| German Tour Operator Prepares for Greek Euro Exit; Greece to Become Tourist Mecca as Soon as it Scraps the Euro Posted: 07 Nov 2011 07:12 PM PST Inquiring minds will note that the German tour operator Tui is taking measures to protect itself from a Greek exit from the Euro and subsequent currency meltdown. Please consider Tui prepares Greek hoteliers for possible euro exitGerman tour operator Tui has asked hotels in Greece to sign new contracts spelling out how the company will pay its bills if Greece leaves the eurozone and starts using a new currency.
A spokesman for the company confirmed it had written to hoteliers after the letter had been reported in German newspaper Bild.
In the letter, Tui said it was entitled to pay in whatever currency was in use.
But the Greek Tourist Board said that no hotelier would agree to that.
Bild quoted the latter as saying: "If the euro should no longer be the currency... Tui is entitled to pay the sum of money in the new currency. The exchange rate shall be made at the exchange rate set by the government."
Tui spokesman Robin Zimmermann confirmed the letter had been sent to hoteliers, saying: "As a responsible company, we should protect ourselves for a potential exit of Greece from the eurozone."
But Andreas Andreadis, president of the Greek Tourist Board, told Bild that Tui could not pressure hoteliers into signing such a contract.
More than two million Germans traveled to Greece last year, making them the biggest group of visitors there. Greece to Become Tourist Mecca as Soon as it Scraps the EuroWould you risk going to Greece now with all the strife, strikes, missed flights, and violence? Some might but I wouldn't. What if everything in Greece is suddenly 60% lower? Your answer might change (or not) but many answers will change. Yet until it does change, Greece will see cancellation after cancellation of tour operators unwilling to take the chance on Greece. I do not know what Tui will do. However, if I was Tui, I would immediately cancel all tour operation in Greece. If that happens and other tour companies follow suit, pressure will mount inside Greece to tell the IMF, EMU, and ECB to go to hell. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| History Suggests Greece Will Freeze Bank Deposits, Exit Euro by Christmas; Spain and Portugal to Follow Next Year; What's the Rational Thing to Do? Posted: 07 Nov 2011 11:48 AM PST Michael Pettis at China Financial Markets asks the question " Will Greece unravel by Christmas?" Pettis then makes a historical case for exactly that while stating " I don't think Europe can postpone Greece's exit much longer." From Pettis, via Email, with Permission .... Will Greece unravel by Christmas?
President Hu left the G20 meeting in Cannes Saturday without committing China to very much, merely saying: "We believe Europe has the wisdom and ability to solve the debt problem." At this point, however, regardless of the amount of wisdom floating around Brussels I think it is pretty unrealistic to expect a happy solution.
We're well past that stage. By now, it seems to me, neither wisdom nor cooperation among world leaders is going to get us out of the debt and currency problems we face. Rather than try to prevent a major disruption the policy goal now should be to engineer as quickly as possible the least disorderly and disruptive unraveling of financial markets in the peripheral countries. And while it may help relieve frustration to excoriate European leaders for having made poor decisions, we shouldn't assume that there really is a set of "right decisions" that will lead us out of this mess. I think there isn't.
In Athens, the refusal by New Democracy yesterday to join Pasoc in a coalition government indicates just how difficult political cooperation is likely to become, and how drastically political horizons have shortened. What's more, by forcing Papandreou to cancel the referendum just days after he announced it – in the face of white-knuckled threats from an enraged France and Germany – Athens has pretty much made clear just how desperate things are and how little room the leadership has to maneuver.
Indeed the whole issue of sovereignty has become fuzzy. Since France and Germany have basically exercised direct power over Greek's electoral politics without assuming responsibility for solving Greece's domestic problems, I can't imagine that this won't stoke even more resentment in Greece.
But it's worse than just an issue of fuzzy sovereignty. Last week something new happened which cannot help but affect the near-term outlook. By openly speculating for the first time on Greece's leaving the euro, Europe's leaders have ensured that there is almost no chance now of preventing it from happening, and sooner even than most pessimists expected.
A country CAN leave the euro?
Not that there ever really was much of a chance, in my opinion, to keep Greece in the euro, but I assumed that European leaders would do whatever they could to postpone the day of reckoning until after the major elections this and next year. They would find ways, I thought, even if that meant putting more unemployment pressure on the middle and lower classes in Greece for another year or two.
But now I don't think Europe can postpone Greece's exit much longer. Statements by France and Germany may have transformed the dynamics of the crisis affecting Greece.
By openly acknowledging that Greece could abandon the euro, Europe's leaders may have set in motion events that will automatically force Greece to leave. Here is the logic. If Greece is ever forced to leave the euro, it will first have to redenominate domestic corporate and household liabilities into the new currency – let's call it the drachma – or else domestic borrowers will be wiped out by the fall in the value of revenues relative to debt as the drachma immediately depreciates against the euro.
