Eurozone Breakup Inevitable?

Mish writes in Europe Out of Time; Differences Impossible to Untangle; Merkel’s Mind is Fried; Eurozone Breakup Inevitable; “Let the Euro Die”:

Is the Euro Worth Saving?

Regardless of what you or I may think, that question is where European voters come in. From that standpoint it does not look pretty.

German Chancellor Merkel, Spanish Prime Minister Zapatero, Italian Prime Minister Berlusconi, and Greek President George Papandreou will all be gone after the next set of elections.

French President Nicholas Sarkozy may bite the dust as well, and if he does it may be to a vehemently anti-Euro candidate.

All it takes is one government to say “to hell with this” and the whole mess unravels.

The current set of politicians all want to “save the Euro”. But what did the Euro buy Greece, Ireland, Spain, or Portugal except misery?

Even German and Finland voters wonder what it bought them.

Eurozone Breakup Inevitable

Merkel’s half-baked proposal raises more questions than answers. The market (and voters) will not possibly wait for details of her proposal to get hashed out. If this is the best Merkel can come up with, a Eurozone breakup is inevitable.

I think that a complete political breakdown of the European Union would be the best thing that could happen to Europeans. Ditch all European political institutions, but maintain the free mobility of persons, capital, and goods across countries, really the only positive aspect of the Eurozone project. Oh, and you want one unified currency that actually works? I know I’ve been saying this over and over again, but … how about a gold standard? Anyone?

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Irish People Say: Default! Other Governments Go MAD – Screwing the Future

The Independent writes:

A SUBSTANTIAL majority of the Irish people wants the State to default on debts to bondholders in the country’s stricken banks, according to a Sunday Independent/Quantum Research poll.

The finding that 57 per cent favour and 43 per cent oppose default reflects a growing view among policymakers and opinion formers that the State simply cannot support the debt burden it has taken on.

The telephone poll of 500 people nationwide has also found that a majority of around two-thirds opposes the headline measures in the Government’s four-year plan.

Following Fianna Fail’s loss of the by-election in Donegal last week, the findings will add to political uncertainty as an austerity Budget approaches on December 7.

As Ireland awaited the fine details of the international bailout, which are expected tonight, it was learned last night that the Irish delegation negotiating with the EU-IMF last week raised the issue of default.

“The Europeans went completely mad,” a senior government source said.

Mad? Why? Because it’s THEIR ass that’s on the line, not the Irish’s:

Total foreign bank exposure to Ireland’s economy is $844bn, or five times the value of Ireland’s GDP or economic output. Of that, German and UK banks are Ireland’s biggest creditors, with €206bn and €224bn of exposure respectively.

To put it another way, German and British banks on their own have each extended credit to Ireland greater than Irish GDP. Which doesn’t sound altogether prudent, does it?

As for direct bank-to-bank lending, overseas banks have provided Ireland’s banks with €169bn of loans, which is also greater than Irish GDP.

Here is another illustration on Germany’s banks’ exposure to Irish and other gambles:

Screwing the Future

It is important to understand that government debt is always about screwing the future to enrich connected people in the present:

Ironically, when you look at the political stage, all you will hear in regards to “solutions” to deficits in the end, will be tax hikes. These are not solutions. They are the ultimate manifestation of the very problem at hand. They are, in fact, the precise opposite of a solution. Keep this in mind whenever you hear politicians talk about deficit solutions. Raising taxes to reduce deficits is absolutely and 100% an admission that one has completely failed to solve this deficit problem, and in fact laid the final brick that was missing in the very process of the public’s depredation via deficit spending.

Thus European governments will fight tooth and nail to raise as much money as they possibly can in exchange for promising their lenders and increased loot from increased future theft.

In this particular case it will be Irish taxpayers in the future who will foot the bill.

So long as people cling on to the fantasy of the necessity governments, all this stuff will be so completely predictable that it’s almost boring, and it will continue to go on as I have been pointing out from the very beginning of when this financial crisis started hitting Europe.

