German legislators and a democracy group file lawsuits in a constitutional court seeking to challenge the country participation in the eurozone's ESM bailout fund and the fiscal compact, laws for which were approved on Friday (I, II). President Joachim Gauck has said he would delay passage of the measure pending any lawsuits. [View news story]
Maybe Merkel knew this was in motion and caved in at the most recent summit knowing that there would eventually be a popular referendum to determine Germany's continued role within the EMU.
Left to the people, Germany's balance sheet will not be used to fund armies of civil servants, found in France and the peripherals, bestowed with generous salaries, benefits and retirement plans.
Weighing The Week Ahead: Time For Some Fireworks? [View article]
Jeff I always enjoy your columns but seldom agree with your analyses or takeaways, making for interesting discussion.
Last week you correctly identified the summit as something to watch and I must admit the outcome of the 18th or so summit exceeded my expectations although the grandiose statements were supported by few details. We now know the EFSF/ESM will purchase Italian debt with "conditionalities" and provide direct assistance to Spanish and other troubled banks with "conditionalities" once the the hodgepodge of 17 state banking regulators is brought together under the control of the ECB.
We do not know what the "conditionalities" are and we don't know whether the new banking authority can shut down insolvent banks, including national champions, and wipe out equity shareholders and bondholders. We do know the resources of the EFSF/ESM remain insufficient and the euro 100 billion growth pact is not much more than lipstick.
Your coverage of weekly economic events support my view of US economic growth slowing and being part of a synchronized global economic slowdown, which will eventually impact corporate profits beyond what you show in this edition of WTWA. In addition to what you cite, the Chicago area PMI remained almost flat at 52.9 and the readings for new orders were the lowest since September 2009.
China’s Purchasing Managers’ Index fell to 50.2 in June from 50.4 in May, suggesting manufacturing expanded at the weakest pace this year as new orders and export demand dropped. A survey of Japanese manufacturing showed activity shrank in June for the first time in seven months. German retail sales in May unexpectedly dropped 0.3 per cent.
I would only add that China is likely to be in far worse shape than what they want us to believe, growing well below oft cited, lofty measures made possible through manipulation of statistics ahead of sweeping political changes.
Pasted material supporting this view:
On Friday night the June China MNI Survey was out and recorded deteriorating growth:
Chinese businesses conditions improved at their slowest rate in two and a half years in June on the back of an across-the-board deterioration, including falling production, slowing new order growth and worsening credit availability and financial positions, the results of the Flash MNI China Business Sentiment Indicator indicated.
The flash overall conditions index fell to 51.92 from 54.40 in the final May survey. If confirmed by the final results, the June reading would be the lowest since January 2009′s 41.67.
The flash new orders index fell to 54.70 from 56.44 while the flash production index fell to 51.89 from 54.48 in May.
The financial positions index fell to 47.29 from 50.97 while the flash availability of credit index fell to 45.22 from 48.29 in May.
Will The Federal Reserve Unleash QE3 Soon? [View article]
Markit said its U.S. "flash" manufacturing Purchasing Managers Index fell to 52.9 from 54.0 in May. The June reading was the lowest since last July although it stayed above 50, indicating expansion in activity. For the second straight month, weaker demand from Europe and large emerging markets such as China dented sales.
Markit also said U.S. manufacturers reported the second largest decline in new export orders since September 2009. In the same week of releases, Markit showed an alarming and continued deterioration in its series for China and the EMU, with the latter now showing the once muscular Germany falling victim to slowing global growth.
As you note, this and a host of other indicators suggesting slowing domestic growth occasioned the Fed to downgrade it outlook for the US economy by subtracting .5 points from expected growth for the current year, while other high frequency private forecasters did the same.
Many economists believe the US economy, which expanded at 1.9% rate in the first quarter, has now slowed to something in the area of 1.6% to 1.8%; Goldman believes growth will slow to 1.5% by 1Q13.
Variances between Fed forecasts and those of private forms is easily explained by the fact that the Fed has an abysmal record in forecasting domestic growth, always proving too optimistic. In the recent past it has forecasted 3% growth only to see 1.6% growth.
