Financial Crisis

[Naam]

sorry, cannot quote source.

It was all about Greece for the markets this week once again and it will be

another critical week as markets will focus on the "vote of confidence" in the

Greek parliament on Tuesday. The hallmark of Europe’s response to the debt

crisis has been a refusal to admit openly to the loss of solvency which has

occurred. Every intervention so far has pretended that the crisis is one of

liquidity, which can be solved by making loans to the troubled banks and

governments in question.

This has had certain short term advantages. Since, in theory, there has been no

permanent transfer of fiscal resources from the core to the periphery, the

strategy has been just about acceptable to the electorates of the creditor

nations. And since there has been no open admission of default or debt

restructuring by any of the troubled nations, the banking sector has not been

forced to write down debt and raise more capital.If this gamble worked, it might

delay a final resolution of the problem to a time when it could be more easily

absorbed in the European banking sector. Delaying tactics of this sort have

worked before, in periods after severe financial shocks.

However, the strategy requires that fiscal austerity in troubled economies

eventually eliminates primary deficits, so that markets recognise a return to

solvency, and become willing once more to fund the banks and public debt of the

troubled economies. This triggers a virtuous cycle, with yield spreads

declining, and budget arithmetic improving still further. None of this was

impossible, but it certainly does not seem to happening, especially in the case

of Greece. Instead, the austerity measures which the Greek government still

seems determined to pursue are proving so painful that parts of the population

are now in open revolt against the entire strategy.

It is conceivable that Greek politics could lurch in a direction which involves

a disorderly repudiation of public debt, and even a last-resort departure from

the euro. Although some people are arguing that the Argentinian default a decade

ago prepared the ground for improved economic performance in that country, it is

very hard to imagine how a disorderly Greek default today could work to the

advantage of Greece, the core European nations, or the financial markets. More

likely, everyone would lose.

Furthermore, it is not as if the current European approach is avoiding a

build-up of debt, and an eventual fiscal transfer, from the strong countries to

the weak. A list of the main creditors to Greece is now topped by the European

Central Bank, the European Financial Stability Facility (EFSF), and the IMF.

Especially in the case of the ECB, what were initially termed liquidity support

operations have rapidly turned into semi-permanent transfers of resources from

one economy to another. Perhaps it is politically more feasible than a more open

approach, because it is not sufficiently understood by the public, and because

it still might one day, under increasingly implausible scenarios, be partially

reversed. But the financial markets can do simple arithmetic (sometimes!) so the

crisis is not moving towards any sort of resolution.

It is a matter of logic that the economic losses which will ultimately follow

from the sovereign debt crisis must fall on some mixture of the following

parties: the people and tax payers of the indebted economies via budgetary

austerity; the private sector holders of the sovereign debt, mostly in the

European banking sector; the taxpayers in core European countries, like Germany,

via fiscal transfers; and the citizens of the Eurozone as a whole, in the form

of an inflation tax which would follow monetisation by the ECB.

At present, there is an attempt to impose most of the losses on the people of

the GIPS. While this may appear to be a just and proper outcome to the

electorates of the creditor nations, it also might not work. The Wall Street

Journal asked the question last week “what happens if the Greeks do not want to

be rescued?” That, it seems from recent events, is rapidly becoming much more

than just a hypothetical question.

A co-ordinated and determined resolution process could be announced by Germany

and France. This would need to include one or both of the following ingredients.

The first would involve a Brady-type plan for the restructuring of the Greek

public debt, swapping new par Greek bonds for the bonds currently in issue. The

new bonds would be longer in duration and the existing ones, and would carry

lower interest rates, so there would be implied losses for private sector bond

holders to accept. But since the new bonds would carry the same face value as

the old ones, there would be no immediate write-down of banks’ capital.

A second ingredient could be a larger issuance of EFSF debt which would be used

to purchase Greek bonds in the marketplace. Yes, that would involve a fiscal

transfer. But that is exactly what is happening already. An orderly plan would

probably involve a further fiscal transfer which is no bigger than the one which

will happen ayway under the present strategy, but it would replace the current

risky cocktail with a program of much greater order and control.

