spotfxtrader

After a pro EU piece the other week, (and by pro EU I mean anti Europe – his suggested most favourable outcome for the crisis being the introduction of a debt union, i.e. an outcome which would amount to the crushing of any democratic opposition to the EU Superstate), Mr Münchau appears to have seen the error of his ways….

As we’ve been saying all along, the ‘system’ is non-linear, and as it has now become totally unstable, the chances of the crisis being resolved in anything approaching an orderly manner are extremely slim. After considering his earlier piece pretty contemptible, I do like his description of EU decision makers as ‘serially incompetent’. I would venture that that description universally applies to the political classes throughout Europe and the US, with very few exceptions.

Ultimately he suffers from the delusion that the whole edifice could be managed if only good decisions could be made. The only good decision would be not to have attempted the creation of a superstate founded in subterfuge in the first place.

By Wolfgang Münchau

Published April 24 2011, 19:51

I was uncharacteristically optimistic last week, and had planned to end my informal series on eurozone crisis resolution with a benign scenario. The eurozone would survive in one piece; there would be no blood on the streets, just a once-and-for-all, albeit reluctant, bail-out, accompanied by a limited fiscal union. But as several readers have pointed out, my scenario is prone to a very large accident. I accept that point. Last week, we caught a glimpse of how such an accident may come about. My benign scenario looks a lot less certain today than it did a week ago.

The week began with the strong showing of two parties in the Finnish election, which are advocating a partial Portuguese debt default as a condition for a rescue package. The results triggered a renewed outbreak of the financial crisis, as eurozone spreads rose to near record levels once again.

The most disturbing news, however, was a revolt within Angela Merkel’s increasingly fragile coalition. It looks as though the German chancellor is on the verge of losing her majority over the domestic legislation of the European Stability Mechanism (ESM), the long-term financial umbrella for the eurozone. She may have to rely on the opposition to ratify the ESM, which may come at a heavy political cost. The Bundestag already postponed the vote on the ESM until the autumn, hoping to keep it clear from the controversial decision to pass the Portuguese rescue programme in May.

As opposition to the ESM mounted, German officials fell over themselves to be quoted by various newspapers pronouncing that a Greek restructuring was inevitable. Even Wolfgang Schäuble, finance minister, talked about the possibility of default. Some wily speculators unleashed the rumour that Greece would spring a surprise debt restructuring. The rumours prompted a criminal investigation. Another week in the eurozone’s debt crisis!

A monetary union is at a natural disadvantage when it comes to the handling of crises. There is no central government that takes decisions, which makes communications hard to control. What is less forgivable is the serial incompetence of the eurozone’s decision-makers, as exemplified by the perpetual eagerness to declare the crisis over the very second financial market pressure subsides. Not only do they know little about financial markets, they have surrounded themselves with policy advisers who know little too.

Their ignorance is an ideal breeding ground for quack solutions. One such is immediate default. German Christian Democrats and Finnish isolationists spent the last week trying to convince themselves that a Greek debt-restructuring would save them a lot of money.

That belief is premised on two false assumptions. The first is that a voluntary restructuring could solve the Greek debt problem. It can work in limited cases, but not when countries are insolvent. Greece, however, faces no short-term liquidity squeeze, because it is supported by the European Union and the International Monetary Fund. There is no need for any restructuring, voluntary or involuntary, right now. But Greece may need to impose a “haircut” in the future to ensure debt-sustainability. The ideal moment would be when the country achieves a primary surplus, probably in 2013.

The second wrong assumption is that the Greek banking sector would survive a restructuring unscathed. This is a conditional error. If you believe that a voluntary restructuring would be sufficient, then the Greek banking sector would indeed survive. But it would surely not survive a large and involuntary haircut. The European Central Bank would face a haircut on its direct investments of Greek government bonds, and, more importantly, much of the collateral posted by Greek banks would vanish. On my calculation, the cost of a Greek default to the German taxpayer alone would be at least €40bn ($58bn), including recapitalisation of the ECB. A bail-out would be cheaper.

