1--Geithner Plan for Europe is last chance to avoid global catastrophe, Telegraph
Excerpt: ...the G20, and the global authorities have one last chance to contain the EMU debt crisis with a nuclear solution or abdicate responsibility and watch as the world slides into depression, endangering the benign but fragile order that has taken shape over the last three decades.
The International Monetary Fund warned last week that emerging markets face the risk of "sharp reversals" or even a "sudden stop" if there is further spill-over from Europe. This comes at a time when Asia and parts of Latin America are already in the topping phase of a credit boom, one of epic proportions in China where loans have doubled to almost 200pc of GDP over the last five years
Commercial banks that cannot raise money from Mid-East wealth funds will be seized by the state, partly or fully, or be recapitalized by the EFSF. This should leave them strong enough to absorb a 50pc default imposed on Greece, and potential knock-on defaults in Portugal and Ireland.
Or at least, that is the idea. We will see how the Bundestag reacts this week. It has not even voted on the July deal to boost the powers of the EFSF, itself a furiously contested plan that may provoke a 30-strong rebellion within Chancellor Angela Merkel's own coalition. German lawmakers now learn that implicit liabilities may be five times as big.
"We should not think of leveraging a public pot of funds as a free lunch," said
2--German Central Bank Opposed to Merkel's Euro Course, Der Speigel
Excerpt: Even the expanded European Financial Stability Fund (EFSF), whose new powers are expected to be ready to use by the middle of next month -- assuming that all the euro-zone parliaments ratify the reforms by then -- won't change things much. In short, the amounts of money that would be needed to help Italy would simply be too big for it.
"If the EFSF purchased €50 billion worth of Italian sovereign bonds, it would exhaust a good deal of its free resources without achieving anything on the markets," say Michael Heise, chief economist at the German insurance giant Allianz. This has led many central bankers to fear that European leaders will soon put pressure on the ECB to take renewed action.
US Treasury Secretary Timothy Geithner has already done just that. At the recent summit in Poland with his European counterparts, Geithner called for a banking license to be issued to the newly expanded bailout fund. The suggestion was also discussed at the meeting of the International Monetary Fund (IMF) and the World Bank held last week in Washington. Even Finance Minister Schäuble said he would think about the idea.
If this model were actually implemented, the EFSF could purchase significantly larger amounts of state debt and deposit them at the ECB as collateral in return for fresh money with which it could, in turn, purchase additional sovereign bonds.
But what Geithner and the Obama administration view as a particularly elegant solution to the euro crisis is a nightmarish idea to stability champions like Weidmann. Last week, he warned the German parliament's budget committee that "state financing through monetary policy" would become a permanent fixture if the solution were adopted.
3--Plan B: Flood the markets, The Telegraph
Excerpt: The Europeans, insiders claimed, were beginning to coalesce around a nascent plan.
The idea had three key elements – a bank recapitalisation, a bigger eurozone bail-out fund, and a possible Greek default. The goal was to put a firebreak around the single currency periphery to prevent contagion spreading across Europe to the core of Spain and Italy in particular. “A political solution is not insurmountable,” one source said.
According to insiders, a resolution package would be announced in one go and, until then, the public line would remain consistent – that Greece would not default and that the European Financial Stability Facility (the eurozone’s Eu440bn bail-out fund), would not be augmented beyond the terms agreed on July 21.
But hints of the plan were being dropped publicly. The G20 communique stated: “We will ensure that banks are adequately capitalised and have sufficient access to funding to deal with current risks.”
“Current risks” indicated something far beyond the recent European stress tests that called for 16 banks to find a little extra capital. It suggested many tens of billions of euros would be needed, not the paltry Eu2.5bn identified.
4--Euro Zone Death Trip, Paul Krugman, NY Times via Economist's View
Excerpt: Europe’s situation is really, really scary: with countries that account for a third of the euro area’s economy now under speculative attack, the single currency’s very existence is being threatened — and a euro collapse could inflict vast damage on the world.
On the other side, European policy makers seem set to deliver more of the same. They’ll probably find a way to provide more credit to countries in trouble, which may or may not stave off imminent disaster. But they don’t seem at all ready to acknowledge a crucial fact — namely, that without more expansionary fiscal and monetary policies in Europe’s stronger economies, all of their rescue attempts will fail.
The story so far: The introduction of the euro in 1999 led to a vast boom in lending to Europe’s peripheral economies, because investors believed (wrongly) that the shared currency made Greek or Spanish debt just as safe as German debt. ... But when the lending boom abruptly ended, the result was both an economic and a fiscal crisis. ...
So now what? Europe’s answer has been to demand harsh fiscal austerity,... meanwhile providing stopgap financing until private-investor confidence returns. Can this strategy work?
Not for Greece... Probably not for Ireland and Portugal... But given a favorable external environment — specifically, a strong overall European economy with moderate inflation — Spain ... and ... Italy ... could possibly pull it off.
Unfortunately, European policy makers seem determined to deny those debtors the environment they need. ... And I see no sign at all that European policy elites are ready to rethink their hard-money-and-austerity dogma.
