User: robin: Eurozone: Mish's Global Economic Trend Analysis
Mish's Global Economic Trend Analysis
According to IIF director Charles Dallara in a Bloomberg interview, "ECB will be insolvent if Greece were to exit the euro. Europe would have to first and foremost recapitalize its central bank."
Excuse me for asking but how would they attempt to do that? Print Euros?
Please consider Dallara Says Greek Euro Exit May Exceed 1 Trillion Euros
The cost of Greece exiting the euro would be unmanageable and probably exceed the 1 trillion euros ($1.25 trillion) previously estimated by the Institute of International Finance, the group’s managing director said.The Washington-based IIF’s projection from earlier this year is “a bit dated now” and “probably on the low side,” Charles Dallara said in an interview in Rome today. “Those who think that Europe, and more broadly the global economy, are really prepared for a Greek exit should think again.”
The European Central Bank’s exposure to Greek liabilities is more than twice as big as the ECB’s capital, said Dallara, who represented banks in their negotiations with the Greek government on its debt restructuring. As a result, he predicted the bank would be unable to provide liquidity and stabilize the euro-area financial sector.
“The ECB will be insolvent” if Greece were to exit the euro, Dallara said. “Europe would have to first and foremost recapitalize its central bank.”
In February, the IIF estimated that Greece’s liabilities, in the event of a euro exit, could be crippling. “It is hard to see how they would not exceed 1 trillion euros,” the group said in an internal Feb. 18 report that hasn’t been made public.
It’s not clear whether Spain will need a bailout as it seeks to help its banks weather the euro crisis, he said.
“The only way to help markets see past that obscurity is to remove the cloud of uncertainties of national fiscal position and move toward unification,” Dallara said.
Suspect Thinking or Purposeful Fear-mongering?Since it is perfectly clear that Spain is an untenable situation, and since it is equally clear that unification is not going to happen and would not solve numerous problems, one has to wonder about the rest of his analysis as well.
However, Dallara's statements regarding ECB exposure to Greek liabilities rings true, so let's assume the trillion+ euro figure is correct.
Just where is Europe to get that?
Greece Exit Manageable?
One needs to balance Dallara's statements with statements from Germany that a Greece exit is manageable. For example The Telegraph reports Bundesbank says Greek euro exit would be 'manageable'
The impact of a Greek exit from the eurozone would be substantial but "manageable", Germany's Bundesbank said, raising pressure on Athens to keep its painful economic reforms on track.Echoing German political leaders, the Bundesbank warned against Europe easing the conditions for Greece to access aid.
"Attempting to kick-start the economy in the short term and putting off consolidation efforts in the long term are not conducive to regaining lost confidence."
Counterbluff?Bloomberg reports Greek Euro Exit ‘Manageable’ for Markets, BdB German Banks Say
A German banking association that represents Deutsche Bank AG (DBK), Commerzbank AG (CBK) and more than 200 other lenders said investors are prepared should Greece leave the euro area.“It would be manageable for markets,” Andreas Schmitz, president of the BdB Association of German Banks told reporters in Frankfurt yesterday. “The risks have largely been priced in. A Greek exit would bring lower risks than two years ago but is not to be underestimated.”
Priced In? Who is Bluffing Whom?The question is: who is bluffing whom or do they all believe these contradictory statements?
In response to What if Tsipras is Not Bluffing? Who Holds the Upper hand? What is Troika's Biggest Fear? Can Greece Possibly Stay in the Eurozone After Default? my friend Pater Tenebrarum pinged me via email with this set of statements.
Whether they are or are not right about this, the Germans now believe that the euro area can survive a Greek exit. Tsipras can really threaten them with nothing. It's a miscalculation, he underestimates how desperate the political mood in Germany and elsewhere has become.
If Tsipras goes through with his threat, Greece will be cut off from ELA and TARGET-2 and that will be that. Check my Catch 22 Revisited post.
The Germans have had enough, and so have many others - primarily Portugal and Ireland, who are furious that the Greeks are threatening to drag them down with them.
The chances of Greece getting kicked out have risen to 85% in my opinion.
Desperate Political Mood
Perhaps Germany misunderstands the desperate political mood in Greece. More importantly, given the politically charged emotions, does anyone understand anything or is it all a pack of lies and suppositions everywhere?
If the ECB Prints, Would Germany Exit the Euro?
If Tsipras wins the June 17th election (I think it is a 60+% chance) then if the ECB would be made insolvent as Dallara suggests, what would Germany do? What would the ECB to do?
If the ECB prints, would Germany leave?
Thus it is not so simple as to say "Germans have had enough" given that Mario Draghi sits as ECB president. Would Germany exit the euro if Draghi takes a course of action Germany does not agree with?
