Thursday 9 August 2012

Euro – How Many Will Leave?


Baltic Dry Index. 812 -24

LIR Gold Target by 2019: $30,000.  Revised due to QE programs.

Alas, August 20 is the out-of-money date. September is irrelevant. Because someone else turned off the spigot. Um, the ECB. Two weeks ago, it stopped accepting Greek government bonds as collateral for its repurchase operations, thus cutting Greek banks off their lifeline. Greece asked for a bridge loan to get through the summer, which the ECB rejected. Greece asked for a delay in repaying the €3.2 billion bond maturing on August 20, which the ECB also rejected though the bond was decomposing on its balance sheet. 
It would kick Greece into default. And the ECB would be blamed.

But the ECB has a public face, President Mario Draghi. He didn’t want history books pointing at him. So the ECB switched gears. It allowed Greece to sell worthless treasury bills with maturities of three and six months to its own bankrupt and bailed out banks. Under the Emergency Liquidity Assistance (ELA), the banks would hand these T-bills to the Bank of Greece (central bank) as collateral in exchange for real euros, which the banks would then pass to the government. Thus, the Bank of Greece would fund the Greek government.

Precisely what is prohibited under the treaties that govern the ECB and the Eurosystem of central banks. But voila. Out-of-money Greece now prints its own euros! The ECB approved it. The ever so vigilant Bundesbank acquiesced. No one wanted to get blamed for Greece’s default.

If Greece defaults in September, these T-bills in the hands of the Bank of Greece will remain in the Eurosystem, and all remaining Eurozone countries will get to eat the loss. €3.5 billion or more may be printed in this manner. The cost of keeping Greece in the Eurozone a few more weeks.


It is now virtually certain that the euro as we know it is over. The Euroland public are now being “conditioned” for the prospect of a Greek exit. “Don’t worry, it’s workable,” is the new spin.  “Trust me, I’m a central banker, after all.” Stay long physical precious metals, more than just Greece must exit. With Euroland’s economy faltering, and now starting to drag down the top four economies in the monetary union, there’s no way that most of Club Med  won’t be forced to follow Greece out of the ill-advised, politically driven monetary union.

Below, the state of disintegrating Euroland this August 2012. So much European wealth is now being destroyed by the great financial experiment gone Frankenstien wrong, Europe will be lucky not to emerge with a spate of nationalist governments all looking to get even with Germany and to settle scores. As the global economy wobbles, and America sleep walks towards “falling off a cliff” in early 2013, recession in Euroland in 2012 will push most of Club Mad off a cliff this year. France, the only member that needn’t necessarily plunge over, is off pursuing loony left, long discredited populist socialist policies, that guarantee that France will topple over as well. Be prepared for a Euroland Autumn of Discontent and crash. Dither and drift is no substitute for reality. The reality is that Europe’s recession is not solved by pilling on even more austerity. Nor will bankrupting Germany help save the sinking members of Club Med. Euro exit, devaluation, and reform, are the only hope for Club Mad. The sooner implemented the less wealth destruction for all. The faster growth will restart. The faster youth unemployment will come down.

Euro founder admits some nations may be forced to leave

One of the founding fathers of the euro admits that some states may be forced to abandon the single currency, but insists Germany would be better off staying in.

Otmar Issing, a former European Central Bank chief economist, warned that the eurozone could be heading towards fracture in a book called How we save the euro and strengthen Europe published this week .
"Everything speaks in favour of saving the euro area. How many countries will be able to be part of it in the long term remains to be seen," said Mr Issing in the book, which is written as a conversation between an economist and a journalist.

At no point did he explicitly refer to Greece, but the debt-stricken country has been hovering perilously close to default and an exit from the eurozone as it makes harsh spending cuts and tax hikes to appease the EU and ECB after receiving billions in bail-out payments.

"We are still a long way off saying 'that's it, now we are sure to make progress'. Substantial reforms in almost all countries are still pending," he added.

Mr Issing is one of the founding fathers of the euro, but also predicted potential problems with the plan and argued that political union ought to precede a shared currency to ensure its stability in the long-term. The economist has now said there is a case for some countries to leave the union in order to solve their own debt problems, but that Germany would do best to remain a member.

----The German economist also played down the role that the central bank, his former employer, could have in solving the debt crisis, suggesting that countries needed to fix their own problems.

"There is no quick fix and anything in the direction of euro bonds or something similar would mean for me the end of the stability-oriented currency union.”
More
http://www.telegraph.co.uk/finance/financialcrisis/9462381/Euro-founder-admits-some-nations-may-be-forced-to-leave.html

Greece’s Power Generator Tests Euro Fitness Amid Blackout Threat

By Jonathan Stearns and Natalie Weeks - Aug 8, 2012 10:01 PM GMT
In the mountains of northern Greece lies an $800 million power plant whose future may help determine whether the country can salvage its euro status.

