Central Perk: Mish's Global Economic Trend Analysis

vineri, 16 septembrie 2011

Mish's Global Economic Trend Analysis

Navarra Region of Spain Bankrupt by End of Year "No Money to Pay Workers or Provide Services"; Electricity cut off to Spanish town over unpaid bills
Geithner Warns Europe About "Loose Talk" and Infighting, Gets Caught Up in Infighting; Greece Tranche Vote Postponed; Geithner Believes in Pixies
Eurozone Breakup Logistics (Never Believe Anything Until It's Officially Denied)

Navarra Region of Spain Bankrupt by End of Year "No Money to Pay Workers or Provide Services"; Electricity cut off to Spanish town over unpaid bills

Posted: 16 Sep 2011 01:50 PM PDT

Entire regions of Spain are in severe economic stress including Navarra in Northern Spain.

Courtesy of Google Translate, Navarra has no money to pay for commitments made this year

The Vice President and Minister of the Presidency, Public Administration and Home Affairs of the Government of Navarra, Roberto Jimenez, said that "the situation is dramatic provincial coffers and no money to pay for commitments made this year."

"There is money to pay public workers, no money to continue to provide quality public services"

"There is no money to plug holes. I'm not talking about Greece, in October and cannot pay public salaries, I'm talking about Navarra" he argued.

Navarra has in terms of national accounts "a deficit of 600 million euros," added Jimenez, who has remarked that "only now, after entry of the Government of Navarre PSN has been officially recognized."

Map of Navarra

See Wikipedia Navarra fordetails about the region.

Costa del Sol in Southern Spain Thrown in Darkness over Unpaid Bills

The Telegraph reports Electricity cut off to Spanish town over unpaid bills

Coin, near Malaga in southern Spain, is, like many towns across the crisis-hit nation, on the verge of bankruptcy with an estimated debt of nearly 30 million euros (£26m) owed by the town council.

For more than a week there has been no lighting in public areas after power company Endesa cut services because of an outstanding bill of 280,000 euros (£240,000).

Meanwhile some 500 council employees in the town have not yet been paid their August wages, it was reported.

The town of 22,000 residents has been ordered to make an urgent payment of 400,000 euros (£346,000) to the Treasury in monthly instalments to cover its debts but the mayor has said the town will be forced to file for bankruptcy.

It is a problem repeated in municipalities across Spain. In some towns, police officers have been ordered to walk to crime scenes in a bid to save costs on patrol cars.

On Tuesday rating agency Moody's warned that Spain's regions could fail to meet their deficit-cutting targets, a move considered necessary for the nation to meet the EU-agreed public deficit ceiling of 3 per cent of GDP by 2013.

Austerity Stranglehold

Does anyone really think austerity measures are going to help Spain reach its deficit ceiling targets by 2013?

Is the plan then to suck Spain dry before it defaults?

More than likely "sucking Spain dry" will be the end result of delusional bailout attempts rather than the plan. From the point of view of Spain, it loses regardless.

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

Geithner Warns Europe About "Loose Talk" and Infighting, Gets Caught Up in Infighting; Greece Tranche Vote Postponed; Geithner Believes in Pixies

Posted: 16 Sep 2011 10:19 AM PDT

US Treasury Secretary Tim Geithner flew to Europe and chastised European leaders on "loose talk" and infighting. Austria's finance minister put Geithner in his place.

Please consider Geithner warns EU against infighting over Greece

Speaking at a closed meeting of eurozone finance ministers in Poland, he is reported to have told them that the divisions were "very damaging".

Some eurozone ministers seemed unhappy with Mr Geithner's comments.

They have also delayed a decision over Greece's next bailout loan.

Mr Geithner reportedly said: "What's very damaging is not just seeing the divisiveness in the debate over strategy in Europe but the ongoing conflict between countries and the [European] central bank."

He said that "governments and central banks need to take out the catastrophic risk to markets".

His presence at the meeting was measure of how concerned the US is about the danger of economic contagion from Europe's government debt and banking crisis.

But his comments about ending divisions seemed to open up some new ones.

Austria's Finance Minister Maria Fekter was one eurozone politician at the meeting who voiced her objection to Mr Geithner's comments.

She said: "I found it peculiar that even though the Americans have significantly worse fundamental [economic] data than the eurozone, that they tell us what we should do."

