Creature From The Back Lagoon - flickr Boogeyman13

So why is it that tiny little Cyprus and the their banks are causing such consternation and high blood pressure over in Europe and why should we care ? Richard Wolff gives a good explanation with this audio clip from an interview on KPFA that I grabbed and uploaded to my web site. You can hear the whole program here if you like.

Here is the long and the short of it. The Eurozone was the outgrowth of The Common Market or EEC – European Economic Community.

The European Economic Community (EEC) was an international organisation created by the Treaty of Rome of 1957.^[1] aIts aim was to bring about economic integration, including a common market, among its six founding members: Belgium, France, Italy, Luxembourg, the Netherlands and West Germany. The EEC was also known as the Common Market in the English-speaking world and sometimes referred to as the European Community even before it was officially renamed as such in 1993.

It gained a common set of institutions along with the European Coal and Steel Community (ECSC) and the European Atomic Energy Community (EURATOM) as one of the European Communities under the 1965 Merger Treaty (Treaty of Brussels).

Upon the entry into force of the Maastricht Treaty in 1993, the EEC was renamed the European Community (EC) to reflect that it covered a wider range of policy. This was also when the three European Communities, including the EC, were collectively made to constitute the first of the three pillars of the European Union (EU), which the treaty also founded. The EC existed in this form until it was abolished by the 2009 Treaty of Lisbon, which merged the EU’s former pillars and provided that the EU would “replace and succeed the European Community.”

Whew. That’s is essentially how it began. To allow trade between the various countries that made it up to proceed with few hindrances and eventually to have a common currency. Sounds good in theory but it has a number of flaws. For one there is a central bank but no central government behind it. It has no real power except to print money. It cannot set policy of the member states.  Nor can it set the policies of theses states banks. The states themselves remain autonomous.  When the single currency was brought forth, it was – more or less – to replace each states currency on a one for one basis, even if the exchange rate at the times was wildly different.

All of this was in and of itself a prescription for disaster.  As we all know the exuberance and risk taking by the banks both here and in Europe built up mounds of debt. Debt that eventually came due and the debtors could not pay.

So why all this fuss over Cyprus banks ? They could not be THAT big…or could they.  Well as a matter of fact and as Richard Wolff explains in the interview they are. Far bigger that this tiny country with only tourism and some maritime shipping would ever generate on it’s own.

Read the rest of this entry →

Euro - flickr creative commons

The on going and deepening economic crisis in Europe once again has come to the for front in at least a few media outlets.  Now before I go any further let me point out what has been going on in reality – at least according to Richard Wolff.  He has given a good synopsis of the situation in a number of his presentations on the economy.

The European Central bank – funded primarily by Germany, France and Belgium – has been “bailing out” various peripheral countries.  Mainly Greece, Spain, Portugal and Italy. But where is the money going ? Well back to the big banks in Germany, France, Belgium and Switzerland.   That’s where. In other words it has been and continues to be a stealth bailout of these big banks, mostly by Germany.

And Germany is keeping this part quiet since Merkel and all know damn well that the German people would not put up with this if they knew this was what was really going on.  I suspect they do however and this is why this item from Ives Smith over at Nakedcapitalism is not and should not come as a big surprise.  She gives a good rundown on the situation – as linked to by Faster – and what it may mean.  Beginning with this revelation.

Data point one. One of my colleagues studied in Germany, has extensive, high level political and economic contacts there, and reads the press daily. He also describes his sang froid as “somewhere between that of a Chinese sage and a dead animal.”

Needless to say, he not prone to overstatement or overreaction and also has a propensity to makes Delphic remarks.

He said the Eurozone is over. In pretty much those words, a simple sentence, no caveats or conditionals. I nearly fell out of my chair. This apparently reflects the German recognition as a result of the Italian elections that they will not be able to surmount domestic opposition in Italy and potentially other periphery countries and would rather pull the plug than continue funding their trade partners. He said there was a fair bit of discussion of Germany leaving the Eurozone after the election. I quizzed him on how they thought they could do that, since the new DM would presumably trade at a big premium to the Euro. We discussed that the likely outcome would be further labor “reforms”. Maybe I am naive, but I don’t see how this would not undercut an critical German strength, that of the good, if also sometimes combative, relationship between German workers and management. My source finally said widespread recognition of the existential impasse at most a couple of months away. He’s never this definitive.