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“The Euro Game Is Up”

“Just who the hell do you people think you are?”

We can see the Eurozone disintegrating slowly but surely, and ironically as a result of supposed integration policies.

I have said this many times – The sooner Europeans give up on the mad project that is the Euro currency, the sooner they can expect things to get better. The longer they cling on to it, the longer their plight will last …

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Roubini on Europe: We Are Kicking the Can Down the Road

From Yahoo’s Tech Ticker:

With a $1 trillion bailout package for Greece and the other sick men of Europe, the EU and IMF spurred a huge global rally in stocks Monday, with the Dow rising 405 points, its biggest gain since March 2009.

The massive bailout prevented “another systemic seizure of the global financial system” and, “in the short run, markets are happy we’re not going to have another global meltdown like Lehman,” says NYU professor Nouriel Roubini, co-author of Crisis Economics.

But in the long run, Europe has just “kicked the can down the road,” Roubini says, agreeing with our earlier guest Richard Suttmeier.

Even $1 trillion isn’t enough so solve the “fundamental questions” facing Europe, the economist says, citing the following:

* — Even in Europe, There’s No Free Lunch: All of the bailout money is conditional on countries approving what Roubini calls “massive fiscal consolidation,” i.e. big austerity packages like Greece’s parliament just passed. Such measures mean fewer public sector jobs (and lower salaries for those who remain) and higher taxes in countries where a lot of people work for the government and already pay relatively high tax rates. “Politically can they do that…or will there be riots and strikes that are going to limit” fiscal austerity measures, Roubini wonders.
* — Tough Love Hurts: Raising taxes and cutting government spending should help alleviate the short-term debt crisis in Europe’s so-called PIIGS but will also likely lead to recession, if not outright deflation. “That will make it harder to force austerity” on the public, he says. There’s already violence and rioting in the streets of Athens. “The question is: Will we see the same thing in, for example, Lisbon, Madrid [and] throughout the euro zone?”
* — No Easy Way Out: One reason the European Union is in this mess is because few of its countries are able to compete in a global economy, especially since they lack the ability to deflate their currency, the economist says. Considering it took Germany 15 years to restructure its private sector so unit labor costs came down low enough to compete globally, nations like Greece, Portugal and Spain face a long, hard slog even if they embark upon such painful programs immediately.

So what does all that — and the political pressure against more bailouts in Germany — mean for the future of the euro and the EU itself?

In late April, Roubini said “in a few days, there might not be a euro zone for us to discuss,” at the Milken Conference.

In the accompanying clip, the founder of Roubini Global Economics says he was “just joking” about that dire prediction, which potentially contributed to the recent rout in Europe. But expect “volatility in economies and markets” is going to be with us for the foreseeable future, Roubini says, offering cold comfort (and an odd sense of humor).

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EU Launches Frantic Bazooka – Euro Gives Up Early Gains

Europe Pulls Out Bazooka Part II in 3D

Since Euro countries are grappling with deficits, they are vowing to spend more money to fight the consequences of deficits, EU Crafts $962 Billion Show of Force to Halt Crisis:

European policy makers unveiled an unprecedented loan package worth almost $1 trillion and a program of bond purchases to stop a sovereign-debt crisis that threatened to shatter confidence in the euro. Stocks surged around the world, the euro strengthened and commodities rallied.

Jolted by last week’s slide in the currency and soaring bond yields in Portugal and Spain, European Union finance chiefs met in a 14-hour session in Brussels overnight. The 16 euro nations agreed in a statement to offer as much as 750 billion euros ($962 billion), including International Monetary Fund backing, to countries facing instability and the European Central Bank said it will buy government and private debt.

