Tuesday 27 September 2011

Hasta la Vista

I am off on a business trip later today to sunny Spain. Hopefully, given the Euro crisis, it will still be there for the plane to land.

In the meantime I can see lots of developments of the rest of the week:

- Equity markets rally as they are bored of falling
- Then they fall again when they realise that Germany can't commit to the new EFSF without a referendum
- Then they rise again as the EU gives Greece its next bailout

By then it will be Friday and I will be back. (I will keep some Spanish Euro's as a memento.)

I have some questions on Gold though that Nick Drew may answer:

- How low will Gold go before this sell-off ends?
- Is this a good sign, gold only sold off like this in 2008 immediately post-Lehman - i.e. at the point of maximum pessimism - is this a contrary indicator?

Finally, a thought on the proposed Euro bail out. If Germany won't support the Euro then it should leave. The devaluation will be a better medicine than all the austerity for all the other member countries.


Ryan said...

"the EU gives Greece its next bailout"

What bailout? So far Greece hasn't had a bailout - it has just had its debts effectively underwritten so it can take out more debt. Thus it can now taken out more debt at 15% whereas before it was able to get debt at 5%. In other words the EU has actually managed to make the Greek situation 3x worse by refusing to let Greece default.

Now there is a proposal (and only a proposal) to write off 50% of Greek debt. Now that really is a bailout but since the can will be carried by the banks in that case I can't see it flying. The banks could reasonably suggest that they expect to get more than 50% of their debt out of Greece in the long term. Furthermore the moral hazard associated with such a bailout would be severe - Ireland Spain and Italy would be queuing up for the same treatment.

I don't see any such true bailout happening. Nobody can really afford it because debt levels are too high everywhere. What we are likely to see is some sort of debt re-structuring since this allows the debt to continue to appear as an asset on bank balance sheets, Greece can be forced to pay it all back eventually whilst prevented from taking out more debt and the pain Greece will need to go through will ensure that no real temptation exists for others to follow the Greek example. Right now is the best time to do this since Greece needs fresh debt just to last long enough to reduce its deficit.

I think we need to bear in mind that Germany is in "break-even" territory, so even a small bailout of another feckless country is going to show up on its books as fresh debt, to be paid for by hard-working Germans. The German public won't like that. Merkel might get away with it once but she will be out the door next year and replaced by someone more intransigent. I think all the masters of the universe that are playing games with euro-taxpayers money will be out the door next year. They are dead men (and women) walking. The whole EU project is dead now as Northern Europeans realise that Southern Europeans really aren't alike and can't live together.

I don't see why Germany should leave the Euro rather than Greece - Greece failed to meet Euro rules from day one then lied about its debt levels. It should be kicked out and made to suffer like hell. The Greeks and their government deserve each other. The law of the jungle is about to re-assert itself there. What exactly have the Germans doen wrong other than be so good at industry that they find themselves with an export surplus? They will suffer enough when the global economy goes down the toilet without burdening themselves with Greek debt.

Old BE said...

I would like 50% of my debts written off. I promise to pay back the rest! No, really!

Somewhere I have a little folder with a basket of currencies collected on my travels. I have a small number of Deutschmarks, Guilders, Francs, Argentine government bonds, etc.. I wish I could find it!

Ryan said...

By the way, Germany leaving the Euro hardly allows Greece to re-introduce its own currency which it can then use to monetise its debts, effectively re-structuring all its debt both private and public and "curing" the problem to a certain degree of satisfaction for all. Rather like the UK which is printing its own money to ease its debt burden causing inflation to run up to 5% but is still able to buy debt at 2.2% (effectively meaning that the UK is being paid to run up debt....).

Budgie said...

Ryan said: "What exactly have the Germans done wrong other than be so good at industry that they find themselves with an export surplus?"

They have done nothing wrong. But they have benefited from a euro which is at a lower value than a German mark would be set at by the markets.

Old BE said...

It is some of the other countries that have failed to take advantage of the Euro. We should not criticise Germans for working within the system that has been handed to them, but the Greeks et al. for not taking advantage of a booming Germany to see into that huge market.

The Eastern Europeans took advantage of the disparity of labour and other costs to build manufacturing bases in their countries (see Skoda et al.) why did not the Greeks? Because they thought the free money splurge would go on forever.

Sackerson said...

"How low will Gold go before this sell-off ends?"

Not very, I think - sadly. India, China et all will continue to buy the dips - if they wait for the dips. Marc Faber observed a week or two ago that US Treasuries and gold went up at the same time, which he saw as evidence that people are not so much concerned about inflation as about systemic collapse.

hovis said...

My my a lot of self righteous pointy fingers in today ...

Ryan - agreed the EU has not actually bailed Greece out just charged an extortionate rate as they pretended it was a liquidity crisis not structural caused by the dry up of fund in the market.

Blue Eyes - The Eastern Euopeans have only built industrial bases as their labour was underpriced and their location meant they were a proxy for Germany - down to location and luck as much as any concious decision an if you remember Skoda has only really grown under VW ownership as money and cheap labout have been combined. I know you have a complex that we are being beastly to the Germans, but quite frankly they deserve as much of it if not more than the Greeks.
However all parties as I have just notes are acting out of (i) self interest (ii) the echos of their own historical and cultural backdrop played out.

