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Get familiar with Article 65, writes John Dizard, because plenty of officials and corporate...
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Sunday, June 10, 2012, 7:35 AM ETGet familiar with Article 65, writes John Dizard, because plenty of officials and corporate treasurers are. Article 65 in the EU treaty allows for countries to impose capital controls, and that's what he expects for Greece after its June 17 election (in which the spoils are reportedly already being divvied up by ND and Syriza). The Troika will have no choice but to fund Greece if it doesn't want the contagion to spread.
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This news story has 16 comments:
Checkmate!
"The "contagion" was just snuffed out this weekend (vis Spain)."
Really?
Nothing stops a Spanish person from doing the prudent thing and taking their money out of the country and putting it into German or Swiss banks which means the bank run can continue and accelerate now that the new money is in the system.
From the hated website Zerohedge comes a great quote:
"Mariano Rajoy from May 28, or 12 days ago: "No va a haber ningún rescate de la banca española." Or, more conveniently for the America-based readers: "There will be no rescue of Spanish banks."
The bailout of Spain which like Greece was never going to happen is a sign of panic not strength. However, the idea that it won't be positive for markets short-term has merit until the Spanish version of "sub-prime being contained" unravels again. Italy next?
Too big to save, too big to fail.
I believe you miss the significance of the new accord on Spain, as do some others.
There continues to be a persistent belief, expressed near relentlessly here in SA, that the EU will "run out of (bailout) money." Clearly, those expressing such views don't understand that in modern fiat-currency systems, money is unlimited and may be created, at will. (Yes, I know, we're all going to be the Weimar Republic tomorrow morning.) So, it doesn't really matter that Spain is larger than Greece, or Italy larger, still.
What is important and has been in question, though, is whether the EU (Germany included) could demonstrate a willingness to throw the money out there on the table, as needed and without massive conditions, to support its banking and financial structure. This weekend's actions provide evidence that the will and propensity for decisive action, in fact, do exist. The signal that this should send to investors is that betting on the next "calamity" destroying the EU anytime soon is a fool's errand and more attention should be directed to security valuations, which are massively depressed.
Briefly, as regards my parenthetical Weimar comment, it doesn't make any difference how much money is printed (just as its made little difference in the U.S.) if that money is not circulating and increasing demand for goods. The very best thing that could happen in Europe, which is beset with deflation, would be, in fact, for that money to start flying around, increasing economy activity. A weaker euro would help, too. Let's hope both occur.
The analogy you are using breaks down at the outset - the Spanish are currency "users" not issuers and therefore they are in fact constrained in the ability to deal with the crisis. The Spanish like the Greeks can request a bailout but they cannot do it themselves by printing their own currency without leaving the Euro - this is Soros' , Mauldin's, Zulauf's and many others key point.
The estimates for the amount of capital to bail out the Spanish banks is far greater than what has been announced above - in excess of $400 billion. This is the metaphorical "finger in the dyke" unfolding before us.
The Eurozone does not have fiscal integration, as in the case of Japan, US, Canada, UK, etc., and therefore the Euro as a currency is flawed and will eventually unravel. I see deflation which is already deeply set in as the likely outcome not inflation. The bailouts are liquidity solutions but the issue is solvency so the solution is just another temporary fix.
Having said that, I believe the US is the place to be especially if you want to remain invested.
Of course, I understand that Spain can't issue currency. If they and others could, there would be no issue.
But, the underlying issue for the EU on a more global basis is whether they will endorse whatever support is necessary to fund the system, a la the Fed. They have unlimited ability; the question is whether they will use it. This weekend's actions send a positive message.
The fiscal integration issue you mention is paramount, of course. It will take time to address this, and that's what is being supplied incrementally. None of it can occur overnight.
Your comment about liquidity versus solvency is the exact same debate and complaint that's been leveled about the recent U.S. bailouts, and there are those, still, that continue to suggest that it will all collapse. Mostly, those holding these beliefs and eschewing markets have been left behind. I would not be surprised to see similar course evolve in Europe.
I guess, in the end, it all comes down to the usual debate here on SA. There are those that believe solutions will be found to problems, and there are those who like to stake their investments on failure. I find myself in the former camp. It's served me well over a long period of time.
Spain got a "no strings attached" bailout. Within hours, Ireland made it known that it wants to retroactively renegotiate it's own bailout to match that of Spain's. This virtually guarantees that Syriza is going to win the Greek election, so that Greece can make the same demands.
If you're responding to me, this weekend's actions have rendered Greek election results moot, as will be seen shortly.
All that has transpired with these bailouts is a "kick the can down the road" response where each kick gets weaker and weaker. As competitiveness continues to diverge, eventually Germany will be faced with the recognition that most of southern Europe is no different from any slum region of any large city and will require a permanent transfer of funds to prevent total meltdown. Politically I expect that Germany will leave the Euro before anyone else; Greece and the rest of the PIIGS have no incentive to leave.
You raise a good point and the relevant crux of the whole matter, in the end. I am no Pollyanna, nor able to predict the ultimate outcome; however, I do think that the situation is more bullish in the short-to-intermediate term than gloomsters admit.
I concur that disparities in competitiveness and productivity require improvement, and it's unresolved whether these can be attained, genuinely, rather than merely masked via currency manipulations. On the other hand, there is evidence that such transformations can occur. For example, not that many years ago, Ireland was seen as a place having verdant green landscapes and growing potatoes. Then, in a rather short time, it became a high-technology and drug development and manufacturing center. Similarly, west Texas was known for some longhorn steers; now, it's the second-largest technology center after Silicon Valley.
So, it's not impossible that locales can change, but the question remains, will they? But, I do see that such effort to do so and arriving at the final verdict require "kicking the can down the road" to buy time. In fact, very little in life is accomplished "instantly," despite our living in the "Age of Instant Gratification," so allowing for time is a good thing.
After having been on the planet for almost 63 years, I have learned that consistently betting on failure is not usually a good way to make money.
I agree that "things can turn around" as you describe in Ireland and Texas, but that usually requires some political vision and commitment to at least not obstruct and most likely to create a conducive environment for those endeavors to stand a chance of success. In the case of the long standing European welfare state, the reforms necessary are likely to require a lot of time and a fundamental change in culture. Small businesses do not prosper well in that current climate, at least, those types that become game changers.
When a country's biggest concern is pensions, is it any surprise that you wind up with >50% youth unemployment?