Barry’s Other New BFF

Aside from Bill, Barry has another BFF, Mario.

The head of the European Central Bank, Mario Draghi, announced today that the bank will buy lots and lots of bonds from struggling euro zone countries to help reduce their borrowing costs, especially Italy and Spain.   Draghi in effect drew a line in the sand, saying “The euro is irreversible.”

One country voted against the bond-buying plan.  That’s right — Germany.

Do I think this will save the euro?  No.  But it means there won’t be a big panic between now and our election.

It also seems as if Israel won’t attack Iran between now and November 6, although Bibi is not exactly another BFF.

Looks as if Barry has everything under control.  He just has to get through the debates without checking his watch or sighing and rolling his eyes.

Nurse Merkel Offers More Bandaids

At the European Summit, Italy, France, and Spain did their best to gang up on Germany, but didn’t get much in return.  Merkel is still vehemently opposed to euro bonds, and I don’t see that changing, no matter what.

Italy and Spain will find it easier to get aid from the European bailout fund (the European Stability Mechanism or ESM), but the ESM didn’t get any more money.  Its maximum is still about $633 billion, when Italy and Spain owe about five times that amount.

The ESM will put money directly into Spanish banks rather than using the Spanish government as a pass-through.  And private bondholders of Spanish banks won’t be subordinate to government bond holders.

Such tiny steps have failed to satisfy the markets in the past.

By refusing to “go big,” Europe’s leaders are setting up the euro zone to go bust.

 

Merkel — Euro Bonds Over My Dead Body

With France, Spain, and Italy supporting euro bonds (shared European debt), Germany’s Angela Merkel told them to fugeddaboudit:  “I don’t see total debt liability as long as I live.”

There’s another EU Summit this Thursday and Friday, but I think they’re running out of road to kick the can down.

This isn’t going to be pretty, either in Europe or here.

If you’re Mitt, it’s all good.   For the President and the rest of us, not so much.

 

Spain Is the Big Story

I know everyone’s focused on Greece, but today’s big story really is Spain.  For the first time, the interest rate on its ten-year bonds went over the magic number, 7%.  That’s the point at which Greece, Ireland, and Portugal had to get bailouts.  Spain’s economy is bigger than those three combined, so bailing out Spain would be a huge deal.

Italy’s interest rate went over 6% today.  Bailing out Italy, whose economy is bigger than Spain’s, would probably be impossible.  Italy is the third largest economy in Europe, after Germany and France.

Piecemeal Approach to Euro Cuts Europe to Pieces

For a quick and clear explanation of the mess that is Europe, check out “Why the Bailout In Spain Won’t Work,” Andrew Ross Sorkin, NYT.  Some excerpts:

“By now, it should be apparent that the [Spanish] bailout has failed — or is at least on its way to failing.

“Indeed, it now appears that the bailout could make things in Spain worse, not better.  And market indicators for the next domino in line for a bailout, Italy, point in the wrong direction.

“This was bound to happen.  That’s because bailing out the banks in each European country individually is a fool’s errand.

“Experts often cite — wrongly — that TARP, the Troubled Assets Relief Program that pumped $700 billion into the banking system in the United States, arrested the financial crisis in 2008.  TARP, to some degree, has become the model for Europe.

“But we forget history:  TARP was only one component of the bailout.  Perhaps more important — consider it the unsung hero of the financial crisis — was the government’s unilateral moves to raise the amount of money the Federal Deposit Insurance Corporation could insure, increasing the account limit to $250,000 from $100,000 and fully backstopping the entire money-market industry.

“Investors and bank customers who were considering taking their deposits and running in 2008 no longer had reason to do so….

“That is not the case in Europe.  Customers of Spanish banks still have reason to worry about the solvency of their banks — and their country — making it reasonable for them to take their money from Spanish banks and send it to banks in safer countries like Germany.  Indeed, the bailout makes it less likely Spain can pay back its debts because the new loan of up to $125 billion was just added to its huge debt pile.

“As a result, it could be argued that it would be irresponsible for an individual or company, which has a fiduciary duty to shareholders, not to move its money out of Spanish banks.

“Ultimately, the only real way to begin to ensure the safety of the banks in Spain — and all of Europe — is to create a euro zonewide deposit guarantee system….

“Oddly enough, such a deposit guarantee would probably be pretty cheap.  The psychological effect of such a guarantee would most likely insure the solvency of more banks than the guarantee would ever have to pay out.

“Of course, there a catch.  A euro zonewide deposit guarantee would require agreement from all 17 member countries, which is something the leaders there seem incapable of reaching….