But why should Germany leave the Euro ? perhaps because it is obvious they want all the benefots of a currency area rigged completely in their favour but are unwilling to pay the bills or perhaps it the self interested mercantalist policy they have been running. ( ok nothing wrong with self interest but it explains why most actors in this have behaved as there is a distinct and unpleasent whiff of sanctimony here ...

hovis said...

Sackerson - agree - just a shame I have no cash to buy anything at the moment ...

CityUnslicker said...

Nice comments all.

germany's mercantilist policy of holding down domestic demand and exporting with a cheap currency has played a major role in the Euro crisis.

Here is my example:

Greece borrows money at cheap rates from German Banks
It gets Siemens of germany to build a new railway for e16 billion.

Greeks get a railway but Germans get debt interest and siemens the profits and jobs.

Now the Greeks want to default...who lent them the money and what was it used for?

Sometimes humans can be too clever.

Old BE said...

So CU you are saying that Siemens should have said "actually Greek government, the productivity gain on the railway won't outweigh the cost so we won't build it"? Or should the Greek government have thought about borrowing and spending the money a bit more wisely?

I'm not saying that lenders should be particularly protected from any losses (they totally mis-priced the risk of lending to Club Med governments, after all, or assumed that Euro governments would never be allowed to go bust) but I am saying that if the Greeks want to tell the world they are a mature democracy (I doubt this) then they have to take some responsibility for the mistakes made by the government they kept electing and electing and electing while the money was sprayed around with no regard to where it was coming from.

Compare and contrast with Ireland where people are being a bit more sensible and realising there is no choice but to cut standards of living back to the bone. We don't hear much about Ireland because they are not out blocking the streets of their own capital, they are getting on with earning the money to feed their families.

Electro-Kevin said...

Yes they can be too clever, CU and here is where it's all come unstuck.

I enjoyed Ryan's comments but what have the Germans done to deserve it ?

Well they have a central part in the EU story don't they ?

Is that not enough ?

Phil said...

@Blue Eyes No one is saying that the Greeks are innocent in this matter.

However those Germans running around pontificating about how those perfidious Greeks have borrowed money from fine upstanding German banks in order to employ fine upstanding German workers and now have the gall to threaten to default on those debts need to take a long hard look at the plank in their own eye.

It suited Germany perfectly to lend to the Greeks in order that the Greeks could employ German workers. Now that it turns out the Greeks can't afford to pay those debts, who exactly is at fault? The lender or the borrower?

Budgie said...

As Phil implies the fault is both the lender and the borrower. But it is not simply a case of Germany vs Greece.

The EU manoeuvred a monetary union into existence which was designed to bypass the markets by hiding individual national economies behind a single currency.

Consequently when the Greek government did silly things the market was unable to punish the drachma. Action was divorced from consequence. The reckoning has therefore taken much longer to appear but is now much worse (for everyone). It is really EMU's fault.

James Higham said...

I am off on a business trip later today to sunny Spain.

How dare you.

Nick Drew said...

- How low will Gold go before this sell-off ends? - Is this a good sign, gold only sold off like this in 2008 immediately post-Lehman - i.e. at the point of maximum pessimism - is this a contrary indicator?

How low ? I think we saw the bottom yesterday a.m., just MHO - $1540 was quite bizarre but now at 1660 we are back on the 3-year trend-line: it was 1900 a month ago that was out of whack, a bit like silver in April

(Silver, BTW, may have bottomed too at just the same moment, but that one is a bit of a falling knife, I am not ready to get back in just yet)

@Sackers cites Faber: "evidence that people are not so much concerned about inflation as about systemic collapse". Well as you know that's how I too see gold

but maximum pessimism ? Nah !

Anonymous said...

Don't keep too many.....

Old BE said...

It's not true that the market was not able to "punish" Greece. The interest rate charged to Greece could have diverged much more widely than it did. It mainly didn't because it was convenient for lenders to pretend to believe the Greek official borrowing statistics.

Budgie said...

Actually I said "punish the drachma". I did not say that Greece has not been punished, merely that the euro ring fence delayed it. The euro caused a perception of solidarity that was not technically there because there was (is, yet) no fiscal union. Greece's actions were (temporarily) divorced from the consequences by the nature of the politics surrounding EMU.

Old BE said...

Well it goes without saying that a market cannot punish something that doesn't exist! Next you'll be noting sagely that the Escudo has been remarkably stable against the Peseta in recent years...

Anyway, I'm off to short sell the Rentenmark.

Budgie said...

BE, I was comparing Greece with the drachma and Greece with the euro. So it is rather necessary to mention the drachma. If Greece had retained the drachma then it could not have hidden behind the (perceived) euro ring fence.

Therefore any wrong doing by the Greek government, ex-eurozone, would have resulted in the drachma being punished. That is because Greece's actions would have been more directly visible to the market.

My point was that the propaganda and politics (even the hubris) surrounding the creation and first few years of the eurozone was so great that many people (including initially the markets) were befuddled by it. Therefore EMU is to blame as well as Greek over borrowing and the (initially duped) lenders.