Wednesday, May 23, 2012

Today's links

1--Integrate or die? UBS via zero hedge

Excerpt:  The anticipation, and not the act of leaving, will in all probability lead to a cessation of international trade in the conventional sense, the inability of the government to raise any finance in the markets, and bank runs.

The contagion risk

In the event of a Greek exit, contagion risks clearly exist. There seems to be a great deal of official complacency about the ability of firewalls to prevent this. The risk lies in the contagion of bank runs. Bank runs, if they occur, will likely arise because of existential risks about the Euro, rather than solvency or liquidity risks about banking systems. If this does occur, then pan Euro deposit guarantee schemes (however worthy and desirable) are unlikely to provide a remedy. The possibility of other economies joining Greece in a disorderly departure from the Euro must be assumed to be very high – and it is this risk that suggests rational policy-makers would not wish to gamble on the probabilities....
The Euro area faces some tough decisions. Either there is more Europe – integration within the Euro area and a subsuming of sovereignty into a commonwealth of some description. The alternative is a disorderly break-up. An orderly break-up is simply not an option, because to embark on an orderly break-up is to invite a disorderly break-up in anticipation of the end-game. Either we have a Euro confederation and a commitment to the integrity of the union of seventeen countries, or once again continental Europe will cry “havoc”.

2--Hoover on "austerity", credit writedowns

Excerpt:  Below is a 31 May 1932 Address to the Senate on the National Economy in which the President laid out his agenda for fixing the US economy. He had three overarching goals:

1.cutting expenses (and raising taxes to balance the budget)
2.stabilising the US dollar by signalling fiscal discipline
3.mitigating the ill effects of depression through relief and aid for the unemployed.

The continued downward movement in the economic life of the country has been particularly accelerated during the past few days, and it relates in part definitely to the financial program of the Government. There can be no doubt that superimposed upon other causes the long-continued delays in the passage of legislation providing for such reduction in expenses and such addition to revenues as would balance the budget, together with proposals of projects which would greatly increase governmental expenditures, have given rise to doubt and anxiety as to the ability of our Government to meet its responsibilities. These fears and doubts have been foolishly exaggerated in foreign countries. They know from bitter experience that the course of unbalanced budgets is the road of ruin. They do not realize that slow as our processes may be we are determined and have the resources to place the finances of the United States on an unassailable basis

3--No "bottom" in housing yet, Bloomberg

Excerpt:  U.S. house prices haven’t yet bottomed out in regional markets clogged by the slow handling of foreclosures, according to Martin Pfinsgraff, a deputy comptroller at the Office of the Comptroller of the Currency.

“It does not appear that we have yet hit bottom in the pricing of housing stock in many regional markets and the issues attendant to resolution of foreclosure processing have delayed market clearing from occurring more quickly,” Pfinsgraff, who focuses on credit and market risk at the agency, said in a speech today in New York.

4--Leader of Greece's Radical Left party, Alexis Tsipras on austerity, Der Speigel

Excerpt:  "Austerity has evidently failed because Greek society has been destroyed, the production base has been dissolved. Our country has been in a deep recession for the fifth consecutive year, this has never happened in Europe in peacetime."

German taxpayers were having their money thrown "into a bottomless pit" in Greece, he said -- because bankers were getting most of it, and the Greek people weren't seeing any benefit.

"If we had had a different bailout program from the start that wasn't based on strict austerity but on growth and job creation, the Greeks could get back on their feet and pay back the debt," Tsipras said. "If you're giving a patient a drug that's making him worse the solution isn't to increase the dosage but to stop giving the drug.

"If the patient can't be cured the disease will spread to the whole of Europe and we all carry a historic responsibility to prevent this."

5--Obama spending binge never happened;  Commentary: Government outlays rising at slowest pace since 1950s, marketwatch

Excerpt: Almost everyone believes that Obama has presided over a massive increase in federal spending, an “inferno” of spending that threatens our jobs, our businesses and our children’s future. Even Democrats seem to think it’s true.

Although there was a big stimulus bill under Obama, federal spending is rising at the slowest pace since Dwight Eisenhower brought the Korean War to an end in the 1950s.

Even hapless Herbert Hoover managed to increase spending more than Obama has.

