Tag Archives: Euro

The risks of a Greek Collapse

While Greece seems to be engrossed in its “success story,” the country’s partners appear more concerned with its “stability story,” in other words whether or not the country will stay on an even keel. There are several reasons why this is what they are most interested in.

Portugal is on the brink of a major political crisis; Italy seems unable to find solutions to its problems, and an out-of-control collapse in Greece would complicated this already tenuous situation. There are also broader geopolitical reasons. The Americans and the Europeans are becoming quite frightened by the chaos in the Middle East, especially at a time when Israel is particularly isolated. Their stance toward Turkey has also changed as they grow more and more concerned by the instability there and Prime Minister Recep Tayyip Erdogan’s arrogant behavior. A Greek “accident” is seen as very dangerous in such a climate. Of course there are those who expect Greece to fail, but argue that even if does, it will find a way to get back on its feet. The majority of international observers and officials, however, do not take the possibility of a Greek collapse so lightly.

So what is the problem? The Greek political system and public administration are nowhere near achieving reform targets, even when these are lowered. The international community is aware that it can exert pressure on Athens until the end of the year when Greece hobbles to a primary surplus. But, as that time approaches and it feels that it only has a few more months to exert influence, the more pressure it will apply. And this is where the danger lies: Greece’s creditors may cause the crash by applying too much pressure.

In the middle of it all are the markets, either in the form of large funds willing to invest in the new low-cost Greece or in the form of lenders who would like to see the Greek bond market operate again.

Prime Minister Antonis Samaras believes that maintaining calm is the top priority. He hopes that an excellent summer in terms of tourism, public works projects due to begin imminently, the TAP pipeline and some good investment news will create a positive climate come the fall.

At the same time he is equally aware that the people are about to be hit with a cascade of taxes and that if these are not collected the fiscal gap will be hard to manage. No one can predict whether there will be a sense of positive shock or an even greater feeling of misery in the fall.

All of this, meanwhile, is taking place ahead of an anticipated clash between Berlin, the International Monetary Fund and Brussels right after the German elections over whether Greece should receive a further debt writedown and a different policy mix.

©Alexis Papachelas : Ekathimerini.com

We could go down so fast that you’ll get a nose bleed!

European stock markets slumped and the euro dropped under $1.28 for the first time in four months Wednesday owing to concerns over fallout from the Cyprus bailout and a disappointing bond sale in Italy, analysts said.

London’s FTSE 100 (FTSE: ^FTSE news) index of leading companies fell 0.69 percent to stand at 6,355.10 points in afternoon deals, as Frankfurt’s DAX 30 (Xetra: ^GDAXI – news) shed 1.44 percent to 7,766.11 points and in Paris the CAC 40 (Paris: ^FCHI – news) slumped 1.46 percent to 3,693.95 points.

Madrid tumbled 1.90 percent and Milan lost 1.59 percent. The Athens stock exchange, a low volume market, plunged 6.83 percent.

Italian borrowing rates fell slightly in a 10-year debt auction on Wednesday, but borrowing rates were higher for five-year debt and demand was weak amid concerns of political deadlock in the recession-hit country following inconclusive elections.

Stock indices were falling “as the ongoing issues in Cyprus continue to weigh on sentiment,” said Alpari trading group analyst Craig Erlam.

In foreign exchange deals, the euro dropped to $1.2751 — the lowest level since November (Xetra: A0Z24E – news) 21 — compared with $1.2861 late in New York on Tuesday.

Gold prices slipped to $1,591 an ounce from $1,598 Tuesday on the London Bullion Market.

The foreign exchange market “is concerned about medium-term contagion effects” of the Cyprus bailout, said Commerzbank (Xetra: 803200 – news) analyst Thu Lan Nguyen.

Troubled eurozone nation Cyprus on Wednesday scrambled to finalise capital controls to avert a run on banks, a day before they are due to reopen after a nearly two-week lockdown while the island secured a huge bailout.

Meanwhile there are fears that the controversial terms of the bailout could be mirrored in any future financial rescues of indebted eurozone members.

Nicosia early Monday agreed a last-minute deal with its international lenders that will see it receive a $13 billion rescue package to help pay its bills.

And while the decision to tax bank savings above 100,000 euros raised fears of a similar move in future rescues — reinforced by comments from the head of the Eurogroup of finance ministers — officials have since insisted that Cyprus is a special case.

“The negative sentiment is also enhanced by rumours that this format will be adopted as a template for any further bailout schemes,” said Currencies Direct trader Amir Khan.

“Although top officials deny any such move in the future, markets are still wary that this format will leave the banks with fewer deposits and in turn will allow them to lend less, shrinking growth.”

Elsewhere on Wednesday, in indebted eurozone member Italy there was weak demand at an auction of 5- and 10-year bonds, with bid-to-cover ratios of 1.2 and 1.3.

Ratios of above 2.0, where submitted bids are double those accepted, are considered strong.

The Italian treasury took in 3.91 billion euros at a rate of 3.65 percent, a five-month high.

However the yield on 10-year bonds dipped 4.66 percent, compared with 4.83 percent at the last similar auction on February 27, with three billion euros raised.

The European Commission meanwhile said its key business and consumer confidence index for the eurozone fell 1.1 points in March to 90 points, reflecting a downturn in the manufacturing and service sectors while consumer sentiment was steady overall.

Amid the gloom in Europe, US stocks moved lower Wednesday in early trading.

The Dow Jones Industrial Average gave up 0.33 percent, the broad-based S&P 500 sank 0.36 percent, while the tech-rich Nasdaq Composite Index dropped 0.26 percent.

The retreat followed strong gains Tuesday that resulted in a record high for the Dow and a near-all-time high to the S&P 500.

“Follow-through has been lacking this morning for reasons that are both convenient and clear,” Patrick O’Hare of Briefing.com wrote. “Headlines out of Europe are largely to blame.”

— Dow Jones Newswires contributed to this report —

It’s STILL all Greek!

Eurozone Ministers have arrived at a “pact” in respect of Greece. The pact allows the release of those much-needed loans that have taken up so much of the Eurozone’s time and energy. You may think that this is all very good news for the Greek people.

However, the central core of the agreement is that Greek Public Debt should fall to 124% of  Gross Domestic Product by 2020 and is to be achieved via a raft of more debt-cutting steps and continuing austerity.

This “tentative” agreement should see the release of up to €44 billion in bailout funds to Athens, otherwise….. formal insolvency beckons.

Once again, we are going to be witnessing a process of German dissidence, the continued rise of the IMF, performance-related stage payments, delays etc….as the Greek funding is parsimoniously unlocked in three increasingly painful stages.

The formal decision and an agreement on how these disbursements are to be managed will me made by 13th December. One thing that we can be sure of is that each payment will involve a similar process of troika visits, meetings and procrastination.

Apart from cuts to the interest rate which Greece is having to pay on all of its loans, there will be an 15 year extension of the bilateral and EFSF loans plus a deferral  of 10 years on interest payments on EFSF loans.

So what difference will all of the above make to the average Greek in the street?….NONE.

Yesterday, Bank of Greece Governor George Provopolous said that the Greek economy is expected to grow in 2014. He feels that by then,  Greece’s fiscal problems will have been eliminated.

He did not specify how the country’s political, social and institutional issues will have been dealt-with.

The main effect is that the Markets will now enjoy a few more days in the Greek sunshine…….as they await the next cloud………

ECB Mario Draghi’s Statement……….. 6th September 2012

Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the President of the Eurogroup, Prime Minister Juncker, and by the Commission Vice-President, Mr Rehn.

Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. Owing to high energy prices and increases in indirect taxes in some euro area countries, inflation rates are expected to remain above 2 percent throughout 2012, to fall below that level again in the course of next year and to remain in line with price stability over the policy-relevant horizon. Consistent with this picture, the underlying pace of monetary expansion remains subdued. Inflation expectations for the euro area economy continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2 percent over the medium term. Economic growth in the euro area is expected to remain weak, with the ongoing tensions in financial markets and heightened uncertainty weighing on confidence and sentiment. A renewed intensification of financial market tensions would have the potential to affect the balance of risks for both growth and inflation.

It is against this background that the Governing Council today decided on the modalities for undertaking Outright Monetary Transactions (OMTs) in secondary markets for sovereign bonds in the euro area. As we said a month ago, we need to be in the position to safeguard the monetary policy transmission mechanism in all countries of the euro area. We aim to preserve the singleness of our monetary policy and to ensure the proper transmission of our policy stance to the real economy throughout the area. OMTs will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro. Hence, under appropriate conditions, we will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area. Let me repeat what I said last month: we act strictly within our mandate to maintain price stability over the medium term; we act independently in determining monetary policy; and the euro is irreversible.

In order to restore confidence, policy-makers in the euro area need to push ahead with great determination with fiscal consolidation, structural reforms to enhance competitiveness and European institution-building. At the same time, governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial market circumstances and risks to financial stability exist – with strict and effective conditionality in line with the established guidelines. The adherence of governments to their commitments and the fulfilment by the EFSF/ESM of their role are necessary conditions for our outright transactions to be conducted and to be effective. Details of the Outright Monetary Transactions are described in a separate press release.

Furthermore, the Governing Council took decisions with a view to ensuring the availability of adequate collateral in Eurosystem refinancing operations. The details of these measures are also elaborated in a separate press release.

Let me now explain our assessment in greater detail, starting with the economic analysis. Recently published statistics indicate that euro area real GDP contracted by 0.2 percent, quarter on quarter, in the second quarter of 2012, following zero growth in the previous quarter. Economic indicators point to continued weak economic activity in the remainder of 2012, in an environment of heightened uncertainty. Looking beyond the short term, we expect the euro area economy to recover only very gradually. The growth momentum is expected to remain dampened by the necessary process of balance sheet adjustment in the financial and non-financial sectors, the existence of high unemployment and an uneven global recovery.

The September 2012 ECB staff macroeconomic projections for the euro area foresee annual real GDP growth in a range between -0.6 percent and -0.2 percent for 2012 and between -0.4 percent and 1.4 percent for 2013. Compared with the June 2012 Eurosystem staff macroeconomic projections, the ranges for 2012 and 2013 have been revised downwards.

The risks surrounding the economic outlook for the euro area are assessed to be on the downside. They relate, in particular, to the tensions in several euro area financial markets and their potential spillover to the euro area real economy. These risks should be contained by effective action by all euro area policy-makers.

Euro area annual HICP inflation was 2.6 percent in August 2012, according to Eurostat’s flash estimate, compared with 2.4 percent in the previous month. This increase is mainly due to renewed increases in euro-denominated energy prices. On the basis of current futures prices for oil, inflation rates could turn out somewhat higher than expected a few months ago, but they should decline to below 2 percent again in the course of next year. Over the policy-relevant horizon, in an environment of modest growth in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain moderate.

The September 2012 ECB staff macroeconomic projections for the euro area foresee annual HICP inflation in a range between 2.4 percent and 2.6 percent for 2012 and between 1.3 percent and 2.5 percent for 2013. These projection ranges are somewhat higher than those contained in the June 2012 Eurosystem staff macroeconomic projections.

Risks to the outlook for price developments continue to be broadly balanced over the medium term. Upside risks pertain to further increases in indirect taxes owing to the need for fiscal consolidation. The main downside risks relate to the impact of weaker than expected growth in the euro area, particularly resulting from a further intensification of financial market tensions, and its effects on the domestic components of inflation. If not contained by effective action by all euro area policy-makers, such intensification has the potential to affect the balance of risks on the downside.

Turning to the monetary analysis, the underlying pace of monetary expansion remained subdued. The annual growth rate of M3 increased to 3.8 percent in July 2012, up from 3.2 percent in June. The rise in M3 growth was mainly attributable to a higher preference for liquidity, as reflected in the further increase in the annual growth rate of the narrow monetary aggregate M1 to 4.5 percent in July, from 3.5 percent in June.

The annual growth rate of loans to the private sector (adjusted for loan sales and securitisation) remained weak at 0.5 percent in July (after 0.3 percent in June). Annual growth in MFI loans to both non-financial corporations and households remained subdued, at -0.2 percent and 1.1 percent respectively (both adjusted for loan sales and securitisation). To a large extent, subdued loan growth reflects a weak outlook for GDP, heightened risk aversion and the ongoing adjustment in the balance sheets of households and enterprises, all of which weigh on credit demand. Furthermore, in a number of euro area countries, the segmentation of financial markets and capital constraints for banks continue to weigh on credit supply.

Looking ahead, it is essential for banks to continue to strengthen their resilience where this is needed. The soundness of banks’ balance sheets will be a key factor in facilitating both an appropriate provision of credit to the economy and the normalisation of all funding channels.

To sum up, the economic analysis indicates that price developments should remain in line with price stability over the medium term. A cross-check with the signals from the monetary analysis confirms this picture.

lthough good progress is being made, the need for structural and fiscal adjustment remains significant in many European countries. On the structural side, further swift and decisive product and labour market reforms are required across the euro area to improve competitiveness, increase adjustment capacities and achieve higher sustainable growth rates. These structural reforms will also complement and support fiscal consolidation and debt sustainability. On the fiscal front, it is crucial that governments undertake all measures necessary to achieve their targets for the current and coming years. In this respect, the expected rapid implementation of the fiscal compact should be a main element to help strengthen confidence in the soundness of public finances. Finally, pushing ahead with European institution-building with great determination is essential.

We are now at your disposal for questions.

Eurozone – a new religion?

The Eurozone has gradually and imperceptibly acquired all the unsavoury aspects of a religion – and we don’t even appear to have noticed!

For instance, Greece is having to do PENANCE (austerity) as punishment for its past sins. Others are already gathering to follow the Greek example. The HOLY EURO demands it!

All believers need HOPE in order to believe. The Eurozone hope is provided by the ECB which may or may not decide to help. Sometimes it is merciful but yet on other occasions it gives the impression that perhaps Euromortals should be allowed to make their mistakes and then clear up the mess themselves. Freewill or Predestination?

Then of course, any religion worth its salt has its Unique Selling Proposition. The most simple and powerful is the promise of an afterlife  or , more accurately, the choice between TWO afterlives. One where the Euro remains intact and everyone lives happily ever after (HEAVEN). The other is the threat of HELL should the Euro break up. However, the Eurozone High Priests have provided a third way – PURGATORY – where the genuinely penitent can suffer for a while so that their transgressions (SINS) may be forgiven.

(Greece is currently languishing  in PURGATORY with its cilice so tight that it has begun to draw blood).

Every religion has a DOGMA. That is provided by the strong belief that Monetary Union is the only true Path of Righteousness.

The DOCTRINE is extracted from the many words which have been handed down over the years. They are true because it has been written that they are true. (See Maastricht Treaty).

There are RITUALS – every religion has its rituals. The Eurozone rituals are mysterious and enacted during the frequent MEETINGS of the High Priests with the important rituals being acted-out in THEIR own Vatican, which is in Brussels but some believe that it is in Berlin. Every such ritual generates words for the believers – but just like every other religion, the words have become repetitive and Mantra-like with little real meaning or relevance.

There has to be a MYTH. Something which , even in the face of overwhelming evidence , remains sacred. Theirs is THE HOLY EURO…..