A premature Greek default would change everything. As would the failure by the EU and Portugal to agree a rescue package in time; or an escalation in the EU’s dispute with Ireland over corporate taxes; or a ratification failure of the ESM in the German, Finnish or Dutch parliaments; or a German veto for a top-up loan for Greece in 2012; or the refusal by the Greek parliament to accept the new austerity measures; or a realisation that the Spanish cajas are in much worse shape than recognised, and that Spain cannot raise sufficient capital.

Then there is the downgrade threat for French sovereign bonds. I recall asking a French official about this, and getting the smug answer that the rating agencies could hardly downgrade France if they maintained a triple A rating for the US. That was before last week. By extension, France must also now be in danger. A downgrade would destroy the logic of the European financial stability facility. It is built on guarantees by the triple-A countries. Without France, the lending ceiling of the EFSF would melt down further.

The list of potential accidents is long, but they share a joint theme – serial political crisis mismanagement. We saw another glimpse of that last week. If we go down the route of premature default, and allow the True Finns and the true Germans to run the show, the eurozone as we know it will be finished.

this time from Bill Bonner in the Daily Reckoning…

Another thing taking a beating today is Europe’s periphery debt after the Portuguese voted against austerity. To put this into perspective, there are only two ways to go. When you borrow too much money from the future, you either have to pay it back or you go broke. The Portuguese were trying to pay down their debts, by cutting “services.” But it’s harder to cut services than you might think. Modern democratic welfare states are built on a fraud — that the government can give people more in services than they pay for. Typically, the government takes the extra money from groups that are politically weak — such as the next generation, which doesn’t get a vote.

Citizens don’t like it when the government tries to cut back. And when a majority of voters are on the taking end of the exchange — getting more from the feds than they pay in taxes — it’s very hard (maybe impossible) to impose “austerity” measures.

What the Portuguese election is telling us is that many governments will go broke before they pay down their debt. At least, that’s what it implies…

from Peter Oborne writing in the Telegraph…

Some European countries are in the habit of going bankrupt

A few hours after George Osborne’s faintly banal Budget speech, José Sócrates, the Portuguese prime minister, resigned. So far as I know, these two events were not in any way connected. Nevertheless, it is a very good bet that this little Iberian drama will have far more effect on British household finances and our national prosperity over the coming year than the Osborne Budget.

The resignation plunges the eurozone into a crisis it cannot survive. Mr Socrates’s failure to force his austerity package through the Portuguese parliament marks a crucial turning point.

It is the moment when the peripheral eurozone countries refuse to take orders any more from the centre. Effectively, Portugal has adopted blackmail as an economic strategy – and very effective it is, too.
The country is ready to be bailed out of its chronic financial mess, but only on its own terms. Otherwise it has a deadly card to play. It has the option of going bankrupt, an act of naked malice which would set in motion a second round of the banking crisis which began in 2007.

The consequences of this would be terrible: the break-up of the euro, mass unemployment, financial collapse, social despair. The scary truth is that the scale of the problem facing the eurozone has been gravely underestimated by British commentators. The reasons are shaming. One significant factor is the financial and economic illiteracy of political journalists and foreign correspondents. Too many are ill-equipped to look behind the bland statements made by European chancellors or to interpret the deliberately misleading balance sheets of major European banks.

This problem is exacerbated by the fact that almost all leading financial journalists share the moral and emotional commitment the European political class has long felt for the euro. The Financial Times, for example, has been a passionate supporter of the single currency since its inception, a pathology which runs so deep that its chief political columnist recently dedicated a column to making the extraordinary argument that the British economy would have been better off if we had joined the euro when it was first introduced.

But the most important problem is the failure to study history. Here the facts are devastating, and bear repetition. Portugal has defaulted on its national debt five times since 1800, Greece five times, Spain no less than seven times (and 13 times in all since 1500).

By contrast, Anglo-Saxon countries rarely, if ever, default. In this country, we haven’t reneged on our debts in nearly 1,000 years, though there have been close shaves. The same applies to Canada, Australia and the United States.