At present, the strong economies are making ever-increasing fiscal transfers to

the weak, without resolving the crisis. The Greek crisis should be a storm in a

tea cup, not a global financial melt-down.

The contagion factor and signs of slowing economies will continue to influence

the sentiment and investors are likely to use any rebounds in the markets to

reduce their positions in risk assets and shift to safe havens.

[craigt3365]

funny how we got a solid week of MSM reporting Osama Bin Laden being shot

followed by another week about Anthony Weiners weiner ... And yet nothing about this ?

I'm guessing you meant MSN? CNN has been reporting on this a lot...even had a 20 or 30 minute special on it yesterday...complete with being run out of town by the Chinese officials.

sorry, cannot quote source.

It was all about Greece for the markets this week once again and it will be

another critical week as markets will focus on the "vote of confidence" in the

Greek parliament on Tuesday. The hallmark of Europe’s response to the debt

crisis has been a refusal to admit openly to the loss of solvency which has

occurred. Every intervention so far has pretended that the crisis is one of

liquidity, which can be solved by making loans to the troubled banks and

governments in question.

<snip>

Thanks, Naam....great read.

[craigt3365]

What has this got to do with the OP? Anyway, these guys were breaking the law on purpose. ..they were asking for it.

So Craig, surely this must be relevant to the OP? In fact I can't think of anything more relevant to a financial crisis than to watch publicly spirited people having to feed the hungry in the park?

You didn't see anything wrong with people being arrested in Washington DC simply for dancing so what about this then?

Are you beginning to see the trend?

Shocking....horrible people....I have noticed a trend in the UK also, just little stories here and there popping up more frequently....however, about people being shown a disproportionate reaction from state officials for the most petty things...In fact this one in the Uk was also charitable in nature

I read this one this week from the US...this one actually shocked me...

How I Learned The Truth About The State...in the end, ordinary citizens are going to flip in my humble opinion....you can see in that video in the park the anger is starting to boil..

Hmmm....from a grad student studying divinity. And with topics like this in his blog: “Is There a Scientific Explanation for Justin Bieber?”

He's got a bone to pick with the authorities and now he's blogging about it. Two sides to every story...

[lannarebirth]

A co-ordinated and determined resolution process could be announced by Germany

and France. This would need to include one or both of the following ingredients.

The first would involve a Brady-type plan for the restructuring of the Greek

public debt, swapping new par Greek bonds for the bonds currently in issue. The

new bonds would be longer in duration and the existing ones, and would carry

lower interest rates, so there would be implied losses for private sector bond

holders to accept. But since the new bonds would carry the same face value as

the old ones, there would be no immediate write-down of banks' capital.

A second ingredient could be a larger issuance of EFSF debt which would be used

to purchase Greek bonds in the marketplace. Yes, that would involve a fiscal

transfer. But that is exactly what is happening already. An orderly plan would

probably involve a further fiscal transfer which is no bigger than the one which

will happen ayway under the present strategy, but it would replace the current

risky cocktail with a program of much greater order and control.

Good analysis, thanks Herr Naam.

If current debt insruments are swapped out at par, does that mean the CDS risk that was attached to the original bonds then goes away?

Edited June 20, 2011 by lannarebirth

[Naam]

If current debt insruments are swapped out at par, does that mean the CDS risk that was attached to the original bonds then goes away?

i'm not sure that this will be the case but i'm sure that those CDS holder who are sitting on fat profits won't like it. they have undoubtedly a case and could claim technical default as YTM would change.

as there are no details of the potential swap available we are definitely navigating in uncharted territory. major event this week is Tuesday's [no?]confidence vote. if Papandreou fails all bets are off and if he wins it's just a single step of Greece's journey of a thousand miles.

[Naam]

ridiculous markets!

"Chancelorette" Angie and Monsieur le Président Nicolas kissed cheeks, shook hands, presented a wee bit of bla-bla without the slightest factual content but with contradictions and made the markets happy. EURUSD up 2½ cents.