Every religion has its DETRACTORS – those who may wish to modify or change either the beliefs or the mode of worship. There are those who would REFORM. Europe has such an enemy within – it’s own JUDAS. It is called the United Kingdom – which is sometimes viewed (by High Priestess Merkel) as the DEVIL incarnate.

It is appropriate to highlight the New Religion this week because it is the time when the new round of meetings and pilgrimages begins.

At the end of this Holy Euro Week, there will be no changes but the faith of many will be strengthened by the promises of the High Priests.

Amen. May the blessings of the Euro be with you.

Venizelos’ Oral Plan

Here is a 10-point “plan” for a strategic framework, presented to the Greek Parliament by PASOK leader Evangelos Venizelos. He described  his 10-point proposal as a plan for an “integrated national strategy”. (I have highlighted certain words in BOLD.)

1. There is need for immediate actions by Greece in the period of August-September that will concern high-level contacts with the leaders of the EU member states and also the institutional partners (European Commission, European Central Bank and International Monetary Fund), and also for shielding the domestic front. The national negotiating team must be formed and the opposition called on to contribute to the effort. Venizelos said it would be a “mistake” and “insult to the country” for it to be said that it has been inert with respect to the structural changes, adding that the changes effected from 2010 to the present are “unprecedented” and the reproduction of such stereotypes at Greece’s expense must stop.

2. The country must manifest its strong determination to promote structural changes, and noted the 77 obstacles pinpointed by the Fund for privatisations, which he stressed need to be immediately eliminated through legislation.

3. The end fiscal target must immediately be confirmed, so that from a deficit of 11.5 billion euros we will go to a primary surplus, and a 2.6 percent growth rate must be achieved.

4. The fiscal adjustment period needs to be extended to 2016.

5. It is necessary to draft an updated programme for the period 2012-2016, so that the 2012 budget may be closed and a draft budget drawn up for 2013, which should be tabled in parliament in early October.

6. A proposal should be drawn up for full itemisation of the programme for 2012-2014, without across-the-board cuts that affect small and medium incomes.

7. Improvement of the macroeconomic climate which, if improved, will enable an easier implementation of the second stage of fiscal adjustment in 2014-2016.

8. Immediate and tangible measures must be taken to increase employment in tandem with a reduction of the cost of money, as well as measures to control prices.

9. Measures must be taken to reinforce social cohesion.

10. The international communications framework that is negative towards Greece must change, in cooperation with the partners.

The “must be” phrase is the one which gives the illusion of action but in fact means absolutely nothing. It is not even a statement of intent. You will notice (in bold above) that Venizelos is using exactly the language which I outlined HERE .

Political pronouncements would carry far more gravitas if they sometimes contained dates and more definite verbs. For example, looking at just ONE of the items on Mr Venizelos’ shopping list:

See the wording of No 8 (above)…NO amount…NO date…..in fact, NOTHING definite. Here’s a slight modification:

The original:

8. Immediate and tangible measures must be taken to increase employment in tandem with a reduction  of the cost of money, as well as measures to control prices.

A modified version:

8. Directly through the Treasury, we are allocating €5 billion to be available to employers, specifically for them to hire new people. This money is available now and the employer will be paid the equivalent of six months of the new employees salary on Day 1 of that employee joining the business. This facility will be open only to those employers with an annual turnover of under €500,00 per year.  All start-up businesses will be completely tax-exempt for 12 months.

(The figures are only for illustration purposes but they do shed some light on the difference between empty political words and a PLAN.)

It looks as if Mr Venizelos continues to practice exactly what Eurozone politicians have been indulging themselves in for the last FOUR years:

ORAL POLITICS :  Words WITHOUT actions.

Germany reports the biggest fall in new business orders since records began,  manufacturing in France is at a three-year low with Italy experiencing the fastest rise in unemployment for three years. On the other hand, Ireland’s output is beginning to increase – although they did start from a lower base.

The Eurozone’s overall manufacturing activity is at a three-year low although the markets continue their comatose drift whilst traders try to make the best of a bad job.

Expect more fine Eurowords over the next few days with a market rise towards the end of the week if Draghi manages to pull a rabbit out of the ECB hat.

Growing up hungry in Greece

ATHENS/PATRAS, Greece  —  Μarcos Efcarpos is only 10 years old, but he already knows what the euro crisis means.

He lives with his single mother, an English teacher named Nena, in an apartment in the poor, waterfront neighborhood of Kallithea, where a growing number of immigrants jostle with far-right gang members affiliated with neo-fascist party Golden Dawn.

Incomes here have plummeted since the start of the financial crisis in 2008, especially after international lenders imposed debt repayments on the country two years ago.

“My family still pays taxes but very soon we won’t be able to buy what we need,” said Marcos, who plays guitar and appears older than his age. “That’s why we’re careful with what we spend — we have very few possessions.”

Nena works 11 hours a day, six days a week to support her son. But although she often runs out of money by the end of each month, she considers herself lucky because her parents send fruit and vegetables from their rural garden.

Marcos rarely begs for new purchases. “He’s learned to ask if we have money for something he wants,” Nena explained. “We have a new slogan: ‘Fewer needs, fewer worries.’”

Despite his straitened circumstances, Marcos is doing well for a Greek child. Many others are growing up hungry, a stark result of austerity measures such as wage cuts and tax increases that were prompted by the country’s three-year drive to repay its debts, and are affecting almost every part of the population.

Estimates for the number of children living below the poverty line vary. The EU’s official figure, 439,000, or 23 percent of the population under 18, increased a mere 2 percent since 2009. However, that number is derived from the current Greek median wage.

Child poverty specialist Matsaganis Manos says the real number probably jumped “dramatically” between 2009 and 2011 — to 35 percent — if current earnings are compared to what Greeks made before the crisis. And the government’s decision to cut the minimum wage by a fifth earlier this year is “bound to make things even worse for families with children,” he said.

The changes in Greek society are clear on the streets. Social workers say some poor Athens neighborhoods are experiencing close to a humanitarian emergency.

“People are beginning to starve,” said Aglaia Konstantakopolou, who works at a soup kitchen and social center in downtown Athens originally planned for refugees. “Mothers come begging for diapers, milk for their children or food,” he added. “Two years ago, you never saw anything like that.”

Teachers say children often show up to class hungry. Many skip classes to eat breakfast at charity shelters, Konstantakopolou says.

The physical strains are producing psychological effects, especially among younger children who often blame themselves for the effects of the crisis.

“When parents can’t buy clothes or toys, children believe they’ve been bad and are responsible,” child psychologist Salemi Parrisia said.

There are reports of growing numbers of malnourished children collapsing at school and suffering health-related phobias.

Although cuts to social services are partly to blame for those dire developments, some children’s advocates say Greece’s notorious bureaucratic inefficiency is even more responsible.

UNICEF Greek director Ilias Liberis blames “structural weaknesses” among a profusion of overlapping agencies for harming efforts to protect children.

“There are many different services and organizations helping children,” he said, “but no central coordination.”

However, public anger over austerity, corruption and the failing economy has drowned out calls to reform child services.

Already one of Greece’s poorest cities, the western port of Patras has been badly hit by the crisis. The city council estimates the number of poor has more than doubled in less than a year.

At the city’s Greek Orthodox cathedral, employees at a soup kitchen prepare daily basic lunches of beans, olives and fruit.

“The number of people who come begging grows every day,” says cook Konstantina Nikolinakou. “We made food for 30 people before the crisis. Now we serve 120.”

She says there is never enough for everyone. “We can’t chase them away.”

Outside the soup kitchen wait 38-year-old Maria Papanikolaou and her 11-year-old son Petros, hoping for leftover scraps. A former accountant, Papanikolou fell on tough times when the company she worked for closed last September.

“When I grow up, I’ll take my mother far away from Greece,” said Petros. “I promised her we’ll go to an island where I’ll be a fisherman. So we’ll have food to eat and be happier than now.”

Thodoris Skoulis and Charles McPhedran

Whatever It Takes (WIT)

Every European politician is now resorting to the “Whatever it takes” mantra. This week they will do whatever it takes to safeguard the sacred cow that is the Eurozone. That pampered sacred cow which feeds and feeds without actually producing much in return.

The politicians don’t appear to realise that this is a nonsense phrase but they certainly DO realise that it is a phrase which excites the traders because it is code, designed to convey the fact that the ECB , the Fed and all the other usual suspects will once again indulge the banks by creating yet more cash for them to play with.

Another Central Bank Bonanza!

That is why the markets have risen today. This is how it works:

As soon as Central Banks start handing out cash, the investment banks use a proportion of that cash to purchase equities. That in turns “ups” prices. So, if investors convince themselves that next week,  the banks will start splashing money like a lonely Chardonnay-fueled celibate on ebay, they also realise that NOW is the time to buy.

Anything they buy today is bound to increase in price, once the Central Banks open the Banking “All-you-can-eat” Buffet.

In fact, the banks will be buying today in anticipation of Central Bank handouts. Once again, there’s the heady whiff of “empty profit” in the air.

Last week, the ECB’s Mario Draghi said that he would do “Whatever. It. Takes”. Today it was the latest Euro double-act of Merkel and Monti who joined the  W.I.T chant.

The next stage will be expressions of “confidence”, followed by “meetings”, the establishment of a “by the end of the year” deadline  and then the announcement of  “reforms”.

(Reforms are good because they give the illusion of progress.)

One such reform is rumoured to be the granting of banking licences to the EFSM, EFSF, ESM and any other European quango or organisation beginning with Capital “E”.

That will enable them to print yet more money to distribute among the needy….er…banks!

When they say “WHATEVER  it takes” – they mean it!

Merkel Gives No Ground on Demands for Oversight in Debt Crisis

(Bloomberg) — Chancellor Angela Merkel gave no ground on Germany’s demands for more European control over member states in return for joint burden-sharing as she conceded that the bloc has yet to master the debt crisis.

The German leader said yesterday she hadn’t softened her stance at last month’s summit in Brussels and that a so-called banking union involving a bloc-wide financial overseer will have to include joint oversight on a “new level.” She chided member states who had sought to slow moves toward greater central control “since the first summit” in the 30-month-old crisis.

“All of these attempts will have no chance with me or with Germany,” Merkel said in an interview with broadcaster ZDF in Berlin.

Two weeks after a European Union summit aimed at bridging differences over crisis resolution, euro leaders are still squabbling over details of how to lift the bloc out of the turmoil. Merkel hardened Germany’s position that any attempt to share burdens in Europe — such as jointly issued euro bonds or common banking bodies — must first be met with greater cooperation and a handover of some sovereignty to Brussels.

The euro fell to its lowest level against the U.S. dollar in more than two years last week, sliding to as low as $1.2163 on July 13. Europe’s most credit-worthy government bonds climbed, with German two-year note yields down to a record minus 0.052 percent, as investors sought havens from the euro crisis.

Diverging rates and capital outflows within the 17-member monetary union signal that the single currency is “slowly unraveling,” Stephen Gallo, senior foreign-exchange strategist at Credit Agricole SA in London, told Bloomberg Television’s “The Pulse” in a July 13 interview.

’Unraveling’

“The whole project is unraveling, that’s what’s essentially happening now,” Gallo said.

While Merkel said that Europe is on the “right course” toward putting an end to the crisis, euro-area leaders “haven’t solved the problems conclusively.”

German lawmakers will interrupt their summer vacations and return to Berlin on July 19 to vote to approve 100 billion euros ($122 billion) in rescue loans to Spain. After Spanish Prime Minister Mariano Rajoy last week announced 65 billion euros in welfare cuts and tax increases, Merkel reiterated yesterday that financial assistance would not be doled out without conditions.

“Whoever receives assistance and where liabilities are taken over, there has to be control,” Merkel told ZDF.

Banks

French President Francois Hollande, Italian Prime Minister Mario Monti and Spain’s Rajoy have pressed for faster action, including joint liabilities, while Merkel has called jointly issued debt the “wrong way” to fix the crisis. Merkel last month castigated a blueprint for the summit by EU President Herman Van Rompuy as too focused on “collectivization.”

Euro officials this month have also sparred over the timetable for establishing a euro-wide bank supervisor, a benchmark required before they implement one of the decisions from the June 28-29 summit — direct bailout funding for banks. Investors have viewed such a step as a way to sever the link between banking debt and sovereign debt.

Euro-area finance ministers will confer on Friday, July 20, to complete an agreement on Spain’s bank bailout. On July 10, the minister’s announced 30 billion euros of aid would be made available by the end of this month.

Klaus Regling, who heads the euro’s bailout funds, told Welt am Sonntag yesterday that governments could avoid liability for bank rescues under proposals for a regional supervisor. That contradicts German Finance Minister Wolfgang Schaeuble, who said July 9 that he expects governments to guarantee loans even if they go directly to banks, Welt said.


Surrendering Sovereignty

Merkel said leaders hadn’t yet reached an agreement on the terms for bank rescues.

German Bundesbank President Jens Weidmann said euro leaders had caused damage by failing to define more clearly their conclusions at the summit. He told Dutch newspaper Het Financieele Dagblad on July 14 that euro nations “should discuss giving up sovereignty with the same openness as the question of how to resolve the debt problem collectively.”

As governments in Spain and Italy struggle under the burden of higher borrowing costs, Weidmann, Germany’s chief central banker and a European Central Bank GoverningCouncil member, told Boersen-Zeitung that Italy’s higher yields don’t justify a request for bailout assistance. Euro bailout funding should be deployed only as a last resort, he said.

Italy

“If Italy stays the course on reforms, it’s on a good path,” Weidmann told the newspaper in an interview. Asked whether the euro area’s third-largest economy needs to tap the fund, he said, “No, I don’t see Italy in that situation.”

Italian Prime Minister Mario Monti has sought a “debt shield” against spillover from a Spanish banking crisis.

Euro-area leaders have given Spain an extra year, until 2014, to drive its budget deficit below the euro limit of 3 percent of gross domestic product, a concession that may foreshadow leniency for other indebted states in the bloc.

In Greece, an MRB poll published in Athens-based Real News newspaper showed that almost three-quarters of Greeks want Prime Minister Antonis Samaras’s coalition government to insist on a renegotiation of the country’s international bailout.

Seventy-four percent in the survey said the government should insist on discussing the terms even if negotiations steer toward the prospect of Greece leaving the euro; 15.5 percent said the government should stick to current conditions.

Volker Kauder, the parliamentary leader of Merkel’s Christian Democratic Union, told Welt am Sonntag that he doesn’t want to give Greece more time to meet economic targets.

Merkel, asked the same question during the ZDF interview, said she would await a report by Greece’s international creditors, known as the troika.


With assistance from Tony Czuczka in Berlin, Paul Tugwell in Athens, Guy Johnson in London and Fred Pals in Amsterdam. Editor: Dick Schumacher.
To contact the reporter on this story: Patrick Donahue in Berlin at pdonahue1@bloomberg.net
To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

Netherlands political crisis casts cloud on euro zone

By Sara Webb and Thomas Escritt

AMSTERDAM | Mon Apr 23, 2012 7:48am BST

(Reuters) – The Netherlands, a core Eurozone  member, was drawn into Europe’s debt crisis at the weekend when the government failed to agree on budget cuts, making elections almost unavoidable and casting doubt on its support for future euro zone measures.