But not wanting to rattle the market, the Fed simply stated the obvious, acknowledged the headwinds and extended "twisting", which gives the appearance of doing something while actually doing nothing.
When it dawns upon the world the US economy is in far worse shape than allowed by officials the Fed will be forced into another round of QE even though this has shown to be highly disruptive and a blunt instrument in battling a balance sheet recession.
And when it is announced, all blame will be placed upon slowing global growth rather than Fed impotency and horrible fiscal and regulatory policies.
Greece's new coalition government could already be on a collision course with its Troika overlords after yesterday proposing to extend the country's "fiscal adjustment period" by at least 2 years to 2016. Greece also wants to scrap plans to cut 150K public sector jobs, slash VAT on food, and provide unemployment benefits for 2 years instead of 1. [View news story]
This is nothing new as Greece has consistently dithered in implementing structural reforms including reducing the influence of unions and the ranks of its vast army of civil servants. Once the cradle of civilization, Greece is now the seedbed of constituency politics, crony capitalism and vile corruption. And astonishingly, they want somebody else to foot the bill to continue funding unsustainable policies.
Weighing The Week Ahead: Chances For An Upside Surprise? [View article]
Indeed a fascinating week in week in which in the myth of US decoupling was totally shattered; further evidence was offered that global growth is slowing; and US data began to converge and paint a picture of stagnating growth accompanied by revisions downgrading estimates of future growth of GDP and earnings.
Data showed euro-area manufacturing shrank at the fastest pace in three years and a Chinese output gauge indicated contraction. Purchasing managers’ indices for the EMU showed private sector activity shrinking at the same pace as in May, which was the fastest in almost three years.
But Germany’s economy, which has so far saved the eurozone from recession, suffered a significant deterioration, especially in its manufacturing sector – indicating its exporters were being affected by gloomier global conditions.
In parallel China’s manufacturing sector contracted for an eighth consecutive month in June, according to the HSBC flash purchasing managers’ index, as export orders suffered their fastest contraction since March 2009. And as you noted things could easily be worse than believed in China as there is ample evidence China is playing with statistics in advance of a sweeping changes in political leadership.
U.S. stocks tumbled On Thursday after these signals of a global slowdown in manufacturing were reinforced by disappointing US housing and labor market data. Prices further deteriorated after Goldman released an opinion to short the market and revised down its opinion of the US economy.
Claims for jobless benefits were above expectations, manufacturing in the Philadelphia region shrank at an alarming rate and sales of existing homes fell. The Philly Fed general business conditions index showed contraction for a second month and, at a minus 16.6 level, a much more severe contraction than May's minus 5.8. Existing home sales fell 1.5 percent in May to a 4.55 million annual rate. The rate opened the year at 4.63 million in January but hasn't gone anywhere.
The day before we learned that Federal Reserve lowered its growth and employment estimates while announcing its extension of operation Twist. It reduced its growth estimate for the US economy for 2012 from 2.4% t 2.9% to 1.9% to 2.4%. Goldman Sachs has reduced its estimate its estimate for 2012 and has lowered its estimate for 1Q13 to 1.5%. Other economists have lowered their expectations for 2Q12 to 1.6% to 1.8%. Variations among Fed forecasts and those of others can be easily explained by the fact the Fed has been consistent in over estimating economic growth.
When the Fed is forced to publicly acknowledge things are far worse than stated and economic growth is actually in the range of 1.5% the big surprise will be QE3, propelling commodity prices and stocks higher.
Thoughts From The Front Line: The 'Bang' Moment Is Here [View article]
I think the chances of a full blown, integrated union are very slim and would take longer to achieve than most realize, exposing the EMU to countless waves of financial stress.
A true union would require national governments to surrender sovereignty to the European center so that democratic accountability is restored and proper standards of governance can be maintained. While frequently discussed, I’m skeptical as to how many leaders wish to relinquish control of their respective countries to Brussels
And any plan would need a consensus but EU member nations have different views and traditions on taxes, public services, redistribution, risk-sharing, regulations, public borrowing and every other aspect of public finance. These differences would either preclude or limit the scope for fiscal cooperation.
