Springs or their kids vote not to do the highest level of hockey because it's too expensive. Or they drop out of hockey altogether. It's significantly worse than it was a couple years ago.
The journal pointed out social networking and green jobs. However, McNealy dismissed both, and rightfully so. Social networking may make a few venture capitalists rich but it certainly will not be a big source of jobs. McNealy didn't say it, but even most "green jobs" have moved to Asia.

Besides, if it takes government subsidies (and most green jobs do), it isn't worth doing. It's time for smaller government, not more of it.

It was interesting to see McNealy say "the biggest issues with the Valley are local, state and federal governmental overreach and overregulation. It's over-pensioned, over-unionized and over the top."

That is undoubtedly true but it was somewhat surprising to see given that Silicon Valley itself is not heavily unionized. The union effects, however, are both far-reaching and very damaging. I am happy to see McNealy point that out.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.
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