EUCOM Economic Analysis - Part I

[Watcher In The Middle]

The real issue with Greece that I see is that both the ECB and the Troika are the primary (and immediate) creditors to Greece. If Greece just decides to default on their 'deal' and fail to implement the austerity programs, then both the Troika & ECB cut them off. So Greece goes into default. But their money (the Euro) is still at it's full convertibility rate, ie Greek euro = Italian euro = French euro = German euro.

So, the result will be expanded bank runs in Greece (assuming there's any money left in Greek banks), Portugal, Spain, and possibly Italy. Why? Because nobody wants to go back to their original pre-euro currency, because if you are in one of the PIIGS and you have to have your money revert back to the national (pre euro) currency, you just suffered an immediate devaluation in your holdings. Move your money into Euros - immediately. And get the money in your hands.

So, the smart move is to make a hard withdrawal of your money in euro (or dollar) denominated currency. It's already been happening, and now it's accelerating.

The smart money says that to stop the outflow (bank runs), the EU has to kick Greece out of the euro & force Greece to move to the drachma.

But the problem with doing that is that once you start that process, the ECB and Troika holdings of Greek sovereign debt (and non-sovereign Greek debt) just basically became radically devalued, if not functionally worthless. And those are big numbers. But it doesn't just stop with Greece.

So what does the ECB and the Troika do? They have got no good options.

Truth of the matter is that right now Greece holds the cards. They've just shown Portugal, Spain, Iceland, and Italy the way to deal with this situation. IMO, they get to 'party on' while other (primarily the Northern European) nations get to keep picking up the tab.

Not to worry. In 6 months or so, when the US finances melt down (say January - April, 2013), we'll make the entire European quandary look like a sideshow.

[Watcher In The Middle]

Then we get this:

Spain may recapitalize Bankia (BKIA.MC) with Spanish government bonds in return for shares in the bank which last week asked for rescue funding of 19 billion euros ($24 billion), a government source said on Sunday.

Bankia could use the sovereign paper as collateral to get cash from the European Central Bank, forcing the ECB to get involved with restructuring Spain's banking sector, laid low by lending to property developers in a boom that ended in 2008.

Another 19 Billion Euro Bailout - for Bankia

Short summary:

1) Spanish government source
2) Float what amounts to be 19 billion euros of junk bonds
3) Sells them off to the ECB at face value.
4) Uses the proceeds to "recapitalize" Bankia.

Greece all over again....only on a far larger (and completely unaffordable) scale.

[Watcher In The Middle]

Here's somebody to pay attention to.

And the Smart Money Says....

Now if it's Switzerland that sets down the initial capital controls, then everybody else in the EU will have to follow. No choice.

"Capital Controls" = A ban on money transfers in/out of country. Limits on the amount of cash that can be withdrawn from a bank or ATM.

Think what that immediately does to the business environment. For products like pharmaceuticals or petrochemicals being produced at different facilities located in different nations, imagine the headaches. Think about the effects on a corporation like EADS.

I watched the different Sunday Washington "talking heads' all pontificating over US political fights (like over Bain Capital), and it's more than clear to me that those folks are truly clueless over just how bad and on-the-edge economic issues are in Europe.

If there are nation-by-nation capital controls implemented all across the EU, then the entire EU marketplace start to crumble - and anybody who believes those negative economic effects won't reach US shores is just flat out nuts.

As an aside, now we know why all those US multinationals with all those cash hordes held outside of the US wanted so desperately to cut a deal to be allowed to move that money back into the US at a more favorable tax rate. There's going to be a whole lot of CFO's/corporate treasurers with large cash positions in the different EU countries who are going to be sweating blood.

[Fuchs]

I watched the different Sunday Washington "talking heads' all pontificating over US political fights (like over Bain Capital), and it's more than clear to me that those folks are truly clueless over just how bad and on-the-edge economic issues are in Europe.

Admittedly, wrong continent and the trade relations aren't that huge anyway. Few %GDP.

The more worrying problem is that the talking heads don't have a clue how unsustainable the U.S. economy is and that any recovery of the usual kind is only an acceleration towards the next huge crash.

[Firn]

Smart money has been terribly wrong in so many occasions in those last years that I certainly do not stand in awe. Many top guys of said smart money were smart in the sense that they earned lots of money despite the very mixed bag of performances.

---

Spain is not Greece. It is a modern developed economy with a relative strong national and regional institutions which handled its (national) public debt very well for many , many years. It has also a stable government.

Spains initial crisis was in some ways pretty US-like. A low saving rate, cheap and easy credit and lax oversight led to a great party which inflated the wealth of the citiziens especially due to ever higher housing prices. As everything was on a high investors from abroad wanted to join the fun and kept it going. Then the bubble burst and now the private demand has collapsed, entering a vicious downwards spiral with too little help from the state which hit the austerity brake too soon.

The Spanish banks have, as we have seen still a lot of overvalued assets on the balance sheets as one has to expect during such a terrible local crisis without aggressive action. Bankia has been composed of many regional banks with hardly any relative foreign assets, making them fully exposed to the Spanish crisis. The state will step in, no doubt about that.

Personally I think that Spain must stimulate its economy with help from the ECB. A considerably higher debt of 85% of the GDP with an economy not in deep depression would even make for lower yields, but most important of all it would put so much wasted potential back at work.

[Fuchs]

Spain is not Greece. It is a modern developed economy with a relative strong national and regional institutions which handled its (national) public debt very well for many , many years.

I've read this meme often enough, its popularity seems to stem from Krugman.

No, Spain's fiscal policy has been 100% incompetent and disastrous for a long time. They had faked prosperity and decent budgets like the Greeks, their methods was merely less brazen. They had a huge bubble.
Now either they understood that there was a bubble - then they had horrible policy because they allowed it to grow and blow up.
Or they did not understand there was a bubble - then they were utterly stupid, way below common sense.


This is a country which never got its youth unemployment under control (never below 17%).


I don't get why so many people are so lenient regarding the Spanish and their horrible economic policies whenever the language is English. May it be that the U.S. and London housing bubbles would otherwise create too much cognitive dissonance among anglophones?

[J Wolfsberger]

I've read this meme often enough, its popularity seems to stem from Krugman.

Krugman among others. But the nice thing about Krugman is that he'll reverse course and say exactly the opposite if you wait for a little while. I think of him as the man who argues with himself - and loses.

As for the "cognitive dissonance among anglophones," I think its a language independent epidemic. The root cause is economic illiteracy. But that's probably a topic for another board.