Finally if non-Germans are allowed to vote, Germany’s influence would diminish while at the same time reducing Germany’s power and further exposing its balance sheet through mutualization of debt.
Why Spain's Bank Rescue Is Only Its First Bailout [View article]
I believe the needs have underestimated as do others.
As reported by Ambrose Evans Pritchard in the Telegraph “Megan Greene from Roubini Global Economics says Spain's banks will need up to €250bn, a claim that no longer looks extreme.
New troubles are emerging daily. The Bank of Spain said on Thursday that Catalunya Caixa and Novagalicia will need a total of €9bn in new state funds. JP Morgan is expecting the final package for Spain to rise above €350bn, while RBS says the rescue will "morph" into a full-blown rescue of €370bn to €450bn over time -- by far the largest in world history. “
Weighing The Week Ahead: The Search For Leaders [View article]
Too lttle, too late again?
As Gavyn Davies observes “Until now, successive Spanish governments have repeatedly claimed that there was no need for eurozone assistance for their banking sector. However, these claims have not carried much credibility since the economy dropped back into recession last year, taking the real estate sector down with it. The failure of Bankia was the final moment of truth.”
And reporting by the FT clearly supports this position. Mr Rajoy on Sunday expressed regret that Spain had not bailed out its struggling domestic banks three years ago along with other European Union members such as the UK, but said the credit line agreed among eurozone finance ministers on Saturday was essential to restore confidence and help banks provide credit to the real economy.
So it’s pretty clear the leaders of Spain have forestalled taking needed action earlier opting instead to dither, delay and deny which says something about leadership. The critical, intertwined questions now are (1) will this pending request for assistance, which will be formally submitted when two studies have been completed, allay concerns, restore confidence and stem the flight of capital from Spanish banks, (2) will the contemplated aid of euro 100 billion damage Spain’s fiscal sustainability by adding fourteen (14) percentage points to its debt/GDP metric, (3) will the ESM/EFSF actuall be able to mop the amounts being discussed to recapitalize Spains’s banks and (4) will euro 100 billion or whatever amount is requested be sufficient?
Answers to the first questions will be provided by the market over the next weeks while there are already very strong hints that euro 100 will prove inadequate and pave the way for additional injections. To be fair, though, we need to wait for the two independent studies but we do know the IMF study was conducted in such a manner as to intentionally minimize capital requirements by limiting the study through 2011, excluding writedowns on loans in forbearance and limiting writedowns on (surprise) soverien debt.
As reported by Ambrose Evans Pritchard in the Telegraph “Megan Greene from Roubini Global Economics says Spain's banks will need up to €250bn, a claim that no longer looks extreme. New troubles are emerging daily. The Bank of Spain said on Thursday that Catalunya Caixa and Novagalicia will need a total of €9bn in new state funds. JP Morgan is expecting the final package for Spain to rise above €350bn, while RBS says the rescue will "morph" into a full-blown rescue of €370bn to €450bn over time -- by far the largest in world history. “
Weighing The Week Ahead: The Search For Leaders [View article]
As always your time, efforts and views are appreciated Jeff.
With respect to the EMU, leaders are being asked to fix something that cannot be fixed as the EMU is flawed by design and some of the economies inside the EMU are either broken or dysfunctional. When there is pervasive graft, corruption, systemic tax evasion, undue union influence and other pathologies economies cease to function in a normal manner as prices and quantities are not cleared through markets but through bureaucracies and labor agreements while offering few incentives to invest. In this environment growth will work no better than austerity.
