Monday, November 7, 2011

Today's links

1--Everything you need to know about the European debt crisis in one post, Washington Post

Excerpt: Greece had a debt load of over 100 percent of GDP in 2001, when it joined the euro. But joining the euro lowered interest rates on its debt, because the bond markets no longer worried about inflation or a devalued currency. The result was an economic boom fueled by low interest rates, and ever-increasing debt due to a lower cost of borrowing. Greece hired Wall Street firms, most notably Goldman Sachs, to help hide its debt so as not to run afoul of E.U. rules. In October 2009, the conservative government was voted out, and the new socialist government announced that deficits were more than double previous estimates. Greek debt was immediately downgraded. The situation worsened in February 2010, when institutional bondholders started selling off Greek debt and ratings agencies kept downgrading it. Greece responded with a round of austerity measures...

The bailout/austerity package was a failure, leading to plummeting growth that actually worsened Greece’s financial situation. This past June, S&P reduced its rating of Greek debt yet again to CCC, the lowest rating of any government in the world. This spurred Papandreou to reshuffle his cabinet and force a confidence vote for his government. If the vote succeeded, it would have signaled Papandreou had enough support to pass additional austerity measures needed to ensure a second bailout. If it failed, the government would have fallen. The measure passed. As it was being debated, France and Germany hashed out another bailout package, which was finalized by the E.U. last month, that would provide another $145 billion and encourage private bondholders to help out. Moody’s responded by downgrading Greek debt yet again, and declaring that default was “virtually 100 percent” certain.

Ireland: Unlike Greece, Ireland had a balanced budget before the crisis hit. However, it also had a huge real estate bubble even larger than the one in the United States....

Portugal: Unlike Ireland and Greece, Portugal had one of the best recovery records during the first part of the economic crisis. However, panic due to the Greek debt crisis hit the country in late 2009 and early 2010, due largely to concern that the country could not grow over the long term, as well as higher deficit forecasts. It has below-average productivity, a legal structure some condemn as outdated, and strict labor market regulations that some say hobble growth. By November 2010, the market had pushed interest rates to a point where the country was under pressure to ask for a bailout. Concern increased when the parliament failed to pass budget cuts in March, and European leaders met to discuss the possibility of a rescue package. Finally, the Portuguese government requested an E.U. bailout in April. It was approved in May and totaled $116 billion. Portugal’s center-right party came to power in elections in June and remains committed to the bailout. Last month, Moody’s downgraded Portugal to junk status, saying there was a high risk of a second bailout.

Spain: Like Ireland, Spain experienced a real estate bubble leading up to the crisis, which hurt its growth despite the country’s unusually safe financial sector. Facing higher than expected deficits, Spain adopted austerity measures in May 2010. Fitch responded by downgrading its debt a notch from AAA, out of fear these measures would hurt growth. Moody’s followed suit in September. In March, Spain announced it had met its deficit reduction target for the previous year. Moody’s downgraded again, citing concern over slow growth....

Italy: Due to its huge debt load and slow growth, fears that Italy would develop a debt crisis have circulated for months, but they grew more pronounced after S&P downgraded its outlook on Italian debt in May. In June, Moody’s also threatened a downgrade, citing rising borrowing costs and the possibility that Italian Prime Minister Silvio Berlusconi, who is currently on trial for paying an underage girl for sex, might be forced out out. The next month, Berlusconi pushed through an austerity package intended to stave off a crisis as investors started selling off bonds. In recent days, interest rates have shot up amid fears that a Greek default would cause a domino effect, causing Spain and Italy to fall as well. The EFSF probably has enough funds to support Spain for a short time, but Italy, the euro zone’s third largest economy, would be incredibly expensive and perhaps impossible to bail out.

What it means for the euro zone: Many experts argue that the E.U.’s model, which concentrated monetary policy in the European Central Bank (ECB) while leaving fiscal policy to individual member states, is inherently unsustainable, as it denies member states monetary policy levers with which to help their recoveries. This also makes deficit-funded fiscal stimulus harder, as monetary policy can be used to keep borrowing costs low. When different countries are hit differently by a recession, as has happened now, the common monetary authority will act in ways that help some countries but not others. The ECB has pursued tight monetary policy that may prevent inflation in high-growth states like Germany but could also be worsening the recession in Greece, Spain, and other struggling states.