“And here’s another problem with a euro zonewide deposit guarantee:  Unless you believe the euro is going to remain the standard…even the guarantee might not be enough, unless the guarantee holds for all currencies.  For example, if a Spanish bank customer is worried that his euros might one day turn into pesetas — even with a deposit guarantee in place — he might well move his money.”  Emphasis added.

I encourage you to read the whole column.  I think we know whose side Mitt is on here.

We’re going to look back and wonder why solutions like this weren’t put in place before everything fell apart.  In hindsight, it will look so obvious and so easy compared to all the fallout.

 

 

 

The Fair Thing Isn’t Always the Right Thing

A “Grexit” may be the fair thing, but it may not be the right thing.  It may be cutting off the nose of Greece to spite Europe’s face.

From “The Fairness Trap,” James Surowiecki, The New Yorker:

“This [a Grexit] isn’t an outcome that anyone wants.  Even though a devalued currency would make Greece’s exports cheaper and attract tourists, it would do so at a terrible price, destroying huge amounts of wealth and seriously harming the country’s G.D.P.  It would be costly for the rest of Europe, too.  Greece owes almost half a trillion euros, and containing the damage would likely require the recapitalization of banks, continent-wide deposit insurance (to prevent bank runs), and more aid to Portugal, Spain, and Italy….  That’s a very high price to pay for getting rid of Greece, and much more expensive than letting it stay.

“Rationally, then, this standoff should end with a compromise — relaxing some austerity measures, and giving Greece a little more aid and time to reform.  And we may still end up there.  But the catch is that Europe isn’t arguing just about what the most sensible economic policy is.  It’s arguing about what is fair.  German voters and politicians think it’s unfair to ask Germany to continue to foot the bill for countries that lived beyond their means and piled up huge debts they can’t repay.  They think it’s unfair to expect Germany to make an open-ended commitment to support these countries in the absence of meaningful reform.  But Greek voters are equally certain that it’s unfair for them to suffer years of slim government budgets and high unemployment in order to repay foreign banks and richer northern neighbors, which have reaped outsized benefits from closer European integration.  The grievances aren’t unreasonable, on either side, but the focus on fairness, by making it harder to reach any kind of agreement at all, could prove disastrous.

“The basic problem is that we care so much about fairness that we are often willing to sacrifice economic well-being to enforce it.

“You can see this in the way the U. S. has dealt with the foreclosure crisis.  Plenty of economists recommended giving mortgage relief to underwater homeowners, but that has not happened on any meaningful scale, in part because so many voters see it as unfair to those who are still obediently paying their mortgages.  Mortgage relief would almost certainly have helped all homeowners, not just underwater ones — by limiting the spillover impact of foreclosures on house price — but, still, the idea that some people would be getting something for nothing irritated voters.

“The fairness problem is exacerbated by the fact that our definitions of what counts as fair typically reflects…a ‘self-serving bias.’  You’d think that the Greeks’ resentment of austerity might be attenuated by the recognition of how much money Germany has already paid and how much damage was done by rampant Greek tax dodging.  Or Germans might acknowledge that their devotion to low inflation makes it much harder for struggling economies like Greece to start growing again.  Indeed, the self-serving bias leads us to define fairness in ways that redound to our benefit, and to discount information that might conflict with our perspective.  This effect is even more pronounced when bargainers don’t feel that they pare part of the same community — a phenomenon that psychologists call ‘social distance.’  The pervasive rhetoric that frames the conflict in terms of national stereotypes — hardworking, frugal Germans versus frivolous, corrupt Greeks, or tightfisted, imperialistic Germans versus freewheeling, independent Greeks — makes it all the more difficult to reach a reasonable compromise.

“From the perspective of society as a whole, concern with fairness has all kinds of benefits:  it limits exploitation, promotes meritocracy, and motivates workers.  But in a negotiation where neither side can have what it really wants, and where the least bad solution is as good as it gets, worrying too much about fairness can be suicidal.  To move Europe away from the brink, voters and politicians on all sides need to stop asking themselves what’s fair and start asking themselves what’s possible.”  Emphasis added.

 

 

Explain This, GOP

Mitt and the GOP keep scaring people by saying that we are like Greece.  If that’s true, why is it that the U. S. can borrow for ten years for less than 1.75%.  Greece can’t borrow at all except from bailout funds and some very high-flying hedge funds.  Meanwhile, Spain is paying more than 6% to borrow for ten years, and Italy is paying 5.6%.