Though leaders cannot, and have little appetite to do so, fix problems they can paper over symptoms (financial stress) of the deeply rooted structural problems with money and defer ultimate resolution. But even on this count political leaders and EC officials have been consistently behind the curve offering too little, too late and always in response to fresh or renewed financial stress. The first Greek bailout was done through bi-lateral loans; then the EFSF was created; then the ESM was created; then discussion of circuit breakers and firewalls; then combining parts and pieces of the two funds; then discussion of supranational banking supervision with deposit insurance; and now further talk of fiscal integration and investing additional powers in the European Court. All of this after countless summits and dinners of veal and white asparagus served with a first growth Bordeaux.
Bailout five (Greece 2; Portugal; and Ireland) of Spain is confined to the financial sector where reforms and recapitalizaton will be the order of the day. Spain went to lengths to avert a normal bailout, opting instead for a bailout lite and avoiding all of the conditionalities and diktats imposed upon others. This may be viewed as progress as it may reflect the ability of some inside the EC to distinguish between the problems inside the 17 nation EMU which are all different, ranging from reckless spending to property bubbles.
Again, though, the request from the Spanish came after (1) a traumatic week in which Fitch cut the nation’s credit rating by three notches, on the back of estimates that its banks will need up to euro100bn and (2) the IMF issued a 77-page report on the Spanish banking sector that found it was suffering through a crisis “unprecedented in its modern history”. Further, Spain had come under intense pressure from the European Central Bank to strengthen its banking system before Greek elections on June 17, amid fears that political chaos in Greece and the weakness of Spanish banks could threaten the euro’s financial stability.
Spain Bailout, Other Indicators Say: Be Open To Stock Rally [View article]
Interestingly, the agreement follows an extensive IMF report on the Spanish banking sector that found it was suffering through a crisis “unprecedented in its modern history”.
Last week, unrealistically low bailout figures of euro 40 billion were being thrown about but more realistic numbers of euro 100 billion are currently being discussed, reflecting pressures to be more forthcoming about the scope and depth of the Spanish banking crisis.
What I find in interesting in current releases is that funds are being channeled through FROB and not Spain. We're splitting hairs here because loans to Spain would entail extensive sovereign oversight while loans to FROB would not be accompanied by sovereign oversight but oversight over the banking sector with Spain remaining on the hook for the loan. Spain wants to avoid conditionality as imposed on Portugal, Ireland and Greece.
On the surface this is likely to be market positive but if the loans are originated through the ESM, they will enjoy seniority over all other outstanding debt and may disrupt market trading. And capitalization of euro 100 billion may prove unduly optimistic as some think tanks believe Spain needs euro 150 to 300 billion to shore up its banking system.
As with the summits of last year, this may stimulate markets in the short term only to see fresh concerns arise.
The Eurogroup statement on Spain: "The loan will be scaled to provide an effective backstop covering for all possible capital requirements ... with an additional margin of safety up to €100B in total ... the Fund for Orderly Restructuring (FROB), acting as agent of the Spanish government, could receive the funds and channel them to the financial institutions concerned." [View news story]
It's interesting funds are being channeled through FROB and not Spain.
We're splitting hairs here because loans to Spain would entail extensive sovereign oversight while loans to FROB would not be accompanied by sovereign oversight but oversight over the banking sector. Spain wants to avoid conditionality as imposed on Portugal, Ireland and Greece.
On the surface this is likely to be market positive but if the loans are originated through the ESM, they will enjoy seniority over all other outstanding debt and may disrupt market trading.
Spain will ask for an EU bailout, but not until private-sector audits of its banks (expected by June 21) give a better idea of the amount of capital necessary, according to several sources with knowledge of the just-completed conference call. IMF number-crunchers say the amount will be between €40-80B. El Mundoreports the rescue will come without conditions. [View news story]
Interestingly, the agreement follows an extensive IMF report on the Spanish banking sector that found it was suffering through a crisis “unprecedented in its modern history”.
Last week, unrealistically low bailout figures of euro 40 billion were being thrown about but more realistic numbers of euro 100 billion are currently being discussed, reflecting pressures to be more forthcoming about the scope and depth of the Spanish banking crisis.
Unfortunately, though, capitalization needs of this scale may prove unduly optimistic as some think tanks believe Spain needs euro 150 to 300 billion to shore up its banking system.
