Friday, November 25, 2011

Eurocrisis, Black Friday edition

The eurocrisis is proceeding with a sickening air of inevitability, "It would take a radical reversal of course to save this thing. And so far I see no willingness to face up to that necessity," writes Paul Krugman (Neo-Calvinists and the Euro Crisis 11/22/2011)

Martin Wolf writes in To the eurozone: advance or risk ruin Financial Times 11/23/2011 (lin to Globe and Mail version) about the increasing pressure on bond rates basically across the entire eurozone. He sees two reasons for this:

... eurozone sovereigns lack a true lender of last resort. They are what Charles Goodhart of the London School of Economics calls "subsidiary sovereigns". Their debt bears a risk of outright default rather than mere monetisation. Fearing default, investors create illiquidity, which turns into insolvency. The greater the proportion of foreign creditors, the more plausible default becomes: investors know that politicians are more unwilling to default to their own citizens than foreigners. But, as a result of the currency union, foreigners hold a higher proportion of sovereign debt than before: half of Italian public debt is held abroad.

... there is break-up risk. No currency union is irrevocable. Even countries do not survive forever. But a currency union among discordant states is far more fragile than a country.
He sums up the unencouraging situation as follows:

It seems to me that three lessons shine out from the crisis. First, as André Sapir, of the Université Libre de Bruxelles, pointed out at last week's conference, the eurozone's financial sector must be regulated by a common regulator and backed by a common fiscal authority. Second, the eurozone would, at the least, benefit enormously from a unified bond market that covered a big portion of member country debt. Finally, there needs to be more effective discipline over the structural and fiscal policies of the member states. But none of the above would (or should) be acceptable to democracies without a substantial move towards a political union. Yet everything we have recently seen and heard suggests that this development, ruled out in the 1990s, would be even harder now.
. Wolfgang Münchau in Es ist die Politik, Dummkopf! Spiegel Online 23.11.2011 writes (my translation from the German):

Wer Ursache und Wirkung einer Krise missversteht, wird sie nicht lösen. Das ist das eigentliche Problem mit unseren kombinierten Fiskal- und Inflationslügen. Mit Sparen kommt man aus dieser Krise nicht raus. Auch nicht mit Strukturreformen. Erst recht nicht mit falsch motivierten europäischen Vertragsänderungen. Die Krise ist mittlerweile derart weit fortgeschritten, dass ohne die EZB nichts mehr geht. Und ohne Euro-Bonds ebenfalls nicht.

[Those who misunderstand the origins and processes of a crisis will not solve it. That is the real problem with our [European] compbined fiscal and inflation lies [that serve as justifications for austerity economics]. We won't get out of this crisis with saving. And not with structural reform. And certainly not with falsely motivated changes to European [EU] treaties. Meanwhile, the crisis has gone so far that without the ECB [European Central Bank] nothing can be done. And also not without eurobonds.]
There he refers to the ECB acting as buyer of last resorts for eurozone sovereign debts. By eurobonds, he means bonds backed by the credit of all the eurozone countries together, not by the credit of only individual countries.

Der Grund für den Pessimismus besteht darin, dass wir nur noch wenig Zeit haben, maximal ein oder zwei Monate. Man kann einfach nicht mehr davon ausgehen, dass es der Politik gelingen wird, in dieser kurzen Zeit die verfestigten Narrative zu ändern und dann daraus die richtigen Konsequenzen zu ziehen.

[The basis for pessimism is that we have only a short time left, one or two months at the maximum. One can not simply assume that the politicians will change their hardened narrative and then draw the correct conclusions.]
Between now and the end of January, if we accept Münchau's timetable, we have a big change of a chain of events something like this: a eurozone country (Spain, Italy, Greece, Austria, whoever) declares their immediate exit from the euro; a bank run on that countries bank ensues; that triggers wider bank runs and activates the credit default liabilities held in presumably very large amounts (1, 2, 3 trillion dollars?) by European and US financial institutions; a financial meltdown on the the scale of September 2008 or worse.

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