The rescue package for Europe’s sovereign debtors comes little more than a year after the waning of the last crisis, caused by the U.S. mortgage-market collapse, which wreaked $1.8 trillion of global credit losses and writedowns. Under U.S. and Asian pressure to stabilize markets, Europe’s governments bet their show of force would prevent a sovereign-debt collapse and muffle speculation the 11-year-old euro might break apart.

“A very thick line has been drawn in the sand,” said Andrew Bosomworth, Munich-based head of portfolio management at Pacific Investment Management Co. and a former ECB official. “This is all in. What more could they have done?”

A 110 billion-euro bailout package for Greece approved last week by the EU and IMF failed to reassure investors, prompting yesterday’s renewed bid to bolster the euro.

How to Pay

“It might temporarily calm nerves but questions will come back later on how they will pay for this package when all of them need fiscal consolidation,” said Venkatraman Anantha- Nageswaran, who helps manage about $140 billion in assets as global chief investment officer at Bank Julius Baer & Co. in Singapore.

The MSCI World Index climbed 2.6 percent to 1,128 at 12:15 p.m. in Brussels. Standard & Poor’s 500 Index futures rallied 4.4 percent. The euro appreciated 2 percent to $1.30. Crude-oil futures gained 3.4 percent.

“The message has gotten through: the euro zone will defend its money,” French Finance Minister Christine Lagarde told reporters in Brussels early today after markets punished inaction last week.

ECB policy makers said they will counter “severe tensions” in “certain” markets by purchasing government and private debt, and the bank restarted a dollar-swap line with the Federal Reserve.

‘Overwhelming Force’

“This truly is overwhelming force, and should be more than sufficient to stabilize markets in the near term, prevent panic and contain the risk of contagion,” Marco Annunziata, chief economist at UniCredit Group in London, said in an e-mailed note. “This is Shock and Awe, Part II and in 3-D.”

Merkel’s Meeting

As Merkel’s cabinet held a late-night meeting in Berlin on the euro rescue, her party unexpectedly lost control of Germany’s most populous state in a regional election, potentially costing her a majority in the upper house of the federal parliament.

Goaded by Germany, the ministers made a fresh commitment to closer monitoring of government finances and more rigorous enforcement of the deficit-limitation rules.

The vow to push budget shortfalls below the euro’s 3 percent limit echoes promises that have been regularly broken ever since governments in 1999 set a three-year deadline for achieving balanced budgets. The euro region’s overall deficit is forecast at 6.6 percent of gross domestic product in 2010 and 6.1 percent in 2011.

Can you imagine? Governments that have regularly broken commitments to cut deficits? Unthinkable!

One thing’s for sure, as I said over 1 year ago:

The 3% ceiling won’t matter anymore from hereon. Consider the European stability treaty dead. One member state after another will violate the requirements. The fact that a bailout of some Euro states by others is discussed, just shows how torn this European Union really is, how severe its imbalances are. With discrepancies like these, it is completely unfeasible to maintain a currency union. The Euro will keep taking its beating for it.

The Euro

What are foreign exchange markets saying? Here’s the Euro today:

euro

It rallied up as high as $1.31 on the announcement and has given up almost all those gains within a few hours already. This is volatility galore on the FX market!

This may be a result of frantic intervention on the part of the US, as the Federal Reserve opens credit line to Europe:

The Federal Reserve late Sunday opened a program to ship U.S. dollars to Europe in a move to head off a broader financial crisis on the continent.

Other central banks, including the Bank of Canada, the Bank of England, the European Central Bank, the Swiss National Bank and the Bank of Japan also are involved in the dollar swap effort.

The move comes after the European Union and International Monetary Fund pledged a nearly $1 trillion defense package for the embattled euro, hoping to calm jittery markets and halt attacks on the eurozone’s weakest members. The ECB also jumped into the bond market Sunday night, saying it is ready to buy eurozone bonds to shore up liquidity in “dysfunctional” markets.

The Fed’s action reopens a program put in place during the 2008 global financial crisis under which dollars are shipped overseas through the foreign central banks. In turn, these central banks can lend the dollars out to banks in their home countries that are in need of dollar funding to prevent the European crisis from spreading further.