Most view one of two options going forward as likely. One is that the euro zone will lose members like Greece, Spain and Italy, either by them just leaving or by a default by any one of them, which could unravel the whole monetary union. Barry Eichengreen, a Berkeley economist, has said this would lead to a huge bank run and the “mother of all financial crises.” Another option is closer European fiscal union, so that fiscal policy can be coordinated at the continent level as well as monetary policy, bringing the E.U. closer to being a sovereign state.

What it means for the U.S.: U.S. financial institutions hold considerable European financial assets that could plummet in value if the euro zone enters a full-on crisis. For example, European debt makes up almost half of all money-market fund holdings. Direct exposure to the so-called PIIGS countries profiled above is limited, but exposure to France and Germany is high, and given, for example, France’s tight linkages with the Italian financial system, a Italian default could roil France and the U.S. in turn. The crisis is also leading to heavy spending cuts and reduced borrowing that hurts U.S. exports to Europe, further endangering the American recovery.

2--Oligarchy, American Style, Paul Krugman, Economist's View

Excerpt: Why does rising inequality matter?:

Oligarchy, American Style, by Paul Krugman, Commentary, NY Times: Inequality is back in the news, largely thanks to Occupy Wall Street, but with an assist from the Congressional Budget Office. ... The budget office ... documented a sharp decline in the share of total income going to lower- and middle-income Americans. ...

So who is getting the big gains? A very small, wealthy minority.(see chart)

The budget office report tells us that essentially all of the upward redistribution of income away from the bottom 80 percent has gone to the highest-income 1 percent of Americans. That is, the protesters who portray themselves as representing the interests of the 99 percent have it basically right, and the pundits solemnly assuring them that it’s really about education, not the gains of a small elite, have it completely wrong.

If anything, the protesters are setting the cutoff too low..., almost two-thirds of the rising share of the top percentile in income actually went to the top 0.1 percent...

... extreme concentration of income is incompatible with real democracy. Can anyone seriously deny that our political system is being warped by the influence of big money, and that the warping is getting worse as the wealth of a few grows ever larger?

Some pundits are still trying to dismiss concerns about rising inequality as somehow foolish. But the truth is that the whole nature of our society is at stake.

3--Summers: To end slump, United States must spend, MIT News

Excerpt: “No thoughtful person can look at the U.S. economy today and believe that the principal constraint on expansion of output and employment is anything other than the lack of demand experienced by firms,” Summers said. That is, not enough consumers in the country have sufficient spending power; government programs employing more people would change that, he asserted at the event, hosted by MIT’s Undergraduate Economics Association.

“If the private sector is either unable or unwilling to borrow and spend on a sufficient scale, then there is a substantial role for government in doing that,” added Summers, who also served as Treasury secretary in the Clinton administration. “That’s the right macroeconomics. It’s also common sense.”

Lawmakers in Washington are currently proposing new budget cuts. By contrast, Summers recommended, “government should be embarked on a multiyear, substantial investment program in infrastructure.”

Summers claimed that monetary policy — essentially control of interest rates — would normally by itself spur growth, by making it easier for businesses to borrow and spend. But with Federal Reserve rates near zero, that option is now impossible. “When the zero interest rate binds, everything works differently,” Summers said....

4--The Greek revolt: Good news for Europe, Charles Wyplosz, VOX EU

Excerpt: There is nothing wrong with an attempt to restore sovereignty and with a message from its inventors that democracy is a fundamental value, even if it is difficult, even if it stands in the way of the technocratic approach that has prevailed all along.

Following the wrong road to the bitter end

From the very beginning of the sovereign crisis, it was clear that an austerity package imposed on a country in a deep recession would fail. It was clear that Greece would have to restructure its debt.

•After more than year of denial and negation, EZ leaders finally accepted that Greece could default. We are, however, far from implementation.

•The October Summit has been long on words but short on precision; the 50% voluntary orderly debt-cancellation is an oxymoron.

The Summit strengthened the austerity measures imposed on Greece and sent a team to go deeper into its internal accounts to ensure compliance.