But it doesn't end there. If a bank's assets – its outstanding loans – are to be redenominated into drachma, then its liabilities, i.e. deposits, must be redenominated too, or else the balance sheet mismatch will bankrupt the bank.
And there is where the problem lies. As soon as any depositor realizes that bank deposits are likely to be redenominated into drachma, he will pull his deposits out of the banks so as to protect the value of his savings. But obviously only a few depositors will be able to do this before forcing the bank into closing. In order to prevent the resulting collapse in the banking system, the only thing Athens can do is to freeze bank deposits long before most depositors have had a chance to cash out.
But depositors know this. As the probability of Greece's leaving the euro rises – and clearly it rose dramatically this past week – anxious depositors eager to prevent their deposits from being frozen and redenominated in a weaker currency know that they will have to speed up their withdrawal of deposits from banks. And of course as anxious depositors withdraw their deposits, the likelihood of a banking crisis rises, and with it the likelihood of Greece's being forced to freeze deposits and leave the euro.
A Bagehot intervention?
We are caught, it seems, in one of those self-reinforcing loops that almost always presage a collapse. Rational behavior by individual agents leads towards a catastrophic event the threat of which reinforces the behavior.
I don't see any way to get out of this loop except with a Bagehot-style intervention – a very unlikely but immediately credible announcement by Germany and France that they are prepared to guarantee all deposits in the Greek banking system. I call it a "Bagehot intervention", but of course Walter Bagehot would never have recommended bailing out an insolvent borrower.
Without a credible intervention this process almost always ends the same way. There is in my opinion a very high probability that within weeks, or months at most, Greece will be forced to freeze bank deposits as a prelude to leaving the euro. Mexico in 1994 and Argentina in 2001 chose the Christmas/New Year holiday season to announce their devaluations. Will Greece follow suit? "If history repeats itself," footballer Andrew Demetriou once pointed out, "I should think we can expect the same thing again."
And it probably won't end there. In my opinion the real risk for Europe in that case becomes a contagion of deposit withdrawal, not immediately, but at the first sign of trouble in their home countries. As households from Italy, Spain, Ireland, Portuguese, and other vulnerable countries read every day about hardships faced by Greek families (and those, it will be noted, who trusted the authorities were the worst hit), what will they do?
I know what many of my wealthy Spanish friends are already doing. They are moving their deposits to safer havens. I suspect that in other countries too anyone who can afford to withdraw money from the domestic financial system is at least thinking of doing so. If this process accelerates it may be very hard to maintain domestic confidence in the local banking systems anywhere.
If Greece gets worse in the next few weeks, Europe had already better have a plan about what steps it will take to defend banks in peripheral Europe. Once Greece goes, even the least sophisticated households in other countries will know what the consequences for depositors will be. Deposit withdrawals, after all, are one of the kinds of actions that different sectors of the economy will take to protect their interests in the face of a crisis, even though this behavior increases the likelihood of the crisis.
This is simply part of the logic of sovereign financial distress – declining credibility causes stakeholders to act in ways that reduce credibility further. What's more, deterioration in the political process is part of financial distress at the sovereign level. Remember, as Keynes pointed out back in 1922, that resolving these kinds of crises is always political – it is about which sector of the economy (or class) ends up paying for the adjustment.
Workers can pay in the form of high unemployment and declining wages, the middle class can pay by having its savings inflated away, private businesses can pay in the form of confiscatory taxes and expropriation, creditors can pay through forced debt forgiveness, and so on, but ultimately someone must pay. Politics becomes about deciding which groups will be forced to foot the bill. Historical precedents suggest that political fault lines are likely to develop as different groups organizes politically to protect themselves.
We will probably see this happen, for example, in Spain. On November 20 Spain will hold elections. For now it looks like the conservative PP will sweep out the Socialists and take nearly 200 of the 350 seats in Parliament. This will give them a clear mandate and the power to enact any legislation they want.
Unfortunately, as I suggested earlier in this newsletter, this doesn't mean that they can resolve the crisis if only they figure out the "right decisions". Although it is unlikely they will mismanage the crisis to the same extent as the Socialists under Zapatero, who seemed to place a little too much importance on charm and cleverness over leadership, I am not sure there is a whole lot the PP will be able to do better than the Socialists.
Both parties after all face the same problem. They must drive the economy back into competitiveness, but aside from tinkering at the margins with tax and structural changes, really the only two ways Madrid can make Spain competitive is to drive wages down or devalue the currency. The options for the PP, in other words, are the same as for the Socialists: either abandon the euro or accept extremely high levels of unemployment for the rest of the decade. It is unlikely that any government facing those two options can maintain popularity for very long. Risk of Bank Run RisingAllianz Global Investors chief investment officer says Risk of Greek Bank Run, End of Euro RisingThe risk of a run on Greek banks and an end to the euro has increased as the sovereign debt crisis continues to shake markets, according to Allianz Global Investors, a fund-management unit of Europe's biggest insurer.
