Mish's Global Economic Trend Analysis

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Contagion Catch 22; Finland Opposes Greece Bailout Deal; No Scope for Solutions Posted: 15 Jan 2015 03:04 PM PST Alexis Tsipras, head of the Greek radical-left party Syriza, currently in the lead in national elections, wants a new bailout deal for Greece, including huge debt writeoffs. Socialist policies aside, on that score Tsipras is correct. Greece cannot possibly pay back the €245 billion it owes creditors. Contagion Catch 22 Germany fears contagion in the form of demands by other countries that will also want bailout deals or rule changes if Greece gets one. Yet, yet a much more destructive contagion via a cascade of defaults is all but assured if Greece is forced into default. New Hurdle in Finland Making matters worse, Finland has joined the no bailout parade. Even if Germany was willing to  offer Greece some concessions, Finland does not want to go along. This poses an additional problem for the eurozone block that must agree unanimously to all such deals. With that backdrop, please consider Finland Emerges as Major Hurdle to Greek Bailout Deal. Finland has emerged as the biggest stumbling block to negotiating a new bailout deal with an incoming Greek government, telling its eurozone partners that it will not support debt forgiveness and is reluctant to back another extension of the €172bn rescue. In an interview, Finland's prime minister [Alex Stubb] said he would give a "resounding no" to any move to forgive Greece's debts and warned that a new government in Athens would have to stick to the terms of the existing bailout. "We will remain tough. It is clear that we would say a resounding no to forgiving the loans," Mr Stubb said. "We naturally do not want to influence the Greek elections," Mr Stubb added. "But I think it's fair to Greeks and Finns to say out loud that some of the statements by Greek parties, and their presentations and ideas about the current programmes are simply unacceptable for Finland." The bailout of Greece has been a lightning rod for anti-euro sentiment in Finland. It was arguably the most enthusiastic cheerleader for austerity during the euro crisis. In an unusually tough stance that angered other European countries, it insisted in 2011 on receiving collateral from Athens before giving its backing to one of the Greek bailouts. "We believe there is no going back on the loans or any of the other programmes. We should keep crystal clear in mind that the loans have already been eased many different times." Limited Scope for Solutions Even if Finland was agreeable to bailout changes, the Size of Greece's Debt Limits Scope for Solutions. Eurozone finance ministers agreed in November 2012 to consider further debt relief for Greece once it reached a budget surplus before interest payments, which it did for the last two years, and as long as it stuck to its promises of austerity and reform. But how much scope is there to reduce Greece's debt burden? Around three-quarters of Greek public debt — or around €270bn out of a total of €317bn — is held by the official sector — the EFSF eurozone rescue fund, the European Central Bank as well as the IMF, according to IMF figures. Of the €270bn, defaulting on the €24bn owed to the IMF is considered the ultimate taboo, even by Syriza. The ECB and national central banks are owed €54bn. The ECB is unable to offer any relief, since it could constitute illegal monetary financing of national governments. According to an analysis of options by the Bruegel think-tank, reducing interest rates on the €53bn in bilateral loans to the three-month borrowing costs of each eurozone governments would reduce Greece's debt mountain by 3.4 per cent of GDP by 2050 (in net present value terms). A further 10-year maturity extension would shave off another 4.5 per cent of GDP. On its €142bn in EFSF loans, Greece only pays 1 basis point over the rescue fund's borrowing costs, so there is little room for cutting the interest rate. But a 10-year maturity extension would cut the debt