Does anyone else think the simple and repellent plan is getting a little traction? Certainly, more and more mentions of the idea of buying back tons of distressed Greek debt and therefore both reducing the total and converting it into a liability between Eurozone official institutions seem to be out there.
They better be: here’s a study into the effects of the crisis on European suicide rates.
One of the interesting things upon 1st quick read of the European Banking Authority stress tests is the way it downplays the sovereign debt issue:
The data from the sample of 90 banks (Dec. 2010) shows the aggregate exposure-at-default (EAD) Greek sovereign debt outstanding at EUR98.2 bn. Sixty-seven percent of Greek sovereign debt (and 69% of the much smaller Greek interbank position) is in fact held by domestic banks (about 20% refers to loans which are mostly guaranteed by sovereign). The aggregate EAD exposure is EUR52.7 bn for Ireland (61% held domestically) and EUR43.2 bn (63% held domestically) for Portugal. Importantly, EAD exposures are different from similar exposures reported on a gross basis in the disclosure templates …
Given the distribution of the exposures described above, the direct first-order impact, even under harsh scenarios, would primarily be on the home-banks of countries experiencing the most severe widening of credit spreads. In such cases the capital shortfall should be easily covered with credible back stop mechanisms such as the support packages already issued or being defined for Ireland, Portugal and Greece. In this context these countries have announced capital enhancement measures requiring banks to hold capital to a higher level than that used for the EBA’s EU wide stress test. Additional capital strengthening measures have been, and will be, announced to ensure this.
In other words, most of the Greece, Ireland, and Portugal debt is held by domestic banks which is good news for the other EU banks that might otherwise be feared to be sitting on this stuff and thus should be bad news for the domestic banks of these strained sovereigns — but since they are already under official lending programs, these can be tapped to ensure that the domestic banks (and their lenders) don’t lose money.
Leave aside the concern that Exposure at Default is a technical measure that allows some netting of exposures that might not happen as smoothly in practice as on a balance sheet. Think about the claim that since sovereign debt is domestic, losses can be handled as long as there is an official lending program in place. Doesn’t that invite attention on countries with lots of domestically held debt, but no program?
We hope to have more when the individual bank results are revealed. Note also the filename of the EBA document — it includes a “v6” at the end. That’s a lot of meetings!
I’ve recently read some interesting but somewhat shocking article, recommended by FT alphaville, in The Globe and Mail (Canada): “Germany’s season of angst: why a prosperous nation is turning on itself”. Fortunately, the author Doug Saunders is wrong.
Describing Germany’s booming economy, he writes:
These are, by several measures, the most successful people in the world. Yet it is very hard to find anyone here who is happy about this state of affairs.
And from my personal anecdotal evidence, he is right. When I talk to my fellow Germans about the economic situation, I have the same impression. But why is that? Doug’s interpretation, that Germany is afraid of change, involvement with the outside world, immigration or technological progress may be fitting with an earlier image of Germany. But I find other explanation much more plausible.
For starters, Germans fear the consequences of the Euro crisis in part because some politicians, academics and the media deliberately nurture fear. From “defending the Euro” to Prof Sinn’s exaggerated Target-2 arguments, from claims of high inflation to a Lehman-moment, the Germans are being told that the economic risks for them are huge and imminent, which is only partly correct (if at all). Interesting enough, the political risks – that the German taxpayers will become the major creditors of the periphery thanks to fear-induced bailouts (money and friendship…) – is discussed much less often.
But more importantly, Germans have lived through 15 years (!) of near-stagnation or mind-bogglingly high unemployment or both. That shapes your expectations in two important ways.
First, Germany knows how difficult it is to integrate and reform an economically (much more) devastated country of roughly the size of Greece. In fact, they have just been through it. So not only are they jolly well fed up with paying for something like that: after cumulated net public transfers of €1400bn (it’s not a typo), there are still €6bn in net transfers going to Eastern Germany. Per month. (The brain drain from former Eastern Germany was heavy, so how much “Western” Germany really payed is debatable.) At the same time, many Germans feel obliged to help European friends according to a recent poll:
A new survey finds that 60 percent of Germans believe their country has to help Greece in the eurozone debt crisis — like it or not.
Anyone caught in this tension will stray to extremes at times (like the person that Doug interviewed). The trigger may be when the Greek press retaliates with Nazi-jargon to German tabloids’ disgraceful headlines. Or when German politicians – supported by part of the German press – keep talking about “rescuing Greece” instead of being honest about what is actually being rescued: German investors and banks.
Second, after a decade-and-a-half-long economic struggle, Germans simply cannot believe that those times have finally passed for good, which is fully understandable for a country in whose national psyche security comes first. And no, Doug, the German boom is neither built on the birth of the Euro nor on “a deliberate strategy to keep labour costs low and productivity high”. It is built on Germany having re(!)-gained its competitiveness (warning: shameless cross-linking) and an ECB that will have to conduct too loose monetary policy for Germany in the years to come.
