Greek shipping heir Peter Nomikos has a plan wipe out Greek debt. His idea is to buy all the Greek bonds then forgive the debt.
Given that Greek bonds sell for 12 cents on the dollar, on the surface his plan may seem like a reasonable idea. First let's consider the idea, then potential problems.
Greek shipping heir Peter Nomikos has taken matters into his own hands. While EU leaders wrangle for a solution to Greece's problems, Nomikos started a non-profit to wipe out the country's debt. If all of his countrymen do their part, he tells SPIEGEL ONLINE, they will be able to shore up the country's finances.
SPIEGEL ONLINE: Mr. Nomikos, you have just started a campaign to free Greece of debt. Your organization buys up Greek bonds and then forgives the debt. Are you serious?
Nomikos: Professionally, I deal with distressed debt. And it struck me that Greece has a historical opportunity. In the euro, the Greeks have a very strong currency, while the price of their government bonds has collapsed. That makes it possible to buy back debt at very low prices and reduce the Greek debt burden with relatively little expenditure.
SPIEGEL ONLINE: You are asking your countrymen for donations. What do you tell them?
Nomikos: If you break down the national debt, each Greek owes around €25,000 ($31,485). So I am telling my fellow citizens to make themselves debt-free. Greek government bonds with a nominal value of one euro currently trade for around 12 cents. For a donation of around €3,000, every Greek can buy his freedom.
SPIEGEL ONLINE: How many bonds has your foundation already bought?
Nomikos: We always buy those bonds that have the deepest discount. So far we have invested €273,000 ($343,816) and hold €2.2 million ($2.8 million) in Greek debt.
SPIEGEL ONLINE: And then you cancel the debt?
Nomikos: Not immediately. If we did that, we would decrease the impact of our project. When the GDP-to-debt ratio goes down, bond prices go up. If the movement becomes a great success, this could become a problem, because we cannot buy debt as cheaply on the markets. So we hold these bonds for a while and use any profits to buy more bonds. We plan to amass as many bonds as possible and then cancel the debt all at once.
Problematical Math
The population of Greece is 11,316,000. At €3,000 per person, Nomikos would need to raise nearly €34 billion. That is far lower than the €283 billion in bonds (at €25,000 per person), but it is hardly inconsequential.
Bond prices will not stay at 12 cents on the dollar if the program makes any reasonable headway.
Greek banks and pension plans are the biggest holders of Greek debt. I highly suspect neither has marked bonds to market. They certainly have not marked the bonds to zero. In other words there are severe implications should Nomikos succeed.
Those depending on Greek pension plans have a vested interest that he not succeed.
I wish Peter Nomikos success, but point number 3 above suggests severe consequences. Points 1, 2, and 4 suggest that it will not happen in the first place, making point number 3 moot.
The clearest conclusion to the European Agreement made by Spain and Italy is that our government has preferred to sacrifice the sovereignty of the banking supervision enjoyed by the Bank of Spain in exchange for the bailout of the sector does not compute as debt or deficit and that The European rescue fund to buy Spanish debt when things get as ugly as this week. However, many unknowns are open, including the timing of the operation. Therefore, the FROB who will initially inject capital to entities that need it in September, with funds from European loan subsequently permutarán MEDE the money.
"The government has chosen to advance the loss of competition in banking supervision, it was inevitable sooner or later if you go to a European Banking Union in exchange for breaking the feedback loop between the banking and public debt, which is very positive and not only for Spain, "says an analyst.
Officials of both Economy and the Bank of Spain claimed yesterday that has not yet been defined how will such a monitoring mechanism or what the status of the former Central Bank. Some sources believe that it is logical that national central banks are the arms of the central agency in each country and to continue in office today, but accountable to a higher power who will make the final decisions.
