EUCOM Economic Analysis - Part I

[Watcher In The Middle]

"Hopefully his econ team can ensure that the nationalization, breakup, and sale of the remaining assets is a case study in how to repay taxpayer funds plus interest."

Actually, I agree fully with this approach. It's what we should have done here in the US (except not to nationalize, but make them file Chapter 11/Chapter 7 in federal bankruptcy court). And then we should have kicked out all the upper level management in disgrace (& board of directors), and then assigned a task force of special prosecutors to look into each occurrence.

But we didn't do that, and we've been paying for it ever since (undoubtedly, with more to come).

France in particular needs to get to the bottom of this entire real estate mortgage crisis really fast and decisively, because otherwise, you just might see France turn into "Spain, Part II". Don't do like the US is doing -trying to 'push it all down the road'.

[M-A Lagrange]

France in particular needs to get to the bottom of this entire real estate mortgage crisis really fast and decisively, because otherwise, you just might see France turn into "Spain, Part II". Don't do like the US is doing -trying to 'push it all down the road'.

Makes too long I'm not living in France so I don't really see where you are coming from. If it's true that real estate market in France is getting a little crazy, I do not believe you can compare the situation to Spain. If real estate is too expensive in Paris, it remains accessible in "province". Also, it's a hell to get a credit from the banks. The problem is more that banks do not play their role anymore by refusing to allow grants to small enterprises. This basically kills a lot of business, even if they are health but need cash to fund their growth.

but i might be wrong.

[Firn]

Well almost all banks are indeed greedy when others are greedy and fearful when others are fearful. It is just all too human and at the same time a strange case of Dr Jekyll and Mr Hyde. Only that both extremes will make the economy suffer be it a couple of years down the road or now.

@Surferbeetle: Banks are unique institutions as when many a banca becomes rotta the economy suffers greatly. As we have seen in dire times it is the citizien who covers the downs of those big banks while he has little from the ups. I believe we really should give a nod to the law of medieval Genua and literally break the big banks, but in away that the pieces can stand on their own feet.

[Fuchs]

@Surferbeetle: Banks are unique institutions as when many a banca becomes rotta the economy suffers greatly.

It depends. The real economy had been complacent about the leeches in the financial industry and the big consulting firms, but since the crisis began they broke largely free from the banks.

Large corporations not only have a lot of liquidity - they also have their own means to emit bonds and such for foreign capital.

Small businesses have always been better off by dealing with regional savings & loan institutions instead of with the big banks.

Medium-sized companies are in between.


The real economy did its job of mitigating the risks of association with the big banks to the point that German big banks are now desperately in search for large loan customers. These well-done homeworks may be part of the reason why the German economy can now grow faster than long term average (which would be in real terms: working age population growth about -0.5% + annual technological progress rate about +1.5% = 1% p.a. total at most since the capital stock doesn't change much).

[Surferbeetle]

@ Firn

Banks have been vital to financing large engineering efforts for aeons; the Assyrians had them back when. Speaking of which there was a Tel outside of Mosul with amazing views of the Tigris and incredible work (way too heavy to carry by even a team of rapists of history) that must have been quite the amalgam of engineering, politics, and finance of pull off and build ... Eurobonds will be interesting to watch and see what results.

@ Fuchs

The distinctions between large, medium, and small banks are perhaps not as clear cut as one might think....and to stir the pot a bit, simplifying...Krugman thinks TBTF can work if managed while Greenspan thinks killing some TBTF off is not a bad thing...

The Economist has a timely multi-section report on Banking worth reading:

Special report: international banking: Banking goes digital, May 17th 2012, 4:46 from Schumpeter, Our correspondents discuss how new technologies will affect the future of retail banking, The Economist

Spain is arguably the world’s most competitive banking market. Thanks to its fiercely independent regions, it has a remarkable number of banks for its size. Even more remarkable is the number of branches, some 43,000, which works out at one branch for every 1,000 people, or about six times the number in Britain and more than twice as many as in France and America. “With too many players you end up overbanked because every bank wants to be everywhere,” says Pedro Rodeia at McKinsey. This keen competition pushed some smaller banks to lend recklessly, causing a banking crisis that blew up the economy. Yet it also forced banks to squeeze out costs, which at Santander and BBVA account for less than 50 cents of every euro they earn, despite their huge branch networks. Most large retail banks in other countries would be happy with anything below 60 cents.