Greece Tranche Postponed Until October

Eurozone leaders will now decide in October whether to release the next 8bn euros ($11bn; £7bn) in bailout loans to Greece.

The move to delay a decision on the next tranche of Greek aid came after the country's finance minister Evangelos Venizelos said Athens would meet its austerity plan and default was not an issue.

"The intention is to meet the fiscal targets for this year and next year without delay, without exception and deviations," he said on arriving in Poland.

But there remains concern that the meeting has not yet resolved some fundamental issues, such as whether Greece should provide collateral in return for more aid.

Our correspondent in Wroclaw, Chris Morris, said that eurozone leaders remain as divided as ever over whether Greece has done enough to deserve further funds.

Ahead of the meeting, Finland's minister Jutta Urpilainen played down the chances of resolving a dispute over providing more money to Greece.

Finland wants collateral in return for contributing money to a second Greek bailout.

But Ms Urpilainen said: "Unfortunately I don't see that we can find a solution tonight."

And Austria's finance minister refused to rule out an eventual Greek default.

Geithner Believes "Woods Populated by Pixies"

The quote of the day goes to Jamie Robertson of BBC World News:

"There may be a few people who still believe Greece will not default on its debt, but my suspicion is most of them also believe elephants can fly and the woods are populated by pixies."

In a sense, Geithner is correct. Infighting should stop. However, needs to with the bus in a logical spot, not in woods populated by Geithner loving Pixies. The logical spot is default, with further talk of a Eurozone breakup, not with everyone bowing to Geithner and Pixies.

Foe more on the reasons a Euro breakup is inevitable, please see Eurozone Breakup Logistics (Never Believe Anything Until It's Officially Denied)

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

Eurozone Breakup Logistics (Never Believe Anything Until It's Officially Denied)

Posted: 16 Sep 2011 05:58 AM PDT

In his latest Email update, Michael Pettis at China Financial Markets discusses the in more detail the likelihood of a Eurozone breakup.

Until the label "End Pettis", what follows is from Pettis and anything in blockquotes (indented) is a reference that Pettis quotes.

Logistics of Denial by Michael Pettis

Slow growth is embedding itself solidly into the US economy and the bond mayhem in Europe continues. The external environment for China is getting worse. This will almost certainly make China's adjustment – when Beijing finally gets serious about it – all the more difficult.

With still weak domestic consumption growth, and little chance of this changing any time soon, weaker foreign demand for Chinese exports will cause greater reliance than ever on investment growth to generate GDP growth.

Europe's travails in particular can't be good for exports. What's worse, it's now pretty much official that the euro will fail soon enough. We have this on no less an authority than Angela Merkel. Here is what Thursday's Financial Times says: Merkel Promises Euro Will Not Fail

Angela Merkel, German chancellor, declared on Wednesday that "the euro will not fail" after the country's powerful constitutional court rejected a series of challenges to the multibillion-euro rescue packages agreed last year for Greece and other debt-strapped members of the eurozone.

In a passionate restatement of Germany's determination to defend the common currency, the chancellor welcomed the court's judgment as "absolutely confirming" her government's policy of "solidarity with individual responsibility".

First Rule of Politics

No, I didn't misread the article. I just have a very different understanding of the logistics of a denial. Last year, for example, I wrote on my blog about ferocious denials by both Spain and Portugal that they would need any official help in funding themselves. But according to one of my favorite British television comedies, Yes, Minister, an official denial means something very different from what is intended.

"The first rule of politics," Sir Humphrey, the wily civil servant in the show, insists is: "never believe anything until it is officially denied."

I don't want to sound too glib or too jokey, but I wonder if there has ever been a forced devaluation that wasn't preceded by ringing assertions from presidents and central bank governors that under no circumstance would the currency ever devalue.

What is all the more interesting is that I recently discovered that the quote "never believe anything until it is officially denied" doesn't originate with the writers of the British TV comedy. Apparently it can be traced to at least as far back as Otto von Bismarck, who was born not too far from where Angela Merkel grew up. Never believe anything until it is officially denied, the Iron Chancellor warned us.

An Interesting Proposal

So if Germany's Iron Lady is now denying that the euro will fail, can its failure be far off? It depends I guess on what we mean by failure. If any important reversal in the structure and membership of the euro is a failure, then it will almost certainly fail, but I suppose there are many ways the euro project can be transformed without quite calling it a failure.