Dragging The U.S. Into The European Recession [View article]
Interesting piece Steve.
While Europe is important, I think the larger theme of slowing global growth is more important. Trade and capital flows will ebb.
As to the US, I think there is a decent probability that growth will come to a halt in the current quarter because of declining auto sales. In 1Q12 close to 60% of growth in GDP came from sales of automobiles and accessories.
Auto sales, though, peaked in February and have declined in SAAR terms every month since then, suggesting the automotive industry will contribute nothing (maybe negative) to qoq growth for 2Q12.
And nothing will take its place as core capital spending continues to slide; state and local governments continue to contract; and our trade deficit is deteriorating amid slowing global growth.
From my perch, the Euro mess is simply accelerating what would happen anyway: very anemic growth and/or recession.
German legislators and a democracy group file lawsuits in a constitutional court seeking to challenge the country participation in the eurozone's ESM bailout fund and the fiscal compact, laws for which were approved on Friday (I, II). President Joachim Gauck has said he would delay passage of the measure pending any lawsuits. [View news story]
Left to the people, Germany's balance sheet will not be used to fund armies of civil servants, found in France and the peripherals, bestowed with generous salaries, benefits and retirement plans.
Weighing The Week Ahead: Time For Some Fireworks? [View article]
Last week you correctly identified the summit as something to watch and I must admit the outcome of the 18th or so summit exceeded my expectations although the grandiose statements were supported by few details. We now know the EFSF/ESM will purchase Italian debt with "conditionalities" and provide direct assistance to Spanish and other troubled banks with "conditionalities" once the the hodgepodge of 17 state banking regulators is brought together under the control of the ECB.
We do not know what the "conditionalities" are and we don't know whether the new banking authority can shut down insolvent banks, including national champions, and wipe out equity shareholders and bondholders. We do know the resources of the EFSF/ESM remain insufficient and the euro 100 billion growth pact is not much more than lipstick.
Your coverage of weekly economic events support my view of US economic growth slowing and being part of a synchronized global economic slowdown, which will eventually impact corporate profits beyond what you show in this edition of WTWA. In addition to what you cite, the Chicago area PMI remained almost flat at 52.9 and the readings for new orders were the lowest since September 2009.
China’s Purchasing Managers’ Index fell to 50.2 in June from 50.4 in May, suggesting manufacturing expanded at the weakest pace this year as new orders and export demand dropped. A survey of Japanese manufacturing showed activity shrank in June for the first time in seven months. German retail sales in May unexpectedly dropped 0.3 per cent.
More Constructive On Stocks [View article]
I would only add that China is likely to be in far worse shape than what they want us to believe, growing well below oft cited, lofty measures made possible through manipulation of statistics ahead of sweeping political changes.
Pasted material supporting this view:
On Friday night the June China MNI Survey was out and recorded deteriorating growth:
Chinese businesses conditions improved at their slowest rate in two and a half years in June on the back of an across-the-board deterioration, including falling production, slowing new order growth and worsening credit availability and financial positions, the results of the Flash MNI China Business Sentiment Indicator indicated.
The flash overall conditions index fell to 51.92 from 54.40 in the final May survey. If confirmed by the final results, the June reading would be the lowest since January 2009′s 41.67.
The flash new orders index fell to 54.70 from 56.44 while the flash production index fell to 51.89 from 54.48 in May.
The financial positions index fell to 47.29 from 50.97 while the flash availability of credit index fell to 45.22 from 48.29 in May.
Will The Federal Reserve Unleash QE3 Soon? [View article]
Markit also said U.S. manufacturers reported the second largest decline in new export orders since September 2009. In the same week of releases, Markit showed an alarming and continued deterioration in its series for China and the EMU, with the latter now showing the once muscular Germany falling victim to slowing global growth.
As you note, this and a host of other indicators suggesting slowing domestic growth occasioned the Fed to downgrade it outlook for the US economy by subtracting .5 points from expected growth for the current year, while other high frequency private forecasters did the same.