5--Commodities Drop as Silver Slumps on Europe, Bloomberg
Excerpt: Commodities fell to their lowest in almost 10 months and silver tumbled below $28 for the first time since February on speculation Europe’s debt crisis will worsen, curbing raw-material demand. Copper plunged below $7,000 a ton for the first time in more than a year.
The Standard & Poor’s GSCI Spot Index shed 1.1 percent to 592.5 by 9:28 a.m. in London after slumping as much as 2.6 percent to the lowest since Dec. 1. The gauge slumped 8.3 percent last week, the worst performance since May. Cash silver plunged as much as 16.3 percent to its lowest level since November. Copper slumped as much as 7.6 percent, a seventh day of declines and the worst losing streak since December 2008.
European policy makers are facing mounting pressure to step up efforts to prevent their sovereign-debt crisis from further roiling the world’s financial markets and economy. Pacific Investment Management Co., which runs the world’s biggest bond fund, is forecasting that advanced economies will stall over the next year as Europe slides into a recession
6--Industrial metals prices point to global contraction, Pramatic Capitalism
Excerpt: The latest slide by industrial commodity prices suggests that, unlike QE2, Operation Twist 2 will not swell
inflation expectations. QE2 probably encouraged an overbidding for commodities that a number of buyers
now regret. The latest plunge by base metals prices starkly shows the impossibility of sustaining rapid price
inflation without the full participation of the labor market. If sluggish wages and diminished access to credit prevent consumers from “affording” higher prices, inventories ultimately will outrun sales by enough to
prompt price discounting.”
We’re seeing an incredible confluence of events here as the Fed appears powerless, the economic slow-down continues and the global credit crisis persists. The disequilibrium that the Fed helped induce is now coming out of the industrial metals complex and as I’ve discussed in detail, we have to consider the very real possibility that this disequilibrium will exacerbate the economic slow-down. The precious metals decline might capture most of the headlines here, but keep an eye on the industrial metals. The action there is far more telling of global economic trends and just how bad this downturn is likely to get.
7--The Wages of Bad Macroeconomics, Paul Krugman, NY Times
Excerpt: What you missed if you believed that the bond vigilantes were coming any day now, that rates would soar as soon as Bernanke ended QE2, and all that: Betting on Bernanke Returns 28% for Treasuries.
Betting on Ben S. Bernanke has been the most profitable trade for government bond investors in 16 years, defying lawmakers in the U.S. and abroad who said the Federal Reserve chairman’s policies would lead to runaway inflation and the dollar’s debasement.
Treasuries due in 10 or more years have returned 28 percent in 2011, exceeding the 24.4 percent gain in all of 2008 during worst financial crisis since the Great Depression, according to Bank of America Merrill Lynch indexes. Not since 1995, when the securities soared 30.7 percent, have investors done so well owning longer-dated U.S. government debt.
Tell me why business people pay attention to the WSJ editorial page?
8--Euro zone damps talk of rapid debt crisis steps, Reuters
Excerpt: Euro zone officials played down reports on Monday of emerging plans to halve Greece's debts and recapitalize European banks to cope with the fallout, stressing that no such scheme is yet on the table.
Europe came under fierce pressure from the United States and other major economies at weekend talks in Washington to take swift, decisive action to stop the Greek debt crisis engulfing bigger euro zone states and derailing world economic recovery.
But officials said media reports that planning was already in place for a 50 percent writedown in Greek debt and a vast increase in the euro zone rescue fund, the EFSF, were highly premature.
"There is no change to the framework we are working on," said a euro zone official who is involved in decision-making on financial assistance to Greece, Ireland and Portugal.
"All this talk of a specific haircut for Greece or an enlargement of the EFSF, it is all just speculation. We are not working along those lines," said the official.
9--Report: Six Week deadline to Prepare New European Plan, Calculated Risk
Excerpt: From the Telegraph: Multi-trillion plan to save the eurozone being prepared
German and French authorities have begun work on a three-pronged strategy behind the scenes amid escalating fears that the eurozone’s sovereign debt crisis is spiralling out of control.
According to sources, progress has been made at the G20 meeting in Washington ... the world’s leading economies set themselves a six-week deadline to resolve the crisis – to unveil a solution by the G20 summit in Cannes on November 4.
First, Europe’s banks would have to be recapitalised with many tens of billions of euros to reassure markets that a Greek or Portuguese default would not precipitate a systemic financial crisis. ... Officials are confident that some banks could raise the funds privately, but if they are unable they would either be recapitalised by the state or by the European Financial Stability Facility (EFSF) ...
The second leg of the plan is to bolster the EFSF. Economists have estimated it would need about Eu2 trillion of firepower to meet Italy and Spain’s financing needs in the event that the two countries were shut out of the markets. Officials are working on a way to leverage the EFSF through the European Central Bank to reach the target.
The complex deal would see the EFSF provide a loss-bearing “equity” tranche of any bail-out fund and the ECB the rest in protected “debt”.