A bank run in Greece is a "real danger" and the country's plan for a referendum on the European bailout package is a "very serious threat" to the currency, Andreas Utermann, the firm's chief investment officer, said at a press event in Frankfurt today. "An uncontrolled insolvency of Greece and an end of the euro would unleash a tsunami that would make the collapse of Lehman Brothers seem like a small problem."
While Utermann said he doesn't expect Greece to exit the euro, leaving the fate of the decision in unpredictable voters' hand boosts the risk. Allianz Global Investors isn't preparing for a breakup of the euro area because even if Greece leaves, the common currency could be sustained by the remaining countries, he said. What's the Rational Thing to Do?The rational thing to do if you live in Spain, Portugal, or Greece is to take all of your money out of banks while it's still denominated in Euros, while you still can. If a majority, or even a significant minority of depositors act rationally, it will be all over in days. Thus, I believe Pettis has this called precisely, while Utermann has missed the mark. Given that the German Supreme Court would not allow a "Bagehot Intervention", once a run of sufficient size starts it will be all over in days. Please see Bagehot's Rule, Central Bank Incentives and Macroeconomic Resilience for further discussion of the "Bagehot Rule". Please see Germany's Top Judge Throws Major Monkey Wrench Into Leveraged EFSF Machinery, Demands New Constitution and Popular Referendum for Further Powers for reasons why a "Bagehot Intervention" is not going to happen. Right now, Greece wants to hang on until the next Tranche of money comes in. EMU leaders want to prevent a Greek exit at any and all costs (without doing an analysis of the costs). Thus, the EMU, ECB, and IMF "Troika" have made matters much worse for themselves when the inevitable finally happens. This is out of the hands of Greece, Germany, Merkozy, the Troika, President Obama, and everyone else who thinks they are in control. End of the Line when Depositors Act RationallyThe end of the line comes when Greek citizens act rationally and pull their deposits. From my perspective, the sooner that happens the better as sending more money to Greece does nothing but squander more European taxpayer's money. To that end, the Troika would be advised to not send the next tranche of money and instead coordinate an exit strategy for countries that are inevitably going to exit. Unfortunately, EMU bureaucrats will not be bright enough to figure this out. Expect a very disorderly, disruptive, and unplanned exit accompanied by bank closures. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| EFSF Conducts Bond Sale it Canceled Last Week, Spread at 104 Basis Points, Existing Spreads Widen to 167 Basis Points; Blind Faith Posted: 07 Nov 2011 09:45 AM PST Today the EFSF went ahead with the bond sale it canceled last week. The spreads are not pretty, and they will get worse. Please consider EFSF Bailout Fund Revives 3 Billion-Euro Bond Sale Amid Deepening CrisisThe European Financial Stability Facility revived the 3 billion-euro ($4.1 billion) bond sale it pulled last week even as the region's sovereign crisis deepened.
The bailout fund priced the bonds due February 2022 to yield 104 basis points more than the benchmark swap rate, according data compiled by Bloomberg. That compares to the facility's existing 3.375 percent bonds due in 2021 that were priced to yield 17 basis points, or 0.17 percentage point, more than swaps when they were sold on June 15, Bloomberg data show. A basis point is 0.01 percentage point.
The relatively high spread on the new issue "is a complete level-changer, a completely new world for the EFSF," said David Schnautz, a fixed-income strategist at Commerzbank AG in London. "This will be the new reference point" for any future 10-year deal, he said.
The EFSF's existing notes have underperformed European benchmark debt, with the extra yield over governments on its 3.375 percent 2021 bonds widening to 167 basis points, the most since the notes were sold, Bloomberg Bond Trader prices show. Blind FaithBear in mind no one knows how this new EFSF even works, how much leverage it will use or how big the guarantee is. Why anyone would want to buy it is a mystery. "You're being asked to invest in something that could change shape relatively radically" said Richard McGuire, a senior fixed-income strategist at Rabobank International in London. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Italy Prime Minister Still in Power (Not for Long as Rats Jump Shift); Mish's Rule of Junkyard Politics Posted: 07 Nov 2011 02:31 AM PST Italy's Prime Minister Silvio Berlusconi's days are numbered. He will likely be gone in a week. When it happens it will be a case of 2 down with Merkozy (France and Germany), Spain, and Portugal (thus 4) to go. Bloomberg reports Berlusconi's Majority Unravels as Allies TurningPrime Minister Silvio Berlusconi's majority is unraveling before a key parliamentary vote tomorrow, with allies pressuring him to step aside after contagion from the region's sovereign debt crisis pushed Italy's borrowing costs to euro-era records.
