Wednesday, November 30, 2011

"it does nothing to address the underlying problems"

Hard to justify today as more than an oversold bounce. The markets are looking for anything, and this was an excuse:

Finally, note that while this move can ease financial market conditions, it does nothing to address the underlying problems creating those conditions. So this is no substitute for the difficult decisions that Europe must make to overcome its troubles.

Monday, November 28, 2011

Ten days left for the Euro?

Lots of optimism out there - not:

The Euro Area Is Coming to an End: Peter Boone and Simon Johnson

The eurozone really has only days to avoid collapse that includes this:

Italy’s disastrous bond auction on Friday tells us time is running out. The eurozone has 10 days at most.

Sunday, November 27, 2011

It isn't too complicated

Mysterious Europe

What I have never understood, and still don’t understand, is how European leaders think this is going to work out. What’s the plan? Or lacking a plan, what’s the story with a happy ending?

As I see it, the underlying eurozone story is pretty clear and simple. After the creation of the euro, investors developed a false sense of security about lending to peripheral economies; this led to large capital flows from the core to the periphery, and corresponding current account imbalances:

These capital inflows also caused a boom in the periphery that raised costs and prices dramatically compared with the core:

Now all of that has to be unwound. So how is that supposed to happen?

It seems obvious that spending cuts in the periphery have to be offset by spending increases in the core, and also that a way has to be found to make the required real depreciation in the periphery feasible. But eurozone policy is for austerity everywhere, and a low inflation target for the area as a whole, which means crippling deflation in the periphery.

So where is the story about how this is supposed to work?

As far as I can tell, European policy makers aren’t even thinking about scenarios. They’re just repeating the old slogans about stable prices and fiscal responsibility, with no narrative at all about how pursuing those virtues can be consistent with European recovery.

Even a few months ago I regarded a complete euro crackup as highly implausible. Now I’m having trouble finding a plausible story about how the thing survives.

In other news, Jean-Claude Trichet is the new chairman of the Group of 30. My congratulations. True, I have said some harsh things about his policies — but as Tessio said, it was only business.

Tuesday, November 1, 2011

Just as an aside

This is part of the problem (as far as hot the problem is reported/perceived) - perception:

Despite its desperate circumstances, however, Lewis shared a wonderful story about how Vallejo's fire chief is moving heaven and earth to do more with less. As a result of seeing that resourceful and inspiring work, Lewis "has a hard time getting depressed about our country," though he admits that he "doesn't have a hard time getting depressed about Greece."

Michael Lewis is a smart guy, and a great writer, obviously. But why the difference between the US and Greek views? Left alone, Greece will do fine - or good enough for the Greeks, as it did for the last couple of thousand years. There are 11 million people in Greece - California is more than three times that at 36,961,664. This "crisis" now in Europe is a problem made of the global banking system and the Euro governments. Let them (the individual countries) clean it up, give them their sovereign currencies back, and we'll all be fine - eventually. Greece is not different that different from California (except for being smaller) - Americans just don't speak the language.

Markets Tumble as Greece Sets Referendum on Latest Europe Aid Deal

Wow. So the global game of financial chicken continues to be played. At first blush this sounds like a crazy idea by Papandreou but I know enough to know that I don't know anything about the internals of Greek politics. The worst part about it is at least two more months of kicking the can down the road (at the least).

ATHENS — In a surprise move that jolted Europe and put his political future in play, Prime Minister George A. Papandreou announced late Monday that his government would hold a referendum on a new aid package for Greece, putting austerity measures — and potentially membership in the euro zone — to a popular vote for the first time.

The announcement sent tremors through Europe’s markets on Tuesday, with bank stocks taking a particular hammering. French and German indexes were down by more than 3 percent while, in Britain, which is not a member of the euro zone but trades heavily with continental Europe — the FTSE 100 index was down by 2.5 percent.

Mr. Papandreou’s surprise promise of a vote on the austerity package introduced a note of uncertainty in what had seemed to be a done deal, threatening a comprehensive agreement reached by European leaders last week to shore up the euro zone. A rejection by the voters would also be likely to be treated as a vote of no confidence in the government and lead to early elections.