At the end of last month Hans-Olaf Henkel, for example, the former head of the Federation of German Industries, had an interesting OpEd in the Financial Times. In Sceptic's Solution he says:

Having been an early supporter of the euro, I now consider my engagement to be the biggest professional mistake I ever made. It would be misleading to proclaim there is an easy way out. But it is irresponsible to maintain there is no alternative. There is.

The end result of plan "A" – "defend the euro at all cost" – will be detrimental to all. Rescue deals have led the eurozone on the slippery path to the irresponsibility of a transfer union. If everybody is responsible for everybody's debts, no one is. Competition between politicians in the eurozone will focus on who gets most at the expense of the others. The result is clear: more debts, higher inflation and a lower standard of living. The eurozone's competitiveness is bound to fall behind other regions of the world.

As a plan "B" George Soros suggests that a Greek default "need not be disorderly", or result in its departure from the eurozone. But a Greek default or departure from the eurozone implies risks too high to take. First in Athens, then Lisbon, Madrid and perhaps Rome, people would storm the banks as soon as word got out. A "haircut" would not improve Greece's competitiveness either. Soon, the Greeks will have to go to the barber again. Anyway, we now talk also about Portugal, Spain, Italy and, I am afraid, soon France.

That is why we need a plan "C": Austria, Finland, Germany and the Netherlands to leave the eurozone and create a new currency leaving the euro where it is. If planned and executed carefully, it could do the trick: a lower valued euro would improve the competitiveness of the remaining countries and stimulate their growth. In contrast, exports out of the "northern" countries would be affected but they would have lower inflation. Some non-euro countries would probably join this monetary union. Depending on performance, a flexible membership between the two unions should be possible.

I think Henkel is right, although I think the likelihood of Europe's adopting his Plan C is pretty small. Still, it is interesting to consider why he might be right.

Damned Either Way

The problem is that if Spain leaves the euro and returns to the peseta, it will be caught in a downward currency spiral like the ones suffered by Mexico in 1982 and 1994 and Korea in 1997. In both cases the currency plunged by far more than the amount of its theoretical overvaluation. This happened because a substantial portion of Mexican and Korean debt was denominated in foreign currency. Of course once Spain revives the peseta, it will be in a similar position – with a lot of its debt denominated in euros, which will become a foreign currency.

What does external debt have to do with the extent of the devaluation? Quite a lot, it turns out. Mexico and Korea (and a host of others examples) remind us that when a country is forced to devalue, the amount of the devaluation is not necessarily in line with estimates of the amount of overvaluation.

I would argue that Spain probably suffers from 15-20% overvaluation, but once Spain returns to the peseta the peseta will not devalue by that amount. It will devalue by at least 50%, and probably a lot more. Why? Because of the self-reinforcing relationship between the currency and external debt.

It always works the same way when a country with a lot of external debt devalues its currency. As the peseta devalues, Spain's external debt will rise in tandem since it is denominated in the appreciating currency. Since Spain is already believed to be overly indebted, as the debt rises relative to domestic assets, Spanish credibility will decline quickly and financial distress costs will rise.

But of course as credibility declines and defaults rise, the peseta will drop even more as investors flee the currency and as domestic borrowers with euro-denominated debt try to hedge the currency risk. This will go on in a self-reinforcing way until the currency has been crushed. In the end, for Spain to leave the euro would probably cause its external debt to more than double – perhaps even triple – as the peseta falls. Of course it will be forced into default within days or weeks.

This, by the way, is not an argument for Spain to stay in the euro. If Spain stays in the euro we will still arrive at default, but much more slowly, and mainly at first through a grinding away of wages and economic growth over many, many years and a gradual building up of debt as Germany refinances Spanish debt at interest rates that exceed GDP growth rates. The default will occur anyway, but only after years of high unemployment.

This is why I think Henkel's proposal makes sense. Rather than have Spain leave the euro, Germany can leave the euro. The new German currency would automatically appreciate and the euro would depreciate, but without the terrible debt dynamics, the adjustment in the currency value would be much closer to the theoretically correct adjustment. The relative adjustment would probably be in the 20% range rather than in the 50% range.