Other experts, such as Eurointelligence, say that "it is far from clear that Germany is willing to give up their own banks to supervision by the ECB." It is also unclear what will happen to insurance, which can not be monitored by the ECB according to the EU Treaty. Or if the conditions to be imposed in order to use the European Stability Mechanism (MEDE), conditions that likely will go beyond the financial sector despite yesterday again denying Mariano Rajoy.
A major uncertainty centers on the period within which this new monitoring system will come into force, which is the condition for the MEDE to inject money directly to banks. In principle, the idea is to reach an agreement in October to put in place before year end. But "it is unrealistic to expect an agreement by October? MEDE himself was delayed. The EU has consistently been too optimistic on the timing," adds the analyst firm.
The terms do not match
And although respected, there is an inconsistency between this term and timing of the rescue plan by Spain. This includes the signing of the memorandum with the conditions for the sector on 9 July, the end of the audit work in each state on July 31 and defining the specific needs of each in September, when performing the new stress test bottom-up (bottom up). Thereafter, viable entities that need capital will have nine months to get their media, and immediately nonviable may receive the loan proceeds Europe.
Therefore, various sources claim that the FROB will perform the first injection of capital until the conditions for you to do the MEDE. So initially counted as debt itself. So then have to do a swap between the FROB and MEDE. Another option is to wait until the system is willing, but the markets probably will not have much patience, and as mentioned, is likely to be delayed.
A priori, it seems very complicated to start with the FROB and replaced by MEDE, but the text of the Declaration of the Summit opened the door this way, referring to Ireland: "The Eurogroup will review the status of the Irish financial sector with a view to further improving the sustainability of the adjustment program is working well. Similar cases are treated in the same way. " That similar case would be Spain.
In the wake of yet another summit, we need to ask our usual question: is this the eurozone's game changer?
My fear is that, as so often in the past, the devil will prove to be in the detail. The more carefully one examines the text of the statement, the more questions are raised about how the proposed measures will actually work.
In particular, it is debatable whether there are any terms for direct eurozone recapitalisation of Spanish banks which will be acceptable both to the Spanish government and to the German Bundestag. (The latter will be empowered to "monitor" the new arrangement, according to Mrs Merkel's spokesman.) And the shortage of remaining funds in the EFSF/ESM, which I discussed here last week, has certainly not been solved.
1. Direct bank recapitalisation by the ESM
This is clearly the critical new development which potentially allows the costs of recapitalising troubled banks to fall on the eurozone as a whole, rather than on an individual sovereign country. It could therefore represent a very large step towards debt mutualisation, and it directly addresses the point which the markets so disliked in the Spanish bank deal two weeks ago. The statement says that this can only be done after the eurozone's new bank supervisor is "established", and that this should only be "considered" by the Council before the end of the year. ... I suspect that Germany will be quite demanding is setting these terms. Otherwise, there could be great problems with the constitutional court in Karlsruhe. ...
3. ESM support for the Spanish and Italian bond markets
The final paragraph of the statement gives the strong impression that the ESM will in future be able to stabilise these bond markets in a "flexible and efficient" manner. This appears to be a major victory for Mario Monti, but actually it does not contain anything really different from the status quo.
4. The availability of funds for the ES
German Finance Minister Schauble emphatically said yesterday to the Wall Street Journal that there would be no increase in the size of the ESM, and that position has been maintained by Germany at the summit. Furthermore, Mrs Merkel has repeatedly stated that there will be no "joint financing" of eurozone debt (ie eurobonds, or eurobills) before full fiscal union has taken effect. Again, there is no change in that position. Indeed, that is the basis for the German government's insistence that they have not taken on any extra "joint liabilities" as a result of this summit.
In summary, the summit has given the ESM some new tasks, but no new money with which to discharge these tasks. And many details are obscure.
Spoof of Gotye's "Somebody That I Used To Know", done Star Wars style, of course. It's a story of heartbreak to which Star Wars fans everywhere can relate.