Germany throwing in the towel ? If Merkel’s Christian Democrats do as badly in the upcoming elections as it has been doing in the local elections recently, this is a good bet.  Since they have been footing the bill for most of this themselves. Not something that has proven popular with the German people one bit.

And with Italy in a dead lock politically,  the ministers of Portugal fearing for their safety and the police and firefighters refusing to enforce evictions in Spain – the likelihood of the enforced austerity programs IE bank bailouts  continuing apace grows dimmer and dimmer.

Greece is on the verge of exploding and imploding all at once. And other countries are taking notice. As Ives says.

Thus Greece for the Germans served pour decourager les autres, to show what would happen if you let your debt levels and finances get as badly out of whack as Greece has. But that might have backfired. Citizens in periphery countries now suffering high unemployment might decide they’d rather take more pain now and gain control over their destiny rather than face being broken later on the Trokia’s rack.

As I said, I don’t have an answer here. I’ve long thought the technocrats underestimated the risk of democratic revolt. Those tail risks are bigger than you think! The European elites beat back that threat in Greece, but Italy may (stress may) prove to be different.

Not to mention Spain and Portugal…among others.  It has been said in the past by other economists that the Euro was a bad idea poorly implemented and not really thought through . I tend to agree. I also think that Merkel’s loyally to the banks and her conservative ideology has been laid bare to the German people through all of this. Not good for her or her party and I see no way she can come out looking good.

So what does this mean for us ? Well according Ives sources in hedge funds circles, happy days are here again. But we have seen this kind of denial and naive exuberance before from Wall Street and even the FED and Treasury under Bush.  Even in the late 1920s just before the market crashed. And we actually had a manufacturing base back then.

I could be wrong but I suspect an unraveling of the Eurozone would lay bare a lot of uncomfortable realities concerning these masters of finance both in Europe and here.

With Greece still edging toward the financial abyss despite all the political maturations.  Now Italy – as has been predicted – is now hurling toward the inevitable default. Even though Italian prime minister Silvio Berlusconi’s promise to step down.  Now Barclays says Italy is finished as well. Courtesy of Zero Hedge.

Euphoria may have returned briefly courtesy of yet another promise for a resignation that will likely not be effectuated for weeks or months, if at all, and already someone has done the math on what the events in the past several days reveal for Italy. That someone is Barcalys, the math is not pretty, and the conclusion is that “Italy is now mathematically beyond point of no return.”

Summary from Barclays Capital inst sales:

1 ) At this point, it seems Italy is now mathematically beyond point of no return
2 ) While reforms are necessary, in and of itself not be enough to prevent crisis
3 ) Reason? Simple math–growth and austerity not enough to offset cost of debt
4 ) On our ests, yields above 5.5% is inflection point where game is over
5 ) The danger:high rates reinforce stability concerns, leading to higher rates
6 ) and deeper conviction of a self sustaining credit event and eventual default
7 ) We think decisions at eurozone summit is step forward but EFSF not adequate
8 ) Time has run out–policy reforms not sufficient to break neg mkt dynamics
9 ) Investors do not have the patience to wait for austerity, growth to work
10 ) And rate of change in negatives not enuff to offset slow drip of positives
11 ) Conclusion: We think ECB needs to step up to the plate, print and buy bonds
12 ) At the moment ECB remains unwilling to be lender last resort on scale needed
13 ) But frankly will have hand forced by market given massive systemic risk

The whole report [PDF] is available here. And now Reuters is reporting that both France an Germany are talking (how seriously I don’t know) about a break up of the Eurozone to contan only them and a few others who are still financially stable.

German and French officials have discussed plans for a radical overhaul of the European Union that would involve setting up a more integrated and potentially smaller euro zone, EU sources say.