Many European countries are culturally attuned to bankruptcy. Indeed, Greece has spent approximately half of the 182 years since it achieved independence from the Ottoman Empire in a state of default and therefore denied access to international capital markets – a position it is likely to resume in the very near future.

The importance of these statistics is very great. They show that the widespread assumption by bureaucrats, senior politicians and commentators alike that eurozone countries could never go bankrupt is simply wrong.

In fact, the opposite is the case. The normal and indeed the automatic response of Spain, Portugal, Greece and many other European countries to major financial crises such as the one we are living through today has been to renege on their debts. So it would be extraordinary were they not to do so. History also shows that currency unions such as the eurozone invariably fail: the most relevant case in point is the Latin monetary union formed by France, Belgium, Italy and Switzerland in 1865, with Spain and Greece joining a few years later. Once again, these failures are invariably sparked by grand financial crises of the kind the world faces today.

These historical facts make contemporary European political discourse completely baffling. It is universally assumed by members of the European political class that the single currency cannot possibly fail because the political will to make the venture succeed is so powerful. There is no doubt about the will: French president Nicolas Sarkozy announced this year at the World Economic Forum in Davos that he and Angela Merkel, the German Chancellor, will “never, never… turn our backs on the euro… We will never let the euro go or be destroyed.”

Sarkozy and Merkel are dreaming. They are out of their depth, struggling against forces they cannot control and which will in due course wash them away. It is economic reality, not political speeches, that will determine the success or failure of the single currency, and the facts on the ground are so devastating that it is hard to see a way forward.

The experiment of imposing a single currency and a single monetary policy upon economies as divergent as those of Germany and Greece has gone tragically wrong. Germany, bolstered by an artificially low exchange rate and rock-bottom interest rates, is enjoying a boom. But the economies of Ireland, Portugal, Greece and others are being destroyed – businesses closing, unemployment surging, dependent on bailouts, all self-respect and independence gone.

It cannot be emphasised too strongly that were these countries outside the eurozone, there would be no real problem. The IMF could intervene, reschedule their debts and allow the national currencies to float until they reached a competitive level. In the case of Greece, this level would be well under half where it stands today as a member of the euro.

In the very short term, all is well. Portugal will get its bailout: the European Central Bank and its German paymasters have no choice if they are to avoid catastrophe. But it is now impossible that in the medium term the eurozone can survive intact, and increasingly likely that its collapse will be accompanied by a fresh banking crisis that will throw the entire Continent into another crippling recession, in all likelihood far more devastating than the one from which we have just emerged.

Ten years ago, William Hague, then Tory leader, forecast with astonishing precision the predicament that faces the 17 eurozone states today. He compared membership of the euro to being stuck in a burning building with no exits.

Luckily, we do not find ourselves in that position. But houses are already blazing in the next street, and Britain urgently needs to take steps to protect itself. First, and least important, we must minimise our financial commitments to the eurozone. It now looks certain that Britain will be legally obliged to make a very significant financial contribution when the Portuguese bailout comes. This is as a result of the reckless commitment made by former chancellor Alistair Darling in the dying days of the Brown government. Sadly, there seems no way out of this.

More importantly, however, we can take steps to reduce our national exposure to European sovereign debt, much of which is likely to become valueless. George Osborne controls two banks, RBS and Lloyds TSB, a legacy of the 2007 crisis. He needs to prune their balance sheets. Individuals, too, can play their part. Depositors should be chary of placing more than £50,000, the maximum insured by the state, on deposit with Santander (which owns what used to be the Abbey National and Bradford & Bingley). Santander is Spain’s best-run bank by some distance. But we are entering terrifying times, and there is no need at all to take unnecessary risks.

Portugal’s prime minister resigned on Wednesday evening after losing a confidence vote on austerity measures in a move that threw Portugal into political crisis and raised the likelihood of it seeking an international bail-out.

