The fear was a chain-reaction reaching Spain and Italy, detonating an uncontrollable financial collapse
The European Central Bank is becoming dangerously over-extended and the whole euro project is unworkable in its current form, the founding architect of the monetary union has warned.
The ECB has “crossed the Rubicon” and is now in an untenable position, trying to reconcile conflicting roles as banking regulator, Troika enforcer in rescue missions and agent of monetary policy. Its own financial integrity is increasingly in jeopardy.
The central bank already holds over €1 trillion of bonds bought at “artificially low” or negative yields, implying huge paper losses once interest rates rise again. “An exit from the QE policy is more and more difficult, as the consequences potentially could be disastrous,” he said.
“The decline in the quality of eligible collateral is a grave problem. The ECB is now buying corporate bonds that are close to junk, and the haircuts can barely deal with a one-notch credit downgrade. The reputational risk of such actions by a central bank would have been unthinkable in the past,” he said.
The euro zone crisis is back – at least in the minds of many Germans. Since last summer, the influx of hundreds of thousands of refugees from the war-torn Middle East has overshadowed all else, dominating the political debate in Berlin and the front pages of German newspapers. But over the past weeks a shift has taken place. With the tide of arriving migrants slowing to a trickle, angst over Europe’s long-suffering currency bloc has returned – with a vengeance. “A storm is brewing,” warned an editorial in the left-leaning daily Sueddeutsche Zeitung this week. www.reuters.com/article/us-germany-euro-angst-idUSKCN0XB1YY
Nouriel Roubini, the famed New York University economist and founder of RGE has gone “prepper”.
now telling his clients at RGE that a “perfect storm” is gathering for even more doom-n-gloom in 2013. It seems we survive the Mayan calendar, but only by a hair.
In summary, RGE (which stands for Roubini Global Economics, the good professor’s market research firm) is now greatly concerned about the future and investors who take a Roubini world view need to prepare. Prepare for what?
For Roubini, the storm clouds are gathering for a disorderly unwinding in the eurozone with a Greek exit and significant contagion to other fragile periphery members, namely Spain. There’s also dark cumulonimbus clouds on the U.S. horizon, with growth slowing to stall speed from this year’s expected 2.5% GDP rate.
With more than $1.2 trillion in Spanish, Portuguese, Italian, and Irish debt, Europe’s lenders still face deposit flight risk and rising defaults elsewhere. “A Greek exit would be a Pandora’s box,” says Jacques-Pascal Porta of Ofi Gestion Privee, an asset manager in Paris. “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?”
A Greek exit could trigger “a chain reaction of bank runs and soaring risk premiums on government bonds of weaker countries, and that ultimately breaks up the entire euro zone,
RUNS on banks. Mattresses stuffed with cash. Borders closed. Hyperinflation. Riots. Shortages of food, medicine and oil. It’s not hard to envisage disaster scenarios for Greece if it exits the euro currency and returns to the drachma, a possibility that has spawned a new phrase: ”Grexit”.
There are roughly three ways it could happen. First, Greece could voluntarily leave. Second, other eurozone nations could eject Greece. Or, third, perhaps most worrying at present, it could happen by accident through a widespread run on Greek banks.
The head of Greece’s radical left party—throwing down a gauntlet that could increase tensions between Greece and its frustrated European creditors—said he sees little chance Europe will cut off funding to the country but that if it does, Athens will stop paying its debts.
A financial collapse in Greece would drag down the rest of the euro zone, said Alexis Tsipras, the 37-year-old head of the Coalition of the Radical Left, known as Syriza, and potentially the country’s next prime minister. Instead, he said, Europe must consider a more growth-oriented policy to arrest Greece’s spiraling recession and address what he called a growing “humanitarian crisis” facing the country.
“Our first choice is to convince our European partners that, in their own interest, financing must not be stopped,” Mr. Tsipras said in an interview with The Wall Street Journal. He said Greece doesn’t intend to take any unilateral action, “but if they proceed with unilateral action on their side, in other words they cut off our funding, then we will be forced to stop paying our creditors, to go to a suspension in payments to our creditors.”