“France and Germany have had intense consultations on this issue over the last months, at all levels,” a senior EU official in Brussels told Reuters, speaking on condition of anonymity because of the sensitivity of the discussions.

“We need to move very cautiously, but the truth is that we need to establish exactly the list of those who don’t want to be part of the club and those who simply cannot be part,” the official said.

French President Nicolas Sarkozy gave some flavor of his thinking during an address to students in the eastern French city of Strasbourg on Tuesday, when he said a two-speed Europe — the euro zone moving ahead more rapidly than all 27 countries in the EU — was the only model for the future.

Well mostly stable since France has not been looking too healthy lately. And now Merkel’s CDU is suggesting ways that countries could leave the Euro.

Merkel’s Christian Democratic Union party wants to make it possible for European Union members to exit the euro area, Handelsblatt reported in a preview of an article to be published tomorrow, citing unnamed participants in the discussion.

A commission within the party, that is crafting a framework to be presented at a party meeting, has proposed allowing a euro member who doesn’t want to or isn’t able to comply with the common currency rules to leave the euro region without losing membership in the EU, the newspaper said.

Which of course is sending the markets into a nose dive. Especially the financials. Oh well…easy come, easy go.  And how does one say “Turn the lights out before you leave.” in Portuguese ?

All of this will naturally throw a major monkey wrench into a lot of peoples economic policies.  For starters you can kiss goodby to any thoughts of making the Euro a reserve currency and attempting to solve our deficit problems by having the dollar devalued.   This wild ride has just begun and a lot of people will like get tossed off in the process.

Update from The Guardian:

Fears that Europe’s sovereign debt crisis was spiralling out of control have intensified as political chaos in Athens and Rome, and looming recession, created panic on world markets.

Reports emerging from Brussels said that Germany and France had begun preliminary talks on a break-up of the eurozone, amid fears that Italy will be too big to rescue.

Despite Silvio Berlusconi‘s announcement that he would step down as prime minister once austerity measures were pushed through parliament, a collapse of investor confidence in Europe’s third-biggest economy sent interest rates in Italy to the levels that triggered bailouts in Portugal, Greece and Ireland.

Italian bond yields surged through the critical 7% mark, at one point hitting 7.5%, amid concern that the deteriorating situation had moved the crisis into a dangerous new phase.

In Athens talks to appoint a new prime minister to succeed George Papandreou were in deadlock, and will resume on Thursday morning. The Italian president, Giorgio Napolitano, sought to reassure the markets by promising that Berlusconi would be leaving office soon.

Angela Merkel said the situation had become “unpleasant”, and called for euro-members to accelerate plans for closer political integration.

“It is time for a breakthrough to a new Europe,” she said. “Because the world is changing so much, we must be prepared to answer the challenges. That will mean more Europe, not less Europe.”

Looks like it’s gaining speed.

After pulling his punches on the referendum, Greek Prime Minister George Papandreou now faces a no-confidence vote in parliament.  This is to be held at midnight Greek time (5:00 PM Eastern).

From the Guardian..

The main opposition New Democracy party which withdrew from parliament at the start of the confidence debate has said it will return for the vote expected to take place at midnight.

The excitement should build up to 11pm Greece time (9pm GMT), when George Papandreou is expected to take the stand.

We reported earlier that Papandreou’s own Pasok MPs have told him that to win their votes tonight he must pledge to step aside.

Will he utter the words “resign and national unity government?” If he doesn’t you can expect the bloodletting to begin within Pasok….

And if he loses then snap elections would be held in as little as 30 days.   However this would not guarantee a  majority government – one that would hold a mandate. If he wins he would try to form a coalition government with opposition conservatives.

From CNBC.

The most likely scenario is that of Papandreou’s party — angered by his shortlived plan to put the bailout to a referendum — backing him in the confidence vote on the understanding he makes a face-saving exit later.