But the worst news from the Summit is the announcement that EZ leaders believe the fiction that somehow the EFSF can be leveraged up to €1 trillion without adding fresh commitments from the stronger Eurozone countries.

And finally, the Summit ignored the unavoidable fact that the ECB will have to carry out most of the rescue operation, an idea that is finally seeping through....

What happens next? Default and contagion

The political situation in Greece is murky so detailed predictions are implausible. Some basic principles, however, are likely to prevail, as indeed they have done over the last two years.

•It is likely that Greece will be cut out from external funding, so it will default.

•The long feared but unavoidable involuntary and disorderly default will prompt a banking crisis, certainly in Greece but possibly elsewhere as the collapse of MF Global suggests.

•Contagion will soon follow.

Will it be Portugal? Will it be Italy? Probably both will go the IMF and greet the Troika in their respective capitals. More banks will fail in Europe and elsewhere. At that stage, France will come to the front line. This will be a repeat, of worse, of what followed Lehman Brothers, but unlike the Lehman’s debacle, this outcome was clear from the start. Any clearheaded scholar of debt crises could see how this would end. The writing was on the wall all along.

The bright spot is that such a crash may bring us closer to the beginning of the end of the crisis.

An alternative is that a new Greek government, coalition or not, promptly agrees to the new package. The economy will keep contracting and the deficit will not be significantly reduced. In this case, European policymakers will feel vindicated and they will insist on pursuing the strategy of the October Summit.

No matter what, however, the debt will still have to be restructured and it will be disorderly, so we revert to the previous scenario.

Maybe this is when policies will finally be reappraised. A few more months will have been lost and the costs – in terms of unemployment, lost income, and debt accumulation – will have increased further. For example, in 2008, the Greek debt stood at 110% of GDP. Today it is about 170% and the debt restructuring plan aims at bringing it down to 120%, higher than when it was first deemed unsustainable.

Where is the end of the road?

At some point down the road, the ECB will accept that it is a lender of last resort....

•Banks will have to be bailed out, possibly with EFSF resources, but in the Bagehot way that minimises moral hazard and maximises taxpayer protection.

•That means wiping out shareholders and, if need be, unsecured bondholders.

This is what Sweden did in the early 1990s; it even hired foreign managers – foreign to the web of cross-interests that link bankers and politicians – to quickly return the nationalized banks to profitability and thus protect the taxpayers.

Then, when the crisis is over, the time will come to fix the Eurozone flaws. This means imposing fiscal self-discipline and getting serious about bank regulation.

Conclusion

It was clear from May 2010 that Eurozone leaders took the wrong path because they fundamentally misunderstood the nature and depth of the problem. They thought they could brazen their way out and things would go back to like they were in the 2000s.

But the global crisis, with its extra debt and slow growth, revealed all the flaws that growth had hidden in the euro’s first ten years. Fixing these will require the Eurozone leaders and the ECB to be playing on the same side with credible rules that clearly define each player’s behaviour.

5--Italian Bond Yields Soar, Wall Street Journal

Excerpt: —European government bond markets reeled Friday, sending Italian borrowing costs soaring after the Group of 20 industrialized and emerging countries failed to agree on how the International Monetary Fund could help ease the euro zone's debt crisis.

Investors had hoped that tapping the IMF could augment European efforts to shore up its defenses against possible government debt crises. So far, European efforts to pump up its own rescue fund have been bogged down by talks over details.

German Chancellor Angela Merkel acknowledged that no G-20 country has committed itself to investing in the European Financial Stability Facility, the euro-zone bailout fund. She indicated the G-20 leaders agreed in principle that the IMF and the EFSF could work together, but how they would do so is still unclear.

"News that the G-20 has made no progress on the debt crisis issue is a big negative. We are also seeing heavy selling by real-money investors," said a senior trader in London.

An afternoon selloff pushed 10-year yields for Italian bonds to their highest levels since the inception of the euro. The yield on the benchmark 10-year Italian bond climbed 0.23 percentage points to 6.40%, matching a euro-era record. The extra yield demanded by investors to hold 10-year Italian bonds instead of German bunds widened 0.31 percentage points to 4.59 percentage points.