Prime Minister Mark Rutte, whose centre-right coalition has been in power since October 2010, said on Saturday that crucial talks on budget cuts had collapsed after his ally Geert Wilders refused to do a deal, and that new elections were inevitable.

In the short term, the government must seek support for budget cuts from the opposition parties.

But uncertainty over the makeup of a new government, and waning voter support for bailouts and austerity measures, raised questions over Dutch backing for a fiscal responsibility pact seen as crucial to helping Europe cope with its debt crisis.

The catalyst for the crisis was Wilders, who refused to agree to 14-to-16 billion euros ($18.5-$21.1 billion) of budget cuts needed to bring a bloated budget deficit under control.

Now the euro-sceptic, anti-immigration politician has threatened to fight his campaign on a European battleground.

“The Freedom Party benches are unanimously against Brussels diktats and the attack on our elderly,” Wilders tweeted on Sunday, later telling Dutch news agency ANP that Europe would be in “sharp focus” during any coming election campaign.

Wilders most recently has lobbied to jettison the euro and return to the guilder, the old Dutch currency, and he is against immigration not only of Muslims but also of Poles and other central and eastern European members of the EU – views that strike a chord with his supporters.

His Freedom Party had a pact to support Rutte’s minority government in parliament, giving it the majority to pass legislation, but after seven weeks of budget talks, Wilders suddenly backed out just when a deal appeared close.

His supporters are against budget cuts, particularly cuts in welfare, health and unemployment benefits.

“This was a package that would damage our economy over coming years and increase unemployment. And all that to meet a demand made by Brussels, accepted by the Liberals, of reaching a 3 percent deficit in 2013,” he said on Saturday.

FRAGMENTED POLITICAL FIELD

An opinion poll published on Sunday showed the Netherlands remains highly fragmented politically, suggesting that it could prove difficult to form a new coalition quickly and that Wilders’s chances of forming a new government were slim.

The Maurice de Hond poll, conducted after the budget talks collapsed, showed that no single party would have a majority if elections were held now, though Rutte’s Liberal Party has strengthened its lead, followed closely by two leftist parties.

The poll also showed that a majority favour smaller budget cuts than those stipulated by the European Union, a further sign that the notoriously frugal Dutch are suffering from “bailout fatigue” and resent the high cost of rescuing profligate peripheral euro zone countries.

“Voters from different parties share the same view – disgust or disappointment over the political action and the political parties,” De Hond said in a statement, adding that two thirds of those polled agreed with the statement: “I’m tired of all the party politics”.

Asked whether the Netherlands should cut less than the European Union wants, 57 percent of respondents agreed. Supporters of the populist Freedom Party and of the leftist Socialist Party were particularly set against cuts.

The poll showed the Dutch were most strongly opposed to spending cuts that would have a direct impact on standards of living, 56 percent of respondents opposing the introduction of a new, modest prescription charge, and 47 percent opposing an increase in value added tax.

The cabinet is set to meet on Monday to discuss what it should do next to agree a budget and whether to resign. The Queen could accept its resignation, paving the way for elections, or ask the prime minister to form a new coalition.

If elections are called, Rutte’s Liberals would win 33 seats in the 150-seat parliament, up from 31 now, the poll showed, followed by the eurosceptic Socialist Party with 30 seats and the pro-Europe Labour Party with 24 seats.

Rutte’s coalition partner, the Christian Democrats, and the Freedom Party, until Saturday his main ally, have both slipped in the polls and would win 11 and 19 seats respectively.

BUDGET SINNERS

Rutte and Finance Minister Jan Kees de Jager – who flew back from IMF talks in Washington when the crisis broke – are among the euro zone’s harshest critics of “budget sinners” like Greece and Portugal, and the Netherlands is seen as close to Germany in calling for tough austerity measures.

That is about to change.

“The Netherlands can no longer be a role model to others. There may be a reaction in other countries: ‘If they don’t do it, why should we?’ This risk exists, which is unpleasant,” said Jaap Koelewijn, an economist and professor of corporate finance.

The annual budget cuts Wilders has balked at are needed for the Netherlands to meet European Commission targets. Without them, its public deficit is forecast to hit 4.6 percent of GDP in 2013, well above the 3 percent agreed with the Commission.

If the Netherlands does not cut spending and breaks EU budget rules, it is likely to lose its coveted triple-A credit rating, leading to higher borrowing costs.

The level of state debt rose to 65.2 percent of GDP at the end of 2011 from 62.9 percent in 2010, Statistics Netherlands said last month.

Ratings agency Fitch recently warned the Netherlands it must get its finances in order or risk a ratings downgrade, while in a report last month, Citibank went as far as to say it no longer deserved to be considered a core member of the euro zone because of its fiscal woes.

The uncertainty over budget cuts and reforms, and the time it takes to organise elections, will probably lead to higher interest rates and higher yields on Dutch government bonds.

“The cost of finance for the Netherlands will go up slightly compared to Germany, but our debt is mostly long-term. The Netherlands doesn’t have high refinancing needs in the next few years,” said economist Sweder van Wijnbergen.

($1 = 0.7571 euros)

(Additional reporting by Gilbert Kreijger and Anthony Deutsch; Editing by Michael Roddy)

Greek party leaders seek deal as bankruptcy looms

By NICHOLAS PAPHITIS
Associated Press

ATHENS, Greece (AP) — Greek party leaders on Tuesday will seek a long-delayed agreement on harsh cutbacks demanded to avoid looming bankruptcy, amid intense pressure from its bailout creditors to reach a deal, a general strike disrupting public services and thousands of protesters taking to the streets of Athens.

Heads of the three parties backing the interim government will confer with Prime Minister Lucas Papademos on new income cuts and job losses, which Greece’s eurozone partners and the International Monetary Fund are demanding to keep the country’s vital rescue loans flowing.

A general strike against the impending cutbacks stopped train and ferry services nationwide, while many schools and banks were closed and state hospitals worked on skeleton staff.

Police said up to 14,000 people took part in two peaceful anti-austerity demonstrations in Athens. The separate marches were to converge on central Syntagma Square, outside Parliament, which has been the focus of demonstrations over the past two years of economic pain.

On Monday, Prime Minister Lucas Papademos’ government caved in to demands to cut civil service jobs, announcing 15,000 positions would go this year, out of a total 750,000. The decision breaks a major taboo, as state jobs had been protected for more than a century to prevent political purges by governments seeking to appoint their supporters.

Athens must placate its creditors to clinch a euro130 billion ($170 billion) bailout deal from the eurozone and the IMF and avoid a March default on its bond repayments.

Among the measures the EU and IMF are pressing Greece for is a cut in the euro750 ($979) minimum wage to help boost the country’s competitiveness. This reduction would have a knock-on effect in the private sector – because private companies also base their salaries on the minimum wage – and even unemployment benefits. Unions and employers’ federations alike have deplored the measure as unfair and unnecessary.

“It is clear that there is a lot of pressure being put on the country. A lot of pressure is being placed on the Greek people,” Finance Minister Evangelos Venizelos said during a break in talks with EU-IMF debt inspectors late Monday.

He called on coalition parties to work more closely together.

“To save Greece … will involve a huge social cost and sacrifices,” Venizelos said. “On the other hand, if the negotiations fail, bankruptcy will lead to even greater sacrifices.”

“No one is as strong as Hercules on his own to face the Lernaean Hydra,” a swamp monster in Greek mythology, he said. “We must all, together, fight this battle, without petty party motives and slick moves.”

A disorderly bankruptcy by Greece would likely lead to its exit from the eurozone, a situation that European officials have insisted is impossible because it would hurt other weak countries like Portugal.

But on Tuesday, the EU commissioner Neelie Kroes, in charge of the bloc’s digital policies, said Greece’s exit wouldn’t be a disaster.

Kroes told Dutch newspaper De Volkskrant that “It’s always said: if you let one nation go, or ask one to leave, the entire structure will collapse. But that is just not true.”

Greece has been kept solvent since May 2010 by payments from a euro110 billion ($145 billion) international rescue loan package. When it became clear the money would not be enough, a second bailout was decided last October.

As well as the austerity measures, the bailout also depends on separate talks with banks and other private bondholders to forgive euro100 billion ($131.6 billion) in Greek debt. The private investors have been locked in negotiations over swapping their current debt for a cash payment and new bonds worth 50 percent less than the original face value, with longer repayment terms and a lower interest rate.

Greek government officials say they expect private investors to take losses of an estimated 70 percent on the value of their bonds.

The EU-IMF bailout will also provide an estimated euro40 billion ($52 billion) to protect Greek banks from immediate collapse. Domestic lenders and pension funds hold some 34 percent of the country’s privately-owned debt.

However, the bailout has to be secured for the deal with private investors to go ahead as about euro30 billion from the bailout will be used as the cash payment in the bond swap deal.

Greece’s coalition party leaders held a first key meeting on the austerity measures on Sunday, and postponed a second round of talks by a day so Papademos could complete negotiations with EU-IMF debt inspectors that ended early Tuesday.

The leaders have already agreed to cut 2012 spending by 1.5 percent of gross domestic product – about euro3.3 billion ($4.3 billion) – improve competitiveness by slashing wages and non-wage costs, and re-capitalize banks without nationalizing them. But the details remain to be worked out.

Creditors are also demanding spending cuts in defense, health and social security.

European Commission spokesman Amadeu Altafaj Tardio said Monday that Greece was already “beyond the deadline” to end the talks.

Also Monday German Chancellor Angela Merkel warned that “time is pressing,” and “something has to happen quickly.”

While Greece remains cut off from international bond markets – where it would have to pay interest of about 35 percent to sell 10-year issues – it maintains a market presence through regular short-term debt sales.

On Tuesday, the public debt management agency said Greek borrowing costs dropped slightly as the country raised euro812 million ($1.06 billion) in an auction of 26-week treasury bills. The coupon was 4.86 percent, compared to 4.90 percent in a similar auction last month, while the auction was 2.72 times oversubscribed.

Derek Gatopoulos in Athens and Gabriele Steinhauser in Brussels contributed to this report.

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Greece points the way.

Many have said that the defining photograph of 2011 was taken earlier this year, somewhere in or near Tahrir Square.  I disagree.

For me it is this image .

It represents the normally stoic Greeks shouting “Enough!” and trailblazing in a way which points to the inevitable and  over-postponed conclusion to the fast-failing Euro adventure.

Eventually, while the politicians and bankers play their increasingly convoluted monetary games,  the people WILL have their say.

Happy Christmas.

The Merkozy Love-in.

This week sees yet another meeting of Eurozone leaders. On previous form, I would bet that the only outcome will be a series of half-measures and promises which will be primarily designed to reassure fund managers, investors and to placate the banks. The fate of the Euro will yet again, be postponed as millions of Europeans continue to stand in the fast-growing unemployment queue.

Theoretically, Euroleaders (or should I say Frau Merkel) will be deciding not-only the fate of the Euro but the fate of every economy in what used to be known as the “advanced industrial world”.

Austerity has become the new growth with the INEVITABLE result of ever-lengthening unemployment queues and increasingly turbulent currents of social unrest.

Received wisdom is that deficit reduction is more important than job creation through fiscal stimulus. The downside is that for countries which have already launched themselves on a deficit reduction programme, it is beginning to look as if there can never be quite enough deficit reduction because of  rapidly decreasing tax revenue.

There will always be  that no-man’s land between deficit reduction and fiscal stimulus. Not a single economy has arrived there yet.

However, what is even more worrying, is that there isn’t a single politician, banker or economist who can even begin to  put a time frame on the process. Currently, it looks like an open-ended arrangement.

One thing that the average punter does NOT realise that there are initiatives and money movements  within the banking system which he knows nothing about – unless of course, it is such a big move that the banking authorities decide that would be  prudent to go public. Last week’s sudden announcement by central banks that they would “assist” European banks which needed US dollars was a case in point.

The coordinated move was so huge that the most likely cause was that one or two major European banks must have made THE phone-call to their  own Treasury to say that they were about to go under. The U.S. Federal Reserve Bank, the European Central Bank, the Bank of England, the Bank of Japan, the Swiss National Bank, and the Bank of Canada lowered their rates for borrowing dollars from each other by a 0.5 percentage point to “ease strains in financial markets.” (a meaningless phrase).

They went on: “At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise,”

Even  China  took steps to stimulate domestic demand by lowering its central bank interest rate.

Make no mistake – there was a crisis.

Every action so far by central banks and politicians has been a temporary fix. They are still trying to figure out the cure – if indeed there is one.

Last week, the central banks merely threw a rope for Eurobanks to cling onto  – but that does NOT solve  – or even begin to solve the still-spreading sovereign debt crisis.

This week, communiques are being written, meetings are being conducted and financial horse-trading is taking place as under-qualified politicians  attempt to put together a package which, in one fell swoop should solve the global financial crisis.

The whole circus will culminate in a December 9th Brussels summit ( another one) during which the 17 Eurozone leaders will be joined by the 10 non-Euro-participants and a series of agreements will be promulgated.

The ONLY agreement that they really need to pull out of the hat is  a “contract” to coordinate Eurozone fiscal policies.

Merkel’s dream of a Federal Europe will have taken its first faltering step.

So far , the Markets have tended to play ball with the floundering politicians but even those eternal optimists are fast running out of patience.

The latest rally has no legs because the current assumption is that somehow (for the first time ever), Eurozone leaders will provide a solution.

So, what is the likelihood of a TARP (Toxic Asset Relief Programme)?  What is the likelihood of a coordinated programme to recapitalise ALL the banks? What is the likelihood of Germany changing its mind on ever-increasing austerity programmes which are driving weak Euro economies to Depression (these days, mere Stagnation seems like an attractive alternative – an aspiration!)

So far, the Eurointransigence has been destructive: Unemployment, demotivated and desperate countries, amplifying hardship, collapsed governments.

The evidence so far suggests that those believing that this week will provide the Miracle in Brussels will be disappointed.

The weeks events began with today’s meeting between Chancellor Merkel and Nicolas Sarkozy – The Merkozy Meeting. The output was predictable with an early hint of further postponement.

German Chancellor Angela Merkel has called for “structural changes” after the keenly-watched meeting with French President Nicolas Sarkozy in Paris today. The two leaders said that they had agreed on a “comprehensive” agreement to be proposed on Friday at the summit. (What he meant was is that he had agreed with everything that Frau Merkel had proposed)

“This package shows that we are absolutely determined to keep the euro as a stable currency and as an important contributor to European stability,” said Merkel.

Among the proposals were that the European Court of Justice will have a say when countries break the legally established limit for public debt of 3% of GDP. Also, both leaders rejected the need for the joint issuance of European debt by member states, adding that socialising debt burdens is no solution. (Another Merkel victory).

Sarkozy has added that he expects all of the necessary negotiations to be finalised by March (no surprises there!) and that changes to the Treaty will be ratified in France, following the next national elections in March.

The pair  indicated that it is yet to be seen if the changes will be adopted by all 27 European nations or simply the  17 Euro states.

Lastly, they also made it clear that it is their intention to continue working with the International Monetary Fund and to bring forward the implementation of the permanent rescue fund by a full year, to 2012.