Many economists believe the US economy, which expanded at 1.9% rate in the first quarter, has now slowed to something in the area of 1.6% to 1.8%; Goldman believes growth will slow to 1.5% by 1Q13.
Variances between Fed forecasts and those of private forms is easily explained by the fact that the Fed has an abysmal record in forecasting domestic growth, always proving too optimistic. In the recent past it has forecasted 3% growth only to see 1.6% growth.
But not wanting to rattle the market, the Fed simply stated the obvious, acknowledged the headwinds and extended "twisting", which gives the appearance of doing something while actually doing nothing.
When it dawns upon the world the US economy is in far worse shape than allowed by officials the Fed will be forced into another round of QE even though this has shown to be highly disruptive and a blunt instrument in battling a balance sheet recession.
And when it is announced, all blame will be placed upon slowing global growth rather than Fed impotency and horrible fiscal and regulatory policies.
Greece's new coalition government could already be on a collision course with its Troika overlords after yesterday proposing to extend the country's "fiscal adjustment period" by at least 2 years to 2016. Greece also wants to scrap plans to cut 150K public sector jobs, slash VAT on food, and provide unemployment benefits for 2 years instead of 1. [View news story]
Weighing The Week Ahead: Chances For An Upside Surprise? [View article]
Data showed euro-area manufacturing shrank at the fastest pace in three years and a Chinese output gauge indicated contraction. Purchasing managers’ indices for the EMU showed private sector activity shrinking at the same pace as in May, which was the fastest in almost three years.
But Germany’s economy, which has so far saved the eurozone from recession, suffered a significant deterioration, especially in its manufacturing sector – indicating its exporters were being affected by gloomier global conditions.
In parallel China’s manufacturing sector contracted for an eighth consecutive month in June, according to the HSBC flash purchasing managers’ index, as export orders suffered their fastest contraction since March 2009. And as you noted things could easily be worse than believed in China as there is ample evidence China is playing with statistics in advance of a sweeping changes in political leadership.
U.S. stocks tumbled On Thursday after these signals of a global slowdown in manufacturing were reinforced by disappointing US housing and labor market data. Prices further deteriorated after Goldman released an opinion to short the market and revised down its opinion of the US economy.
Claims for jobless benefits were above expectations, manufacturing in the Philadelphia region shrank at an alarming rate and sales of existing homes fell. The Philly Fed general business conditions index showed contraction for a second month and, at a minus 16.6 level, a much more severe contraction than May's minus 5.8. Existing home sales fell 1.5 percent in May to a 4.55 million annual rate. The rate opened the year at 4.63 million in January but hasn't gone anywhere.
The day before we learned that Federal Reserve lowered its growth and employment estimates while announcing its extension of operation Twist. It reduced its growth estimate for the US economy for 2012 from 2.4% t 2.9% to 1.9% to 2.4%. Goldman Sachs has reduced its estimate its estimate for 2012 and has lowered its estimate for 1Q13 to 1.5%. Other economists have lowered their expectations for 2Q12 to 1.6% to 1.8%. Variations among Fed forecasts and those of others can be easily explained by the fact the Fed has been consistent in over estimating economic growth.
When the Fed is forced to publicly acknowledge things are far worse than stated and economic growth is actually in the range of 1.5% the big surprise will be QE3, propelling commodity prices and stocks higher.
Thoughts From The Front Line: The 'Bang' Moment Is Here [View article]
A true union would require national governments to surrender sovereignty to the European center so that democratic accountability is restored and proper standards of governance can be maintained. While frequently discussed, I’m skeptical as to how many leaders wish to relinquish control of their respective countries to Brussels
And any plan would need a consensus but EU member nations have different views and traditions on taxes, public services, redistribution, risk-sharing, regulations, public borrowing and every other aspect of public finance. These differences would either preclude or limit the scope for fiscal cooperation.
Finally if non-Germans are allowed to vote, Germany’s influence would diminish while at the same time reducing Germany’s power and further exposing its balance sheet through mutualization of debt.
Germany will not agree to this.