Moody’s Investor Service carried out a sweeping downgrade of 16 Spanish banks on Thursday, including Banco Santander, the euro zone’s largest bank, citing a weak economy and the government’s reduced ability to support troubled lenders.
All the banks’ long-term debt ratings were downgraded by at least one notch, and some suffered three-notch cuts.
Spain’s banks, awash in bad loans after a real estate boom went bust, are at the heart of the euro zone debt crisis because markets fear a state bailout would put a severe strain on the country’s already stretched public finances.
With every passing day, the chances recede that Spain will escape the kind of meltdown that has afflicted Greece and Ireland. With every passing day, too, the chances of the eurozone surviving dwindle still further. A Greek exit would send shock-waves through the eurozone. Portugal and even Spain would probably come under fierce market pressure in their turn.
What’s more, there is no guarantee that France will escape the European contagion. For it is becoming increasingly and disturbingly clear that there are huge problems across France’s Pyrenean border.
Portugal is in a terrible mess. After a €78?billion bailout last year, Lisbon slashed welfare spending, cut public sector pay and put up taxes.
will know what happened the last time the world economy collapsed in ruins.
With capitalism and democracy in retreat, many European countries turned to military strongmen, extremist agitators and xenophobic demagogues. Barely eight years after the continent’s banks had collapsed, the world was at war.
The deepening political turmoil in Greece has begun reverberating throughout the global financial markets as Athens’ failure to form a government last weekend threatens to further undermine the battered European economy and banking system.
On Thursday, Greece’s fragmented political leadership failed in another last-ditch effort to form a government, all but assuring another round of elections next month. Voters swept from power the two major parties that had engineered a painful austerity plan with Europe’s wealthier countries, led by Germany, in exchange for an ongoing financial lifeline.
With no government in place to enforce spending cuts, the European Union temporarily cut off a portion of that lifeline, raising the likelihood that Greece will be forced to leave the 17-nation compact that shares a common currency. The Athens government is due to run out of cash in June.
Investors are also warily watching the looming “fiscal cliff” facing the biggest borrower of all, the U.S. government. Unless Congress and the White House can steer away from it, massive tax hikes and spending cuts are scheduled to take effect at year-end. Economists have warned the combined impact could cost the U.S. economy between 2.5 and 5 percent of gross domestic product, stopping the anemic recovery in its tracks.
In Greece, on the same day, parliamentary elections will produce a hammer blow to the existing two-party system and will significantly increase the strength of the anti-Europeans on the far left and the extreme right. These elections will be held in the context of a continuously worsening economic picture in the continent, which has convinced almost everyone—with the crucial exception of the Germans—that the current recipe of one-size-fits-all austerity is leading to catastrophe and needs to be modified before it causes irreparable harm.
Francois Hollande has long made it clear that he will not be the obedient junior partner to Angela Merkel that Nicolas Sarkozy has been. In particular, he has issued calls for a renegotiation of the fiscal compact agreed by 25 out of 27 EU members earlier this year, to make it more growth-friendly. He has insisted that without a supplementary package of pro-growth measures, he will refuse to ratify it. Read More…
An assumption that governments will bail them out is keeping European banks’ debt above junk status in the opinion of major rating agencies, but such implicit reliance on state aid is clouding future attempts to raise capital from private investors.
StarMine, a Thomson Reuters company which calculates default probabilities using quantitative data, however rates the debt of major banks across Europe at no higher than ‘speculative grade’ or ‘junk’.
That contrasts with more flattering headline ratings from large credit ratings agencies, which take into account factors like state support for banks which are seen as too big to fail, effectively ruling out a default.
With Europe plunging back into recession and unemployment soaring, Francois Hollande, the French presidential candidate, is calling for growth objectives to be reprioritised over the chemotherapy of austerity.