Here in the United Kingdom, where politicians have recently voiced concerns on how EU treaty changes could affect Britain, Downing Street has said that there will be no referendum on the EU treaty changes.

A spokesman for Prime Minister  said, “What is being talked about is a new set of rules for the Eurozone and how those countries that are members of the euro organise themselves on fiscal policy. There is no proposal on the table for a transfer of powers from the UK to Brussels. That is not what is being talked about…No-one has put that on the table and I don’t think it is likely to be on the table.”

At the end of the first day, it seems that we are about to be served-up yet another portion of bland European procrastination  – but what an object lesson in Blatant Brinkmanship from the Germans!

Chancellor’s Autumn Statement – just the facts

“We will do whatever it takes to protect Britain from this debt storm” in Europe.

Office for Budget Responsibility does not predict a recession in UK.

OBR forecast: GDP growth estimated at 0.9% in 2011. 0.7% in 2012 (down from 2.5%).

Borrowing falling but not as fast as forecast.

OBR sees additional borrowing of £5bn in 2011/12, £20bn in 2012/13 and £30bn in 2013/14.

Public sector pay awards set at average of 1% increase after the pay freeze ends next Spring.

NHS and schools budgets protected.

Deal on public sector pensions is “fair”.

Basic state pension to rise by £5.30 next April. Pension credit also uprated by £5.30.

In 2026 – state pension age will rise to 67.

Benefits uprated by 5.2% next April.

Credit Easing to help small business – ceiling of £40bn. National Loan Guarantee Scheme to use country’s record low interest rate to ease interest rates charged to firms who borrow from banks.

Country’s low rate to benefit families too through mortgage indemnities. Will reinvigorate “right to buy” to also help construction sector.

Bank Levy rate to rise from January 1st.

National Infrastructure Plan to get Britain building to improve roads, bridges, rail, schools etc. It will be paid for through”British savings for British jobs.” £20bn to come from pension schemes.

£5bn of additional Government spending on infrastructure plan – 90% of homes will have access tosuper-fast broadband.

Regional Growth Fund for England to get extra £1bn.

£0.5bn for science projects.

Health & Safety red tape to be cut further for small firms.

Corporate tax rate to fall to 25%.

Business rates holiday extended until April 2013.

8.7% unemployment rate forecast for next year by OBR.

New Youth Contract to offer work experience and assistance getting into private sector to help ease youth unemployment.

Extra £1.2bn to schools with 100 extra ‘free schools’. Maths Free schools to help UK’s science industry.

Free nursery places for 40% of the country’s 2-year olds (260,000)

Planned 3p per litre fuel duty increase in January is cancelled. August’s planned increase to be reduced.

Rail fares capped at 1% higher than CPI inflation

Italian Euro-light?

European Union Economic and Monetary Affairs Commissioner Olli Rehn has said that Belgium, Cyprus, Hungary, Malta and Poland are not doing enough to cut their deficits. How DO these people know?

The good news is that Italy has managed to shift 5 billion euros-worth  of one-year bonds at a rate of 6.087%. That means that in 12 months, the Italian government will have to repay those bonds at over 5.3 billion. By then, it will have to borrow more in order to redeem the 5.3 billion etc etc.

This bond issue  is, of course is a mere drop in the ocean if set against the 1.4 TRILLION which they will probably need for a bailout.

Within a few weeks, Italy’s president Giorgio Napolitano will attempt to form a new government. With Italy’s past electoral history, the creation of a new administration will make the Greek efforts look like a W.I. meeting.

October 2011 Eurozone Output

This is what they said:

1. Over the last three years, we have taken unprecedented steps to combat the effects of the world-wide financial crisis, both in the European Union as such and within the euro area. The strategy we have put into place encompasses determined efforts to ensure fiscal consolidation, support to countries in difficulty, and a strengthening of euro area governance leading to deeper economic integration among us and an ambitious agenda for growth. At our 21 July meeting we took a set of major decisions. The ratification by all 17 Member States of the euro area of the measures related to the EFSF significantly strengthens our capacity to react to the crisis. Agreement by all three institutions on a strong legislative package within the EU structures on better economic governance represents another major achievement. The introduction of the European Semester has fundamentally changed the way our fiscal and economic policies are co-ordinated at European level, with co- ordination at EU level now taking place before national decisions are taken. The euro continues to rest on solid fundamentals.

2. Further action is needed to restore confidence. That is why today we agree on a comprehensive set of additional measures reflecting our strong determination to do whatever is required to overcome the present difficulties and take the necessary steps for the completion of our economic and monetary union. We fully support the ECB in its action to maintain price stability in the euro area. Sustainable public finances and structural reforms for growth

3. The European Union must improve its growth and employment outlook, as outlined in the growth agenda agreed by the European Council on 23 October 2011. We reiterate our full commitment to implement the country specific recommendations made under the first European Semester and on focusing public spending on growth areas.

4. All Member States of the euro area are fully determined to continue their policy of fiscal consolidation and structural reforms. A particular effort will be required of those Member States who are experiencing tensions in sovereign debt markets.

5. We welcome the important steps taken by Spain to reduce its budget deficit, restructure its banking sector and reform product and labour markets, as well as the adoption of a constitutional balanced budget amendment. Strictly implementing budgetary adjustment as planned is key, including at regional level, to fulfil the commitments of the stability and growth Pact and the strengthening of the fiscal framework by developing lower level legislation to make the constitutional amendment fully operative. Further action is needed to increase growth so as to reduce the unacceptable high level of unemployment. Actions should include enhancing labour market changes to increase flexibility at firm level and employability of the labour force and other reforms to improve competitiveness, specially extending the reforms in the service sector.

6. We welcome Italy’s plans for growth enhancing structural reforms and the fiscal consolidation strategy, as set out in the letter sent to the Presidents of the European Council and the Commission and call on Italy to present as a matter of urgency an ambitious timetable for these reforms. We commend Italy’s commitment to achieve a balanced budget by 2013 and a structural budget surplus in 2014, bringing about a reduction in gross government debt to 113% of GDP in 2014, as well as the foreseen introduction of a balanced budget rule in the constitution by mid 2012. Italy will now implement the proposed structural reforms to increase competitiveness by cutting red tape, abolishing minimum tariffs in professional services and further liberalising local public services and utilities. We note Italy’s commitment to reform labour legislation and in particular the dismissal rules and procedures and to review the currently fragmented unemployment benefit system by the end of 2011, taking into account the budgetary constraints. We take note of the plan to increase the retirement age to 67 years by 2026 and recommend the definition by the end of the year of the process to achieve this objective.

We support Italy’s intention to review structural funds programs by reprioritising projects and focussing on education, employment, digital agenda and railways/networks with the aim of improving the conditions to enhance growth and tackle the regional divide. We invite the Commission to provide a detailed assessment of the measures and to monitor their implementation, and the Italian authorities to provide in a timely way all the information necessary for such an assessment. Countries under adjustment programme

7. We reiterate our determination to continue providing support to all countries under programmes until they have regained market access, provided they fully implement those programmes.

8. Concerning the programme countries, we are pleased with the progress made by Ireland in the full implementation of its adjustment programme which is delivering positive results.Portugal is also making good progress with its programme and is determined to continue undertaking measures to underpin fiscal sustainability and improve competitiveness. We invite both countries to keep up their efforts, to stick to the agreed targets and stand ready to take any additional measure required to reach those targets.

9. We welcome the decision by the Eurogroup on the disbursement of the 6th tranche of the EUIMF support programme for Greece. We look forward to the conclusion of a sustainable and credible new EU-IMF multiannual programme by the end of the year.

10. The mechanisms for the monitoring of implementation of the Greek programme must be strengthened, as requested by the Greek government. The ownership of the programme is Greek and its implementation is the responsibility of the Greek authorities. In the context of the new programme, the Commission, in cooperation with the other Troika partners, will establish for the duration of the programme a monitoring capacity on the ground, including with the involvement of national experts, to work in close and continuous cooperation with the Greek government and the Troika to advise and offer assistance in order to ensure the timely and full implementation of the reforms. It will assist the Troika in assessing the conformity of measures which will be taken by the Greek government within the commitments of the programme. This new role will be laid down in the Memorandum of Understanding. To facilitate the efficient use of the sizeable official loans for the recapitalization of Greek banks, the governance of the Hellenic Financial Stability Fund (HFSF) will be strengthened in agreement with the Greek government and the Troika.

11. We fully support the Task Force on technical assistance set up by the Commission.

12. The Private Sector Involvement (PSI) has a vital role in establishing the sustainability of the Greek debt. Therefore we welcome the current discussion between Greece and its private investors to find a solution for a deeper PSI. Together with an ambitious reform programme for the Greek economy, the PSI should secure the decline of the Greek debt to GDP ratio with an objective of reaching 120% by 2020. To this end we invite Greece, private investors and all parties concerned to develop a voluntary bond exchange with a nominal discount of 50% on notional Greek debt held by private investors. The Euro zone Member States would contribute to the PSI package up to 30 bn euro. On that basis, the official sector stands ready to provide additional programme financing of up to 100 bn euro until 2014, including the required recapitalisation of Greek banks. The new programme should be agreed by the end of 2011 and the exchange of bonds should be implemented at the beginning of 2012. We call on the IMF to continue to contribute to the financing of the new Greek programme.

13. Greece commits future cash flows from project Helios or other privatisation revenue in excess of those already included in the adjustment programme to further reduce indebtedness of the Hellenic Republic by up to 15 billion euros with the aim of restoring the lending capacity of the EFSF.

14. Credit enhancement will be provided to underpin the quality of collateral so as to allow its continued use for access to Eurosystem liquidity operations by Greek banks.

15. As far as our general approach to private sector involvement in the euro area is concerned, we reiterate our decision taken on 21 July 2011 that Greece requires an exceptional and unique solution.

16. All other euro area Member States solemnly reaffirm their inflexible determination to honour fully their own individual sovereign signature and all their commitments to sustainable fiscal conditions and structural reforms. The euro area Heads of State or Government fully support this determination as the credibility of all their sovereign signatures is a decisive element for ensuring financial stability in the euro area as a whole. Stabilisation mechanisms

17. The ratification process of the revised EFSF has now been completed in all euro area Member States and the Eurogroup has agreed on the implementing guidelines on primary and secondary market interventions, precautionary arrangements and bank recapitalisation. The decisions we took concerning the EFSF on 21 July are thus fully operational. All tools available will be used in an effective way to ensure financial stability in the euro area. As stated in the implementing guidelines, strict conditionality will apply in case of new (precautionary) programmes in line with IMF practices. The Commission will carry out enhanced surveillance of the Member States concerned and report regularly to the Eurogroup.

18. We agree that the capacity of the extended EFSF shall be used with a view to maximizing the available resources in the following framework: • the objective is to support market access for euro area Member States faced with market pressures and to ensure the proper functioning of the euro area sovereign debt market, while fully preserving the high credit standing of the EFSF. These measures are needed to ensure financial stability and provide sufficient ringfencing to fight contagion; • this will be done without extending the guarantees underpinning the facility and within the rules of the Treaty and the terms and conditions of the current framework agreement, operating in the context of the agreed instruments, and entailing appropriate conditionality and surveillance.

19. We agree on two basic options to leverage the resources of the EFSF: • providing credit enhancement to new debt issued by Member States, thus reducing the funding cost. Purchasing this risk insurance would be offered to private investors as an option when buying bonds in the primary market; • maximising the funding arrangements of the EFSF with a combination of resources from private and public financial institutions and investors, which can be arranged through Special Purpose Vehicles. This will enlarge the amount of resources available to extend loans, for bank recapitalization and for buying bonds in the primary and secondary markets.

20. The EFSF will have the flexibility to use these two options simultaneously, deploying them depending on the specific objective pursued and on market circumstances. The leverage effect of each option will vary, depending on their specific features and market conditions, but could be up to four or five.

21. We call on the Eurogroup to finalise the terms and conditions for the implementation of these modalities in November, in the form of guidelines and in line with the draft terms and conditions prepared by the EFSF.

22. In addition, further enhancement of the EFSF resources can be achieved by cooperating even more closely with the IMF. The Eurogroup, the Commission and the EFSF will work on all possible options. Banking system

23. We welcome the agreement reached today by the members of the European Council on bank recapitalisation and funding (see Annex 2). Economic and fiscal coordination and surveillance

24. The legislative package on economic governance strengthens economic and fiscal policy coordination and surveillance. After it enters into force in January 2012 it will be strictly implemented as part of the European Semester. We call for rigorous surveillance by the Commission and the Council, including through peer pressure, and the active use of the existing and new instruments available. We also recall our commitments made in the framework of the Euro Plus Pact.

25. Being part of a monetary union has far reaching implications and implies a much closer coordination and surveillance to ensure stability and sustainability of the whole area. The current crisis shows the need to address this much more effectively. Therefore, while strengthening our crisis tools within the euro area, we will make further progress in integrating economic and fiscal policies by reinforcing coordination, surveillance and discipline. We will develop the necessary policies to support the functioning of the single currency area.

26. More specifically, building on the legislative package just adopted, the European Semester and the Euro Plus Pact, we commit to implement the following additional measures at the national level:

a. adoption by each euro area Member State of rules on balanced budget in structural terms translating the Stability and Growth Pact into national legislation, preferably at constitutional level or equivalent, by the end of 2012;

b. reinforcement of national fiscal frameworks beyond the Directive on requirements for budgetary frameworks of the Member States. In particular, national budgets should be based on independent growth forecasts;

c. invitation to national parliaments to take into account recommendations adopted at the EU level on the conduct of economic and budgetary policies;

d. consultation of the Commission and other euro area Member States before the adoption of any major fiscal or economic policy reform plans with potential spillover effects, so as to give the possibility for an assessment of possible impact for the euro area as a whole;

e. commitment to stick to the recommendations of the Commission and the relevant Commissioner regarding the implementation of the Stability and Growth Pact.

27. We also agree that closer monitoring and additional enforcement are warranted along the following lines:

a. for euro area Member States in excessive deficit procedure, the Commission and the Council will be enabled to examine national draft budgets and adopt an opinion on them before their adoption by the relevant national parliaments. In addition, the Commission will monitor budget execution and, if necessary, suggest amendments in the course of the year;

b. in the case of slippages of an adjustment programme closer monitoring and coordination of programme implementation will take place.

28. We look forward to the Commission’s forthcoming proposal on closer monitoring to the Council and the European Parliament under Article 136 of the TFEU. In this context, we welcome the intention of the Commission to strengthen, in the Commission, the role of the competent Commissioner for closer monitoring and additional enforcement.

29. We will further strengthen the economic pillar of the Economic and Monetary Union and better coordinate macro- and micro-economic policies. Building on the Euro Plus Pact, we will improve competitiveness, thereby achieving further convergence of policies to promote growth and employment. Pragmatic coordination of tax policies in the euro area is a necessary element of stronger economic policy coordination to support fiscal consolidation and economic growth. Legislative work on the Commission proposals for a Common Consolidated Corporate Tax Base and for a Financial Transaction Tax is ongoing. Governance structure of the euro area

30. To deal more effectively with the challenges at hand and ensure closer integration, the governance structure for the euro area will be strengthened, while preserving the integrity of the European Union as a whole.

