Friday, November 04, 2011

End of the euro, Friday edition

Kevin Siers' cartoon for the Charlotte Observer of 11/03/2011 seemed out of date before the day was over because Greel Prime Minister Giorgios Panpandreou dropped his referendum threat that had so shocked the financial world before the day was over. But the troubles aren't over.

The eurozone is coming apart. The Greek deal that France's Nicolas Sarkozy and Germany's Angela Merkel just rammed down the Greek Prime Minister's throat - not that Panpandreou put up an impressive fight - isn't even arranged yet. The much-discussed 50% writedown ("haircut") of the Greek debt held by private banks is based on voluntary agreement by the banks which hasn't been secured yet. And the banks currently hold only about half of Greece's debt. The total debt needs to be written down by 50-60%. Even if the banksters agree to the proposed haircut for themselves, that represents a writedown of only around one-quarter of Greece's debt. It's not enough. And even with an adequate writedown, other actions would have to occur soon to save the current eurozone, including the European Central Bank (ECB) starting to act as a buyer of last resort for eurozone countries' debt.

The PBS Newshour brought this report on Thursday the 3rd, 'Like G-20 Didn't Happen': Greek Crisis Overshadows Summit featuring New York Times reporter Steven Erlanger:

Paul Krugman's reaction after Papandreou recanted his short-lived democratic commitment to a referendum on the austerity suicide pact the EU is forcing on Greece in their role as collection agents for the banks (Enter The Draghi 11/03/2011): "it's really hard to see this as any kind of turning point. The situation still looks impossible without dramatic policy changes that are hard to see happening."

Erlanger in the PBS Newshour report talks about the concerns over Italy's debt:

Well, the IMF is an integral part of this eurozone rescue plan, which seems to be, I think, back on track. The biggest hole on it is this big bailout fund and who is going to invest in it and how it is going to protect Italy, which after all has nearly two trillion euros worth of debt. Greece has only 350 billion, and after the bank cut 250 billion.

So, the IMF, you know, after all, it's being run by a former French finance minister. It wants to play a bigger role in Europe, but the Americans don't really want to go back to Congress and ask for more money for the IMF, which, after all, is designed to help poor countries more than rich ones. [my emphasis]

McClatchy's Kevin Hall has more on Italy's situation in As Greece woes ebb, other Eurozone problems surface11/03/2011:

Italy is in the crosshairs [of bond speculators] because Berlusconi has failed to deliver on promised economic reforms. He was forced to make new promises at last week's "summit to end all summits," yet after a Cabinet session Wednesday he arrived mostly empty-handed Thursday at the G20 meeting of industrialized countries, held in the French seaside city of Cannes.

"The fact that they haven't been able to reach consensus to put this package in place is quite worrying and illustrates political problems in Italy," said Iscaro, pointing to rising borrowing costs for the Italian government. "You're in a vicious cycle of contracting activity that puts public finances under more stress."

Among the promises Berlusconi made to EU partners but has failed to keep is selling off state companies, undertaking infrastructure spending to create jobs, and reducing Italy's notorious government bureaucracy to make its businesses more competitive. Separate from the EU promises, Italy is sinking under an aging population with costly government pensions and outdated labor laws.

Italy also has debts of about $2.6 trillion. The ratio of Italy's debt to its overall economy is around 120 percent. That debt ratio is what European leaders are trying to bring Greece down to by 2020, and it underscores how Italy and Greece face similar challenges.
It's important to note here that even at 120% of GDP, Italy's debt is not unmanageable if it weren't the target of bond speculators who are driving up its rates. However corrupt Berlusconi or his government may be, it isn't corruption or reckless borrowing that's causing this problem. It's the bond speculators taking advantage of the critical weakness of the eurozone in this situation. If Italy had it's own currency right now, it would be much less likely to be facing such pressure from the bond markets.

We're seeing a horrible failure of European leadership, especially on the part of Sarkozy and Merkel, who are on the verge of going down in history as the two fools who wrecked the European Union.

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