Government sources have said Papandreou had struck a deal at a cabinet meeting on Thursday under which he would stand down after he had negotiated a coalition agreement with the conservative opposition, provided he survives Friday’s vote.

Some of his own supporters have hinted at this, saying they will back him at Friday’s vote as long as he begins talks with the opposition on a cross-party coalition government that can ratify the euro zone rescue plan and then resigns.

Several lawmakers in the ruling Pasok party have already said they are in favor of such a “national unity” government and Papandreou himself has said he is willing to begin talks with the New Democracy opposition party on the issue.

Former European Central Bank Vice President Lucas Papedemos has been cited as a potential candidate to lead such an interim government of technocrats.

One potential sticking point between the two sides is on how long a coalition government will be in charge.

New Democracy leader Antonis Samaras wants a transitional government that ratifies the bailout and proceeds immediately to elections — in as little as six weeks — while a Pasok party official has suggested holding elections in March.

If those talks fail, the ensuing chaos would mean the country heads to snap elections sooner or later.

Whether Papandreou wins or loses the no confidence vote, he is likely out as Prime Minister and party leader.

And either way Greece will likely leave the Euro, which would not upset the vast majority of Germans who wish that it would. Even Germany’s Merkel now thinks that is a likely outcome.

From the Guardian.

Before things get too heated in Greece, let’s post this jolly tale from David Gow:

The “live ticker” on spiegel.de has made a wonderful contribution to German-Hellenic understanding by quoting at length Uli Hoeness – remember him England? – now the president of Bayern Munich, on the debt crisis.

“Wir Europäer sind nicht schuld an der Krise der Griechen. Und wenn sie unsere Hilfe nicht wollen, sollen sie es bleiben lassen”, sagte er. Zumindest aber sei ein “Dankeschön fällig. Ich bin eigentlich gewohnt, dass man sich bedankt, wenn man Hilfe angeboten kriegt”, sagte Hoeneß: “Wenn sie die Hilfe nicht annehmen, wird es zappenduster.”

Roughly: We Europeans are not to blame for the crisis of the Greeks. And if they don’t want our help, they should drop it. But at the very least a thank you is long overdue. Actually, I’m used to people being grateful when they get offers of help. If they don’t accept the help, then they’re in real shtuck.”

That comes on top of German polls showing 90%-plus want Greece out of the euro and tabloid headlines. Perhaps the Germans have yet to forgive one of their own (Otto Rehhagel) for managing Greece to victory in the European Championships in 2004.

Along with all of this, there are still massive protests in Athens as being reported by the BBC and others.

From BBC Live coverage.

1916: In the debate, Environment Minister George Papaconstantinou has told MPs that “the widest possible agreement in the political system is needed” to ratify the EU bailout, AFP news agency reports. “The bailout deal requires this… that is why the government asks for a vote of confidence,” he says.

1912: @Inflammatory in Athens, Greece tweets: Protesters in #Syntagma reportedly plan to stay until parliament talks come to an end tonight.

1905:One protester at the communist rally in Athens says: “Only one thing should concern the Greek people – how they can intervene drastically into [these] developments with organised political action, and overturn Papandreou and the policy that he expresses.”

1900:There are now thousands of people massing in Syntagma Square near parliament in Athens, many of them waving communist party flags.

All of this could take weeks or even months to sort out no matter how it goes.  Then there is also the matter of Italy and Spain and Portugal to deal with. Assuming the Euro lasts that long. Personally I’m not holding my breath. Especially since the latest G20 conference accomplished absolutely nothing.   This roller coaster ride ain’t over yet.

Update: From the Guardian:

10.53pm: Papandreou has won. By 153 votes to 144.

While we are all engaged in the OWS protests and hating those financial institutions that made this all possible,  the economic crisis that brought us all this entertainment still bubbles on. Still on the verge of blowing it’s top. This time brought to you by the European banks and the money they have tied up in countries like Greece, Italy, Spain and yes even France.  With France being the latest to get its debt downgraded.

