marți, 6 decembrie 2011

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

12 of 26 Economists in Financial Times Survey See Probability of Eurozone Breakup at 20 to 30 Percent; What are the True Odds?

Posted: 06 Dec 2011 11:47 AM PST

Financial Times Deutschland says the key to whether or not the Eurozone holds together depends on Bundesbank president Jens Weidmann.

Will he or won't he go along with ECB president Mario Draghi's hint that the ECB is about to purchase more sovereign debt.

Via Google Translate, please consider Everyone looks at Weidmann
Twelve of 26 economists see the probability of a breakup of the euro zone at 20 to 30 percent. From the perspective of ten economists, the risk is ten percent. Anna Grimaldi, the Italian bank Intesa Sanpaolo sees a 40 percent chance and John Greenwood of Invesco investment company rates the probability at 70 percent.

At the other extreme are Anders Matzen at Swedish Nordea Bank, which estimates the probability of survival of monetary union to 95 percent, and Ulrich Kater from Deka Bank who sets the value at 99 percent.

Most economists indicated that they were convinced that the position of Weidmann will be crucial in deciding whether the ECB more than at present to save the euro is taking. "The attitude of the Bundesbank to the program for the purchase of government bonds is more important than their normal attitude to monetary policy, since the program moved to the edge of the contractual mandate," said Torge Middendorf from WestLB.
Not So Simple

Certainly a huge feud between Weidmann and Draghi will not help. However, that is not the only issue. The German supreme court can step in at anytime and demand a voter referendum.

The UK can and probably will single-handily torpedo the treaty changes proposed by Merkel and Sarkozy.

According to the Washington Post, British Prime Minister David Cameron said he did not intend to "pass any powers from Britain to Brussels." He noted that if the treaty changes suggested by Sarkozy and Merkel require such a transfer, he would have to call a national referendum to approve them.

Will UK voters pass that referendum? I see a zero percent chance of that. Then what?

Please see Eurozone Treaty Changes to be Finalized in March, Then a Vote in May, Then Country-Specific Referendums, Then? for further discussion.

Ireland, Germany, or Finland may also torpedo the agreement.

Moreover, voters in Spain, Portugal, or Greece may eventually (and correctly) say to hell with all this austerity just to pay back French and German banks.

To repeat what I have said several times:

Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the "bail out" debt foisted on their country to be null and void. That person will be elected.

What are the True Odds?

A few months ago, economists would have pegged the probability close to zero percent. The shift of 14 economists to 20% or greater probability is a significant shift in the right direction.

It's important to remember that economists are a perpetually optimistic lot. Ironically, a breakup is likely before economists agree it will happen.

Taking everything into consideration, the probability the Eurozone stays intact is arguably 15 percent at best.

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.

ECB Ready to Push Boundaries on Interest Rates and Bond Purchases; One Size Fits Italy

Posted: 06 Dec 2011 10:28 AM PST

Get ready for record low interest rates in Europe as ECB ready to push boundaries of crisis role
A Reuters survey of 73 analysts showed a 60-percent chance the ECB will cut rates by 25 basis points to a record low of 1.0 percent -- a floor it previously reached during the financial crisis in 2009. It cut rates by a similar amount in November.

New ECB President Mario Draghi reinforced expectations for a rate cut last week when he said the bank had a responsibility to ensure inflation did not undershoot its target of just below 2 percent, not just to stop it exceeding it.

Markets have taken it to heart. Three-month Euribor futures -- one of the main gauges of market expectations -- point to rates being be cut this month and then even further.

The case for a cut is supported by the euro zone economy teetering on the brink of recession. With the ECB increasingly concerned about falling consumer prices, further cuts may be in the offing even if the ECB has never cut rates below 1 percent before -- not even after the collapse of Lehman.

Draghi made his comments a day after the world's major central banks took emergency joint action to provide cheaper dollar funding for starved European banks.

This was the latest in a slew of actions aimed at propping up European banks, which are struggling with the fallout from the debt crisis, such as higher capital requirements and rising tension in the interbank money market.

Banks are increasingly turning to the ECB and the recent jump in overnight deposits at the ECB has highlighted the freeze in interbank lending markets.

Sources have told Reuters that the ECB is looking at extending the term of loans it offers banks to 2 or even 3 years to try to prevent the euro zone crisis precipitating a credit crunch that chokes the bloc's economy.
One Size Fits Italy

Under ECB president Jean-Claude Trichet, ECB actions were best described as "One Size Fits Germany and France". Under Draghi, ECB policy has morphed into "One Size Fits Italy".

Central banks say and do what they want when they want. Eurozone inflation remains at 3 percent, for 3 consecutive months. So where did this concern for falling prices come from?

It certainly did not come from Eurozone price data. Rather it came from the desire of Draghi to help Italian bonds. That also explains Draghi's comments to the European Parliament last week, that the ECB could take stronger action to fight the crisis if European leaders agree on tighter budget controls.

Tighter budget controls will not be realistic of course, but the illusion will give Draghi the cover he wants to buy more Italian bonds.

The can-kicking exercise continues. So does the ticking of the clock before the market once and for all decides it has enough of proposals that do nothing.

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.

Eurozone Treaty Changes to be Finalized in March, Then a Vote in May, Then Country-Specific Referendums, Then?

Posted: 06 Dec 2011 12:54 AM PST

On December 8 Merkel and Sarkozy will have reached a 6-point agreement requiring ratification of a new treaty.