In 1898, the Winton Motor Carriage Company took out an ad in Scientific American for its horse-free, hydrocarbon motored Winton Motor Carriage. The ad was the first of its kind and even brought in a customer. Robert Allison of Port Carbon, Pennsylvania became first person to purchase a Winton automobile after seeing the world's first car advert. Wikipedia
Weekly Address: An All-Hands-On-Deck Approach to Fighting the Colorado Wildfires
President Obama speaks to the American people from Colorado, where he toured areas impacted by the devastating Waldo Canyon fire and met with first responders as well as families affected by the fires. The President thanks the brave firefighters and countless volunteers who are providing food, water, and shelter to those in need, and makes clear that his administration will continue to bring all resources available to assist efforts to combat the fires.
Time to Move Forward:Yesterday the Supreme Court upheld the Affordable Care Act, ensuring that hard-working, middle class families will get the security they deserve and protecting every American from the worst insurance company abuses. This comprehensive reform enables young adults, seniors, small businesses, and families to better afford health care benefits.
Jobs for Heroes and their Families: On Monday, Vice President Biden announced new Vets-to-Cops hiring grants for cities and counties across the nation, which will create approximately 600 law enforcement jobs for post-9/11 veterans. On Tuesday, First Lady Michelle Obama was in Chicago to announce that Illinois has signed the Military Family Licensing Act into law, making it easier for military spouses to transition jobs when they are forced to move by removing restrictions on the transfer of professional licenses. Illinois became the 23rd state to adopt pro-military spouse license portability measures.
Do You Qualify? This week the White House released an interactive tool that helps homeowners determine if they would be eligible to refinance their mortgage. With interest rates at historic lows, refinancing could mean an average saving of $3000 a year. President Obama is urging Congress to pass legislation that would allow homeowners who don’t have federally backed loans to cut through the bank’s red tape, avoid costly processing fees, and refinance even if their home is under water.
We Come Together: This past week Colorado Springs has been dealing with some of the worst forest fires in Colorado’s history. The President traveled to the state today to see the devastation and commend firefighters and other first responders, “We’ve got to make sure that we have each other’s backs. And that spirit is what you’re seeing in terms of volunteers, in terms of firefighters, in terms of government officials. Everybody is pulling together to try to deal with this situation.”
The only reason every project doesn't scale to infinity is that something runs out. Time, money, natural resources, new fashions, new customers... something is scarce.
The first question you need to ask about your project is: what's scarce?
The rise of the Five Star Movement in Italy is the number one happening in Europe right now and mainstream media has not even begun to cover it in any depth. The movement is led by an Italian comedian, Beppe Grillo.
Main Rules for the Five Star Movement
Not be an elected politician prior to 5 Stelle
Commit to stay in charge for no longer than 2 terms
Commit to take a minimum salary and give the rest back to the community
Post a public platform on the internet
Be willing to hold a public debate on the platform
Beppe Grillo's personal position, not a mandate for the Five Star Movement is "Get out of the Euro and default on debt"
Following are some time lapse polls of the Five Star Movement and other political parties in Italy. Please give the graphs extra time to load.
The polls are from data gathered by data gathered by Termometro Polico (one on the best Italian poll-makers according to a friend who sent me the link.) The important poll is in tab number four.
Explanations and Comments on the graphs appear below.
For now, please click on tab number four. You may also wish to go to the link above for additional information (in Italian).
Graphs courtesy of Termometro Polico via tools from Tableau Software.
Explanations and Comments
The following comments are from Lorenzo, who lives in Italy. He is the person who sent me the link to Termometro Polico.
Hello Mish
In the first and third chart, red=centre-left (PD+Idv+Sel+others), blue= centre-right (PdL+Lega+Others), and yellow = 5 star movement. PdL = Former Prime Minister Berlusconi's party.
The third tab shows that a centre-left plus center (green) coalition could win the election, albeit with a relatively small margin. There is a catch however: (centre-left and centre-right) do not currently exist, except as theoretical coalitions rather than political parties.