Traders were also unnerved by a move by the IMF to monitor Italy's austerity drive, although Prime Minister Silvio Berlusconi said he doesn't think Italy needs a loan from the IMF.

A sustained weakness in Italian bonds should worry policy makers. Italy's large size—its government bond market is the third-largest in the world—would severely test the firefighting capabilities of the EFSF should the country's borrowing costs rise to unsustainable levels.

The 6% mark on the 10-year bond is seen as crucial because a breach of that level in the past has portended a sharp rise in bond yields of other fiscally frail countries.

Default insurance costs for Italy were higher, with its five-year credit default swap pushing 0.08 percentage points wider to 4.91 percentage points, according to data provider Markit. This means it now costs an average of $491,000 a year to insure $10 million of debt issued by the country.

6---ECB's Teutonic Mario chills bond rescue hopes, The Telegraph

Excerpt: Investors are slowly digesting the bittersweet message from Mario Draghi, the Teutonic Italian now at the helm of the European Central Bank (ECB).

While he surprised and delighted markets with a quarter-point cut in interest rates to 1.25pc, reversing last July's ill-judged rise, he also dashed hopes for mass bond purchases to save Italy and for radical action to stop the crisis spiralling out of control. That matters far more.

"What everybody wanted to know was whether the ECB would step up to the plate and do something grand and we didn't get that at all," said David Owen, of Jefferies Fixed Income.

In a sombre debut, Mr Draghi warned that Euroland's economy is "heading towards mild recession by year-end" with mounting risks as the debt crisis drags on....

To drive home the point, Mr Draghi issued a categoric warning that the ECB would not act as final guarantor of the system, or step in to rescue feckless states. "It would be pointless to think that sovereign bond rates can stably be brought down for a protracted period by outside intervention. The first and foremost responsibility lies with national economic policies. Put your public finances in order.

"What makes you think that to become the lender of last resort for governments is actually the thing that you need to keep the euro area together? I don't think that is really in the remit of the ECB."

A chorus of voices from global bodies, led by the US Treasury, have called on Europe to mobilise the ECB's full lending power to restore confidence. City banks say the ECB may have to commit up to €3 trillion to contain the brushfire.

Mr Draghi was at pains to stress the bank's intervention to buy southern European bonds could be justified only if it was "temporary", "limited in amount", and undertaken with the strict purpose of "restoring monetary transmission" rather than propping up states. The language is code for what amounts to a German veto on further bond purchases. Two German ECB members have already resigned in protest over the policy, and German president Christian Wulff has accused the bank of going "far beyond its mandate", subverting the Lisbon Treaty.

Mr Cailloux said the ECB has been buying bonds at a €450bn annual rate since "D-day" in August and needs to step up the pace to cap yields. "The situation is critical. This is the biggest financial crisis Europe has ever seen. Persuading Germany to get fully behind the ECB is going to be long and drawn out. I don't know whether we have the time," he said.

What is clear is that the ECB does not have a treaty mandate to rescue states that cannot fund themselves at a viable cost. The bank already faces a challenge at the European Court.

7--China’s Shadow Banking System: The Next Subprime?, WSJ

Excerpt: It’s always something, isn’t it? We’re still cleaning up the mess from the massive debt-fueled housing bubble in the US when suddenly we’ve got to deal with Europe’s public finances. We haven’t even gotten started on that one when a third debt debacle starts rumbling, in China.

We all know by now the standard-issue worry about China — too much debt-fueled building too fast, raising the risk of a hard landing. There’s an additional wrinkle to the story, too, one that might be more worrying, as it has a bit of the feel of the subprime mortgage debacle that took down the global economy just a few years ago.

We’re talking about a large, off-balance-sheet world of debt, China’s “shadow banking” system, which has grown to make up about 22% of all new financing in China, Barclays Capital reports.

The system is made up partly of bank loans, trust companies that “sell wealth-management products to the public,” Barclays writes, while also doing some lending on the side, along with similar loans using banks as intermediaries. This lending helps finance infrastructure, industrial and commercial projects and real estate.

This corner of the market is poorly regulated and opaque, raising worries about what dangers lurk within.