Two Berlusconi allies defected to the opposition last week, and a third quit last night. Six others called for Berlusconi to resign and seek a more broadly backed government in a letter to newspaper Corriere della Sera. More than a dozen more are ready to ditch the premier's coalition, Repubblica daily reported yesterday, without citing anyone. Berlusconi said yesterday he was confident he still had a majority.
The desertions may deprive Berlusconi of a majority in the lower house for tomorrow's vote on the 2010 budget report. The Chamber of Deputies failed to rubber-stamp the routine measure in an initial ballot last month, prompting Berlusconi to call a confidence ballot, which he won with 316 votes, barely a majority in the 630-seat body. A second defeat on the budget law would likely lead to another confidence vote, with the defections threatening the outcome.
The premier urged the opposition to back his economic revamp because rejecting it amounts to "betrayal" of Italy. Calls on him to resign are just "gossip," Berlusconi said.
Calls Real, Not GossipOne does not respond to gossip, begging for votes. The calls for his resignation are very real and Berlusconi knows it. Bold lies are a clear sign of weakness and do him no good. Rats Jump ShipCNBC reports Italy's Berlusconi at Mercy of Party Rebels, MarketsItalian Prime Minister Silvio Berlusconi has one day left to win over waverers and see off a group of party rebels threatening to bring down his government in a backlash over its failure to adopt reforms to defuse a dangerous debt crisis.
Estimates vary widely over how many centre-right deputies will jump ship in a crunch vote on public finance in the Chamber of Deputies (parliament) on Tuesday. Berlusconi's message to potential "traitors" is clear: you have nowhere else to go and you will be rewarded if you stay.
"We have checked in the last few hours and the numbers are certain, we still have a majority," he told party followers on Sunday.
"Berlusconi is bluffing in a last desperate attempt to save himself. He no longer has a majority in the Chamber," said Dario Franceschini of the main opposition Democratic party.
Newspapers have estimated the number of potential defectors at between 20 and 40, which would be more than enough to topple the government, but in previous narrow escapes Berlusconi has proved his powers of last-minute persuasion.
A deputy from his ruling coalition said after meeting Berlusconi that the premier was ready to reward doubters with "well-deserved jobs" in government. Berlusconi said on Friday defectors would be "betraying the government and the country".
It is entirely fitting and expected for rats to offer other rats bribes for votes. This is what politics is all about. Mass Rally Calls for Berlusconi's DeparturePlease consider Mass Rally Calls for Berlusconi's DepartureTens of thousands of demonstrators gathered in Rome Saturday for a rally organised by the main left-wing party to demand Prime Minister Silvio Berlusconi's resignation.
"Silvio out" was the rallying cry for the large crowd that took part in the rally organised by the Democratic Party, the country's main opposition movement.
Some demonstrators poured scorn on the prime minister after G-20 leaders humiliatingly put Italy's struggling economy under surveillance, amid a lack of trust in Berlusconi's reform pledges.
At the summit in Cannes, the billionaire prime minister played down the gravity of the economic crisis with a trademark quip, claiming that "restaurants are full and the planes fully booked."
"I go to restaurants... to do the washing up," read one banner at Saturday's mass demonstration.
"The sooner we send them to the junkyard the better," read one large placard at the rally, plastered with the pictures of Berlusconi's ministers, as pressure mounted on the 75-year-old leader's government.
Berlusconi's popularity ratings have hit a record low of 22 percent, according to the latest poll released on Wednesday. Mish's Rule of Junkyard PoliticsSending politicians to the junkyard is one thing. Replacing them with someone better is another. The former is extremely difficult. The latter is nearly impossible. Careful analysis of the long-term historical trend will prove my point. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Italian Debt Yields Soar to Euro-Era Record; 2-Year Yield Surges 70 Basis Points to 6.17% Posted: 07 Nov 2011 02:25 AM PST Italy 10-Year Government Bond Yield Italy 2-Year Government Bond Yield Charts courtesy of Bloomberg. That is one amazing move in the 2-year yield in and of itself, but even more so in relation to the move in the 10-year yield. Once again I point out that the Bloomberg charts on the right do not match the quotes on the left. The quotes appear to be accurate. However, the charts reflect the previous day's close. I will repeat this message until Bloomberg is humiliated enough to fix this blatant error. That said, I appreciate the fact that Bloomberg offers these charts at the bargain basement deflationary price of zero. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Greece 1-Year Debt Yield "Improves" to 235.35% Posted: 07 Nov 2011 12:47 AM PST I have good news to report. The sovereign debt crisis in Greece is improving as shown by the following chart.  Word of caution for my many non-US readers: Sarcasm does not translate well. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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