[RedFxTrade]

What has this got to do with the OP? Anyway, these guys were breaking the law on purpose. ..they were asking for it.

So Craig, surely this must be relevant to the OP? In fact I can't think of anything more relevant to a financial crisis than to watch publicly spirited people having to feed the hungry in the park?

You didn't see anything wrong with people being arrested in Washington DC simply for dancing so what about this then?

Are you beginning to see the trend?

Shocking....horrible people....I have noticed a trend in the UK also, just little stories here and there popping up more frequently....however, about people being shown a disproportionate reaction from state officials for the most petty things...In fact this one in the Uk was also charitable in nature

I read this one this week from the US...this one actually shocked me...

How I Learned The Truth About The State...in the end, ordinary citizens are going to flip in my humble opinion....you can see in that video in the park the anger is starting to boil..

Hmmm....from a grad student studying divinity. And with topics like this in his blog: "Is There a Scientific Explanation for Justin Bieber?"

He's got a bone to pick with the authorities and now he's blogging about it. Two sides to every story...

Your right that there always two sides to every story, however, my point is that I m seeing more and more a nanny state in the UK and reading more and more stories from a wide range of people and sources regarding these issues...from both Europe, the US and the UK...

IS there a Scientific Reason for Justin Bieber was not on his blog, it was by another author...and its a comment on a claim by Emory Uni Prof that neuroimaging can be used to predict future trends...Did you read it Craig or just go by the title? The author refutes the idea, and is not the one posing the question..IS there a scientific reason for JB?

Edited June 20, 2011 by RedFxTrade

[churchill]

nobody Tricky,Sarky,Maybe,Berscalexy,van rompwho , ...... can decide what to do , there is no leadership ... There are now only hard decisions , which nobody will take -- so they will continue delaying as long as they can --- Same for the US and Europe

Sarky - Maybe can flirt and kiss ..... but lead .. no.....

Deal on Lifeline to Avert Greek Bankruptcy Is Postponed

http://www.nytimes.com/2011/06/20/business/20euro.html?_r=2&hp

Boris Johnson: let Greece go bankrupt and leave the euro

http://www.telegraph.co.uk/news/worldnews/europe/eu/8585704/Boris-Johnson-let-Greece-go-bankrupt-and-leave-the-euro.html

Nigel Farage - Bankers+politicians = 'unholy alliance' vs people

Edited June 20, 2011 by churchill

[12DrinkMore]

sorry, cannot quote source.

Well I can

http://www.coloresme...m/index.php?p=2

Which has plagiarized a fair chunk from Gavyn Davies here

http://blogs.ft.com/...=496&SID=google

Edited June 20, 2011 by 12DrinkMore

[Naam]

that's not the source but two participants copied and pasted both versions. sources however were mentioned, i.e. "FT" and "Ideal".

[churchill]

Any more clues ? What's the prize ...

[Naam]

i feel like i won a prize yesterday because i detected after a long search the so-called "ignore user" button. what a relief!

[churchill]

China is finally buying fewer US Treasuries, StanChart says

So what are they buying Naam ?????? any clues

http://ftalphaville.ft.com/blog/2011/06/20/599391/china-is-finally-buying-fewer-us-treasuries-stanchart-says/

[lannarebirth]

China is finally buying fewer US Treasuries, StanChart says

So what are they buying Naam ?????? any clues

http://ftalphaville....stanchart-says/

I believe their expenditures this month center around shoring up their banks which are sitting on a mountain of nonperforming loans.

[RedFxTrade]

nobody Tricky,Sarky,Maybe,Berscalexy,van rompwho , ...... can decide what to do , there is no leadership ... There are now only hard decisions , which nobody will take -- so they will continue delaying as long as they can --- Same for the US and Europe

Sarky - Maybe can flirt and kiss ..... but lead .. no.....