Right now PDL and PD support the Monti government, while all the other parties that they commonly ally with (Lega, IDV, SEL, etc) do not. The two main parties (PD and PDL) scorn each other but are "forced to go along", while the minor parties in both "coalitions" bad-mouth them and Monti's government to attract the resentment created by Monti's taxes reforms.
This makes it pretty hard to predict the shape the two coalitions will take and how the voters' choices will change according to it. The situation is pretty fluid right now.
Italian politics is hard to make sense of for somebody used to a simple two-parties system situation.
Andrea is a reader who is from Italy but now lives in France. The pertinent section is labeled "Explaining Italian Politics".
Five Star Movement September 2011 vs. June 2016
This simple graph below shows the stunning rise of the Five Star Movement
Implications of the rise in popularity of the Five Star Movement from 3.7% in September 2011 to 20.6% in June 2012 are both massive and obvious. Yet mainstream media in the US and Europe have essentially ignored the phenomena.
The short term effect of Japanese stimulus following the earthquake and tsunami has now worn off. All Japan has to show for that stimulus is a bigger pile of debt, proving once again the Broken Window Fallacy.
In the real world, Japan has a debt-to GDP ratio of 225% and rising. Japan's export machine has stalled. So has Japanese manufacturing in general.
June data pointed to the first month-on-month reduction in manufacturing output since December 2011, as both new business and new export orders fell. Backlogs of work decreased as a result, while employment growth eased to only a marginal rate. On the price front, factory gate charges fell further in June, in response to a first reduction of average costs in 20 months.
After adjusting for seasonal factors, the headline Markit/JMMA Purchasing Managers' Index™ (PMI™) dipped fractionally below the neutral 50.0 threshold in June, to post its lowest reading in seven months.
Commenting on the Japanese Manufacturing PMI survey data, Alex Hamilton, economist at Markit and author of the report said:
"June data suggest that Japan's manufacturing sector upturn is fading into mid-year, with output and new business falling simultaneously for the first time since December 2011.
Growth in the year to date has been supported by earthquake-related reconstruction projects. The latest survey findings indicate that the boost from these efforts is starting to ebb, however, with investment goods producers noting a particularly sharp fall in output during June. This bodes ill for growth heading into the second half of the year, especially given the fragility of demand in external markets – highlighted by an accelerated fall in new export business during June."
Japan's lower house voted Tuesday to double the country's sales tax to 10 percent over three years in a bid to rein in a bulging national debt as an aging population burdens the country's social security system.
The vote, however, shook Prime Minister Yoshihiko Noda's grip on power because of strong opposition from a group within the ruling party led by power broker Ichiro Ozawa that believes the tax hike will weaken the economy. Ozawa and his supporters have threatened to bolt the Democratic Party over the tax issue.
The bill passed easily by a vote of 363-96, with support coming from the two biggest opposition parties. The bill must still pass the less powerful upper house to become law, which is expected.
It calls for raising the sales tax from 5 percent to 8 percent in 2014, and then to 10 percent in 2015.
Even Noda's government projects the tax hike will take only a modest bite out of Japan's deficit. The Cabinet Office forecasts that doubling the sales tax will boost revenues by ¥13.5 trillion ($170 billion) annually by 2015. Japan currently runs a deficit of about ¥45 trillion ($563 billion) a year.
Ruling party veteran Ozawa, who has often criticized Noda and controls a bloc in the ruling party, has suggested he may leave the party and take as many lawmakers as he can with him to form a new one. If 54 or more lawmakers join Ozawa, Noda's party would lose its majority in the key lower house.
Japan is in a very tight situation. The US will find itself in a similar situation down the road if it listens to misguided economists hell-bent on getting government to waste more money.
Futures are flying over a "breakthrough" that supposedly will lower borrowing costs for Italy, Spain, and Ireland. The "breakthrough" is a modification to the terms of the ESM to allow "the possibility" to recapitalize banks directly.