The facility near Florina, a town known as “Where Greece Begins,” is the most modern of four production units that state-controlled Public Power Corp. SA (PPC) is scheduled to sell to competitors to meet four-year-old European Union demands that the country deregulate its energy market. The most powerful Greek union is now threatening nationwide blackouts at the height of the summer tourist season to derail the plan.

“We will make saving PPC a cause for all Greeks,” Nikos Fotopoulos, head of the 18,000-strong GENOP union, said last month in his Athens office adorned with photos of communist revolutionaries including Vladimir Lenin and Leon Trotsky. “We fight our battles with faith and passion, and we fight them hard. A serious state must control businesses of strategic importance.”

While on the surface PPC is another tale of Greek conflict during the worst economic crisis of modern times, it encapsulates how Greece has found itself at the sharp end of Europe’s struggle to keep the euro intact and what the country still faces to defend its place in the currency.

Founded in 1950 to distribute domestically generated electricity to Greek citizens, PPC is a microcosm of political protection, vested interests and reliance on foreign financing that have defined the economy for decades.
More

France heading back to recession, says central bank

France is headed back into recession for the second time in three years, its central bank has warned in a fresh blow to the recovery prospects of the stricken eurozone.

9:50AM BST 08 Aug 2012
In a gloomy survey of the outlook for Europe's second biggest economy, the Bank of France predicted a 0.1 percent contraction in gross domestic product (GDP) for the third quarter of this year.

If that outcome is confirmed it would follow a similar fall in output for the three months to June and zero growth in the first quarter of 2012.

The survey was released alongside official figures from Germany imports and exports in the eurozone's biggest economy dropped in June and following figures on Tuesday showing Italy shrank further into recession in the second quarter

----Uncertainty over the fate of the euro and related problems in credit markets have resulted in consumers and investors either cancelling or delaying major spending decisions.

This has hit the construction and automobile industries in France particularly hard. New housing starts in the second quarter were 14pc below 2011 levels, while July car sales were down 7pc on a year earlier.

With these job-intensive sectors struggling, unemployment has spiked.

Latest figures put the jobless total at nearly 10pc of the workforce with a further 5pc working fewer hours than they would like.

----Elected in May on a jobs and growth ticket, Hollande faces an increasingly tough battle to deliver while simultaneously meeting a commitment to reduce France's budget deficit in line with eurozone requirements.
Before embarking on their holidays last week, government ministers were issued with spending ceilings for the next 12 months, which will require major cuts in all but a handful of departments.
More
http://www.telegraph.co.uk/finance/financialcrisis/9461052/France-heading-back-to-recession-says-central-bank.html

August 8, 2012, 7:12 p.m. ET

Declining Output Highlights Europe's Weakness

FRANKFURT—Industrial output in the euro zone showed signs of retreat in June, with Spanish production declining for its 10th straight month and German output weakening more than economists had expected, according to official figures released Wednesday.

Germany's economic ministry said industrial output fell 0.9% on the month in June in adjusted terms, partly unwinding a 1.7% gain in May. Year-to-year, output fell an adjusted 0.3%. Official second-quarter German gross domestic product data are due Aug. 14.

In Spain, the National Statistics Institute said industrial production fell an annual, seasonally adjusted 6.3% in June. That compares with a revised fall of 6.5% in May and 8.4% in April.

The latest from the euro zone's No. 1 and No. 4 economies continued the string of negative news for the currency bloc, which could be in contraction for the second and third quarters, according to many forecasts. 
The general slowdown in the global economy hasn't helped.

----Germany's economy has so far remained relatively resilient to the debt crisis that has enveloped the country's euro-zone peers, posting robust first-quarter growth of 0.5% that helped keep the 17-nation bloc out of recession. Not so Spain, where Wednesday's industrial output figures provided new evidence that the recession there is deepening.

As Spain's economy shrinks, the government brings in less money and is less able to pay its debts. The country's borrowing costs have surged to euro-era highs and the government has already slashed spending to rein in one of Europe's largest budget deficits.
More
http://online.wsj.com/article/SB10000872396390443404004577576790821334080.html?mod=WSJUK_hpp_LEFTTopWhatNews

"For more than two thousand years gold's natural qualities made it man's universal medium of exchange. In contrast to political money, gold is honest money that survived the ages and will live on long after the political fiats of today have gone the way of all paper."

Hans F. Sennholz

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