Jose Socrates was driven to quit his post after failing to win parliamentary support for the latest austerity package, the fourth and most severe put forward by the minority government in less than a year.

“This crisis occurs in the worst possible moment for Portugal,” Mr Socrates said on the steps of Belem Palace in Lisbon after tendering his resignation to the nation’s president Anibal Cavaco Silva.

“Today every opposition party rejected the measures proposed by the government to prevent Portugal being forced to resort to external aid,” Mr Socrates, who has led a minority government since 2009, said in a televised address.

The main opposition centre-right Social Democratic Party (PSD) had allowed past austerity plans to pass by abstaining from voting. But last minute negotiations failed to garner support and the government was only able to count on the vote of 97 members in the 230-seat parliament.

Despite the government warning that rejection of the austerity package would push Portugal closer to seeking a bail-out the opposition refused to accept further tax increases and cuts to social spending arguing that it hit the most vulnerable members of society.

“This crisis will have very serious consequences in terms of the confidence Portugal needs to enjoy with institutions and financial markets,” Socrates said.

“So from now on it is those who provoked it who will be responsible for its consequences,” he added.

The events in Lisbon came on the eve of a two-day EU summit, a meeting aimed at repairing the damage done to the euro by Irish and Greek bailouts last year.

An election in Portugal could not occur before 55 days, according to parliamentary rules, raising additional fears that Mr Socrates – who will head a caretaker administration with limited powers in the interim – will be unable to prevent a full collapse in market confidence.

President Silva said in a statement he will meet with all political parties on Friday to decide the way forward.

Portugal’s government is on the verge of collapse after opposition parties withdrew their support for another round of austerity policies aimed at averting a financial bailout.

The expected defeat of the minority government’s latest spending plans in a parliamentary vote Wednesday will likely force its resignation and could stall national and European efforts to deal with the continent’s protracted debt crisis.

The vote comes on the eve of a two-day European Union summit where policymakers are hoping to take new steps to restore investor faith in the fiscal soundness of the 17-nation eurozone, including Portugal.

The governing Socialist Party’s parliamentary leader Francisco Assis made an 11th-hour appeal for opposition rivals to negotiate changes to the latest austerity package and ensure the government’s survival. Prime Minister Jose Socrates, who heads the government, has said he will no longer be able to run the country if the package is rejected.

But opposition parties say the center-left government’s latest austerity plan goes too far because it hurts the weaker sections of society, especially pensioners who will pay more tax. The package also introduces further hikes in personal income and corporate tax, broadens previous welfare cuts and raises public transport fares.

The leader of the main opposition center-right Social Democratic Party, Pedro Passos Coelho, said late Monday that the political deadlock made an early election “inevitable.”

As in Greece, the austerity policies have prompted numerous strikes, with train engineers set to walk off the job during the morning commute Wednesday.

Portugal’s plight stems from a decade of miserly growth. While growing at the tepid rate of 1 percent a year, it ran up debt to finance its western European lifestyle.
Bloomberg reports Portugal Faces Lawmaker Vote Threatening to Push Toward Election, Bailout

Portuguese Prime Minister Jose Socrates will today face a vote in parliament against his deficit-cutting plan which threatens to push the country toward early elections and the need for a European Union bailout.

Lawmakers will discuss the government’s so-called stability and growth program of austerity measures at 3 p.m. in Lisbon. The opposition Social Democratic and Communist parties both pledged yesterday to table resolutions against the plan.

“If parliament decides on a motion against the stability and growth program, that means the government is not in a condition to make commitments internationally,” Socrates said on March 15. “That would mean a political crisis. In my understanding, the consequence of a political crisis is the worsening of the financing risks of our economy and would lead Portugal to request external intervention.”

Portugal is going to fail. Wednesday is as good a day to do it as any.

Thus, sooner, rather than later, another bailout is coming. However, it will not be Portugal who is bailed out, but rather German, French, and UK bank that lent money to Portugal.

Eventually Greece, Ireland, and Portugal will default, even though pretending otherwise may continue for a while.