pile by a further 8.1 per cent of GDP. Together, these concessions would reduce Greece's debt burden to only around 160 per cent of GDP, a long way from Syriza's objective. But EU officials argue that the overall total matters less if annual payments are low and spread out over several decades. Other options, such as cheap fixed rate loans, or a much more radical debt forgiveness scheme along the lines of the Paris club, would impose direct losses on lenders and could be impossible for Greece's eurozone partners to swallow. High-Growth Impossibility The burden of debt in and of itself rules out the "high-growth" scenario. Yet all other options leave Greece with debt-to-GDP near 150% for as far as the eye can see. Recall that the Troika once said that debt over 120% of GDP was untenable. Now officials conveniently argue "the overall total matters less if annual payments are low and spread out over several decades". The longer this stretches out, the longer Greece will remain a mess. Now vs. Then Recall that the Troika forced €245 billion of bailout debt on Greece just to prevent default on €40 to €50 billion or so in obligations. Bailouts never made any sense. However, what makes the most sense now, is to recognize what cannot be paid back, won't. Given that Germany and now Finland don't want to make that kind of ruling, outright default and a eurozone exit looks increasingly likely. Should that happen, the creditor countries will all be worse off than if they did grant a change in terms. Financial Chicken What's going on is an amazing game of financial chicken, arguably coupled with financial ignorance. Let's take a look at Finland and Germany's Responsibility should Greece default. Here is some charts and commentary from Bluff of the Day: Germany Warns "Greece is No Longer of Systemic Importance For the Euro". Eurozone Financial Stability Contribution Weights Country Guarantee Commitments (EUR) Millions Percentage Austria € 21,639.19 2.78% Belgium € 27,031.99 3.47% Cyprus € 1,525.68 0.20% Estonia € 1,994.86 0.26% Finland € 13,974.03 1.79% France € 158,487.53 20.32% Germany € 211,045.90 27.06% Greece € 21,897.74 2.81% Ireland € 12,378.15 1.59% Italy € 139,267.81 17.86% Luxembourg € 1,946.94 0.25% Malta € 704.33 0.09% Netherlands € 44,446.32 5.70% Portugal € 19,507.26 2.50% Slovakia € 7,727.57 0.99% Slovenia € 3,664.30 0.47% Spain € 92,543.56 11.87% Eurozone 17 € 779,783.14 100% The above table from European Financial Stability Facility Here's a second table that will put a potential €245 billion default into proper perspective based on percentage liabilities. Responsibility in Euros Country Percentage Greek Debt Responsibility Austria 2.78% 6.79875 Belgium 3.47% 8.49317 Cyprus 0.20% 0.479465 Estonia 0.26% 0.62671 Finland 1.79% 4.3904 France 20.32% 49.79527 Germany 27.06% 66.308515 Greece 2.81% 6.88009 Ireland 1.59% 3.88913 Italy 17.86% 43.75651 Luxembourg 0.25% 0.611765 Malta 0.09% 0.221235 Netherlands 5.70% 13.96451 Portugal 2.50% 6.12892 Slovakia 0.99% 2.42795 Slovenia 0.47% 1.151255 Spain 11.87% 29.076355 Eurozone 17 100% 245 The idea that Greece is responsible to cover its own default is of course ridiculous, so mentally spread Greece's €6.88 billion liability to the other countries. Where is Spain going to come up with €30 billion? Italy €45 billion? France €51 billion? A quick check shows that Finland would need to come up with €4.3 billion? To Finland, that's a huge pile of money. Where will any of these countries come up with their share? The simple answer is they aren't. So, does the ECB print the money in violation of rules and pass it out? If not, who's bluffing whom regarding "systemic importance" of Greece? Extreme Irony Greece was no systemic threat to the eurozone until the Troika foolishly threw €245 billion at Greece hoping to prevent a default. Curiously, the Troika made Greece a systemic threat by pretending it was, when it really wasn't. And now that it is, they pretend that it isn't. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com 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.