31. We will thus meet regularly – at least twice a year- at our level, in Euro Summits, to provide strategic orientations on the economic and fiscal policies in the euro area. This will allow to better take into account the euro area dimension in our domestic policies.

32. The Eurogroup will, together with the Commission and the ECB, remain at the core of the daily management of the euro area. It will play a central role in the implementation by the euro area Member States of the European Semester. It will rely on a stronger preparatory structure.

33. More detailed arrangements are presented in Annex 1 to this paper. Further integration

34. The euro is at the core of our European project. We will strengthen the economic union to make it commensurate with the monetary union.

35. We ask the President of the European Council, in close collaboration with the President of the Commission and the President of the Eurogroup, to identify possible steps to reach this end. The focus will be on further strengthening economic convergence within the euro area, improving fiscal discipline and deepening economic union, including exploring the possibility of limited Treaty changes. An interim report will be presented in December 2011 so as to agree on first orientations. It will include a roadmap on how to proceed in full respect of the prerogatives of the institutions. A report on how to implement the agreed measures will be finalised by March 2012.

Annex 1

Ten measures to improve the governance of the euro area There is a need to strengthen economic policy coordination and surveillance within the euro area, to improve the effectiveness of decision making and to ensure more consistent communication. To this end, the following ten measures will be taken, while fully respecting the integrity of the EU as a whole:

1. There will be regular Euro Summit meetings bringing together the Heads of State or government (HoSG) of the euro area and the President of the Commission. These meetings will take place at least twice a year, at key moments of the annual economic governance circle; they will if possible take place after European Council meetings. Additional meetings can be called by the President of the Euro Summit if necessary. Euro Summits will define strategic orientations for the conduct of economic policies and for improved competitiveness and increased convergence in the euro area. The President of the Euro Summit will ensure the preparation of the Euro Summit, in close cooperation with the President of the Commission.

2. The President of the Euro Summit will be designated by the HoSG of the euro area at the same time the European Council elects its President and for the same term of office. Pending the next such election, the current President of the European Council will chair the Euro Summit meetings.

3. The President of the Euro Summit will keep the non euro area Member States closely informed of the preparation and outcome of the Summits. The President will also inform the European Parliament of the outcome of the Euro Summits.

4. As is presently the case, the Eurogroup will ensure ever closer coordination of the economic policies and promoting financial stability. Whilst respecting the powers of the EU institutions in that respect, it promotes strengthened surveillance of Member States’ economic and fiscal policies as far as the euro area is concerned. It will also prepare the Euro Summit meetings and ensure their follow up.

5. The President of the Eurogroup is elected in line with Protocol n°14 annexed to the Treaties. A decision on whether he/she should be elected among Members of the Eurogroup or be a full-time President based in Brussels will be taken at the time of the expiry of the mandate of the current incumbent. The President of the Euro Summit will be consulted on the Eurogroup work plan and may invite the President of the Eurogroup to convene a meeting of the Eurogroup, notably to prepare Euro Summits or to follow up on its orientations. Clear lines of responsibility and reporting between the Euro Summit, the Eurogroup and the preparatory bodies will be established.

6. The President of the Euro Summit, the President of the Commission and the President of the Eurogroup will meet regularly, at least once a month. The President of the ECB may be invited to participate. The Presidents of the supervisory agencies and the EFSF CEO / ESM Managing Director may be invited on an ad hoc basis.

7. Work at the preparatory level will continue to be carried out by the Eurogroup Working Group (EWG), drawing on expertise provided by the Commission. The EWG also prepares Eurogroup meetings. It should benefit from a more permanent sub-group consisting of alternates/officials representative of the Finance Ministers, meeting more frequently, working under the authority of the President of the EWG.

8. The EWG will be chaired by a full-time Brussels-based President. In principle, he/she will be elected at the same time as the chair of the Economic and Financial Committee.

9. The existing administrative structures (i.e. the Council General Secretariat and the EFC Secretariat) will be strengthened and co-operate in a well coordinated way to provide adequate support to the Euro Summit President and the President of the Eurogroup, under the guidance of the President of the EFC/EWG. External expertise will be drawn upon as appropriate, on an ad hoc basis.

10. Clear rules and mechanisms will be set up to improve communication and ensure more consistent messages. The President of the Euro Summit and the President of the Eurogroup shall have a special responsibility in this respect. The President of the Euro Summit together with the President of the Commission shall be responsible for communicating the decisions of the Euro Summit and the President of the Eurogroup together with the ECFIN Commissioner shall be responsible for communicating the decisions of the Eurogroup.

Annex 2

Consensus on banking package

1. Measures for restoring confidence in the banking sector (banking package) are urgently needed and are necessary in the context of strengthening prudential control of the EU banking sector. These measures should address: a. The need to ensure the medium-term funding of banks, in order to avoid a credit crunch and to safeguard the flow of credit to the real economy, and to coordinate measures to achieve this. b. The need to enhance the quality and quantity of capital of banks to withstand shocks and to demonstrate this enhancement in a reliable and harmonised way.

Term funding

2. Guarantees on bank liabilities would be required to provide more direct support for banks in accessing term funding (short- term funding being available at the ECB and relevant national central banks), where appropriate. This is also an essential part of the strategy to limit deleveraging actions.

3. A simple repetition of the 2008 experience with full national discretion in the setting-up of liquidity schemes may not provide a satisfactory solution under current market conditions. Therefore a truly coordinated approach at EU-level is needed regarding entry criteria, pricing and conditions. The Commission should urgently explore together with the EBA, EIB, ECB the options for achieving this objective and report to the EFC.

Capitalisation of banks

4. Capital target: There is broad agreement on requiring a significantly higher capital ratio of 9 % of the highest quality capital and after accounting for market valuation of sovereign debt exposures, both as of 30 September 2011, to create a temporary buffer, which is justified by the exceptional circumstances. This quantitative capital target will have to be attained by 30 June 2012, based on plans agreed with national supervisors and coordinated by EBA. This prudent valuation would not affect the relevant financial reporting rules. National supervisory authorities, under the auspices of the EBA, must ensure that banks’ plans to strengthen capital do not lead to excessive deleveraging, including maintaining the credit flow to the real economy and taking into account current exposure levels of the group including their subsidiaries in all Member States, cognisant of the need to avoid undue pressure on credit extension in host countries or on sovereign debt markets.

5. Financing of capital increase: Banks should first use private sources of capital, including through restructuring and conversion of debt to equity instruments. Banks should be subject to constraints regarding the distribution of dividends and bonus payments until the target has been attained. If necessary, national governments should provide support , and if this support is not available, recapitalisation should be funded via a loan from the EFSF in the case of Eurozone countries. State Aid

6. Any form of public support, whether at a national or EU-level, will be subject to the conditionality of the current special state aid crisis framework, which the Commission has indicated will be applied with the necessary proportionality in view of the systemic character of the crisis

S.M.A.R.T Barroso.

José Manuel Durão Barroso is a very able, bright  and distinguished politician. He is the lawyer-economist who is President of the European Commission.

His speech of 12 October 2011 to the European Council was going to tell the world what was going to be done about an issue which for the past two years, even during Middle Eastern revolutions, earthquakes and hurricanes , has consistently been one of the TOP THREE news items:   The European Economic Crisis.

During that time, politicians, economists and bankers have adopted a strange general, non-specific tone, laced with metaphor and euphemism and we have all become seduced by this new trick of being told nothing, yet imagining that we have been told everything.

Last week, I analysed Bank of England Governor Mervyn King’s latest statement and found that true to form, it was flooded with generalisations and platitudes with a sprinkling of occasional metaphor.

Mr Fact has become a stranger and fear appears to have driven away the the art of realistic economic ambition and goal-setting.

Most of us have come across the goal-setting model S.M.A.R.T.

A goal has to be structured as follows. It has to be  SPECIFIC, MEASURABLE, AGREED, REALISTIC and TIME-BASED.

So, if a politician says that “something will be done as soon as possible”, it fails on all counts. However, if a politician says (and the figures do not matter!):

” It has been agreed with all members of the Eurozone as well as the IMF and the ECU that the European Central Bank will hand-over $250 billion to the Greek Government on November 1st 2011 with an additional $50 billion on March 31st 2012″, then we have a definite  statement of intent – a goal.

If a Chancellor said “The Austerity programme is NOT an open-ended precaution. On January 1st 2013, the VAT rate will be reduced to a zero rate until the end of the First Quarter 2014 and every viable  SME with a turnover of less than £100,000 will be given a grant of £20,000”  would also be a goal.

“Boosting Capital”,  “Rebuilding Balance Sheets”, “Banks have to lend more” etc. are further examples of empty non-goal-based rhetoric.

The text of Mr Barroso’s speech is reproduced below. I have highlighted certain phrases.

You decide.


Brussels, 12 October 2011

Mr. President,

Presidency in office of the Council,

Honourable Members,

The European Council of 23 October will be held against a backdrop of urgency over the threat of systemic crisis now unfolding. There are many issues on the European agenda. The Minister of the Polish Presidency mentioned most of them. I will not of course go into detail of the many important challenges, from the conference in Durban to very important external items. I will today focus on the urgent response needed to the financial and economic crisis.

To break the vicious cycle of uncertainty over sovereign debt sustainability and over growth prospects, we need comprehensive solutions now.

In my State of the Union address to this Parliament two weeks ago I promised responses. Today we are delivering. I can announce that the Commission has just adopted a roadmap to stability and growth. And we have set out concrete terms and timelines to implement it. You are the first to whom I communicate the main elements of this roadmap. I am sending to the President of the European Parliament the document that we have first adopted some time ago.

Honourable Members,

Over the last three years, the European Union has come out with specific responses to different aspects of the crisis. Now is the time to bring them all together. To once and for all meet the depth of the crisis with a full comprehensive and credible response.

The elements in this roadmap are interdependent. They must be implemented simultaneously. They must be implemented immediately. This is the only way that the European Union can convincingly:

  • Give a decisive clear response to the problems of Greece;
  • Enhance the euro area’s backstops against the crisis;
  • Make a coordinated effort to strengthen the banking system including through recapitalisation;
  • Frontload stability and growth-enhancing policies and;
  • Build a more robust and integrated economic governance.These are the five points of the roadmap I put before this House today and that I will take to the European Council on October 23rd as a coherent and comprehensive plan for Europe that embodies a Community approach.

Here is how.

First, on Greece, we need a decisive solution. Doubts and uncertainties over Greece’s future jeopardise stability in the entire euro area and beyond. The time has come to definitively remove these doubts. This means three immediate and sustained actions:

  • paying the sixth tranche of the loans to Greece. The result of the Troika mission has sent a positive signal in this respect;
  • deciding a sustainable solution for Greece within the euro area. This should be through an effective second adjustment programme, based on adequate financing through public and private sector involvement, backed up with robust implementation and monitoring mechanisms;
  • We also understand that Greece must fully carry out its programme in a timely manner, with continued support from the Commission’s Task Force and maximised disbursement of structural funds focused on growth.

But there is a more general problem in the euro area.

Despite the assurances given by Heads of State or Government on 21 July to support countries under programmes, and despite their assurances that private sector involvement would be strictly limited to Greece, contagion risks have not been contained. To decisively put a stop to this threat that is hampering all our efforts, we must strengthen the euro’s firewalls. We must have credible, stronger instruments.

At the European Council I will strongly urge Heads of State and Government of the euro area to complete and complement the measures they agreed on 21st July.

This is crucial to give a much-needed injection of confidence to market participants.

It means making operational the agreements taken to increase the flexibility and effectiveness of the EFSF and the future ESM, to allow for precautionary programmes based on conditionality, on which the Commission and ECB should be consulted in advance. Stronger monitoring and surveillance could be included as part of the Stability and Growth Pact.

But, the EFSF must be more than just a firewall.

It should have real firepower. We should maximise its capacity.

And, to further cement the expression of unity and responsibility inherent in these crisis resolution mechanisms, we must accelerate the adoption and entry into force of the permanent ESM – preferably to mid-2012.

We must trust that the European Central Bank will continue to provide the background of financial stability necessary for all this to be done.

The strengthened and more flexible EFSF is in the interest of all euro countries, including the Slovak people. Our common currency plays a crucial role in investment decisions, in growth, in jobs, all over Europe. I commend those in Slovakia who have risen above partisan attitudes and voted in favour of what is important for all Slovak citizens, for the euro area and for the European Union as a whole. And I call upon all parties in the Slovak Parliament to rise above the positioning of short term politics, and seize the next opportunity to ensure a swift adoption of the new agreement.

The third element of the roadmap is the need for a coordinated approach to strengthen the banking system. Let us be clear – over the last three years huge efforts have been deployed to this end. Billions of euros in aid and guarantees. An overhaul of banking supervision. Boosting capital requirements and protecting citizens’ deposits.

However, all this has not yet been sufficient to lift the weight of uncertainty hanging over the banking system, or to halt the volatility and pressure on the European banks. While these doubts persist and spread, sufficient confidence cannot be restored to allow liquidity to flow again and to oil the growth that our economies so badly need. For confidence to return we need to fix the sovereign debt problem, which can only be done through a coherent package.

We must therefore urgently strengthen the banks, because in fact those two issues – the sovereign contagion and the banks are now, whether we like it or not linked. This must be coordinated through the Member States, the European Banking Authority, the ECB and the Commission. The strategy should comprise 5 key steps:

  • It should include all potentially systemic banks identified by the European Banking Authority across all Member States;
  • It should take account of all sovereign debt exposure in full transparency;
  • It should involve a temporarily higher capital ratio after accounting for exposure;
  • Banks that do not have the required capital should present and then implement plans to have it in place as swiftly as possible. And until they have done so, they should be prevented from paying out dividends and bonuses by the national supervisors.
  • Banks should use private sources of capital first. If necessary the national government should provide support as a next step, as a last resort, drawing on a loan granted from the EFSF. Any public support should be compatible with the state aid rules. The Commission intends to extend the existing state aid framework for bank support beyond the end of 2011.

Naturally, details on capital ratios and evaluation methods should be proposed by the EBA with national supervisors, who are best placed to judge on this.

At the same time, the ongoing work on a new financial regulation system should be completed as swiftly as possible. To that end, the Commission will present its remaining proposals to implement the full G20 commitments by the end of this year. We also urge rapid adoption of the Financial Transaction Tax I presented to you two weeks ago.

The fourth element is to frontload policies that consolidate stability and boost growth.

We all know that most Member States do not have much room for fiscal stimulus. Those who have should use it. However, all Member States do have at their disposal means to implement structural reforms, to focus spending on priority areas, and to remove obstacles to growth.

As I said to you in my State of the Union address, growth is within our reach if we can break down the barriers that stop money, services and people flowing through our Union as they should.

This means first – getting more out of what has already been agreed at the – European level.

I am talking about implementing for instance the services directive, delivering on the digital agenda. I’m talking about maximising our trade agreements.

These are measures we can take today, that don’t require significant additional investments or budgetary effort, but that can have immediate and significant benefit for our companies, for our citizens, for our economy.