Of course German banks would still have a problem. Their deposits would be in the form of the new German currency, and a lot of their loans – all those to Spain, for example – would be in the depreciating euro, and so they would take large losses. But at least the losses will be less – and more importantly the process will be more orderly – than if Spain simply leaves the euro and defaults.

One way or the other Germany is going to take a pretty big hit. It is a complete waste of time trying to figure out how to avoid it. It would be far more constructive to resolve the problem as quickly as possible in as orderly a manner as possible, and as any good Minskyite would tell you, that means we have to pay special attention to the balance sheet dynamics. That's why I think Henkel's proposal is an interesting one.

Of course the really interesting thing about Henkel's proposal (at least to me) is to figure out what decision France would make if something like this happened. If France remained within the euro (i.e. "peripheral" Europe in Henkel's scenario), the possibility of a United States of Europe would be forever dashed, but it would almost certainly be replaced with a two-entity Europe – the United States of Germany and the United States of France, or perhaps, for those who like 19th Century monetary history, the new Zollverein and the new Latin Union.

End Pettis - Start Mish

There is much more in Pettis' email including a discussion of trade, the irrelevance of China's trade agreements conducted in the Yuan (a point I emphatically agree with) and competitive currency devaluations by Switzerland.

The post will be up on his blog shortly.

I raised the possibility that Germany would leave the Eurozone some time ago, and I am sure others have as well.

However, it was interesting to see detailed reasons from a former EuroBull (Hans-Olaf Henkel not Pettis), as to why option C makes sense.

Is it Plan B or Plan C?

Ironically, the longer everyone sticks with plan "A: defend the euro at all cost" remain, the more likely Plan C is, because plan A cannot possibly last.

Eventually someone will leave.

Pettis Speculates on what France would do in a breakup. I think the answer is easy enough, or rather we will know the answer soon enough.

French President Nicholas Sarkozy May Be Ousted in Preliminary Voting

In French elections, the top two candidates face a runoff in the national elections. France 24 reports New poll shows far right could squeeze out Sarkozy

Marine Le Pen, leader of the anti-immigration National Front (FN), is projected to win enough votes to knock out President Nicolas Sarkozy from the second round of next year's all important 2012 presidential election, the French daily Le Parisien's revealed on Thursday.

Marine Le Pen Says "Let the Euro Die"

The results for Le Pen are very interesting because of her stance on the Euro. Via Google Translate, please consider M. Le Pen says "let the euro die".

We must "let the euro die a natural death," means of reassuring the markets and revive the economy, said the president of the Front National Le Pen Marine, interviewed this morning on France Info.

Asked about the remedies it proposes to end the economic crisis, she said that we must "first stop bailouts repeat: there was Greece, now there will be Cyprus, Italy, the Spain ... " "There are masses of savings to do," she said, particularly expenses related to immigration. "The cost of the AME (State medical assistance for undocumented) explodes, there are 20 billion euros of social fraud against which nothing is done," she added, saying that "of 60 Vitale million cards, 10 million are false, that qualify for benefits unjustified ".

The market clearly says "Time's Up", yet politicians cannot agree on one major thing, and to top it off, voters are fed-up with austerity measures, bailouts, and politicians.

Clearly Le Pen is an anti-Euro, anti-immigration candidate and that is just the kind of message that can easily catch fire in this environment.

Elections in Germany or France may seal the direction, unless we see exodus by countries before the election.

Plan B and Plan C?

Do not rule out Plan B and Plan C. By that, I mean Greece leaves, and everyone else initially stays on until an election in Germany or France seals the deal for plan C.

Thus, I am more optimistic for Plan C than is Pettis. However, there will be more pain involved than necessary because Merkel and Sarkozy will stay with plan A until they are booted out of office.

Both will likely be gone soon enough (along with Italy Prime minister Silvio Berlusconi and Greece Prime Minister George Papandreou). Spain's Prime minister Jose Luis Rodriguez Zapatero has already indicated he will not seek reelection.

Look for a new set of leaders in Italy, Greece, and Spain, and probably France and Germany. Also look for those leaders to win on platforms far different than the "bail out the bondholders at all costs" platform of Merkel and Sarkozy.

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

vineri, 16 septembrie 2011

Mish's Global Economic Trend Analysis

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vineri, 16 septembrie 2011

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