With the likely hood of a Greek default being around 97% these days and the reluctance of the Germans and French to want to continue funneling money their way, the plan now is to re-capitalize the European banks that would be a risk when this occurs.  But the people of Germany and France now have little stomach for that either and both Merkel and Sarkozy are on shaky political ground now. And in my opinion this would be like closing the barn door after the horse has left, kicked over the lamp, set it on fire and burned it to the ground.

Merkel herself flopping in the wind like a flag in a hurricane. First saying that any resolution would take a while to implement and then announcing that a solutions is nearly at hand.  But the banks themselves are not happy about this solution saying that it puts a strain on them to keep so much capital on hand. Of course we all know that the real reason is that accepting the money would be tantamount to admitting they are in deep  trouble and continued investing in them would be a really bad idea.   By the way, continued investing in them would be a really bad idea.

Meanwhile Sarkozy and the French government are yelling that letting the banks fail and the governments default would mean the end of the Euro and Eurozone, that this would result in the return to the economic and political environment prior to WWII.   (cue Glenn Miller and Arty Shaw music)

Add to that the Chinese economy is now contracting and of course the financial sector is blaming the decisions of the Chinese government on that.  (Funny how they blame the government when things go sour and take full credit when they don’t)

What has this got to do with us ? Read the rest of this entry →

It may happen and sooner than you think.

An interesting take on the situation.

“This problem cannot be solved,” he said. “I’m fairly confident that the Euro is going to crash, and it’s going to fall pretty hard.”

Rastani added: “Personally, I’ve been dreaming of this moment for three years. I have a confession, which is, I go to bed every night and I dream of another recession. I dream of another moment like this. Why? Because people don’t seem to really remember. The depression in the 30′s wasn’t just about a market crash. There were some people who were prepared to make money from that crash. I think anybody can do that.”

“What I would say to everybody is, get prepared. It’s not the time right now to, wishfully thinking the government’s going to sort things out. The governments don’t rule the world. Goldman Sachs rules the world. Goldman Sachs does not care about this rescue package, neither does the big funds.”

Greek Default?

This editorial from The Guardian pretty much nails it. That the leaders of the Eurozone (Germany, France and even England) as well as here in the US insist on the fantasy that all will be good, Greece will pay it’s debts and the Great Pumpkin will spread joy to all.

The latest blizzard of statistics blew in yesterday from the International Monetary Fund, which knocked a quarter off the fragile growth forecast pencilled in for the rich economies In June. The UK fared slightly worse than this average, with a downgrade nearer a third. The IMF came closer than ever to warning the chancellor to change course on the cuts. Let’s hope last night’s reports about £5bn in new capital spending indicate a new willingness to listen. But Britain is a small fish in global waters: it may have ruled the waves; it does not make them now. The horrific twist concerns the two economies that do, the US and the eurozone. The projections assume that compromise triumphs in Washington, and that the eurozone crisis gets “resolved”. Without these heroic assumptions, a dank grey outlook turns unremitting black. Already nations like Britain are experiencing a second spike in unemployment, and the IMF was explicit: we could soon be looking at the long-mooted double dip in output too.

Sadly, world leaders still seem more interested in polite fictions than grim realities, especially in Berlin. Read the rest of this entry →

While we are all distracted by the game of chicken being played with the debt ceiling and Michael Bachmann’s latest verbal insanity there is still a situation with the global economy being played out and as this piece by Irwin Stelzer points out, it ain’t about Greece or Spain or Italy. It’s about the banks.

What we have come to call the Greek crisis is, first, an international banking crisis. Like Lehman Brothers, Greece is definitely not too big to fail. It is too interconnected to fail, too interconnected to the international banking system, too interconnected to the political ambitions of those who have spent decades replacing the system of nation states with a united Europe.

Start with Greek banks, which hold €70 billion ($99.3 billion) of their government’s sovereign debt. The Economist estimates that if Greek banks were required to recognize the fact that markets are valuing Greek government debt at about half the value assigned to this paper on their books, shareholders would be wiped out and the banks would have to scramble to raise substantial new capital. Depositors would scramble to get their money out, and the European Central Bank would have to torture its rules to find a way to continue accepting Greek bank IOUs in return for the cash needed to maintain the liquidity of the Greek banking system.