However, details will not be finalized until March. At that time, if all goes to plan (and it won't), a vote by all 27 EU nations will take place. If that fails (and hopefully the UK torpedoes it), various aspects of the treaty might still be ratified by (and apply only to) the 17-member Eurozone nations.

However, fiscal rules will still require individual referendums in Ireland and in my opinion Germany. Got that?

Eurointelligence writes That „comprehensive agreement" in full
Angela Merkel and Nicolas Sarkozy essentially agreed on the German position. These should be embedded in a New Treaty, and they have asked Herman van Rompuy to put those proposals formally on the agenda for the Dec 8 and 9. Here is a summary of the six most important decisions taken. As so often, the newspapers cover only a short subset.

  1. Automatic sanctions. In case of non-compliance with the deficit rule, countries are subject to automatic sanctions, which will require a majority of 85% to overturn.
  2. Golden Rule: All EU member states, but in particular the eurozone, should subject themselves to uniform debt limits. The ECJ will adjudicate in case of a dispute, and should have the right to declare national budgets illegal.
  3. Private Sector Participation will follow the rules of the IMF. The PSI agreement on Greece remains valid, but is a unique case that should not be repeated;
  4. Germany and France want the ESM to start end-2012.
  5. The heads of state and government meet once a month as the eurozone's economic government.
  6. There shall be no eurobonds.

These proposals indeed require substantial treaty change, but we are surprised that this could be concluded so quickly, given the necessary procedures, and their own implantation record. A change in the EU treaties would require a convention, unless the European Parliament were to decide to wave its rights in this respect.

Given that these proposals entail a transfer of sovereignty, national referendums in Ireland and possibly other countries may be required. While there are possibilities for the eurozone to adopt its own set of policies, points 1 and 2 (which are the main element of the fiscal agreement) require a full treaty change, to be ratified by all 27 members (even if the provisions are only implemented in respect of the eurozone).

We suspect therefore that Sarkozy agreed to these measure in the full knowledge that this will never be implemented. If you subtract the treaty change proposals, one is left with a shallow agenda.

Also, newspapers reported that Merkel gave up PSI. That is not true. The position is now that the IMF rules will be applied, which are not all that different. CACs will also remain in the ESM treaty.
Shallow Agenda or No Agenda at All?

Ambrose Evans-Pritchard weighs in with Zilch again from Merkozy
No fiscal union, no Eurobonds, no ECB as lender of last resort – yet. Just the usual blather and a revamped Stability Pact (Fiskalunion).

Yawn.

Merkel seems to have backed off on demands that budget breaches will be justiciable before the European Court, so the Treaty chatter is mostly Quatsch, bêtises, and eyewash.

This Merkel climb-down makes it less likely that she will give in on real rescue measures, so why the market exuberance in Italy? Beats me.

Private investors will not have to face further haircuts after Greece (if you believe anything they say on this subject) but that was already the case. Nothing further to add at this stage.
Will 27 Nations Sign on the Dotted Line?

Those treaty changes may sound good on paper, but what is the likelihood these treaty changes pass? The Washington Post chimes in with Sarkozy, Merkel call for new E.U. treaty to address debt crisis
Under growing pressure from nervous financial markets, the leaders of France and Germany reached a difficult compromise agreement Monday to seek mandatory limits on budget deficits among debt-laden European governments.

If adopted by other nations in the union, the deal would mean drastic cuts in European budgets. It would also spell the end of three decades of overspending that helped finance a cozy social protection system envied by much of the world.

Although France and Germany represent the core of the European Union, it is far from certain that the rest of the group's 27 nations will go along at a crucial European summit scheduled for Thursday in Brussels. The deal could face significant opposition from those reluctant to surrender national sovereignty over fiscal policy.

"This package of measures is a proof of our absolute determination to guarantee a stable euro," Merkel said at a joint news conference with Sarkozy in Paris.

The Franco-German accord is to be outlined in a letter to E.U. leaders Wednesday and voted on at the special summit conference the next day, making this a make-or-break week for the ideal of European unity. Sarkozy said the hope is that all 27 E.U. nations will adhere to the plan. But he said it could also move forward with consensus from only the 17 countries that have adopted the euro as their common currency.

The swift schedule for the treaty change is unheard of in the history of the European Union, which is notorious for slow-moving bureaucracy and endless bickering among governments at all-night conferences at the union's Brussels headquarters.

The deficit limits — a "golden rule" of 3 percent of gross domestic product — would be enforced by elected leaders of the European Community acting with a supermajority of 85 percent, according to explanations provided by Sarkozy and Merkel at the news conference. The E.U. leaders would rule on any government cited as overspending by the European Court of Justice, they added.

In a suggestion of the debate still to come, British Prime Minister David Cameron said he did not intend to "pass any powers from Britain to Brussels." He noted that if the treaty changes suggested by Sarkozy and Merkel require such a transfer, he would have to call a national referendum to approve them.
Would the UK voters agree to this in a referendum? Ireland? Germany? Austria? Netherlands?

I think the answer is no. So what is left in this much ballyhooed great compromise between Merkel and Sarkozy?

Here is the compromise in case you missed it.

  • Merkel gets the "no eurobond" position she wants
  • Sarkozy gets the "no bondholder haircuts except Greece" position he wants.


This proposal solves absolutely nothing. For some reason the market seems to love "nothing" these days. Don't expect that to last.

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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