What Europe really needs is a return to free-floating sovereign currencies. Only then will Europe’s seemingly interminable debt crisis be lastingly resolved. All the rest is just so much prancing around the goalposts, or an attempt to make the fundamentally unworkable somehow work.
The latest eurozone data are truly shocking, much worse in its implications both for us and them than news last week of a double-dip recession in the UK. Even in Germany, unemployment is now rising, with a lot more to come judging by the sharp deterioration in manufacturing confidence. For Spanish youth, unemployment has become a way of life, with more young people now out of a job (51.1pc) than in one. In contrast to the US, where the unemployment rate is falling, joblessness in the eurozone as a whole has now reached nearly 11pc. Against these eye-popping numbers, Britain might almost reasonably take pride in its still intolerable 8.3pc unemployment rate. Read More…
Europe’s political centre is starting to crumble. Elected governments have already been swept away – or replaced by EU technocrats without a vote, indeed to prevent a vote – in every eurozone state where unemployment has reached double-digits: Spain (23.6 per cent), Greece (21 per cent), Portugal (15 per cent), Ireland (14.7 per cent), and Slovakia (14 per cent).
The political carnage has been striking. Ireland’s Fianna Fail, creator of the Irish free state, has lost every seat in Dublin. Greece’s Panhellenic Socialist Movement (PASOK) – torch-bearers of Greek democracy since the colonels – has fallen to 14 per cent in the polls and faces ruin next month.
For more than two years, Europe’s mainstream political elites have been battling to save the single currency, seeking its salvation in a German-scripted program of austerity and legally enshrined fiscal rigour that curbs the budgetary sovereignty of elected governments.
This week the tornado smashed into the core, bringing down the Dutch government and threatening the French President Nicolas Sarkozy.
In elections in France last weekend, in the Royal Palace in The Hague on Monday, and Wenceslas Square in Prague on Saturday, a democratic backlash appeared to be gathering critical mass as the economic prescriptions of the governing class collided with the street and ballot box. The collision is likely to bring down three European governments.
Spain’s unemployment rate rose to almost one in four, according to data released on Friday, as the country’s foreign minister warned of an economic crisis of “enormous proportions”.
The comments from José Manuel García-Margallo came the day after Standard & Poor’s downgraded Madrid’s credit rating and warned the country faced significant risks meeting economic growth and budgetary performance targets.
The eurozone’s crisis deepened this week, as the political and economic costs of fiscal austerity became clearer amid signs that the ECB’s medicine is wearing off fast.
The Bank of Spain estimated the country’s GDP fell by 0.4 per cent in the first quarter, while purchasing managers’ surveys showed that economic activity across the region fell to a five-month low in April, killing hopes that the recession would be short and shallow. Meanwhile, the fall of the Dutch government after a row about Budget cuts and Nicolas Sarkozy’s poor showing in the first round of the French presidential election “highlight popular unease at austerity attempts”, according to Investec’s Ewen Stewart.
… yields on 10-year Spanish government bonds hit 5.9 per cent this week, a full percentage point higher than they were in early March.
“The LTRO party is over. Bond markets are in panic mode” says Marchel Alexandrovich at Jefferies International. “The ECB will have to do something else.” That something, he thinks, could be full-blown quantitative easing.
LONDON: The crisis-hit euro is teetering on the brink of collapse, the International Monetary Fund (IMF) has said.
In a significant vote of no-confidence, Tuesday’s report from the global financial organisation admitted the troubled European single currency had “flaws” and was at risk of a “disorderly default and exit by a euro area member”.
And it warned that a euro meltdown could be even more devastating for the world economy than the 2008 credit crunch, the express.co.uk reported.
The admission in the World Economic Outlook from the IMF came amid renewed fears that Spain could soon follow Greece, Portugal and Ireland in accepting a multi-billion pound international bail-out.
The report warned: “The potential consequences of a disorderly default and exit by a euro area member are unpredictable and thus not possible to map into a specific scenario.