Here are the facts, according to the official government statistics:

• In the 2009 fiscal year — the last of George W. Bush’s presidency — federal spending rose by 17.9% from $2.98 trillion to $3.52 trillion. Check the official numbers at the Office of Management and Budget.

• In fiscal 2010 — the first budget under Obama — spending fell 1.8% to $3.46 trillion.

• In fiscal 2011, spending rose 4.3% to $3.60 trillion.

• In fiscal 2012, spending is set to rise 0.7% to $3.63 trillion, according to the Congressional Budget Office’s estimate of the budget that was agreed to last August.

• Finally in fiscal 2013 — the final budget of Obama’s term — spending is scheduled to fall 1.3% to $3.58 trillion. Read the CBO’s latest budget outlook.

Over Obama’s four budget years, federal spending is on track to rise from $3.52 trillion to $3.58 trillion, an annualized increase of just 0.4%.

There has been no huge increase in spending under the current president, despite what you hear.

6--Economists React: What Happens If Greece Leaves Euro Zone?, WSJ

Excerpt:  JP MORGAN: There’s now a 50% chance of Greece leaving, up from 20% before the country’s politicians failed to produce a coalition government. Regional unemployment could be higher than “anything seen in the past half-century.” In terms of policy responses “the euro-system’s direct exposure appears manageable in the context of large revaluation gains but if losses exceed the readily available buffer, euro-zone sovereigns may be called upon to make immediate capital injections.”

Among the paths it lays out from here, the “chaos scenario” for JP Morgan goes as follows: “outright victory by the Radical Left or significant influence in a coalition and declaration of a debt moratorium, which the ECB/International Monetary Fund/European Union troika would respond to by ending the financing program and denying Greece access to ECB borrowing. If Greece then introduced the drachma, EUR/USD would probably decline to 1.10 due to widespread capital flight from the region. If instead the government backtracked and re-engaged the troika given that 80% of the electorate favors retaining the euro, the currency would stabilize around 1.20.”

A Greek departure is likely to be disruptive and disorderly, pushing the euro to around $1.15-1.10 against the dollar and causing a 2% drop in euro-zone gross domestic product....

“In the very negative scenario, the game of chicken between Syriza and the EU/IMF gets out of control and ends with no agreement. The EU/IMF stop the support for Greece and the ECB no longer accepts Greek bonds as collateral. Greece effectively has to undergo the fiscal adjustment overnight. There is a severe run on the Greek banks. Greece defaults on its remaining public debt. The introduction of a new currency would take some time. This scenario would result in initial market chaos. Also, Spain and Italy are likely to come under pressure.”

7--Panayiotis Lafazanis: Farewell to the memorandum, Athens News

8--Bernanke to Congress: We're Much Closer to Total Destruction Than You Think, CBC

Excerpt: Bernanke scaremongering

9--Not so organic - USDA accused of conspiracy with agribusiness insiders, RT

Excerpt: A watchdog group that handles issues dealing with the American agriculture industry is lashing out at the federal government for allegedly corrupting the advisory board that oversees organic food stuffs in the United States.

The Cornucopia Institute from the state of Wisconsin is calling out the US Department of Agriculture (USDA) in their latest report by saying that the governmental panel that determines what is and isn’t considered “organic” is stacked with federal insiders with an alternative agenda.

According to the findings in The Organic Watergate paper released this week, the USDA’s National Organic Standards Board (NOSB) has taken a turn for the worse in recent years, hiring staffers in bed with corporate entities that aren’t as concerned with protecting consumers as they are with making a buck.

"This is the proverbial fox watching the organic chicken coop,” Mark A. Kastel, co-director of The Cornucopia Institute, says in a press release

10--Fiscal policy works, economists view

Excerpt:  I find two types of evidence that predate the crisis even more compelling. The first comes from wars. The fact that the major increases in government purchases in the two world wars and the Korean War were associated with booms in economic activity, and that those booms occurred despite very large tax increases and extensive microeconomic interventions whose purpose was to restrict private demand, seems to me overwhelming evidence that fiscal stimulus matters.

The other type of evidence is more general evidence about the functioning of the macroeconomy. We know that monetary policy has powerful real effects, which means that aggregate demand matters. We know that current disposable income is important to consumption. And we know that cash flow and sales have strong effects on investment.It would take a strange combination of circumstances for those things to be true but for fiscal policy, which one would expect to work through those channels, not to be effective. Given this wide range of evidence—not to mention the large body of pre-crisis work on the effects of fiscal policy that I have not even touched on—I think we should view the question of whether fiscal stimulus is effective as settled. ...