Barclays economists today write that they don’t yet see it as an existential threat — though it poses serious threats:

We believe the bottom line is that we might see a wave of redemptions in the coming year. Although many of the shadow banking-funded projects might remain financially sound, even isolated cases of default could lead to widespread redemption, since individual investors have little clear information about the financial positions of the projects in which they invested. This also means that in the short term, the amount of trust lending is likely to decline, while more money may flow back to the banking system in the form of deposits.

Finally, will such developments lead to systemic economic and financial risks? At this stage, it looks very unlikely to us. Both trust and entrusted loans have limited direct-risk exposure to the commercial banks. Banks’ direct involvement in trust lending is low (except for the development of “Bank-trust cooperation products” which is now under strict regulations), as individuals as a rule do not borrow to invest in wealth management products. Banks do act as intermediaries for entrusted loans. But the funds are from designated deposits by corporations, not from the banks’ own deposits. If such lending defaulted, then individuals and corporations would incur significant financial losses, but this would not add directly to the nonperforming loans (NPLs) of the commercial banks. Losses by individual investors could cause significant social and political tensions, however, which could eventually require intervention by the regulators or even the government.

But, of course, the commercial banks and other financial institutions cannot be entirely insulated from these developments. For instance, while defaults of trust loans borrowed by property developers would not cause an increase in NPLs, property developers already borrow quite massively from the banks, accounting for about 8% of total bank credit. If property developers face redemption from investors, then their ability to repay bank loans would be seriously affected. Similarly, SMEs still borrow a large volume of loans with the banks, accounting for about 22% of total outstanding loans. So the second-round effect could increase NPLs at the banks.

Therefore, the risks inherent in shadow banking are high at the moment, as housing prices decline and economic growth moderates. Defaults of some projects could lead to widespread redemption. It is possible that the size of trust financing might actually fall in relative terms. Investors, including both individuals and corporations, will likely suffer significant financial losses. Risks for financial institutions may also rise, as an indirect result of deterioration of trust financing conditions. In the short term, however, these are unlikely to represent systemic financial risks, at least in the immediate future, as we will probably not see the vicious cycle among falling asset prices, deteriorating balance sheets and forced selling-off in China. By contrast, social and political tensions might be a bigger worry. Of course, if deterioration of trust financing persists, especially if it is accompanied by a steep hard landing of the economy and a deep correction of housing prices, then the financial risks are bound to turn systemic.

8--Approaching the Italian endgame, FT Alphaville

Excerpt: We are also quite close to the point beyond which other sovereigns have found it very difficult to return, when yields breach 6% (Figure 3). This is partly because feedback loops kick in and additional widening could easily accelerate. For example, if spreads of 450bp on 10-year governments are exceeded for five consecutive business days, LCH haircut requirements for banks borrowing against Italian collateral will rise by 15%. If banks liquidate their BTP holdings, this will simply exacerbate the problem. If instead they choose to seek funding at the ECB (for example, if they are running short of collateral), publicity around different countries’ banks’ usage of ECB facilities seems likely to lead to more selling in both the banks and the countries concerned. This is part of the reason why when Portuguese spreads breached this point, not only did the sovereign yield quite rapidly back up further, eventually breaching 10%, but the rating agencies followed up with sovereign and bank downgrades for good measure. Admittedly this was all part of Portugal’s losing access to markets and applying for a bail-out, but we see no reason why the feedback loops should operate any differently for Italy.

Unsurprisingly, King — like probably everyone apart from the man himself — doesn’t think Silvio Berlusconi can stop this rot, and regardless, the “reform” measures will only cut Italian growth further. This leaves — guess who! — Super Mario. King thinks further, “quite aggressive” bond purchases are possible and “in theory, [the ECB] could easily do much more”. But…

…we struggle to think that a complete change in strategy lies immediately around the corner.

9--Why you shouldn't just read the headlines on US unemployment, Bond Vigilantes

Excerpt: Everyone is familiar with the deterioration in US labour market. Figures out today show that the unemployment rate has more than doubled to 9.1% from its pre-crisis low of 4.4% in 2007. The question is how accurately does the unemployment number reflect the true state of the US labour market? To understand this, we need to grasp how the unemployment numbers are compiled....