Deal on Lifeline to Avert Greek Bankruptcy Is Postponed

http://www.nytimes.c...ro.html?_r=2

Boris Johnson: let Greece go bankrupt and leave the euro

http://www.telegraph...e-the-euro.html

Nigel Farage - Bankers+politicians = 'unholy alliance' vs people

Wow, Farage speak so much sense, you have to wonder is he really a politician...oh wait, he was a commodities trader and an economist for 20 years beforehand...I guess his judgements are based on sound reasoning....which is more than can be said for the fools in charge...

China Is Buying Fewer US Treasuries Finally, Stanchart...and guess where some the slack is being spent? Europe...

It seems Naam has placed me on ignore from his last post for presenting no personal attacks and for presenting facts....with sources I might add...corroborative sources at that. Naam was going on about a small $275 loan, while within the last year the Chinese state martime company bought over the largest shipping port in Greece for $4.3 Billion USD and have set up at $10 billion loan fund for Greek shipping companies with 250 order already in....childish in the extreme...I always try to get to the bottom of stories or claims,and when I actually do that, you get placed on ignore... ...which proves my point of an overly dogmatic and non liberal approach to information....

Edited June 20, 2011 by RedFxTrade

[RedFxTrade]

China is finally buying fewer US Treasuries, StanChart says

So what are they buying Naam ?????? any clues

http://ftalphaville....stanchart-says/

Literally posted that at the same time man...watch though you ll get put on ignore for presenting some substantiative sources...and presenting credible evidence

[churchill]

So all the money committed to the IMF , World Bank , EU ... has it ever been actually paid or is it all smoke and mirrors - money from nothing ..

http://www.efsf.europa.eu/attachments/faq_en.pdf

[Naam]

China is finally buying fewer US Treasuries, StanChart says

So what are they buying Naam ?????? any clues

http://ftalphaville.ft.com/blog/2011/06/20/599391/china-is-finally-buying-fewer-us-treasuries-stanchart-says/

i don't know what they are buying Churchill and i care a flying fàrt what they are buying. my mind is focussed on what i am buying and selling.

if you want details "what they are buying" ask alpha-jesses_crossroads-zerohedgeville_blogspotcafé and you will receive qualified information.

[cloudhopper]

China is finally buying fewer US Treasuries, StanChart says

So what are they buying Naam ?????? any clues

http://ftalphaville....stanchart-says/

I believe their expenditures this month center around shoring up their banks which are sitting on a mountain of nonperforming loans.

Yeah they have some in-house bailing out to do before they get to Europe.

http://www.zerohedge.com/article/china-conducts-emergency-reverse-repos-inject-money-market-liquidity

[12DrinkMore]

Lest we forget (coming from the German perspective)

http://www.spiegel.d...,769052,00.html

Albrecht Ritschl is calling for the German's to support Greece by taking a "haircut" on the debts. And the reason he gives is that Germany was financially deep in the crap in the last century, but thanks to the magnanimous USA was able to pull itself out of the messes. Ritschl reckons Germany still owes this debt and should exhibit the same level of goodwill towards the Grecian basket case.

&lt;deleted&gt;.

I cannot see how the "haircuts" can be avoided, but the decision for GerMoney to take a hit should not be based on some collective guilt feeling.

Here is a decent summary of the EURO-crisis, this time in English.

http://www.spiegel.de/international/europe/0,1518,769329,00.html

Edited June 21, 2011 by 12DrinkMore

[cloudhopper]

Albrecht Ritschl is calling for the German's to support Greece by taking a "haircut" on the debts.

When in fact he is calling on the Germans to subsidize banks and bondholders who foolishly lent money to the corrupt Greek regime. "How much longer will the average Hans put up with that crap?" is the German perspective I'd like to see.