This means second – accelerating adoption of what is on the table. There are many proposals on the table that we can fast-track for adoption. I am talking about unitary patent protection. I am talking about the energy savings directive. I am talking about concluding ongoing trade agreements.

And it means third – fast-tracking the most urgent growth-boosting proposals. I am talking about the Single Market Act, about forthcoming proposals to facilitate access to venture capital because today there is a lack of venture capital in Europe and this is especially felt by SME’s. I am talking about the Young Opportunities initiative to increase youth employment.

And where agreement on fast-tracking proves difficult, we should be able to use enhanced cooperation so that those who want to move forward are not held back. Frankly dear members of the Parliament it is time to say that the speed of the European Union should not be the speed always of its slowest member. We need sometimes to use reinforced cooperation.

All this should be done in conjunction with targeted investment at European Union level, such as through the Europe 2020 Agenda where we propose also our Project Bond Initiative, the Commission will propose it next week, and will maximise the resources of the European Investment Bank so that it can lend to the real economy.

So reforms, implementation of everything we have agreed and also try to fund some of these efforts through new sources of investment using the appropriate instruments we have and some we can create like the Project Bonds.

The fifth and final element of the Commission’s proposed roadmap to stability and growth is the pursuit of sound economic policies by the Member States, especially of the euro area, reinforced by stronger Community governance.

We now have the six pack– and I thank you for your support in getting the ambitious proposals approved. We have the European Semester and all that it entails in strengthening governance. But we must go further to match the ambitions of our monetary policy with those of our economic policies. As we have said we have to complement the monetary union with a real economic union. The future of the single currency also depends upon it.

In its roadmap, the Commission is proposing a much stronger euro-area dimension in planning, implementing and assessing national policies. This dimension is backed up by strict constraints enforceable at the Euro-area level and is based on an enhancement of the Community approach, which will reinforce the role of the European Parliament in economic governance. We will further reinforce the role of the Commissioner for economic and monetary affairs in full respect of the Treaty.

There are other actions we can take very quickly, without change in the Treaty:

  • We must improve working methods and crisis management between the European Commission, the European Council and the Eurogroup. Proposals to this end will be made soon, in line with the agreements of 21 July, by the President of the Council, Commission President and President of the Eurogroup and the aim is to have a more streamlined process between the Euro area summit, the Eurogroup and the Euro area working group.
  • Second, we should streamline and reinforce the instruments we have. Not only by rapidly implementing the six-pack, but also by strengthening the European Semester by intensifying surveillance and integrating the Euro Plus Pact into the Semester – hence reinforcing the Community method in the Union.
  • And we must also go further than the measures set out in the six-pack, by setting out provisions for strengthening the economic and budgetary surveillance of Euro area Member States requesting or receiving financial assistance from the EFSF, ESM, or other institutions. The Commission will make a proposal to the Council and the European Parliament under Article 136.
  • We must monitor the national budgetary policies of Member States in excessive deficit procedure or countries under programmes through a Commission-Council procedure which will enable the European Union to intervene. For example, in serious cases it could request a second reading of draft budgets, to suggest amendments in the course of the year and to monitor budgetary execution. The Commission will make a proposal to the Council and the European Parliament under Article 136 setting out the graduated steps and conditions that should apply in such cases. You see, honourable members, that we are really speaking seriously when we mention we urge for more discipline, more integration. It means more Europe that, I think, should be the goal of all of us.
  • All this is in addition to the proposals on a more unified external representation for the Euro area and options for ‘stability bonds’ the Commission will bring forward by the end of this year.

One final point on governance – In the State of the Union address I said the Commission would present a single, coherent framework for better economic governance based on the Community method. We are developing that right now.

The proposal will ensure the compatibility between the euro area and the Union as a whole. It will be done in a way that aims to integrate the Euro Plus Pact because coordination and integration must be carried out on a single, Community level. How can we speak about coordination and integration in a disintegrated manner. It is obvious that we need a Community approach to do that. Yes, we need stronger governance. Yes, we need the Euro area heads of government to meet more frequently. But no, we do not need to create yet more institutions or yet more titles, when we already have the structures in place to do the job.

It is essential that we do not create a division between the 17 members of the euro area and the 27 members of the European Union – most of whom wish to join the euro. Such a division could deeply harm the European Union as a whole, put in question the Single Market, be an invitation for renationalisation of Community policies. That is why we need to have stronger governance for the countries that are in the euro area, but have it in full compatibility with the rules and the acquis for the European Union as a whole. This is why it is essential to keep the Community institutions – this European Parliament, the European Commission – at the core of the process of coordination and integration.

The role of these institutions is also to guarantee this link, to guarantee that no Member State is jeopardised, to guarantee that Europe remains strong and united.

Honourable Members,

The solutions to Europe’s crisis, I believe, are known by most of us. But to grasp them requires courage and political will. To do so is to fully acknowledge our interdependence and to take a bold leap towards further integration. The problem of Europe is not too much integration. It is in fact a lack of a European approach. Such changes to the nature of our Union may need to be enshrined in changes to the Treaty. Changes that must keep the Community method at their core.

But one thing is for sure – as the crisis narrows in on us, I see no other option but to act now, so the fact that we are considering for the future more ambitious changes should not be an excuse not to adopt the decisions now and this is why we need to act together in a unified and coherent way.

This crisis is not partial. The response cannot be partial. Our responses cannot be piecemeal. That is why this roadmap is a single, comprehensive approach and all its elements must be implemented in parallel.

This is the message I intend to take to the European Council on 23rd October and for which I would like to have your support – the support for a united and stronger Union.

Thank you for your attention.

Eurobullshit!

I  pointed out a few days ago that it seemed as if there was an orchestrated effort by politicians and bankers to put-out weekly or bi-weekly “Statements of Intent” — purely in order to placate the Markets as well as to postpone the inevitable collapse of the Euro. That means NOT actually doing anything but promising to do something, sometime in the future. It’s the new “Weapon of Choice” for  politicians whose ideas have run out.

THIS week is shaping up as a very special example of this comparatively new phenomenon.

Today, the Markets have responded well to yet more wind and wee from a politician.  So whose turn was it THIS time?

None other than European Commission President himself –  Jose Manuel Barroso!

Let’s have a close look at what he said and maybe ascertain whether his statement actually contains any “doing” words.

He said that he will put forward moves to tackle the Eurozone crisis.  “Put forward”? “Moves”? What moves?

He will urge the Eurozone countries to issue joint bonds. “Urge”?  “Joint Bonds”? How will he “Urge”?

Unsurprisingly, Italian Finace Minister Giulio Tremonti supports Eurobonds.  Italy is vastly over-borrowed – to the extent that its attempt to borrow even more from China was given very short shrift by the Chinese – even though the Italians were offering security.

The fact that George Soros (no less) has backed the concept of Eurobonds was weaved into the equation. Ancient George’s ONLY motivation is to save Uncle Sam – not Greece or Italy.

The main player in the Eurofarce , Germany, is NOT even remotely interested in the Eurobond because, effectively, it with be the “Deutschebond”. German Charity.

Barosso wants a United States of Europe. Pure and  Simple.

He went on:

“I want to confirm that the Commission will soon present options for the introduction of Eurobonds.” Soon? How “soon”, Jose? “Options”? WTF?

Jose does NOT give up easily: “Some of these could be implemented within the terms of the current treaty, and others would require treaty changes.” “Treaty changes“, Jose?

That’s lots of meetings and could take years. That might just keep the markets interested!

He really declared his hand when he said that “the measure” on its own was not enough to solve the Eurozone debt crisis. (What “measure”, Jose? So far,we’ve only heard Eurobullshit)

He said Europe needed a “Federalist Moment” to rescue it. He argued that the solution to the crisis would have to involve the “Community method” which presumably, like the Rhythm Method involves someone being screwed. For instance: the Taxpayer and the Investor?!

Finally!!

( Isn’t it amazing how few NUMBERS there are in a statement about fiscal deficits?)

The Greek Entry.

Last week I predicted that it was Sarkozy’s turn to deliver yet another mealy-mouthed statement. Looks as if it’s this afternoon!

The question is CAN he save the French Banks whilst convincing an increasingly cynical public and sceptical markets that it’s all about saving Greece?

Money Market Funds have been selling French Bank Shares for about a year, during which time they have reduced their holding in French banks by about 50%.

After Sarkozy (or Angela Merkel) tells us that Greece is “doing the right things” or that ” it is making good progress“, it will be interesting to see what the markets make of it all.

The MOST likely outcome of today’s meeting between Sarkozy, Merkel and Greek Premier Papandreou is a statement indicating that Greece needs more  time.

The Euro and the Eurozone both need time – another commodity which is fast disappearing.

Today’s summit has an interesting sub-plot. Rating agency Moody’s has just downgraded France’s two major banks. Credit Agricole has been  busted down from Aa1 to Aa2 and Société Générale from Aa2 to Aa3.

Once again, this has come as both a surprise and relief to the experts because the downgrades were “not as bad as expected“. It seems that these days, NOTHING is as expected.

For politicians and most economists, these are indeed The Days of Mystery!

The seriousness of not-only the Greek but the entire Eurozone situation is exemplified by the fact that The US treasury secretary, Tim Geithner, will be attending Friday’s meeting of EU finance ministers.

Even the Americans can see that Greece is the No1 domino!

The hard fact is that Greece ought never have been allowed to join the Euro. It was a predictable accident waiting to happen.

As many politicians will attest – especially those who attended boarding school, the “Greek Entry” was always going to be painful.

Casino Economics

After three years, the scales have fallen from our eyes and finally, the light has flooded in.  It has been long time coming but suddenly – an Epiphany!

The politicians,  bankers, economists and even the Central Bank astrologers have absolutely NO IDEA as to how to deal with the gradually building waves of a massive economic crisis which is about to sweep the world. They’ve been gambling that  random fiscal and economic measures would somehow provide a solution and make everything well again!

Money has been printed and distributed, bonds have been issued, promises have been made, false political visions have been shared and yet  the self-amplifying problem continues to self-amplify.

Some of us finally realised  that the Eurozone had run out of ideas when the German authorities temporarily banned “naked short selling” of Eurobonds. The action had absolutely NO effect. However,  it did demonstrate that the politicians (who initially blamed the bankers for the pit of shit that they had help to create) were now turning a rheumy eye on everyone’s new bête noire – the SPECULATORS!

Bankers were greedy bastards with large bonuses but now it was the turn of the “casino-banking” speculators. Spit!

In any crisis, it is always a good idea to look for the root or initial cause. In the case of the Euro and the Eurozone it was an ill-conceived plan which , without tighter integration of fiscal policies between states was doomed to failure.

Make no mistake, the increasingly pathetic bleating of the French and Germans in respect of the looming Greek collapse and default has absolutely NOTHING to do with Greece.

It is all about their joint delusive attempt  to prevent the inevitable collapse of their banks –  which are holding billions in Greek IOUs. Nothing at all to do with Franco-German altruism.

As the French and Germans intertwine, hug each other and panic, their assault on the “speculators”  and the markets , although understandable is also ironic.  Why? Because eventually, the Western-European begging bowl will be  waved at the markets and the “speculators” –  in the vain hope that they will lend the impoverished Eurozone BILLIONS so that the sacred Euro cow can be reprieved.

Biting the hand that could feed you is never a good plan but currently, the markets are dealing with increasingly desperate politicians who have painted themselves into a Euro corner with absolutely NO way out.

Euro and Western economies in general are in debt – both in the public and private sectors. Several countries are bankrupt.

The only REAL solution is GROWTH which unfortunately is NOT achieved by insisting that the weakest economies attempt to restore growth through the unusual and meritless medium of  The Austerity Plan.

Austerity gains you a lot of points with the rating agencies, makes it easier for you to borrow more but in the long-term, it is NOT a sustainable strategy –  as we  in the West are ALL about to discover. Overborrowing  is what caused the problem in the first place.

The economic affliction is the mire of public and private sector debt and uncompetitiveness into which  the weaker economies of southern Europe have sunk.

The cure should be to create an atmosphere for economic growth.

Unfortunately, the generally accepted (unproved but imposed) speculation  is to force broken countries to try and balance their budgets and restore economic growth whilst slashing expenditure and demotivating taxpayers through increased unemployment, inflation and the resultant decimation of tax-revenues.

It will NOT be long before the inevitable wake-up call is heard!

Casino economics does not work.

Banks? It won’t be long!!

When the big boxes of  money arrived in Libya yesterday, I bet that there were several European states who were slavering and wishing that someone would send them a box too!

Especially Greece. Plus other states who don’t really want to admit it!

Greece has been back to the well  for another 109 billion Euro bailout.  That bailout could well be the last one because the well is now well and truly dry.

Even quiet and up-to-now compliant Finland is becoming a little bit fractious and will not contribute any more money to the bottomless pit that is Greece without a Charge on Greek assets. The Finns want collateral – and who can blame them?

The German electorate and many politicians are also beginning to voice their displeasure at having to hand over vast volumes of cash to the Greeks, no doubt followed by others.

Quite rightly, German Chancellor Angela Merkel insists she won’t be “blackmailed” into backing Eurobonds and the Germans have every reason to be worried! If they put their national balance sheet at risk just to support countries like Greece and Ireland,  Germany’s borrowing costs would be driven up by an unsustainable additional 50 billion euros!

The simmering Eurocrisis could explode at virtually any moment because the politicians’  “Let’s wait and see” tactics have failed.

That is what sent European bank stocks  lower today. They tanked!

The other day, Warren Buffett threw $5 billion at “near-death” Bank of America. In spite of Warren’s munificence, the bank has now been asked to sort out any potential problems. The bank’s fire sale continues with them now trying to offload their non-profitmaking Countrywide lending unit.

Does the Fed know something that we don’t?

America and Europe do NOT have a  liquidity crisis!  It is a MAJOR SOLVENCY problem.

Banks do not have enough capital to absorb losses on all the European sovereign debts that they are now loaded down with.

Pan-Western bank failures are now inevitable!!

The politicians? They will be doing what they do best.

Observing, having meetings and telling us not to worry.

p.s  Sorry of this post does not make total sense. It was typed in a hot un-airconditioned dump on a Blackberry and then emailed for tarting up. But hopefully, you get the gist.

States of the economies.

The next economic and banking collapse is going to make the 2008 crash look like a slight adjustment.

Once-powerful Western economies are booking  quarterly GDP growths of 1% or less. For the non-mathematicians, that is within a rounding error of ZERO growth. So when you hear a Chancellor deriving solace from an economy achieving  a growth of say 1.5% which was “better than the expected” 1.3%, we know that they and we are in trouble.

Politicians and central bankers have exhausted their entire repertoire on a THREE YEAR attempt to put their economies in order whilst at the same time propping-up a broken banking system. None of it has worked!

They all know that the tsunami is coming but there is no high ground to run to.

European politicians are rushing about, turning inaction into an art-form whilst economies and banks  are merely standing on the trapdoor and holding hands hoping that somehow all this will go away and the entire system will somehow self-right. Their impotent prevarication can (and will) only result in two things – collapse and bankcrptcy.

Bankruptcy of governments, business and of private individuals.