The Fed said action is being taken “in response to the reemergence of strains in U.S. dollar short-term funding markets in Europe,” and to prevent the spread of that strain to other markets and financial centers.

A so-called “swap” line with the Bank of Canada provides up to $30 billion. Figures weren’t provided for the other central banks. The arrangements are authorized through January 2011.

The debt crisis first erupted in Greece. Fears that it could spread to Spain, Portugal and other eurozone countries. The crisis has pushed up demand for the U.S. dollar and has sharply weakened the value of the euro, the currency used by 16 European countries. Eurozone ministers and the IMF this weekend approved a $140 billion rescue package of loans to Greece for the next three years to keep it from imploding.

The Fed had wound down these crisis-era programs with other central banks in February, along with other emergency programs to get lending flowing more freely again and return stability to financial markets. At that time, financial strains in the United States were easing, and the Fed began to take steps to move policy closer to normal.

It also had begun to lay out a plan to reel in the unprecedented stimulus money pumped out during the crisis. The Fed’s balance sheet ballooned to $2.3 trillion, more than double where it stood before the crisis struck. The program reopened on Sunday will expand the Fed’s balance sheet, economists say. However, the program poses little credit risk to the Fed because the arrangements are with other central banks, they added.

It is doubtful whether these currency swaps have ever accomplished anything but a very very short term relief.

We hear European bureaucrats rail against evil speculators who are daring to question the stability of the system. This is all repetitive nonsense which we can shrug off with a smile. I have said before that a truly meaningful reform of capital markets would require that governments remove themselves from the equation, rather than becoming the only factor in that equation:

what needs to happen is to bring down what has brought about the financial crisis in the first place.

Who has created all the excess fiat money that flowed into the system to blow up price bubbles? The Federal Reserve Bank – so just close it down already!

Who has created all the excess credit that blew up the bubble? The fractional reserve banks – so just end the system of fractional reserve banking already!

Who has granted oligopoly status to the rating agencies who one after another failed to assess credit risk appropriately? The SEC – so end the credit rating cartel already!

In fact who has taken away oversight from the stock exchange companies  to try and oversee all stock exchanges in the country, missing one giant fraud after another? Which organization was close to Making Bernie Madoff their chairman?? The SEC – so get rid of it already!

Even after some of the worst excesses of subprime lending, who proudly remains the sole subprime lender in the country? The government owned banks! – So close them down already!

Who has been propping up financial markets in secret over decades with taxpayer money, creating malinvestments and false incentives left and right? The mighty President’s Working Group on Financial Markets! – So get rid of it already!!

What is it that made the common man put so much money into the stock market? It comes to a large degree from the incentive through tax savings for retirement accounts. If the taxes weren’t there in the first place, surely people would think twice about transferring their hard earned and saved money over to Wall St.

On top of that a policy manipulating and suppressing interest rates makes it completely unattractive to put money into savings accounts, and encourages people to be foolish. – So again, stop meddling with the credit markets, get rid of the central bank and with it would go all fractional reserve lending.

Why do you think it is so hard for honest small businesses to obtain funding in a flexible and straightforward manner? Why does it feel to most people like they are secluded from the majority of the action while Wall St. thrives? It is because every single government policy aiming at financial regulation has been designed to herd money into the stock market and lock it up in there for the kids to play with.

Which institution, out of all, is the least capable to be responsible about its finances, stay out of debt, live within its means? … it is of course the government itself.

Folks, wake up to reality, leave fantasy island. Come to your senses and work toward closing down that institution which is the root cause of all your problems: Close down the government and all the things I pointed out above  and many more evils would automatically go with it.

So long as people don’t make these simple connections, they need not be surprised about the same problems popping up again and again, with the same short sighted responses protracting the problems again and again, choking our productive capacity until the system comes to a painful halt.

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