The World is Still Turning … Surprisingly Enough
In mid December we issued a warning that the EU's chief living contrary indicator had piped up again – normally a sign that it is high time to batten down the hatches. We referred to him as the "harbinger of doom" – EU economic and monetary affairs commissioner Olli Rehn, so to speak the chief central planning bureaucrat in Brussels.
Of course the economy needs neither a "commissioner" nor a "minister" to function smoothly. In fact, as a general rule, economies tend to function better without such people.
Hence, when Ludwig von Mises was once asked what his first offical act would consist of if he were appointed "economics minister", his reply was: “Resign.”
Anyway, an entire month has passed since our last “Olli Rehn spotted” warning, and in spite of the confluence of this and the end of the Mayan calendar, here we are with Spanish 10 year yields below 5%. Sometimes miracles do happen.
However, we fear a new warning is called for. Olli has made noises again, this time on the topics of Cyprus and Slovenia.
Blue Skies Everywhere
“The eurozone is not considering a debt restructuring for Cyprus, the EU's top economic official was quoted on Friday as saying, as the heavily indebted island struggles to negotiate an international aid deal.
Cyprus applied for a financial rescue last June after its banks suffered huge losses on the EU-approved writedown on Greece's debt.
But it has so far failed to persuade its European partners to sign off on the package, given concerns the level of the island's indebtedness means it would be unable to repay the aid without further concessions from international lenders.
But "a haircut is not an option for us," Olli Rehn, the European Economic and Monetary Affairs Commissioner, told the German business daily Handelsblatt in an interview.
Ratings agency Moody's slashed Cyprus's credit rating by three notches late on Thursday on an expected rise in its liabilities, adding that it saw a 50 percent probability the Mediterranean island would "default outright or press for a distressed exchange" on its debt.
In Nicosia, Cypriot Finance Minister Vassos Shiarly said he was "not at all happy" about the Moody's downgrade but wanted to focus on the positive outlook for Cyprus offered by the anticipated conclusion of a bailout deal.
The rescue package could reach 17 billion euros, virtually equivalent to Cyprus" entire economic output. But hurdles to a deal are stacking up.
Germany, the EU's paymaster, has expressed unease about channeling taxpayers" money into a country seen by some as a hub of money laundering. Cyprus is a popular tax haven for wealthy Russians but says it fully complies with international rules against money laundering.
Rehn said he shared those concerns. "The government in Nicosia has already changed its legislation (on money laundering). But we must now ensure that the new laws are also applied. The problems are known to me," he said.
Germany's main opposition Social Democrats (SPD) have said they would not back a request in the lower house of parliament for financial help for Cyprus due to their concerns over "dirty money" in the country's banks. Members of Chancellor Angela Merkel's own coalition think likewise.
Now, one might well think that Olli Rehn is somehow mistaken in ignoring the smoke signals from Berlin. In this case though, it may well be that he simply knows his customers. Says Rehn:
“Rehn played down worries of an SPD veto of aid for Cyprus.
"The SPD is a deeply pro-European political force. So I believe that they can eventually support an aid package for Cyprus if we have found a convincing solution on Cyprus which is acceptable for taxpayers and which helps finally to clear up the problem of money laundering," Rehn said.”
Acceptable to taxpayers? Somehow we don't think that concern is at the top of the list. But the 'sPD finding a way to agree to a bailout"? That doesn't sound like too big a problem to us. Comrades, Olli has your number.
So Cyprus (and the evil oligarchs keeping deposits there) need not fear.
What about the other small country with ailing banks? That would be Slovenia, in case readers have forgotten (if has been quiet lately, maybe too quiet?) No problem there either, according to Rehn:
“Slovenia is taking action to address its economic and fiscal problems and is unlikely to ask for a bailout from the euro zone, EU Economic and Monetary Affairs Commissioner Olli Rehn said on Friday.
"I do not expect that Slovenia will be presenting a request for financial assistance. The country is taking action to address its economic and fiscal problems, which include the very important pension reform," Rehn told diplomats and industry executives in response to a question.”
To be sure, we"ve somehow lost track of what's going on in Slovenia as well. At a recent 212 basis points, CDS on its sovereign debt were quite elevated relative to those on the debt of comparable countries (smallish, and either members of, or in the vicinity of euro-land), but definitely a good deal below the highs reached in mid 2012. We would classify that as "mild concern".
5 year CDS in Slovenia (yellow line), Slovakia (green), Lithuania (orange) and Latvia (white). Slovenia is still standing out, but the worries are much reduced compared to what was previously seen. Chart via Bloomberg.
Normally this recent Olligram would cause us to give Slovenia a friendly shout of warning (Hide the women and children! Get the money out of the banks!, and so forth).
However, given that things have actually slightly improved since he was last spotted spouting polyannish little nothings in mid December, we wonder if he is actually still working as an indicator of imminent doom. Maybe it was the exception confirming the rule?
Olli in front of a few curves that have veered off in the wrong direction.
(Photo credit: La Presse)
See? It's all good!
(Photo credit: Jean-Christophe Verhaegen/AFP/Getty Images)