11--War-Gaming Greek Euro Exit Shows Hazards in 46-Hour Weekend, Bloomberg

Excerpt:   Greece may have only a 46-hour window of opportunity should it need to plot a route out of the euro.

That’s how much time the country’s leaders would probably have to enact any departure from the single currency while global markets are largely closed, from the end of trading in New York on a Friday to Monday’s market opening in Wellington, New Zealand, based on a synthesis of euro-exit scenarios from 21 economists, analysts and academics...

“I am completely convinced they could not orchestrate an orderly exit,” said Erik Nielsen, chief economist at UniCredit SpA in London. “This is a country that can’t implement laws, so how in the world are they going to secretly agree to print money, control the banks, control capital flows and think this is going to be orderly? It’s completely impossible.” ...

“There is no reason to think there won’t be riots and violence,” said Lefteris Farmakis, a strategist at Nomura International Plc in London. “It would be a pretty disastrous situation. People have no understanding of the consequences of a euro exit.”

12--European Banks Unprepared for Greek Exit From Euro, Bloomberg

Excerpt:  Europe’s banks, sitting on $1.19 trillion of debt to Spain, Portugal, Italy and Ireland, are facing a wave of losses if Greece abandons the euro.

While lenders have increased capital buffers, written down Greek bonds and used central-bank loans to help refinance units in southern Europe, they remain vulnerable to the contagion that might follow a withdrawal, investors say. Even with more than two years of preparation, banks still are at risk of deposit flight and rising defaults in other indebted euro nations.

A Greek exit would be a Pandora’s box,” said Jacques- Pascal Porta, who helps manage $570 million at Ofi Gestion Privee in Paris, including shares in Deutsche Bank AG (DBK) and BNP Paribas SA. (BNP) “It’s a disaster that would leave the door open to other disasters. The euro’s credibility will be weakened, and it would set a precedent: Why couldn’t an exit happen for Spain, for Italy, and even for France?”

Banks in Greece, Ireland, Italy, Portugal and Spain saw a decline of 80.6 billion euros ($103 billion), or 3.2 percent, in household and corporate deposits from the end of 2010 through the end of March, European Central Bank data show. Lenders in Germany and France saw an increase in deposits of 217.4 billion euros, or 6.3 percent, in the same period.

Greek central bank head George Provopoulos told President Karolos Papoulias last week that savers have withdrawn as much as 700 million euros and the situation may worsen, according to the transcript of the president’s meeting with party leaders published May 15. Greece had 160 billion euros of bank deposits on March 30, down almost 75 billion euros from the peak in 2009, according to the latest data from the central bank...

The ECB’s unprecedented provision of 1.02 trillion euros in three-year cash in December and February helped calm financial markets in the first quarter by removing concern that banks unwilling to lend to one another would run out of cash. Lenders in Spain and Italy also used the funds to buy sovereign debt, reducing government borrowing costs.

The rebound was short-lived as doubts about the health of Spain’s banks and questions over Greece’s future returned. On May 9, the Euro Stoxx Banks (SX7E) index dropped beneath the lows of March 2009. The 30-company index of euro-region banking stocks fell 2.8 percent by noon Frankfurt time today. The Markit iTraxx Financial Index of credit-default swaps on the senior debt of 25 European banks and insurers reached 308.398 on May 18, the highest since Dec. 19, two days before the ECB’s first offering of long-term funds. The euro fell today to a 21-month low against the dollar.

Lenders probably would need another 800 billion-euro liquidity lifeline from the ECB to help stem contagion from a Greek exit, Citigroup analysts estimated in a May 17 note....

Chain Reaction’

Christian Clausen, president of the European Banking Federation and CEO of Nordea Bank AB (NDA), the largest bank in Scandinavia, said a Greek exit from the euro zone is unlikely and won’t be disastrous for the region’s banks if it does occur.

“We’ve come to a level in Europe where that can happen without any major repercussions for the rest of Europe,” Clausen said in an interview in Copenhagen on May 11. “Every bank in Europe will prepare for this, but to think it will impact the European economy and banks in general, that will not happen.”

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