Rabbit Hole Intervention Fails: Wild Moves in Swiss Franc as Switzerland Abandons Euro Peg; Morals of the Story Posted: 15 Jan 2015 11:50 AM PST Today in a surprise announcement, the Swiss National Bank abandoned its silly policy of defending a peg to the euro. Previously, the bank had set a line in the sand, defending the peg at all costs. That policy meant Swiss accumulation of hundreds-of-billions of euros that today plunged in price. Wild Swings click on chart for sharper image 32% Move in 30 Minutes As the above chart from Investing.Com shows, the Swiss Franc soared in value from 1.20-per-euro all the way to 0.82-per Euro. That is a 32% currency move vs. the euro in a matter 30 minutes! Since then, the Franc declined back to 1.03-per euro. One week from today, the ECB is expected to announce a massive €1 trillion QE intervention. If the euro declined as expected, the Swiss National Bank would have to accumulate billions more euros to defend the peg. With that, the Swiss National Bank finally threw in the towel on the euro peg that it promised just last month would defend with "the utmost determination". Swiss Franc Rockets The Financial Times has some interesting comments in Swiss Franc Rockets as Currency Ceiling Scrapped. The SNB's decision highlights the difficulties that central banks of smaller economies such as Switzerland and the UK face as they navigate the turbulent waters between the US Federal Reserve, which is closer to tightening monetary policy, and the ECB, which is poised to loosen it. It also marks a dramatic volte-face for the SNB, which insisted as recently as December that it remained committed to preventing the franc from strengthening beyond SFr1.20 to the euro, adding that it would enforce the policy with "the utmost determination". Thomas Jordan, chairman of the SNB's governing board, defended the decision though, saying that once it was clear that the policy was no longer sustainable, it was important to act quickly. "It is better to do it now than in six or 12 months when it would hurt more," he said. Simon Derrick, chief market strategist at BNY Mellon, said that the SNB had clearly anticipated a huge surge of inflows into Swiss franc assets in the coming days and "saw little reason to provide buyers with an artificially cheap rate". Rabbit Hole Intervention Anyone recall my frequent comments about currency intervention? First in regards to the Japanese yen, then in regards to the Swiss Franc, then in regards to the Russian Ruble, I said currency intervention doesn't work. In this case, the Swiss National Bank is no longer willing to follow the euro further down the rabbit hole. Can you blame them? Switzerland's foreign exchange reserves have swelled dramatically since the SFr1.20 target was introduced. At the end of December they had reached SFr495bn — or almost 80 per cent of Swiss economic output — up from SFr257bn at the end of 2011. Lessons for Polish and Hungarian Borrowers Borrowed money in Swiss Francs? If so you are now in serious trouble. Please consider Swiss move hits Polish and Hungarian borrowers. The abrupt move by Switzerland's central bank to abandon its policy of restraining the franc sparked a financial rout on Thursday in Poland and Hungary, where hundreds of thousands of mortgages are priced in the Swiss currency. Hungarian borrowers will be shielded from a nearly 25 per cent surge in repayment costs, thanks to a conversion programme introduced by prime minister Viktor Orban in November to protect borrowers from foreign exchange risks. By contrast, the more than €30bn worth of Polish mortgages tied to the franc enjoy no such protection. Citibank estimated that the various currency moves would increase Poles' average repayment costs for franc-denominated mortgages by 17 per cent, which could boost the rate of non-performing loans from its current level of about 3 per cent. This sparked concerns among lenders on Thursday that public anger could ultimately force Warsaw to try to enact a similar measure retroactively. Swiss franc denominated credit accounts for about 8 per cent of Poland's total bank assets, but 37 per cent of its total home loans, making it a potential political issue with a general election set to take place in nine months. Morals of the Story Don't borrow money in other currencies, especially long-term mortgages. Don't expect currency interventions to work forever. Don't believe statements made by central bankers. They are not the economic wizards they are made out to be, and they often lie when it suits their purpose. Additional Repercussions This move will shock all of Europe very badly. I doubt it could have come at a worse time. Europe was already heading for a serious recession. This shock wave will make matters worse. And to top it off, the QE coming from the ECB is doomed to fail. It too will make matters worse. For a discussion of why QE will doom Europe, please consider Steen Jakobsen Warns "Euro is Not a Good Idea and ECB About to Make Biggest Mistake in History" Gold is up about $25 dollars today, an arguably muted response but certainly in the appropriate direction given all the central bank foolishness that is doomed to fail. Addendum: I added point number three. It's an important one: Don't believe statements made by central bankers. They are not the economic wizards they are made out to be, and they often lie when it suits their purpose. Today may very well be the start of the "recognition phase" that central banks are not in as much control as widely thought. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com 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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