Amusingly, the existing ESM agreement has not even been ratified. The agreement is still on hold in Germany (numerous other countries have yet to ratify as well).
Other ambiguous statement from the eurogroup committee are simply laughable. Here is the complete text. Emphasis added in places.
EURO AREA SUMMIT STATEMENT - 29 June 2012 -
• We affirm that it is imperative to break the vicious circle between banks and sovereigns. The Commission will present Proposals on the basis of Article 127(6) for a single supervisory mechanism shortly. We ask the Council to consider these Proposals as a matter of urgency by the end of 2012. When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly. This would rely on appropriate conditionality, including compliance with state aid rules, which should be institution-specific, sector-specific or economy-wide and would be formalised in a Memorandum of Understanding. The eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally.
• We urge the rapid conclusion of the Memorandum of Understanding attached to the financial support to Spain for recapitalisation of its banking sector. We reaffirm that the financial assistance will be provided by the EFSF until the ESM becomes available, and that it will then be transferred to the ESM, without gaining seniority status.
• We affirm our strong commitment to do what is necessary to ensure the financial stability of the euro area, in particular by using the existing EFSF/ESM instruments in a flexible and efficient manner in order to stabilise markets for Member States respecting their Country Specific Recommendations and their other commitments including their respective timelines, under the European Semester, the Stability and Growth Pact and the Macroeconomic Imbalances Procedure. These conditions should be reflected in a Memorandum of Understanding. We welcome that the ECB has agreed to serve as an agent to EFSF/ESM in conducting market operations in an effective and efficient manner.
• We task the Eurogroup to implement these decisions by 9 July 2012.
Germany's highest court asked the country's president on Thursday to delay ratification of the permanent euro bailout fund, the European Stability Mechanism, and the fiscal pact into law next week. If he complies, the move could delay the implementation of the ESM by several weeks in the latest setback for Chancellor Angela Merkel.
The Constitutional Court, anticipating challenges to the legislation, wanted more time to review documents. German President Joachim Gauck, hardly three months in office, was already faced with an important decision. If he complied with the request from Karlsruhe, at least one piece of legislation proposed by Chancellor Merkel and her coalition government -- the permanent bailout fund known as the European Stability Mechanism (ESM) -- would undoubtedly be delayed. The ESM was originally scheduled to come into force on July 1, 2012.
More Challenges Coming
The proposed changes will put German taxpayers (eurozone taxpayers in general) at more risk. Thus, it's safe to say that more challenges to the ESM are coming.
However, let's assume for the moment that Finland, Austria, Germany, and the Netherlands accept more taxpayer risk. (Admittedly that's quite an assumption).
After 13 1/2 hours of talks ending at 4:30 a.m. in Brussels today, leaders of the 17 euro countries dropped the requirement that governments get preferred creditor status on crisis loans to Spain's blighted banks, European Union President Herman Van Rompuy said. Banks can also be recapitalized directly with European bailout funds rather than being channeled through governments, he said.
Merkel left the summit, which continues at 10 a.m., without addressing specifics of the agreements. She said there were decisions on "future measures within the framework of our methods that we will have through" Europe's two rescue funds. "I think we will have a successful conclusion."
The euro rose to as high as $1.2628, the strongest since June 21. Euro-area finance ministers will enact today's deal at a meeting on July 9, Van Rompuy said, calling the accord a "breakthrough."
Breakthrough? Really? How Much Firepower is Needed?
Bloomberg reports ...
The EU's two rescue funds may only amount to about 20 percent of the outstanding debt of Italy and Spain, limiting its ability to lower the nations' borrowing costs.
The EU's two rescue mechanisms, the European Financial Stability Facility and the yet-to-start ESM, may have 500 billion euros ($621 billion) available for purchases.
Italy and Spain have about 2.4 trillion euros combined of outstanding bonds, bills and loans.
For now, the market is pleased with this non-breakthrough. Let's see how long it lasts. I suspect not long.
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