Last week we had the very first example of a banker who more-or-less threw-in his hand, admitting that there was little-else that money could do. The Federal Reserve’s Ben Bernanke had the choice of either printing more empty dollars or not. The so-called Quantitative Easing 3 would have increased US inflation and made Investment Bankers happy. It would have enabled the bankers to further plunder the markets and create more of those illusory profits. They’ve been operating on that basis for two years now and perhaps Bernanke decided that enough was enough.

Mainlining money is never the long-term solution – it’s too addictive!

However, No U.S  Quantitative Easing   has simply accelerated the collapse of the United States economy.

Yes! It’s as clear-cut as that.

In the end, Bernanke took a leaf from the politicians’ book and decided to do nothing but sit and wait. NO mention of QE3 and no steps to promote economic growth.

He has decided to kick the the whole thing forward yet another month in the vain hope that Congress can deliver the next promise. THAT’S what you call a long-shot!

For the moment both Europe and the USA appear to be quite content to pause and doze in the middle of their joint economic tightrope until someone else (as yet unknown, probably China) comes along to coax  them out of their torpor.

Unfortunately, America and Europe are entwined in such a way that if Europe falls, so will the USA.

We used to dismiss the  PIIGS nations as the ones heading for the econo-slaughter house — Portugal, Italy, Ireland, Greece and Spain.  Their problem is very simple – they have debts so huge that there is absolutely NO prospect of them ever being repaid.  Their politicians  are also waiting for something miraculous to happen sometime in the future.

The Euro saviour WAS supposed to have been the “strong man of Europe”, the one with the largest economy – Germany. Unfortunately,Germany has also hit the economic buffers. It’s growth in this year’s second quarter was  just 0.1 percent!

France, Europe’s second-largest Euro-economy, has also ground to a halt. President Sarkozy’s has followed the UK route with huge budgetary cuts. That certainly looks good on paper and may lower deficits  but will  produce an  impossible drag on an already-waning economy. THAT will inhibit growth and ultimately lower tax revenues – which will inevitably result in higher taxation.

The United Kingdom’s Chancellor can take the credit for showing everyone else the way to economic stagnation through the triple whammy of  Government budget cuts, rising inflation and plunging consumer confidence. EXACTLY the conditions to discourage anyone from risking any sort of entrepreneurial initiative or borrowing from the banks to fund commercial expansion. That is, if the banks weren’t continuing to sulk.

Europe is frantically cutting spending in a desperate attempt to postpone the inevitable debt meltdown. Meanwhile  Washington continues to rack-up up its national debt at the eye-watering rate of more than 10 percent per year.

All that America has achieved so far is to have its credit-rating slashed by Standard & Poor’s while its local governments, states and cities frantically try everything from releasing prisoners early to selling off the family silver.

The ENTIRE Western economy has ground to a shuddering halt with the weird unwanted bolt-ons of climbing inflation and consumer confidence at near an all-time low.

So what IS the solution?

The solution is comparatively simple and should be attempted in stages.

The first would be to reconcile ALL sovereign debt.

Secondly,  the markets and banks would collapse – but at a controlled rate.

Thirdly, it should be admitted that the Euro and the Eurozone were both very bad ideas which developed into a grotesque sacred cow.

Then we could ALL start again.

The alternatives are greater budget shortfalls, greater deficits, even faster growths in  government debt, followed by  catastrophic collapses and Depression.

The former all require  political decisions of such magnitude that even the politicians have come to realise  that we do not have anyone  with even remotely the courage to  raise his or head above the parapet to take control.

So for the moment, it seems as if we’re knowingly headed for an economic holocaust.

So, unless the politicians wake up soon, we need to create hell and not wait for it.

From “Brother, Can You Spare a Dime,” lyrics by Yip Harburg, music by Jay Gorney (1931)

They used to tell me I was building a dream, and so I followed the mob,
When there was earth to plow, or guns to bear, I was always there right on the job.
They used to tell me I was building a dream, with peace and glory ahead,
Why should I be standing in line, just waiting for bread?

Once I built a railroad, I made it run, made it race against time.
Once I built a railroad; now it’s done. Brother, can you spare a dime?
Once I built a tower, up to the sun, brick, and rivet, and lime;
Once I built a tower, now it’s done. Brother, can you spare a dime?


What did the Greeks ever do for us?

The politicians are very happy to accept credit for taming the debt dragon which, in fact, they themselves created by allowing the banks a free rein for far too long.

The Bank of England’s solution of Quantitative Easing, that is to say handing more and more cash to the banks has done little else apart from allow institutional investors and  the investment banks to maintain Stock prices at  falsely high levels and to push Commodity prices to new stratospheric levels.

These days, the name of the game is to hunt around for any excuse to push the markets higher and higher – not by buying stock and holding it but by keeping it on the move, i.e.   “working those shares”, thus making a dying market look as if it is in rude health.

Last week’s announcement about a possible Greek bailout moved prices up as did the Greek government’s announcement that their austerity measures had been voted through. Good news is all that investors want to hear.

They are all in La-la land!

Scratch the surface and what do you see?  How do all the investors really feel about the possibility of a Greek default? In short, they KNOW that it is going to happen.

That is clearly demonstrated by how much they are willing to pay in premiums for the insurance  contracts which are designed to protect them from future losses in case of default.

The equation is simple, the more the likelihood of a default, the bigger the premium.

The billions in bailouts have made no difference to the perceived likelihood of Greece defaulting and in fact, the likelihood of a total collapse and default is increasing daily.

Today, the cost of insurance against a Greek default is FOUR times greater than it was when their Euro partners announced the very first bailout package.

On May 12, 2010  the European Union (EU) and International Monetary Fund (IMF) announced a €110 billion  bailout for Greece. At that time, the cost of insuring $10 million in bonds against a Greek default was close to $540,000. Last week, it was $2.3 million –  FOUR  times more!

As a comparison, when Lehman Brothers failed and even when the likelihood of a global collapse was at an all-time peak, the absolute maximum that investors were willing to pay for $10 millions-worth  in Greek debt-default insurance was only $52,000.

So, the premium for the cover has increased from $50,000 to over $2 million for the same amount!!  THAT’S FORTY TIMES MORE!!!

To put it simply, investors believe that the likelihood of a Greek default is over 40 times greater today than it was at the height of the 2008 financial crisis.

Meanwhile the politicians are celebrating. Do they really believe that as far as the Greek economy is concerned it’s “job done”? Of course not. Not really!

It’s all window dressing, prevarication, obliquity and procrastination, designed to protect the Sacred Cow of the Euro for the time being, in the vain hope that by some miracle, under-investment and austerity will reboot the Greek economy.

The austerity measures which have been agreed for Greece – massive tax increases and suffocating spending cuts will make it impossible for Greece to pay both its bills AND its debts.

In the United Kingdom we are following the same path to decreasing government revenues by killing entrepreneurial confidence and creating the ideal conditions for another recession – or worse.

Like any business, making staff redundant and selling assets is not the way to generate higher net revenue because in the background, debts are constantly increasing. Both Sovereign States and Commercial enterprises have been forced into this totally nonsensical process.

Without new revenue streams and by “over-slashing” costs there is only one possible end-game. All that we are all achieving is putting-off the evil day whilst at the same time hoping for the lottery win which never comes.

The lotterry win which our own Chancellor is hoping for, is a sudden Phoenix-like rising of  non-existent entrepreneurs who do not have the non-existent backing of the banks. These entrepreneurs’ job (theoretically) is to create new businesses or grow existing ones in order to create employment and produce goods which we can exchange for foreign currency.

Greece is hoping for a similar Miracle on Skid Row but in reality, it will survive through the summer and then the begging bowl will reappear. This time, however, it will remain empty.

So, who do we believe? The politicians who have achieved very little except boot the can along a narrowing cul-de-sac OR the investors who are willing to pay incredible insurance premiums to protect the money that they have lent? The Dreamers or the Pragmatists?

In spite of very generous Euro handouts, Greece is already twitching and Rigor Mortis will have well and truly set-in by the final quarter of 2011.

The answer of who to believe is telegraphed to us daily by people who know – the global investors. Nowadays “buy and hold”  investment seems almost anachronistic.  If you look at Stock prices every day,you will see that they move up and then down , then up again….etc……What is known as a volatile market.

So what WILL the end game be?  What will the Greeks do for us?

Firstly, both European and American banks will collapse (again). European Banks have loaned money to Greece but it is the American Banks who are holding a lot of European bank debt. If European bank shares plunge to ridiculously low levels, financial markets could freeze whilst at the same time, investors will want to withdraw their non-existent money.

Incidentally, money is already being withdrawn and in the last 10 days, over $50 millions has gone from primary money market funds.

Secondly, the market for short-term debts — especially corporate IOUs (commercial paper) may freeze up. (That’s what happened in 2008 as a result of the Lehman Brothers collapse). The difference is that for instance in the United States, the Federal Reserve will not step-in with guarantees or cash – they have said so. Safety net gone.

No doubt other Central Banks will come running-in with the sticking plaster and splints but hopefully, by then, we will have learned to recognise more futile attempts at a temporary fix.

Thirdly, Greece has more cash tied up in debts than their economy produces in a year (debt/Gross Domestic Produce ration of over 100%).  Greece is not alone. Their protests and riots may be just a foretaste of what most Western economies will experience in the not-too-distant future. America is just one example of an economy which has passed the danger threshold and is currently playing a waiting game.

It is not just the well-publicised countries such as Spain, Portugal, Ireland and Italy which are on the brink. The United Kingdom is not far behind.

So what do we do? Do we dance to the politician’s drum-beat?

To a certain extent we have to. Even a wounded tiger is dangerous, so we are forced to ride it along with our governments.

However, we should follow the facts and not believe government “spin”. Do not forget that a skilled tailor can make a hunchback look straight – and our governments have been sewing like crazy for nearly three years!

We (as individuals) should ensure that whichever institution (bank or insurance company) is holding our money, has the ability, will and wherewithal to fulfil its obligations. Not all of them do. Some will have to rely on more government handouts and guarantees.  When you want your money, you want it in full and NOW.

Finally, we should all be very very vigilant.

Remember the 2008 crisis?  The banks did see it coming but to all outward appearances, it all seemed sunny and “business as usual”. Profits….. bonuses……..obsequious governments prostrating themselves before the Gods of Banking…..

Once bitten……….

Nearly forgot: Happy July 4th

25 Predictions for 2011

The predictions for 2011 are in no particular order and are a mixture of both British and world events. For the last two years, governments all over the  world have been doing no more that playing a wait-and-hope game;  the political equivalent of whistling in the dark.

Here in the UK, the Coalition government has introduced its so-called “austerity measures”. The rhetoric may well be very impressive  to the IMF or the European Bank but what is really happening is that the day-of-reckoning is being postponed by being nudged along by successive disjointed government policies. Everyone is confused.

For instance, in spite of the very negative economic prognosis for the coming year, Stock Markets have been climbing. That  demonstrates is that there has been a final dislocation between economies and  world markets. Stock markets have become no more than a large sandpit in which speculators and bankers play their money games and continue to throw sand not-only in each others eyes but  have also somehow managed to blind whole governments.

Bankers have progressed from custodians  and redistributors of money to self-important untouchable deities who are feared by all.

The most bizarre aspect of Global Economics is the inconsistency with which politicians address  it. 

The blame for the collapse (yes!) of  Western economies is often ascribed to a “downturn in the world economy”. However, governments continue to tinker with their own economies without considering any global impact of their policies. In reality, there is no Global Economy. It is a nonsense phrase.  All that we really have is a large number of  increasingly interdependent local economies. It is a jigsaw of economies, the pieces of which can never fit together properly.  The only solution will be a world currency (that would stop the speculators!) and a real globally conceived, calculated and controlled economy. 

So what is holding us back? That’s an easy one – politics and man’s natural parochially tribal nature.

One of the most ignored aspects of modern economics has been the rise of the bureaucrat. In that group, I include not-only large slices of the public sector  but all non-productive professions such as accountancy, the legal profession, consultancy and those who “analyse”. They do not produce anything new or tradable and  there are too many of them. Large slices of the banking profession also fall into that group.

These groups are a massive a drain on an economy. They do not add value – on the contrary, they take. These “professions” are all due for rationalisation because their only contribution is to take and redistribute money which has been  earned by others.

It is highly probable that 2011 may be remembered as the year when the waiting and procrastination had to stop so here are the predictions:

1. The era of BIG Government is dying and all governments will be forced to cut public expenditure.

2. This will be a year of strikes, general public unrest and riots. Students and pensioners will stand together.

3. The Euro will finally stop twitching and die. Germany has already realised that it can no longer remain in the Eurozone when it it surrounded by so many lame-duck economies.

4. Most western countries will experience cuts in police, the fire service and rubbish collection. Paradoxically, times of austerity produce more crime and a substantial increase in the incidence of insurance-inspired fires.

5. China is beginning to experience inflation. This will result in an upward revaluation of the Yuan – which effectively will be a devaluation of the dollar.

6. Banks will be punished for holding too much cash and  for continuing to withhold funds from commerce and industry.

7. There will be a downward correction in world stock-markets. That is very likely to happen very early in the year.

8.  Gold and Silver prices will decrease early in 2011 but rally massively during the rest of the year.

9.  Commodity prices ( wheat, soyabeans etc) will rise very substantially during the year.

10. Oil will cross the $100 per barrel barrier.

11. In the United Kingdom, the Coalition government will collapse and there will be a general election in October 2011.

12. Nick Clegg will be challenged for the leadership of the Liberal Party and  is likely to “cross the floor”.

13.  The Labour anti-Ed Miliband movement will become more and more vocal as the year progresses and  as Labour realises that they elected the wrong man.

14. After the next government reshuffle, Vince Cable will become Minister-without-Portfolio and will quietly be put out to grass.

15. The concept of Man-Made Global Warming will be further eroded as a scientific theory.

16. We are overdue a nuclear or chemical accident. Look out for one in either China or India.

17. An earthquake in California is also overdue.

18. There has been some tittle-tattle about the state of the Beckhams’ marriage. Do not be surprised if there is a sudden announcement of an impending divorce.

19. As a result of fewer students, public sector redundancies and over-optimistic projections in the manufacturing industries, UK unemployment will officially breach the 3 million barrier.

20. The 279 Council elections in May 2011 will signal the beginning of the end of the Liberal Party. They are already an endangered species and will now  progress to near-extinction.

21. The referendum on the alternative vote will see the “first past the post” system retained. That will signal a long-overdue questioning of the Liberal leadership.

22. There will be an anti Coalition revolt with Labour and the Conservative right-wing standing shoulder-to-shoulder with disaffected Liberals.

23. The January visit to the United States by Chinese President Hu Jintao will not produce a cosy new relationship between the two superpowers. On the contrary, the visit may well produce  “sabre-rattling”  for the rest of the year.

24. Israel will carry-out a pre-emptive strike on Iran – as a result of the latter’s nuclear programme. Needless to say, the United States will wade-in with all guns blazing.

25. Sudan will implode. That will produce an ethnically-driven Yugoslavia-like civil war. Needless to say, the United States will wade in with all guns blazing -only this time they will be wearing United Nations hats.