Those are the questions at hand now. Clearly the questions have escalated in significance.
Mike "Mish" Shedlockhttp://globaleconomicanalysis.blogspot.comClick Here To Scroll Thru My Recent Post List
The crisis in Spain is rapidly coming to a head. This crisis has nothing to do with Greek "contagion" as is widely believed. Spain dug this hole by itself. Spain's immediate unsolvable problems are a bankrupt banking system coupled with bankrupt regions that have no way to pay bills. Spain's regional governments need to roll €35.7 billion and there is current deficit of €15 billion.
The president of Spain's Catalonia Region said it faces refinancing needs of needs of €13 billion and is "running out of options refinance its debt".
Catalonia accounts for about one fifth of the Spanish economy.
Moreover, Spain's Valencia region set off alarm bells on a six-month €19 billion bond issue because it may be forced to pay a 7% return, more than two points above what Greece is paying for their junk bonds.
Regions Want "Open Bar" with Central Bank Guarantees
Let's not mince words. Spanish regional governments are clearly and undeniably bankrupt. It should come as no surprise that the regional governments have asked the central government for "an open bar, meaning that the state allows the joint issuance of debt with the guarantee explicit regional treasury, and without demand conditions change, allowing them access to cheaper financing. The matter was discussed again at the Council of Fiscal and Financial Policy last Thursday.
The above story was pieced together with help of Google translate and the following articles:
The rescue of Catalonia and market nerves about Spain
In Guindos wants to keep money in advance to the CCAA
The problem for Spain is if guarantees regional debt (the term used for this is "Hispabonos") then the credit rating of Spain will drop and all of Spain's borrowing costs will rise.
Bankruptcy, default, and an exit of the eurozone coupled with work-rule and pension reform is the only realistic solution.
Mike "Mish" Shedlockhttp://globaleconomicanalysis.blogspot.comClick Here To Scroll Thru My Recent Post List
It would be quite ironic and rather fitting if Germany and France fail to ratify the Merkozy treaty. 25 Nations have ratified the treaty but France and Germany still have not.
French president Francois Hollande has already threatened non-ratification unless the treaty is revised.
The Leader of the Social Democrat Party (SPD)in Germany, Frank-Walter Steinmeier, is making similar threats for the first time.
Effectively chancellor Merkel is painted into a huge corner with no wiggle room. "I guarantee you, there will only be a fiscal pact if it includes complementary growth elements," Steinmeier said.
Specifically, Steinmeier wants a financial transaction tax, expansion of loan volume to the European Investment Bank, and a nebulous "strengthening of investment power".
Steinmeier also called for the creation of a European debt repayment fund. He said that euro bonds could only be introduced "if they come with strict conditions and we have harmonized European economic and finance policy."
Merkel needs those SPD votes because treaty ratification takes a two-thirds majority in the Bundestag, Germany's parliament.
Merkel's 6-Point Plan to Save Europe
Backed into a corner, Berlin Proposes European Special Economic Zones.
With Europe beginning to look for alternatives to its exclusive focus on austerity, the German government has developed a six-point plan to foster economic growth in Europe, SPIEGEL has learned. Included in the proposal is the creation of special economic zones in struggling euro-zone countries.The proposal is part of a six-point plan the German government plans to introduce into the discussion on measures to stimulate economic growth taking place in the European Union. The proposal also calls for the countries to set up trusts similar to the Treuhand trust created in Germany at the time of reunification that then sold old off most of former East Germany's state-owned enterprises in order to divest those countries' numerous government-owned companies.
The plan also calls for the countries to adopt Germany's dual education system, which combines a standardized practical education at a vocational school with an apprenticeship in the same field at a company in order to combat high youth unemployment.
The plan recommends that countries with high unemployment also adopt reforms undertaken by Germany, including a loosening of provisions that make it difficult to fire permanent employees and to create employment relationships with lower tax burdens and social security contributions.
Too Little Too LateSome of those ideas seem quite reasonable. However, haven't they been agreed to before?
How many times has Greece promised work-rule reform only to see nothing happening? Spain has not done much either. Nor has Italy.Merkel Coalition at Risk
At every juncture, Merkel is increasing backed into a corner - by French President Francois Hollande, by ECB president Mario Draghi who sides with Hollande, by Mario Monti, Prime Minister of Italy, and now by the SPD.
As I see the demands, I fail to see how the 6-point proposal comes close to what SPD wants.
Here is the key question: Will the plan satisfy Social Democrats? If not, Merkel's coalition government itself is at risk.
Mike "Mish" Shedlockhttp://globaleconomicanalysis.blogspot.comClick Here To Scroll Thru My Recent Post List
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