The rest of the world has much more confidence in us than our own Republican party.  Yet they say Obama is “un-American.”

Leaders in Europe Ceding Control by Their Inacton

If Europe’s leaders don’t set policy at the top soon, the street is going to take over, and panic and fear will dictate events, not elected officials.

Spain is experiencing a run on its banks (either moving money from weak banks to stronger ones or out of the country entirely) that is only going to gain more momentum, and Spain’s deposit insurance system is bankrupt.  There is still time for Europe to offer European-wide deposit insurance that would quell this run before it becomes a full-blown panic.  Of course, Germany doesn’t want to do this.

European leaders have to decide if they want to cut Greece loose, but try to save other countries like Spain.  That’s the first decision.  Are you going to try to save everyone, are you going to try to save everyone but Greece, or are you going to let the whole thing go to hell?

Europe could offer euro-zone deposit insurance to everybody in the euro zone or dump Greece and offer it to the remaining countries.

Europe could offer euro-zone bonds guaranteeing countries’ debt to everybody or dump Greece and offer them to the remaining countries.

But Europe’s leaders are in a state of paralysis, which in itself is a form of decision-making, an abdication of control and responsibility.

Greece has become an excuse for not addressing the problems of other weak periphery countries, like Spain and Italy.  But ignoring these problems doesn’t make them go away.  Not deciding becomes a decision.

We saw what happened in this country when events overtook our leaders in September 2008, and our entire financial system was brought to the brink of collapse.  We saw Treasury Secretary Henry Paulson go down on his knees, begging Nancy Pelosi to stay in bailout talks after the Republicans walked out.  For Paulson, the arrogant former head of Goldman Sachs and the quintessential Master of the Universe, to be brought to such a shocking state tells you how close we came to tipping over the edge, how close we came to another depression.

Europe is on its knees, and Angela Merkel is on her way out of the room.

Europe — Breaking Up Is Hard To Do

From “A Tempting Rationale For Leaving the Euro,” Eduardo Porter, NYT:

“Europe would be in much better shape if the euro didn’t exist and each member country had its own currency.  Monetary union has shackled together nations with vastly different economies, depriving them of an independent monetary policy that can help them through rough times.  The interest rate and exchange rate that serve Germany also have to serve Spain, though that country has more than four times Germany’s joblessness.

“The euro fed the illusion that Greece, Spain and Italy were as creditworthy as Germany or the Netherlands, propelling a decade-long credit boom in Europe’s less-developed periphery.  And it was spectacularly ill-designed to deal with the shock when capital flows to those nations suddenly stopped.  Weak countries not only had to rely on their own devices; they had to do so without a currency or a monetary policy of their own to absorb the blow.

“Greece probably couldn’t be surgically excised [from the euro zone].  Once investors realized that countries could leave the euro, interest rates would soar on the next most likely candidates.  There would be a huge capital flight out of peripheral countries into Germany, as savers tried to protect their euros from potential devaluation.”

U. S. Election Could Be Decided in Europe

Economist Nouriel Roubini sees Europe sliding this year:*

“But the ensuing honeymoon with the markets turned out to be brief.  Interest-rate spreads for Italy and Spain are widening again, while borrowing costs for Portugal and Greece remained high all along.  And, inevitably the recession on the eurozone’s periphery is deepening and moving to…France and Germany.  Indeed, the recession will worsen throughout this year, for many reasons.

“First, front-loaded fiscal austerity — however necessary — is accelerating the contraction, as higher taxes and lower government spending and transfer payments reduce disposable income and aggregate demand.

“Moreover, while…Germany can withstand a euro at…$1.30, for the eurozone’s periphery, where unit labor costs rose 30-40% during the last decade, the value of the exchange rate would have to fall to parity with the US dollar to restore competitiveness and external balance. …  [T]he only hope of restoring growth is an improvement in the trade balance, which requires a much weaker euro.

“To make matters worse, the eurozone depends on oil imports even more than the United States does and oil prices are rising….

“The trouble is that the eurozone has an austerity strategy but no growth strategy.

“Without a much easier monetary policy and a less front-loaded mode of fiscal austerity, the euro will not weaken, external competitiveness will  not be restored, and the recession will deepen.  And, without resumption of growth — not years down the line, but in 2012 — the stock and flow imbalances will become even more unsustainable.  More eurozone countries will be forced to restructure their debts, and eventually some will decide to exit the monetary union.”  Emphasis added.

As Europe goes, so may go President Obama.

* “Europe’s Short Vacation,” Project Syndicate