Why Spain's Bank Rescue Is Only Its First Bailout [View article]
As reported by Ambrose Evans Pritchard in the Telegraph “Megan Greene from Roubini Global Economics says Spain's banks will need up to €250bn, a claim that no longer looks extreme.
New troubles are emerging daily. The Bank of Spain said on Thursday that Catalunya Caixa and Novagalicia will need a total of €9bn in new state funds. JP Morgan is expecting the final package for Spain to rise above €350bn, while RBS says the rescue will "morph" into a full-blown rescue of €370bn to €450bn over time -- by far the largest in world history. “
Weighing The Week Ahead: The Search For Leaders [View article]
Weighing The Week Ahead: The Search For Leaders [View article]
Too lttle, too late again?
As Gavyn Davies observes “Until now, successive Spanish governments have repeatedly claimed that there was no need for eurozone assistance for their banking sector. However, these claims have not carried much credibility since the economy dropped back into recession last year, taking the real estate sector down with it. The failure of Bankia was the final moment of truth.”
And reporting by the FT clearly supports this position. Mr Rajoy on Sunday expressed regret that Spain had not bailed out its struggling domestic banks three years ago along with other European Union members such as the UK, but said the credit line agreed among eurozone finance ministers on Saturday was essential to restore confidence and help banks provide credit to the real economy.
So it’s pretty clear the leaders of Spain have forestalled taking needed action earlier opting instead to dither, delay and deny which says something about leadership. The critical, intertwined questions now are (1) will this pending request for assistance, which will be formally submitted when two studies have been completed, allay concerns, restore confidence and stem the flight of capital from Spanish banks, (2) will the contemplated aid of euro 100 billion damage Spain’s fiscal sustainability by adding fourteen (14) percentage points to its debt/GDP metric, (3) will the ESM/EFSF actuall be able to mop the amounts being discussed to recapitalize Spains’s banks and (4) will euro 100 billion or whatever amount is requested be sufficient?
Answers to the first questions will be provided by the market over the next weeks while there are already very strong hints that euro 100 will prove inadequate and pave the way for additional injections. To be fair, though, we need to wait for the two independent studies but we do know the IMF study was conducted in such a manner as to intentionally minimize capital requirements by limiting the study through 2011, excluding writedowns on loans in forbearance and limiting writedowns on (surprise) soverien debt.
As reported by Ambrose Evans Pritchard in the Telegraph “Megan Greene from Roubini Global Economics says Spain's banks will need up to €250bn, a claim that no longer looks extreme. New troubles are emerging daily. The Bank of Spain said on Thursday that Catalunya Caixa and Novagalicia will need a total of €9bn in new state funds. JP Morgan is expecting the final package for Spain to rise above €350bn, while RBS says the rescue will "morph" into a full-blown rescue of €370bn to €450bn over time -- by far the largest in world history. “
Weighing The Week Ahead: The Search For Leaders [View article]
With respect to the EMU, leaders are being asked to fix something that cannot be fixed as the EMU is flawed by design and some of the economies inside the EMU are either broken or dysfunctional. When there is pervasive graft, corruption, systemic tax evasion, undue union influence and other pathologies economies cease to function in a normal manner as prices and quantities are not cleared through markets but through bureaucracies and labor agreements while offering few incentives to invest. In this environment growth will work no better than austerity.
Though leaders cannot, and have little appetite to do so, fix problems they can paper over symptoms (financial stress) of the deeply rooted structural problems with money and defer ultimate resolution. But even on this count political leaders and EC officials have been consistently behind the curve offering too little, too late and always in response to fresh or renewed financial stress. The first Greek bailout was done through bi-lateral loans; then the EFSF was created; then the ESM was created; then discussion of circuit breakers and firewalls; then combining parts and pieces of the two funds; then discussion of supranational banking supervision with deposit insurance; and now further talk of fiscal integration and investing additional powers in the European Court. All of this after countless summits and dinners of veal and white asparagus served with a first growth Bordeaux.