For those who think the U-3 calculation is too stringent (like us) to get the full picture of what is going on in the labour market, the BLS produces a broader measure of unemployment known as “U-6”. It basically includes marginally attached and discouraged workers in the unemployment calculation. It also includes those people that are working part-time but would rather be full-time. On this measure, the US labour market appears to be deteriorating once more, and the unemployment rate as calculated by this measure is 16.5%. This suggests around 11.4 million Americans are marginally attached or discouraged workers (from 2001-2008, the number of marginally attached or discouraged workers was on average 5.8m people). According to the BLS, 11.4m Americans do not have an income, do not pay income tax, and do not contribute producing goods and services. Indeed, almost 15% of Americans (45.8m) are now on food stamps. This is a substantial drag on economic growth...

In writing this blog, we’ve had an eyebrow-raising moment. According to the BLS, the American workforce (employed plus unemployed people) has actually shrunk since October 2008. It doesn’t seem to make sense, given most estimates tend to suggest the US population is growing at 1.0% per year, in part due to immigration. We would expect labour force growth to slow due to the retiring cohort of baby boomers and peak in the participation of women in the labour force. But it shouldn’t be negative....

The reason it is negative is because the BLS doesn’t count those who are marginally attached or discouraged from entering the labour force (as shown above, around 11.4m people). This has the result of reducing the size of the labour force, resulting in a lower unemployment rate percentage. This is why the official unemployment rate is much lower than the broader U-6 measure and has actually been falling. More and more people are becoming so disenchanted with their job prospects that they have simply stopped looking for a job.

Despite the idiosyncrasies in calculating the unemployment numbers, they are the best we’ve got. If the Fed is really serious about targeting the unemployment rate – as Chicago Fed President Charles Evans has suggested – then it should have a good hard look at including those people who are underemployed, discouraged or marginally attached to the labour force. The official headline rate – which gets the most coverage amongst the financial community – overstates the current health of the US labour market.

10--Italy In the Cross Hairs, Credit Writedowns

Excerpt: Events continue to spiral beyond the control of European policy-makers. With so much time and effort being put into Greece, the troika now finds itself facing a much bigger problem: Italy. While it has been difficult to remain committed to a short EUR trade, we believe the crisis is entering into territory that will take a huge, sharp toll on the single currency in the coming days. Our year-end target of 1.29 remains intact, and we think the risk is that we hit it before the month is out.

Italian borrowing costs have continued to march upwards to new euro-era highs, with the 10-year quickly approaching the 7% level that many see as the point of no return. While it may be tempting to talk about contagion, we note that Italian debt numbers were already bad heading into this crisis. Rather, we think it is the failure of euro zone policy-makers to effectively bring closure to its debt crisis that has led to deterioration in sentiment that has ultimately brought Italy into crisis too. It was reported today in newswires that the IMF approached Italy about a stabilization program, but that Italy turned it down and instead requested IMF monitoring. This may have actually been the correct course of action for Italy. As we have noted countless times before, the current crisis response structure from the troika is simply too small to be able to help Italy in any meaningful manner.

That Italy is actually running a primary budget surplus means very little when markets are looking at a debt/GDP level above 120% in 2011. In the euro zone, only Greece is higher. With Europe and Italy heading into recession, it will be that much harder for debt-laden countries to improve that ratio. Italy has already been downgraded by all three agencies to stand at A/A2/A+, and further downside is seen as our sovereign ratings model has it at A-/A3/A-. While ratings have lost a lot of their significance during this debt crisis, we simply note that underlying fundamentals in the periphery are getting worse, not better, and that the recession there will only make things worse on the fiscal side.

11--Papandreou pledges Greek government of national unity, WSWS

Excerpt: Papandreou will reportedly step down in favour of his finance minister, Evangelos Venizelos.

Pasok will now join with smaller parties in the 300-seat parliament to give it a larger majority—of a possible 180 seats. The coalition will not include its right-wing opposition, New Democracy, which demanded early elections.

A crucial lesson must be understood from the events of the past week. Every political development in Greece now proceeds at the behest of the financial speculators, the major powers in the European Union and the IMF.

