Tuesday, November 1, 2011

Today's links

1-- ECB doomed to bigger crisis role despite itself, Reuters


Excerpt: Ask senior European Union policymakers in private what can stop the euro zone's festering sovereign debt crisis and the answer is "the European Central Bank."

The federal institution at the heart of the 17-nation currency area could declare itself Europe's lender of last resort, reassuring markets that there will always be someone to buy member states' bonds.

Economists from New York to Beijing are convinced such a move, backed by the central bank's power to print money, would stop the run on Italian and Spanish debt swiftly and help restore confidence in the euro area.

But it runs counter to half a century of German monetary orthodoxy and would require a change in the EU's governing treaty to remove a prohibition on the central bank funding governments, which Berlin would be certain to oppose.

2--Will other banks go the way of MF Global?, Reuters

Excerpt: John Carney wonders whether MF Global might turn out to be simply the first of many banks to go bust in a European financial crisis.

All the very serious people on Wall Street keep saying that the problems at MF Global are “isolated” or “unique.” It’s not a bellwether or a canary in the coal mine, they say.

I’m not so sure. There were lots of firms that were supposedly not canaries in coal mines in 2007. Heck, even the entire subprime market was supposedly not a canary in the coal mine for the broader housing market.

There’s a lot of sense here. Banks are reliant on trust — it doesn’t matter whether or not they are insolvent. All that matters is whether the market thinks that they might be insolvent. In fact, all that really matters is whether market participants think that other market participants might think that they might be insolvent. Whenever you think there’s a risk of a run to the exits, the smart thing to do is to run to the exits before everybody else does. And runs kill banks....

But more broadly, dominoes are falling right now, as a result of European sovereign-debt exposures. Dexia was first; MF Global is second. No one can say with any certainty how many more there will be. But once the cascade has started, it can be very hard to stop.

3--European Doom Loop, Paul Krugman, NY Times

Excerpt: For once — and I almost never say this — I think Dean Baker is being a bit too hard here. The Draghi piece was mainly a profile, and I’m willing to cut a bit of slack on the macro analysis.

That said, Dean is completely right about the macro doom loop the Europeans have created for themselves, in which the ECB’s refusal to provide either the lender of last resort facility or the monetary expansion the eurozone needs is creating a vicious circle of self-reinforcing austerity. Dick Baldwin got at this very well last week, although he was excessively optimistic about how long the fix would last; it was two days, not six months.

And was anyone else struck by Sarkozy’s declaration last week that since French growth was going to be slower than expected, it would be necessary to tighten the budget further? France may still have a AAA rating, but at the margin it’s behaving like a debt crisis country, with fiscal policy reinforcing a downturn rather than fighting it.

I’d still like to imagine that next week Mario Draghi, newly installed as ECB president, will suddenly reveal himself as a supporter of quantitative easing and a 4 percent inflation target, not to mention open-ended lending to crisis countries. And all this would be perfectly sensible — much more so than the way the ECB is actually behaving. But it’s not going to happen.

4--EU: Treaty of debt (ESM) - stop it now!, you tube

(Must see video)

5--On the Troika's Coming Occupation of the Periphery, Credit Writedowns

Political Economy

Excerpt: Europe’s inspectors will henceforth establish an occupation office in Athens to ensure the "full implementation" of austerity policies, for as long as it takes. Greece has been stripped even of the pretence of sovereignty.

This country that freed itself from Ottoman control in the 1820s (with French help), is reduced to a Sanjak of the new imperial order.

The Greeks will find out soon whether these officials answering to one Horst Reichenbach - unfortunately named for this delicate assignment (couldn't they find a Spaniard, or a Slovene?) - intend to foreclose on sovereign assets and transfer the proceeds to North European creditors. I do not think it would be wise for them to try.

-Ambrose Evans-Pritchard

This is the consequence of the deal hammered out last week in Brussels. But, will Ireland and Portugal receive the same treatment? If they don’t make their targets, the answer is yes. The full text of the EU summit statement last week contained the following passage about Portugal and Ireland:

We invite both countries to keep up their efforts, to stick to the agreed targets and stand ready to take any additional measure required to reach those targets.

Translation: continue fiscal austerity until you reduce your deficits significantly. If the depression this creates causes you to miss your fiscal targets, redouble your efforts under the watchful eye of the Troika....

The austerity protests are now picking up in Portugal. The next big strikes are prepared for November 8th.

Austerity cuts demand too much to have the positive effects on deficits in the short-term that Europe wants it to have. All of these countries are likely to miss their targets. And then the Troika ‘occupations’ will commence. Will they hammer out a ‘voluntary’ debt reduction in Portugal too? Will they look to force periphery governments to sell assets to foreigners? Any way you look at it, this is a combustible scenario which awaits Europe. And at this point, I fail to see the upside.

6--Greece calls referendum on new EU aid deal, Reuters

Excerpt: Greek Prime Minister George Papandreou Monday called a referendum on a new EU aid package and said he would ask for a vote of confidence to secure support for his policy for the remainder of his four-year term, which expires in 2013.

"We trust citizens, we believe in their judgment, we believe in their decision," he told ruling Socialist party lawmakers.

Eurozone leaders agreed last week a second, 130 billion euro bailout for the cash-strapped country as well as a 50-percent write-down on its crippling debt to make it sustainable.

The referendum will be held in a few weeks, after the agreement is finalized, Papandreou said.

Nearly 60 percent of Greeks view Thursday's EU summit agreement on the new bailout package as negative or probably negative, a survey showed Saturday.

7--The Division of Europe---EU Summit Paves the Way for a Split Continent, der Speigel

Excerpt: "...there is a general sense, if only temporary, of satisfaction. At the moment, it looks as if Merkel has done a relatively good job." Der Speigel

Germany now has the Europe it wanted. It remains to be seen whether it will be happy with the outcome.

A German Europe arouses old and new resentments among the country's neighbors. It is a shift that has been particularly obvious in Greece and Portugal in recent months. In the past, many citizens were quick to blame "Brussels" when something went wrong in their countries. Now "Berlin" is turning into the new expletive.

This is why all German governments to date have tried to disguise their own interests and ambitions as European or trans-Atlantic. It was a smart strategy, because Germany's partners don't want to see a boastful Germany. They're afraid of it. But Merkel has paid little attention to such concerns, preferring to protect German coffers than the tempers of others....

Merkel's Europe amounts to one underlying rule: Those who do not toe the line will be punished.

But he was unable to assert himself, because of another principle in Merkel's Europe: Those who pay make the rules.

It all sounds like an irony of history: The French wanted the euro to subdue the Germans. Now the euro is helping the Germans to subdue the French.

Protecting German Money

As such, Germany now has the Europe it wanted. It remains to be seen whether it will be happy with the outcome.

A German Europe arouses old and new resentments among the country's neighbors. It is a shift that has been particularly obvious in Greece and Portugal in recent months. In the past, many citizens were quick to blame "Brussels" when something went wrong in their countries. Now "Berlin" is turning into the new expletive.

This is why all German governments to date have tried to disguise their own interests and ambitions as European or trans-Atlantic. It was a smart strategy, because Germany's partners don't want to see a boastful Germany. They're afraid of it. But Merkel has paid little attention to such concerns, preferring to protect German coffers than the tempers of others.

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