[Naam]

When in fact he is calling on the Germans to subsidize banks and bondholders who foolishly lent money to the corrupt Greek regime. "How much longer will the average Hans put up with that crap?" is the German perspective I'd like to see.

the average German Hans will mutter and curse. but in the end he will grind his teeth and obey what has been ordered from "above". especially the last 2½ decades are evidence that the average Hans has no guts. he accepted and keeps paying through his nose for any bullcrap the various governments introduced and if need be he will pay for the dolce vita of the "club med"

[cloudhopper]

Guys - exceptionally good post today at TAE including reference to a Mish post I somehow missed.

http://theautomaticearth.blogspot.com/2011/06/june-22-2011-low-thunder-rolling-cross.html

[lannarebirth]

Guys - exceptionally good post today at TAE including reference to a Mish post I somehow missed.

http://theautomatice...ling-cross.html

You know, I know the Gold Bugs armagaeddon argument, but what I couldn't get was your argument about holding fiat currency outside financial institutions. I think I may be getting that now. If a domino effect runs through money markets, precious metals will plunge and a great deal of "cash" will just disappear. Available fiat will be King. Or I might be talking out my ass.

Edited June 23, 2011 by lannarebirth

[cloudhopper]

You know, I know the Gold Bugs armagaeddon argument, but what I couldn't get was your argument about holding fiat currency outside financial institutions. I think I may be getting that now. If a domino effect runs through money markets, precious metals will plunge and a great deal of "cash" will just disappear. Available fiat will be King. Or I might be talking out my ass.

That is the deflationary scenario as cash is sucked up repaying debt that is not defaulted on. PM and real estate (especially commercial and spec) will plunge but more ephemeral "assets" will plunge much faster and farther. Currency will be hoarded by banks to offset losses and by people in the face of rising unemployment, defaulting pensions and in anticipation of even lower prices in the future. The standard of living (and prices) drops until equilibrium is reached where expenditures = productive capacity. IMO this will be the inevitable result and politicians and their bankers bankers and their politicians will be powerless to stop it. I don't agree with those who say that the Fed has no choice but to (try to) print their way out; the Fed knows that would result in untenable increases in fuel and food prices long before any widespread "currency crisis" appeared. But they could try, who knows. IMO we (in the US at least) already had the 40+ year super bubble fueled by a credit expansion that absolutely dwarfed all the money ever printed to repay it and we are witnessing the start of a catastrophic pop. I'm glad I live in rural LOS now because my former home state of California, along with most of the rest of the "developed" world, is going to be a very grim place as that re-adjustment of living standards takes place.

[churchill]

These types of thefts have been going on in koh Samui for over a year ......

‘Scrap Yards Are The New Pawn Shops’

http://www.dailymarkets.com/economy/2011/06/20/scrap-yards-are-the-new-pawn-shops/

[cloudhopper]

Interesting ZH post

http://www.zerohedge.com/article/mike-krieger-widespread-panic

[churchill]

China Formally Working With IMF To Avoid Eurozone Restructuring

'Step aside IMF, China is now in the driver's seat. Officially.

From Market News:

China doesn't want to see a eurozone debt restructuring and is making efforts with the International Monetary Fund and countries related to the sovereign crisis on avoiding it, a government researcher said Friday.

"China, the IMF and related countries are all making efforts...we don't want to see a debt restructuring," Qu Xing, director of the China Institute of International Studies, a Foreign Ministry think tank, told reporters at a briefing here Friday.'

....http://www.zerohedge.com/article/china-formally-working-imf-avoid-eurozone-restructuring

[churchill]

China premier: We have whipped inflation

“China has made capping price rises the priority of macroeconomic regulation and introduced a host of targeted policies. These have worked,” Wen said in the commentary.

“We are confident price rises will be firmly under control this year,” Wen said.

He said the current situation follows increases in banks’ required reserve ratios and interest rates, which were hiked 12 times and four times, respectively, since 2010. He also cited reforms to the yuan’s exchange rate in June 2010, which have so far led to a 5.3% appreciation against the U.S. dollar.

The published remarks came as Wen began a state visit to Europe.

...... http://www.marketwatch.com/story/china-premier-we-have-whipped-inflation-2011-06-24?link=MW_home_latest_news

[cloudhopper]

China premier: We have whipped inflation

Sorted then. Just like one of our great presidents did when it came time to man up.

edit - well it wasn't really until he finally perfected the WIN button. Genius.

Edited June 24, 2011 by cloudhopper