Doug’s other examples, immigration and a new protest movement, as well as nuclear power and the Libya war, have multiple roots that are too complex to discuss in a single post. He might have a point here, but there are more sympathetic and equally plausible explanations. For instance, the success of a populist and alarmist book by Thilo Sarrazin about the alleged decline of Germany is a late response of the German public to problems that have been piling up largely unaddressed over the last 30 years. In this context, Doug much too easily dismisses the internationally underappreciated contrast to Italy, Netherlands, France or even Sweden (!), not to mention Austria, that no right-wing populist party has made it into the federal parliament during the last 20 years, despite an unmatched economic malaise and a proportional election system.
Germany is not turning on itself. Germans just have a hard time dealing with and making sense of the current economic situation – and who could blame them? But if you give it some time, you will see that the 2006 & 2010 World Cup euphoria was not just a break from a national state of angst.
There doesn’t seem to be any limit as to who they spied on. But now that more and more stories are coming out, is there any stopping point? I’ve seen indications that executives could also be liable to US prosecution under the Foreign Corrupt Practices Act. And of course the parade of arrests under UK law. Is this the end?
Please think of this as a supplement and a slight challenge to Ed’s fine 23 May 2011 piece on Latvia. Besides giving us the most interesting (or weird? 🙂 ) title for a long while, he raises some very important questions: Is the Latvian internal devaluation really over and has it been successful? Ed is not convinced – neither am I but I am not as pessimistic as he seems to be. Continue reading
“The market is pricing these sovereigns at much wider levels than where their agency ratings would imply,” said Diana Allmendinger, a director at Fitch Solutions.CDS on Italy imply a rating of BBB, five notches below its agency rating of AA-minus. And Spain’s implied rating is BB-plus, nine notches below its agency rating of AA-plus.
With so much emphasis being placed on what has been happening farther to the South, economic realities on Europe’s Eastern periphery have largely been escaping the close scrutiny of media and analyst attention. In the wake of the belated recognition of the region’s vulnerability which followed the bout of acute stress experienced during the post-Lehman crisis, a new consensus has now emerged (for an in-depth study of the Latvian example see this piece) that the IMF-guided programmes put in place at the time have essentially set things, if not entirely straight then at least on the right track. In particular, as a result of the extensive fiscal discipline and willingness to sacrifice shown a much brighter future now awaits these countries well to the sidelines of all those horrible Greek debt concerns. Continue reading
The eldest son of the last emperor of Austria-Hungary died on July 4, at his home in Germany.
Otto von Habsburg had been heir to the emperor, head of the house of Habsburg, an outspoken anti-Nazi, Member of the European Parliament (for Bavaria), and a committed European. He played a role in the opening of the Iron Curtain.
His life spanned an age, and more.
What follows is simply a follow-up note to my earlier (Elephant in The Euro Room) piece on Italy. The decision by S&P to put Italian sovereign debt on negative outlook, and the subsequent announcement by Moody’s that it was considering a downgrade has been widely commented on by analysts, and it might be interesting to take a look at some of the views that have been advanced on either side of the argument (although for the detailed analysis see me earlier post). But first, a summary of the problem. Continue reading
Behind all the raw financial data there are always people. Here are two very human voices talking about the current crisis in Greece.
First up is a passionate call for action on Sturdyblog, called Democracy vs Mythology: The Battle in Syntagma Square. One quote:
I know it is impossible to share in a single post the history, geography and mentality which has brought this most beautiful corner of our Continent to its knees and has turned one of the oldest civilisations in the world from a source of inspiration to the punchline of cheap jokes. I know it is impossible to impart the sense of increasing despair and helplessness that underlies every conversation I have had with friends and family over the last few months. But it is vital that I try, because the dehumanisation and demonisation of my people appears to be in full swing.
And then there is Regarding the Greek situation by Eugenia Loli-Queru. One quote (emphasis mine):
In the 1920s, the bureaucracy had become so big that the public sector grew not only in numbers, but also in power. A law was enacted where from the moment you became a civil worker, you effectively couldn’t get fired.
This quickly created a two-tier citizenship in Greece. The powerful civil workers (who retire early, some of them work few hours, some of them working in offices are indeed lazy etc), and the private sector, which remained very underpaid, very hard working, and who’d retire at the age of 65. When Europeans today complain about the lazy Greeks, they must understand that Greece has a virtual cast system, and that not everyone is equal in it.
I kindly invite our readers to go and read both posts. Hat tip for the first post goes to Sargasso.
The New York Times talks to its sources in the NY Police Department and prosecutor’s office and reports:
The sexual assault case against Dominique Strauss-Kahn is on the verge of collapse as investigators have uncovered major holes in the credibility of the housekeeper who charged that he attacked her in his Manhattan hotel suite in May, according to two well-placed law enforcement officials.
Although forensic tests found unambiguous evidence of a sexual encounter between Mr. Strauss-Kahn, a French politician, and the woman, prosecutors now do not believe much of what the accuser has told them about the circumstances or about herself.
More key phrases include “repeatedly lied” to investigators, “issues involving the asylum application,” and “possible links to people involved in criminal activities, including drug dealing and money laundering.”
Continue reading