Spanish banks embraced modernisation relatively late. Having been trapped in a bubble for many years during the fascist dictatorship, once they were freed they were able to leapfrog rivals in more developed markets. The most important innovation was the rapid and almost universal adoption by bank customers of electronic bill payments. Spain’s banks have a huge advantage in not having to process cheques or handle transactions in their branches. They have invested diligently in installing the latest and most effective computer systems, making their banks enviably efficient. Their rapid growth and the economic troubles at home raise some question marks. Even so, they have developed an innovative model of banking that is being exported around the world. It may also hold some clues about what banks elsewhere may soon be doing.

[Firn]

@ Firn

Banks have been vital to financing large engineering efforts for aeons; the Assyrians had them back when. Speaking of which there was a Tel outside of Mosul with amazing views of the Tigris and incredible work (way too heavy to carry by even a team of rapists of history) that must have been quite the amalgam of engineering, politics, and finance of pull off and build ... Eurobonds will be interesting to watch and see what results.

An amalgam of engineering, politics and finance to build a palace for a reign who staked its claims with captured enemies. They certainly wanted to spread the word of their deeds. The Sumerian merchants trying to account for their goods could not knew that once those marks would enable the Assyrian kings to tell us how they slaughtered the sons of this and that lord in front of his eyes. Or the amount of tribute they collected.

Thankfully the situation in the Eurozone is not quite that grim, and the stronger nations are not plundering the weakest one but are sending money, if with strings attached.

As some of you recall I still hold Greek bonds which lost relative little in nominal value. If Greeces does split from the Eurozone I'm quite sure that this credit will at best worth only a third of its current value. With the GDP measured in neodrachma the debt in Euro would be north of 300% I guess, and that after the famous haircut. Too much even for a far stronger country.

[Surferbeetle]

Thankfully the situation in the Eurozone is not quite that grim, and the stronger nations are not plundering the weakest one but are sending money, if with strings attached.

Things have not gone 'biblical' yet, but it is very interesting to see how on edge the normally cool, dispassionate, and very cerebral FT has become of late regarding this topic. Andrew Roberts May 18, 2012 7:47 pm article, "Europe’s hubristic imperial overstretch", Gideon Rachman's May 21, 2012 7:40 pm, article, "Time to plan a velvet divorce for the euro" and Martin Wolf's May 17, 2012 7:10 pm article, "A permanent precedent" are well written examples of this trend.

Looking across the channel, we also see posturing in some, not unexpected, quarters:

"Europa braucht den Euro nicht", Thilo Sarrazin schreibt den Euro ab von Tim Rahmann, 22.05.2012, WirschaftsWoche

Diplomatie ist nicht die Stärke von Thilo Sarrazin. Der Ex-Finanzsenator und ehemalige Bundesbanker hat ein klares Freund-Feind-Schema und denkt gar nicht daran, lange um den heißen Brei herumzureden. Sarrazin stilisiert sich spätestens seit dem Erscheinen seines 2010er-Bestsellers „Deutschland schafft sich ab“ als Mann, der die „unbequeme Wahrheit ausspricht“.

Kritiker nennen seine vereinfachten Thesen populistisch. In seinem neuen Buch „Europa braucht den Euro nicht“, das heute erscheint, kommt Sarrazin erneut schnell zum Punkt: Der Euro ist ein politisches Projekt, dem jegliche ökonomische Grundlage fehlt. Die Gemeinschaftswährung hat dem Kontinent mehr geschadet als genützt. Kurzum: Europa braucht den Euro nicht. Und Deutschland schon gar nicht.

EUROPA IN DER KRISE, Griechische Linke droht mit Euro-Katastrophe, 22.05.2012, 18:00 Uhr, Handelsblatt

Die Euro-Krise treibt seltsame Blüten. Dass einmal die erfolgreichen griechischen Linken gemeinsam mit den zerstrittenen deutschen Genossen in der Bundespresskonferenz in Berlin auftreten, um gemeinsam gegen Bundeskanzlerin Angela Merkel (CDU) und ihre harte Sparpolitik Front zu machen, hätte man sich wohl in den kühnsten Träumen so nicht vorgestellt. Die Spitzenvertreter der am Boden liegende Linkspartei, Fraktionschef Gregor Gysi und Parteichef Klaus Ernst, zeigen sich denn auch mehr als erfreut, dass der Chef der griechischen Linksradikalen, Alexis Tsipras, ihrer Einladung in die Hauptstadt gefolgt ist.