The anxiety stirred up by those fears hammered United States financial markets on Monday, showing once again how the domestic politics of even the smallest members of the European Union can create troubles that not only threaten the currency but reverberate around the globe.

Addressing lawmakers on Monday evening, Mr. Papandreou said the decision on whether to adopt the deal, which includes fresh financial assistance, debt relief and deeply unpopular austerity measures, properly belonged to the Greek people.

“Let us allow the people to have the last word, let them decide on the country’s fate,” he said.

It was unclear how the referendum would be worded, but Mr. Papandreou said it would be a vote on whether or not Greeks supported the debt deal and the program of austerity measures in exchange for foreign aid.

The stakes are extremely high. A no vote could break the deal between Greece and its so-called troika of foreign lenders — the European Union, European Central Bank and International Monetary Fund — which have demanded structural changes and austerity measures in exchange for aid.

Without the aid, Greece would not be able to meet its expenses and would default on its debt, sending shock waves through the euro zone and the world economy.

A yes vote, on the other hand, would move the package forward, effectively shifting responsibility for the nation’s painful economic choices from Mr. Papandreou’s Socialist Party onto the public. That outcome would help Mr. Papandreou shore up his political fortunes and avoid the instability of early elections.

The center-right opposition has opposed the bulk of the austerity program, and the prime minister’s popular support has dwindled as Greeks have been hit by a seemingly endless series of tax increases and wage and pension cuts. On Sunday, the center-left newspaper To Vima reported that a majority of Greeks viewed the deal negatively.

At a time when Mr. Papandreou is under intense political and social pressure, including from members of his own Socialist Party, the move was seen as the last card he could play.

It also appeared to give the Greek government a bit more leverage in negotiations with Europe. The terms of the deal, in which banks have been asked to voluntarily take a 50 percent write-down on Greek debt, have not been finalized and must still be accepted by the banks. Putting the package up for a vote, with the distinct possibility of rejection, could induce banks to agree to the deal rather than face greater losses if Greece defaults.

“It’s not motivated by the intention of some sort of brinkmanship with Europe, but it may have this sort of positive or negative effect,” said George Pagoulatos, a professor of European politics and economy at Athens University of Economics and Business. “It raises the stakes. It’s about, ‘Will we remain in the euro with a lower public debt, or will we lose everything that we will achieve?’ ”

Mr. Papandreou also said that he would seek a parliamentary vote of confidence in his administration, just four months after winning a similar vote before pushing an earlier batch of austerity measures into law. The vote of confidence is expected to be held on Friday, and he is expected to squeak by with his narrow three-vote majority in Parliament.

The referendum will probably be held in January, government officials said, essentially buying the government time while the details of the deal are hammered out.

Addressing lawmakers on Monday evening, Finance Minister Evangelos Venizelos framed the debate as one of Greece’s staying in the euro zone, the group of 17 European Union countries that use the euro, or not. “It’s for the people to decide to stay in Europe or go back to the drachma,” he said.

While the austerity measures have proved incendiary for much of the public, setting off widespread strikes sometimes accompanied by episodes of street violence, being part of the euro zone generally meets with high approval.

Takis Michas, a political analyst with Forum for Greece, an Athens research institute, said posing the question this way was “a master stroke on behalf of Papandreou in the sense it is forcing the various parties to take a very responsible position.”

“If he succeeds in framing the issue as being one of remaining in the euro zone, obviously he is going to get a huge yes,” Mr. Michas added. “But it depends on whether he can frame the question in those terms.”

Under the Greek Constitution, the government must propose the language of the referendum, which would need to be approved by Parliament and then by the president.

Some analysts said the referendum was an invitation for instability. “When the debate is very passionate and things are tense, holding a referendum could be risky,” said Alexis Papahelas, the editor of the center-right daily Kathimerini.

If the referendum fails, he said, “we have a very big chance that the country would go into a disorderly default.”

A spokesman for the center-right New Democracy Party, Yiannis Michelakis, said a referendum was dangerous. Mr. Papandreou, he said, “has tossed Greece’s future in Europe in the air like a coin.”