Even the timing of the vote was determined so that the markets in Europe and the United States were closed to avoid any negative reaction.

On October 31, Papandreou announced his decision to hold a referendum on the austerity measures being demanded by the “troika” in return for the latest tranche of loans to pay Greece’s debts to the banks.

His aim was only to create the best political conditions for imposing these measures. He wanted to force the opposition parties, including the right-wing New Democracy, and the trade unions to abandon their token opposition and rally behind a national effort to impose savage austerity. Back in July, he had already offered New Democracy leader Antonis Samaras to form a national unity government. The offer was rejected—precipitating a vote of no confidence. This time he hoped for success.

Instead, he provoked a run on global markets—the largest two-day slide since 2008. Amid talk of contagion spreading to Italy, the G20 meeting in Cannes, France was thrown into crisis. George Soros, the billionaire speculator, warned of a Greek default and “a run on the banks in other countries as well. That’s the danger of a meltdown.”...

From the standpoint of the elementary concerns of Greek workers for their jobs and livelihoods, there is no difference between any of the protagonists in yesterday’s heated debate. Pasok, having won the confidence vote, will now ratify the austerity measures with the support of the opposition parties. If Pasok had fallen, however, then any newly elected government would have passed the same measures.

The greatest danger confronting workers is the absence of an independent perspective and leadership to take forward the necessary political struggle against the Greek bourgeoisie, its parties and its paymasters in the EU and IMF.

Massive opposition exists to Pasok and the troika’s austerity agenda. But this has remained under the leadership of the two main trade union federations, ADEDY and the GSEE. They have limited workers to an endless round of one-day protest strikes, while refusing to wage the necessary political struggle to bring down Pasok....

Everywhere the demobilisation of the working class by the trade unions and their ex-left hangers-on hands the initiative to the bourgeoisie and their parties.

In Italy, for example, the government of Prime Minister Silvio Berlusconi could fail to secure a majority on November 15 and could even fall due to a vote next Tuesday on the 2010 budget due to a series of desertions of MPs. But should his government fall, Berlusconi would be replaced by parties committed to a more determined implementation of the demands for budget cuts...

The working class is faced with life and death struggles in which the questions of leadership, programme and perspective are decisive. The entire gamut of political representatives of the financial elite must be brought down and replaced with workers’ governments pledged to the unification of the European continent on socialist foundations.

12---How do you create a 'firewall' in Europe, Die Tageszeitung via der Speigel

Excerpt: "How do you create a 'firewall' in Europe? How do you protect Italy and Spain from being driven to a state of bankruptcy? This question is unbelievably explosive -- particularly if you look at recent news, as unlikely as it may seem at first glance. On Thursday, the major French bank BNP published its quarterly report and disclosed that it had sold a large share of its Spanish and Italian bond holdings -- despite the enormous losses of capital and write downs that entailed. The Paribas action made clear that, by now, Italian government securities are considered to be junk bonds that must be dispensed with quickly."

"The development suggests that Italy is close to bankruptcy given that the country has a national debt of €1.9 trillion that must be regularly refinanced. But what bank is going to buy Italian government bonds if its competitors are selling them?"

"This danger is far greater than some theoretically conceivable development, as climbing risk premiums being demanded for Italian government bonds show. The euro zone is facing a crash -- and it may come now rather than at some point many years down the rode. It is entirely inconceivable that the euro would survive if Italy and Spain topple."

"So what can be done? One thing is certain: Despite its recent €1 trillion in leveraging, we can forget about the EFSF backstop fund. Investors don't have faith in it; otherwise they wouldn't demand constantly increasing interest rates on Italian and Spanish bonds. The last thing remaining for a rescue is the European Central Bank. Like the US Fed, it could purchase unlimited amounts of government bonds until the panic among investors quiets down. That's precisely what Obama proposed during his meeting with Chancellor Merkel in Cannes."

"The chancellor has declined because she knows most Germans wouldn't accept having the ECB 'print money'. But the chancellor and Germany need to know: That is the cheapest solution. A crash of the euro would be infinitely more expensive.