Nach Paris ist Berlin die zweite Station für Tsipras‘ Mission, den Euro-Rettern klar zu machen, dass sie Gefahr laufen, das ganze Euro-Projekt in den Sand zu setzen, wenn sie an ihrer harten, den Griechen aufgezwungenen Reformpolitik festhalten. „Wir brauchen alle einen Plan, um eine Katastrophe abzuwenden“, sagte der Anführer des Wahlbündnisses Syriza. Denn eine Auflösung der Euro-Zone würde am Ende die ganze Welt in Mitleidenschaft ziehen. Es müsse daher alles getan werden, dass diese Entwicklung nicht Realität werde. Unmissverständlich macht der Linken-Politiker klar, dass es weniger an den Griechen liegt, das Schlimmste zu verhindern, sondern einzig und allein an den europäischen Staats- und Regierungschefs. „Die EU-Staaten sollten nicht auf Lösungen beharren, die in die Katastrophe führen“, lautet seine unverhohlene Warnung.

But there are still cooler heads out there looking for solutions:

Parallelwährung als Alternative, Griechenland hat nicht nur die Option «Austritt mit grossem Knall» von Christof Leidinger, 23. Mai 2012, Neue Zürcher Zeitung

Allerdings gibt es nicht nur das «Dabeibleiben» oder das «Austreten mit grossem Knall», sondern weitere Möglichkeiten. Zum Beispiel die Einführung einer Parallelwährung zum Euro. Sie könne helfen, eine ökonomische, soziale und politische Katastrophe mit unvorhersehbaren Ansteckungseffekten zu vermeiden, ohne dass die europäischen Institutionen und der Internationale Währungsfonds taktischen Erpressungsversuchen nachgeben müssten, heisst es in einer Studie der Deutschen Bank.

Vor dem EU-Gipfel, Die EU streitet über Eurobonds, Von HENDRIK KAFSACK, BRÜSSEL, 22.05.2012, FAZ

In der EU herrscht vor dem Gipfel der Staats- und Regierungschefs an diesem Mittwoch offener Streit über den Umgang mit der Schuldenkrise. Im Mittelpunkt steht dabei insbesondere die Frage der Einführung von Eurobonds, also der gemeinsamen Begebung von Staatsanleihen durch die Euro-Staaten. Die Bundesregierung sehe in der Schaffung von Eurobonds weiterhin nicht den richtigen Weg, um die Schulden- und Wachstumskrise der EU zu bekämpfen, hieß es am Dienstag aus Regierungskreisen in Berlin. Die Staats- und Regierungschefs sollten bei dem gemeinsamen Abendessen an diesem Mittwochabend besser über die Förderung des Wachstums debattieren.

Für eine Debatte über Eurobonds machten sich außer dem französischen Präsidenten Hollande der italienische Regierungschef Monti sowie EU-Ratspräsident Van Rompuy stark. Beim dem informellen Gipfel an diesem Mittwoch geht es offiziell um die von Frankreich erhobene Forderung, den verschärften Stabilitätspakt um einen EU-Wachstumspakt zu erweitern. Dieser soll etwa die gezielte Förderung kleiner und mittlerer Unternehmen und junger Arbeitsloser oder den Ausbau des Energie- und Verkehrsnetzes umfassen. Konkrete Beschlüsse werden nicht erwartet. Das Treffen soll vielmehr das nächste offizielle Gipfeltreffen Ende Juni vorbereiten.

Skeptisch gegenüber Eurobonds zeigt sich auch der konservative spanische Ministerpräsident Mariano Rajoy, dessen Land in der Schuldenkrise selbst stark unter Druck geraten ist und daher von gemeinsamen Anleihen vermutlich profitieren würde. „Der wichtigste Motor für Wachstum in der EU ist die Finanzstabilität“, hatte Rajoy am Montag in Chicago während des Nato-Gipfels gesagt. Über gemeinsame Anleihen von Euroländern sagte Rajoy, diese benötigten Zeit. Wichtiger seien aber Maßnahmen, die schnell wirkten.

As some of you recall I still hold Greek bonds which lost relative little in nominal value. If Greeces does split from the Eurozone I'm quite sure that this credit will at best worth only a third of its current value. With the GDP measured in neodrachma the debt in Euro would be north of 300% I guess, and that after the famous haircut. Too much even for a far stronger country.

I still have a small sum still sitting on 'black' in the finance sector of the 'core' as the wheel spins. We will see what happens...