Bailout five (Greece 2; Portugal; and Ireland) of Spain is confined to the financial sector where reforms and recapitalizaton will be the order of the day. Spain went to lengths to avert a normal bailout, opting instead for a bailout lite and avoiding all of the conditionalities and diktats imposed upon others. This may be viewed as progress as it may reflect the ability of some inside the EC to distinguish between the problems inside the 17 nation EMU which are all different, ranging from reckless spending to property bubbles.
Again, though, the request from the Spanish came after (1) a traumatic week in which Fitch cut the nation’s credit rating by three notches, on the back of estimates that its banks will need up to euro100bn and (2) the IMF issued a 77-page report on the Spanish banking sector that found it was suffering through a crisis “unprecedented in its modern history”. Further, Spain had come under intense pressure from the European Central Bank to strengthen its banking system before Greek elections on June 17, amid fears that political chaos in Greece and the weakness of Spanish banks could threaten the euro’s financial stability.
I geuss we can call this leadership under duress.
Spain Bailout, Other Indicators Say: Be Open To Stock Rally [View article]
Last week, unrealistically low bailout figures of euro 40 billion were being thrown about but more realistic numbers of euro 100 billion are currently being discussed, reflecting pressures to be more forthcoming about the scope and depth of the Spanish banking crisis.
What I find in interesting in current releases is that funds are being channeled through FROB and not Spain. We're splitting hairs here because loans to Spain would entail extensive sovereign oversight while loans to FROB would not be accompanied by sovereign oversight but oversight over the banking sector with Spain remaining on the hook for the loan. Spain wants to avoid conditionality as imposed on Portugal, Ireland and Greece.
On the surface this is likely to be market positive but if the loans are originated through the ESM, they will enjoy seniority over all other outstanding debt and may disrupt market trading. And capitalization of euro 100 billion may prove unduly optimistic as some think tanks believe Spain needs euro 150 to 300 billion to shore up its banking system.
As with the summits of last year, this may stimulate markets in the short term only to see fresh concerns arise.
The Eurogroup statement on Spain: "The loan will be scaled to provide an effective backstop covering for all possible capital requirements ... with an additional margin of safety up to €100B in total ... the Fund for Orderly Restructuring (FROB), acting as agent of the Spanish government, could receive the funds and channel them to the financial institutions concerned." [View news story]
We're splitting hairs here because loans to Spain would entail extensive sovereign oversight while loans to FROB would not be accompanied by sovereign oversight but oversight over the banking sector. Spain wants to avoid conditionality as imposed on Portugal, Ireland and Greece.
On the surface this is likely to be market positive but if the loans are originated through the ESM, they will enjoy seniority over all other outstanding debt and may disrupt market trading.
Spain will ask for an EU bailout, but not until private-sector audits of its banks (expected by June 21) give a better idea of the amount of capital necessary, according to several sources with knowledge of the just-completed conference call. IMF number-crunchers say the amount will be between €40-80B. El Mundo reports the rescue will come without conditions. [View news story]
Last week, unrealistically low bailout figures of euro 40 billion were being thrown about but more realistic numbers of euro 100 billion are currently being discussed, reflecting pressures to be more forthcoming about the scope and depth of the Spanish banking crisis.
Unfortunately, though, capitalization needs of this scale may prove unduly optimistic as some think tanks believe Spain needs euro 150 to 300 billion to shore up its banking system.
Dragging The U.S. Into The European Recession [View article]
While Europe is important, I think the larger theme of slowing global growth is more important. Trade and capital flows will ebb.
As to the US, I think there is a decent probability that growth will come to a halt in the current quarter because of declining auto sales. In 1Q12 close to 60% of growth in GDP came from sales of automobiles and accessories.
Auto sales, though, peaked in February and have declined in SAAR terms every month since then, suggesting the automotive industry will contribute nothing (maybe negative) to qoq growth for 2Q12.
And nothing will take its place as core capital spending continues to slide; state and local governments continue to contract; and our trade deficit is deteriorating amid slowing global growth.
From my perch, the Euro mess is simply accelerating what would happen anyway: very anemic growth and/or recession.