Other financial institutions would also find life more difficult. Many of Germany’s under-capitalized banks would be hard hit if they were forced to recognize that their books are in good part works of fiction, with IOUs of Greece and its banks and businesses recorded at values that have no relation to their true worth.

German banks are not alone in their predicament: The rating agencies are already expressing concern about the exposure of three French banks and some 29 Italian banks, and the governor of the Bank of England has called the problems of overly indebted euro-zone countries the “most serious and immediate risk” to the U.K. financial sector. It is also obvious that we have no clear idea of the exposure of U.S. money-market funds to Greece’s insolvency, or of insurers—remember AIG, anyone? That’s why $51 billion has been pulled out of those funds in recent weeks by nervous investors, why America’s banks have become reluctant to lend to their European counterparts, and why the Fed is asking U.S. banks about their exposure, including credit default swaps written on European banks.

Greece’s problem has also revealed another crisis—a crisis of governance. The Tower of Babel that is euroland governance is collapsing. Markets have gone from puzzled to incredulous and on to near-panic as Herman Van Rompuy says one thing, José Manuel Barroso another, Jean-Claude Trichet another, Angela Merkel still another. Their failure to sing from the same hymn sheet is damaging—no, destroying—any confidence markets might once have had in the competence of the euro-zone governing class.

So as the various leaders of these countries and Obama attempt to save these institutions piece meal and try to hide the reality of the situation – which has not really changed much since the 2008 meltdown – all they have managed to do is confuse investors, outrage the public and make a bad situation even worse. Instead of attacking the problem head on.  Now I only agree with a few of Irwin Stelzer’s suggestions, the others are typical Reaganomic BS. Here are the one I agree with.

• force the banks to recognize that much of what they count as assets aren’t, and to recapitalize, even if this slows lending and growth in the short term;

• recognize the need to speak to markets with one voice;

• admit that perpetual dependence on the generosity of Germany is not a sustainable policy;

And I would like to add for us at any rate, break up this monoliths and get rid of their casino style financial dealings. But most of all tell them they no longer call the shots.

Here it is.  Though I’m not so sure this is a good thing. It may intensify the people’s outrage.

The Greek government has won a critical vote of confidence in parliament as it struggles to win support for extra austerity measures and avoid a default.

Prime Minister George Papandreou’s new cabinet was approved by 155 votes to 143, with two abstentions.

MPs will now be asked to approve 28bn euros (£25bn) of cuts, tax rises, fiscal reforms and privatisation plans.

Eurozone ministers say the legislation must be passed to receive a 12bn-euro loan Greece needs to pay its debts.

Earlier, thousands of people gathered outside the parliament building in Athens to protest against both the austerity measures and politicians in general. Many chanted: “Thieves! Thieves!”

“I believe we should go bankrupt and get it over with. These measures are slowly killing us,” Efi Koloverou, a 22-year-old student, told the Reuters news agency. “We want competent people to take over.”

Mr Papandreou reshuffled his cabinet and replaced his finance minister last week after weeks of demonstrations against his handling of the crisis.

And as the man says, it ain’t over till it’s over.

Could be. According to this in the Telegraph the UK is panning that this may be the case.

Treasury ministers have admitted that the Government is drawing up contingency plans for a Greek bankruptcy after being warned by a former foreign secretary that the euro “cannot last”.

Jack Straw, the former Labour foreign secretary, said that a “quick” end to the single currency was now better than a “slow death”.

In an emergency debate, senior MPs from all parties demanded that Britain stand aside from a new rescue package for Greece and push for the country to leave the euro.

Mark Hoban, a Treasury minister, admitted that “many scenarios were being considered”. He said it would “not be appropriate” to discuss the detail, but added he would be “guilty of not stepping up to the responsibilities of his office” if plans had not been made to cope with a default.

He said British banks had about £2.47billion in outstanding loans to Greek institutions and individuals.