13--Worries About Italy: Growth and Politics, The Wilder Report

Excerpt: Current bond market pricing implies a 6.17% yield on a 10-yr Italian government bond, or 430 basis points (%/100) over a like German government bond. I’d call this distressed levels for Italian debt, especially for an economy that is very likely contracting as we speak. Today Mark Thoma points us to Kash Mansori’s article on “Italy’s future”. In the article, Kash points out that the [market] “is worried about Italian debt dynamics simply and purely because of skyrocketing interest rate expenses that the Italian government is now facing thanks to the eurozone debt crisis.”

I disagree and comment that his argument is circular in nature. See, the market is pricing in Italian solvency risk by way of a rising risk premium, which then portends more solvency risk as borrowing costs rise. But the market is not pricing in solvency risk because of the risk premium, rather the risk premium is rising due to (1) terrible growth dynamics in Italy, and (2) heightened political risk in Italy.

The PMI’s illustrate the likely recession in Italy – Roubini Global Economics is pointing to negative growth starting in Q3 2011. Those countries that issue debt in a foreign currency (since Italy does not own the euro rather it uses the euro) are subject to market constraints. And with negative growth comes higher government deficits; but the market is not satisfied with the high Italian public debt levels. Therefore, bond investors push for ‘fiscal discipline’ via a rising risk premium.

Another driver of the increasing Italian risk premium is political risk...

...interest rates are rising as a consequence of the deteriorating economic fundamentals and questionable politics; that’s what the market is worried about. I do agree with Kash, though, that austerity is not the answer. But that’s how the Germans are rolling. This idea of fiscal austerity and gaining competitiveness is the new mantra for Europe - a mantra that will probably make or break the EA.

14--G20 summit failure brings world recession closer, Nick Beams, WSWS

Excerpt: The establishment of the eurozone in 1999 was driven by powerful economic forces, which necessitated the establishment of a single currency in order to cut transaction costs and facilitate the movement of finances across the increasingly integrated European economy.

However, financial integration did not extend to the establishment of a central bank that would function as a lender of last resort. This was ruled out by the stronger, northern European economies, especially Germany, on the basis that the eurozone would become a “transfer union” in which funds would be continually channelled to the poorer regions.

In other words, the eurozone embodied in its very foundations one of the most fundamental contradictions of the capitalist economy: that between the integrated character of economic activity and the conflicting interests of rival nation-states.

With the onset of the sovereign debt crisis, attempts have been made to overcome this fatal flaw. The European Financial Stability Facility (EFSF), set up in May 2010 as the Greek financial crisis was developing and since augmented at the summits in July and October, is supposed to provide a bailout for indebted countries. But it is not a fund with its own pool of money able to provide lender of last resort facilities. Rather, it is a so-called special purpose vehicle for the raising of funds on international financial markets for indebted countries.



The EFSF does not overcome the contradictions of the eurozone; it just reproduces them in ever-more bizarre forms. Under the structure of the EFSF, all countries of the eurozone act as its guarantor on financial markets. This means that indebted countries are a backer for the very fund that is supposedly bailing them. If a country such as Italy—a major guarantor—requires a bailout, there is a big question mark over the ability of the EFSF to raise the necessary funds on international markets.



The G20 meeting provided no assistance. The idea that the IMF might lend money to the EFSF was scotched, with IMF managing director Christine Lagarde making clear that the fund “lends money to countries, not to legal entities.”...

The Europeans want funds from the IMF for the EFSF but are thwarted by the US and Britain. The US wants China to lift the value of the renminbi, but the Chinese regime cannot do so for fear of losing international competitiveness. There is near universal agreement that an export “surplus” country like Germany must lift expenditure at home and boost consumption in order to correct global imbalances. Germany insists that the problem is not its surpluses but the debts of other countries. And the list goes on … everyone for himself and devil take the hindmost....

no solution to the global crisis can even begin to be advanced because of the irreconcilable conflict of the national interests among the major capitalist powers.



The eruption of this conflict to the very centre of world economics and politics has the most profound historical significance. Marx explained that a revolutionary epoch arises when “the material productive forces of society come into conflict with the existing relations of production.” Such a period has now opened up. The ruling global elites have no answer to the crisis of their system—unless war, depression, and impoverishment of millions of people be considered a solution.

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