“If such an event occurs, it is possible that other euro area economies perceived to have similar risk characteristics would come under severe pressure as well, with a full-blown panic in financial markets and depositor flight from several banking systems.” It added: “Under these circumstances, a break-up of the euro area could not be ruled out.
Spanish bank borrowing from the European Central Bank doubled last month, revealing a dangerous dependence on emergency funding that on Friday triggered renewed turmoil in financial markets.
The Bank of Spain disclosed the country’s biggest institutions borrowed €316.3bn (£260.9bn) from the ECB in March, almost twice the €169.8bn in February.
Traders dumped Spanish stocks and bought insurance against Madrid defaulting, convinced the data showed that the banks are now almost shut out of international credit markets.
Spain’s Ibex stock market plunged 3.6pc, with bank stocks leading the fall. The nation’s benchmark 10-year bond yields soared past 6pc, heading deep into the danger zone that experts say is not sustainable without external support.
Worries about Spain’s perilous economic outlook and the threat it poses to its fragile eurozone neighbours intensified this week as investors dumped the euro and riskier government bonds ahead of the holiday weekend.
A poorly received Spanish bond auction earlier in the week continued to spread jitters around Europe, with economists warning Spain could become the latest flashpoint in the sovereign debt crisis.
‘We’re increasingly worried about Spain on the back of the sovereign’s rising yields and the potential for contagion,” analysts at Societe Generale said. ”Spanish corporates are feeling the heat, with clear daylight between them and their Italian counterparts in recent sessions.”
MUST READ… Violent protests broke out in Athens last night after an elderly man committed suicide near to the country’s Parliament building, claiming he was distraught at the prospect of “looking in the garbage to feed myself”.
In a suicide note left at the scene the man said the Government had “nullified any chance of my survival which was based on a decent salary that for 35 years I alone (without state support) paid for”.
“Because I am of an age that does not allow me to forcefully react (without of course excluding that if some Greek took a Kalashnikov first, I would be the second) I see no other solution than a decent ending before I start looking in the garbage to feed myself,” it continued.
“I believe that youth who have no future will one day take up arms and hang the national traitors upside-down in Syntagma square just as the Italians did in 1945 to Mussolini.”
A disorderly break-up of the euro would set off a cataclysmic chain-reaction and a collapse of Europe’s banking system, pushing the world into full-blown depression.
The consequences of a completely unplanned ‘Exit’ are likely to be catastrophic,” said Neil Record from Record Currency Management, one of the five qualifiers.
Catherine Dobbs, a former algorithms expert at Gartmore, said the global shock could be five to 10 times worse than the Lehman earthquake in 2008, given the scale of contracts and counter-party exposure.
The biggest threat that most investors see is a return of euro zone debt problems. While the European Central Bank’s lending program gave investors renewed confidence, yields on Spanish bonds have been climbing, signaling that investors are growing more nervous. The interest rates on Spanish 10-year bonds rose in March to 5.3 percent, from 4.9 percent.
In contrast to the situation in Greece, most investors do not think the central bank has the resources to help Spain avert default if its economic problems worsen. Spain is the only one of Europe’s major economies to see its stock market drop this year, with the IBEX 35 index falling 6.5 percent so far.
“The European Central Bank has not done enough to quell all fears of debt issues in Spain and Italy, and realistically it can’t,” said Michael Gapen, senior economist at Barclays Capital.
Some may think the EU is managing to muddle through its financial woes. After all, it has been two years since the debt crisis started and the European Union, despite all the predictions, is larger – not smaller – than when all this began. We were told the financial world would collapse when Greece defaulted on its bonds and yet it has not. Even if Europe is staggering more than a tourist in the French Quarter on Mardi Gras, it is still on its feet. Here’s why it won’t stay that way.
So, why are the dominoes still up?
Because the European Central Bank and company gave the banks the time and means to dump their debt. The negotiations with Greece stretched out so long it seemed as if the entire problem began when Alexander the Great was still running things. All that time allowed a large number of private creditors to dump their debt. And who was dumb enough to take that debt from them? Why the taxpayers of Europe, of course.