The most difficult and surreal world political question – and potentially, the most explosive (literally) is whether the American nation has the appetite to elect Sarah Palin as the next President of the United States. Because, as sure as eggs is eggs, she will be a candidate. That all depends on how far to the right America is willing to lurch as a result of the inevitable failure of Obamanomics.

PIGS will kill us

The Irish Prime Minister

Portugal, Ireland, Greece, Spain. PIGS. What do they have in common? Everyone of them, so far has been quite adamant that it did not need any outside help to help sort out its finances – until 24 hours before they accepted the promise of money from whoever was willing to dish it out.

Ireland has been the latest to take weeks rather than minutes to succumb. One of the great mysteries is why the “we don’t need help” phenomenon keeps on being replayed. The solution is most-likely testosterone-related. Accepting help because your economy is in the red is the same phenomenon as not having the humility to admit defeat when lost.

A man will drive round aimlessly for hours rather than stop his car, approach a local and simply say “I am lost. Can you please help me.” Why? Because asking for help suggests failure, incompetence and ultimately a small willy.

If women had been in charge in Ireland , they would have accepted outside-help months ago. The Irish cock-up didn’t happen within the last few days. They’ve known for ages that their economy had run out of steam but like the lost driver, they have been having pointless meetings and briefings in the vain hope of hitting upon some self-engineered rescue plan which, just like the lost driver, would somehow allow them to accidentally arrive at their destination.

Unfortunately, the Brussels Protectorate of Eire (formerly known as Ireland) cannot just have unconditional money. There are conditions. Firstly, austerity laws will HAVE to be introduced even before even one euro is paid over. Secondly, Ireland’s accounts are now open for Brussels to peruse at its leisure and no doubt an unelected Viceroy of Eire will be nominated by the Eurocrats just to make sure that the Irish government is dancing the right  jig  and singing the right song to the newly-composed Euro-tune.

The civil unrest has already begun. The Irish are a proud lot and the thought of Johny Frog and Fritz Hun running the Irish Economic Song Contest is as unpalatable as it gets. Make no mistake, the Irish economy is now in the hands of International Monetary Fund and European Union pen-pushers. The Irish Finance Minister is an observer.

The Prime Minister Brian Cowen is now regarded as “walking-dead” and it seems unlikely that his administration will last to 2012 which would have been the normal term had the economy not hit the fan.  He has enemies both outside and within his own Party but so far he has managed to hang on to office. There is serious talk of an imminent vote of no confidence which, if carried would cause the government to collapse  and result in a late December General Election.

That would make Ireland’s new Euromasters very nervous because at the moment they understand that after tomorrow’s announcement of  a new 4-year Irish economic plan, the new policies will be signed-off in a December 7th Budget. Their Irish economic Blitzkreig will have been wasted.

Economic crises always go hand-in-hand with political crises and because of the depth of the current mess, it is almost certain that Prime Minister Cowen’s Fianna-Fail party will be out of government for the first time in over 100 years. Presently, they are in power only because of the Green Party’s parliamentary support but relations between Fianna Fail and the Greens have reached such a low-point that the Greens’ support of the forthcoming budget is conditional upon a January General Election.

The latest polls indicate that support for Fianna-Fail among the electorate is currently at a historic low of 17%. That suggests a total wipeout in any forthcoming election.

All electorates imagine that when an economy is not functioning, a simple change of leadership and administration provides an answer. It rarely does. For instance in the United Kingdom, the electorate did not so much vote for the Conservatives as vote AGAINST Labour. In Gordon Brown, they saw an inept leader who was floundering and whose own party was divided. They saw the solution in a vote against Brown.  The Irish are seeing Cowen in the same light.

It was not the fault of the government that their economy collapsed. It was the banks’ fault and contrary to popular opinion, no amount of regulation would have prevented the fiscal crisis.  For a bank, the system is simple:  You buy-in money at a certain rate and you sell it at a higher rate. Simple economics. Alternatively, you can balance the books by lending against assets. If you lend 100,000 euros on a house valued at 100,000 euros, your books balance because you have 100,000 on both sides of your balance sheet.

However, if property values collapse and one side of you balance sheet now shows that you have lent 100,000 euros and the  other shows that the asset against which you lent (the house) is only worth 50,000 euros, you have a problem – a banking crisis.

Ireland’s property market has been collapsing for months and the Irish government went from making things happen to watching things happen. Now they are at the final stage of the cycle and they’re wondering WHAT happened.

The British government has pledged a loan of £7.5 billion loan to the Irish. That seems like a lot of money until you realise that the Irish exposure of the British government-owned Royal Bank of Scotland is well over £50 billion. RBS owns the Ulster Bank where the downward spiral in property prices has effectively meant that the bank has £30 in assets for every £100 that it has lent to mortgagors. That’s the equivalent of a bank giving you a £1 million mortgage on a £300,000 house.

George “Schadenfreude” Osborne’s macho white charger is nothing more than a painted lame donkey. His £7.5 billion is “gesture politics” at its most pointless. His primary worry is RBS and to a lesser extent Lloyds (Irish exposure nearly £30 billion).

Because the markets believe that much of the RBS-owned debt will eventually be written-off, RBS shares are once again falling in value and yesterday stood at  39.4p. Less than three years ago they were over £5. Lloyds Bank is experiencing a similar drop.

RBS also has an exposure of about £15 billion in Portugal which is also employing Ireland’s macho “in denial” technique and announcing to the world that it does not need a bailout.

We’ll see.  Two PIGS down with two to go.

 

New Predictions 2010/2013

Alistair Darling has never looked so relaxed. David Cameron observed that if Darling and and the Prime Minister sat any closer to each other on the front bench yesterday, they would be kissing. The Labour front bench has never  looked so “at ease” and with good reason. There’s absolutely NOTHING that they can now do about the economy, NHS or any of the other major conundrums of State. They are in a good place and enjoying the rapid approach of Spring and what it will bring – the dissolution of Parliament.

The crippled economy appears to have been left to its own devices as it staggers and bumps along from crisis to crisis. The politicians, bankers and economists seem to have been reduced to the role of observers, purveyors of increasingly convoluted euphemisms and “guessers” who still have not grasped the difference between two fundamental Theories: Keynes and Chaos.

It may be an idea to try to slash a path through the current economic goings-on in order to see if we can make any sense of it all.

Our Chancellor’s current laid-back demeanour means one of two things. It means that either he has adopted the fatalistic attitude of one who cannot wait to put his hands on the severance pay, begin his memoirs  and give Gordon Brown the shafting that he has been deserving of for the last 13 years OR  maybe he really doesn’t understand the problem.

The Winter Olympics, Christine Pratt, Gordon Brown and the Coles may be hogging the front pages but perhaps that’s all for the best because what could be on the front pages is strictly Certificate X. In fact, some of what is about to happen to the world’s economy would never pass the scrutiny of the British Board Of Film Censors.  We are heading for a cross between a social  Exorcist and an economic Armageddon. So let’s begin.

I have either observed or worked within the Financial Services Industry for over 30 years and remember the days before the present circus of  exotic financial instruments and comedy accounting. Stockbrokers and Fund managers were not riding financial tigers  or unbroken investment mustangs that were impossible to dismount without a great deal of pain. There were long bull markets interspersed with the occasional short sharp shock of a quick bear. There was order with only the occasional panic which would always be sorted out without the aid of the Bank of England’s printing presses. Those were the “My word is my bond” days.

Investment banks would never have cooked a country’s books in order to replicate what the banks themselves were doing in order to hide gargantuan unsustainable debts. They would not have  charged Greece 0ver £190 million for their trouble so that “on paper” Greece woud look financially fit enough to join the Euro.

Four months ago, Greece’s 10-year bond was trading happily, it was stable and rising.  Then,  global investors began to dump Greek bonds in huge volumes and with unprecedented speed. The whole thing was so brutal that the custodians of the Greek economy did not realise the full extent of the disaster until their economy was exhibiting all the symptoms of near-death. Thanks to Goldman Sachs who had (legally) helped them to cook the books, Greece had been living and borrowing in an economic cloud-cuckoo land. Currently, they are standing on of the equivalent of an “event horizon” at the edge of an economic Black Hole.

Three months ago,  Portugal’s 10-year government bond also peaked. That is also being dumped by global investors. Nobody wants it. Portugal’s problem mirrors that of Greece.  To put it very simply: overborrowed with no collateral. Just like our banks.

Investors are dumping Greek and Portuguese paper because they are nearly 100% certain that their current economic positions  are unsustainable and that both countries will default.

Italy is keeping afloat through the medium of creative accounting. The next economy to tumble after Portugal and Greece will be Spain  which is running out of both time and cheques with which to support its 20% unemployment rate. The ship that is probably going to support the sinking rats is the holed twin-hull of France and Germany who both know that they need to bail out Greece. After that is achieved, there is severe danger of a Euro-queue forming.

The Euro is doomed because France and Germany will be breaking that most sacred of rules which states that “Thou shalt not bail out thy Euro neighbour”. That rule was enshrined in statute so that a Euro economy in trouble would never drag down any other Euro-user.

Both the French and the Germans are continuing their own spending orgies and instead of doing something now, they are following the United States’ and United Kingdom’s lead. They are postponing the day of reckoning and merely watching the final death throes of the Greek economy.

It looks as if the Euro is about to be sacrificed.

The American dollar will also soon be needing  some sort of life support. Rating agency Moody’s  has already warned  the States about its giant but still accelerating debt.

Dollars  and Sterling have been pumped rather over-enthusiastically into both the American and British banking systems and that has directly resulted in an overvalued stock-market and the feeling is that we are now about to witness a fall in market values which will continue into 2013. That will be mirrored by the highest-ever percentage rise in the price of Gold, Platinum, Palladium and even silver. Gold may well cross the $2000 per ounce barrier.

The dollar will continue its slide which will accelerate by the middle of 2010 , with its downward journey picking up speed by the end of  the year. The pound sterling will follow because currency speculators will be falling over themselves to buy currencies such as  Australian and Canadian dollars. From flashy and weak to unexciting but solid.

At the front-end of 2011, we will see the beginning of the dreaded second dip in the recession which many commentators  seem to think is gradually exhibiting those iconic green shoots of recovery. Those shoots will turn brown and atrophy.

All this will happen because back  in 2009,  whole states made the decision to sacrifice themselves in order to  save their dead  banking systems. History will probably judge these to be the worst economic decisions ever made.   A country has never sacrificed its economy and welfare of its citizens in order to save a broke and discredited banking system which it had itself allowed to expand without proper control.

By the end of 2011 and into 2012, most countries will follow the Greek economy – which is currently exhibiting the green shoots of a civil unrest which will soon spread throughout Europe and the Americas .  That will happen because of of an exceptional set of events which will all take place more-or-less simultaneously . Western economies will collapse as their GDPs, currencies and stock markets all bottom-out .

That will finally signal the inevitable dawn of the wealth-shift from West to East.

China will begin to call ALL the shots because Western economies will have  been painted  into an economic  corner with no way out.

Our Chancellor knows that after the next election, he will probably be on the Opposition benches. In the unlikely event of a Labour Prime Minister being asked to form a government, Darling will probably be “reshuffled” out of the Treasury.  Either way, he will be able to continue what he has already started to do – observe the  sunset of the Western economies.

The green shoots of economic recovery? We’ve been looking in the wrong place. They’re in China.

It’s still all Greek.

The statement read out by Herman Van Rompuy after yesterday’s Brussels summit of EU leaders resulted in a vague and uneasy  feeling of dejà vu. It was last year’s much-anticipated G20 conference which produced similar words to Van Rompuy’s but it wasn’t just the rhetoric – it was the worrying lack of content that was so familiar.

“Determined and coordinated action”  is just a sentiment and Angela Merkel’s reference to another “meeting in March” only suggested that difficult decisions were being postponed. Yes, it was  that familiar long-grass syndrome again.

The  statement that Greece “has to take measures to tackle its huge debts”  is a truism and not really worthy of any special mention. The Greek economy is no longer lame – it is deceased  – but European leaders are more concerned about what money-market speculators are about to do to the Euro. They may do to the Euro what Silvio Berlusconi is alleged to have done to Patrizia D’Addario.

PIGS is  an acronym which will burn itself on our collective conscousness very soon. Portugal, Italy, Greece , Spain are the lame-duck european economies on the brink. All they need is a small push.

In fact, the full acrnonym should be PIGSUK.

All these countries have been borrowing cheap money for quite a few years and  like the man who eventually doesn’t bother to open his credit card statements, their debts are now approaching the stage where they are having a problem to even repay the added interest.  If they then have their credit-worthiness down-graded, they will be charged even more interest and the self-amplifying problem grows until they finally have to admit that they cannot repay the money and they default. That is when the Euro will begin to look like coloured printed paper.

Remember the Lira?

Greece is slightly ahead of the game because it has already had its  credit-worthiness downgraded so borrowing more money is now going to be very expensive.

Make no mistake, the money markets are currently very twitchy so it seems that yesterday’s non-announcement was a bit of a tactical error. The markets are hungry for good news but only news with substance. When the announcement was made, the Euro rallied but not for too long. After the words had been analysed, it was realised that nothing had really been said and the  currency fell away again.

Here is an extract form the Van Rompuy statement: 

“We fully support the efforts of the Greek government and their commitment to do whatever is necessary, including adopting additional measures to ensure that the ambitious targets set in the stability programme for 2010 and the following years are met.

“We call on the Greek government to implement all these measures in a rigorous and determined manner to effectively reduce the budgetary deficit by 4% in 2010.”

Greek President, George Papandreou added: “If it is necessary we are committed to take these additional measures to achieve our targets.” 

It was all too vague for the markets.

Budget deficits in euro zone countries have  ballooned this year as slower economic growth has cut government income and boosted government spending. The Euro “ceiling” on budget deficits is 3% of GDP.

Currently the Greek deficit is 12.7% of their GDP. They have had more-or-less the same issues to deal with as the rest of Europe but their Public Spending has been out of control for much longer and the previous Greek Government had been cooking the books. That meant that when George Papandreou took over, he found that he had  inherited a Budget Deficit TWICE as big as that which had been declared.

This will not be the last time that Europe finds itself in such a quandry – for as long as countries using a common currency practice such diverse fiscal policies.

There are self-imposed EU rules which prevent handouts to member states but  next week’s meeting of EU finance ministers  should (hopefully) produce a solution.

Gordon Brown was present at this week’s meeting, although strictly speaking, the United Kingdom is not within the Euro zone. Brown would do well to learn from the Greek experience because the UK budget deficit is more-or-less the same as that of Greece.

These are some of the measures that the Greeks intend to implement:

  1. Cut the budget deficit to below 3% of GDP by 2012. ( Currently 12.7%)
  2. Freeze public sector salaries and cut bonuses
  3. Replace only one in five of people leaving civil service
  4. Raise average retirement age by two years  by 2015
  5. Raise taxes on fuel, tobacco, alcohol and property

The above initiatives are a very strong pointer to what the UK government will need to do in order to achieve a similar result. However, the first stirrings of civil unrest in Greece are demonstrating how deeply unpopular all such measures are.  That is why this is not really a job for politicians who have one eye permanently trained on the opinion polls.

The British insular attitude was expressed by a reporter who inquired whether the British taxpayer would be contributing to any bailout of the Greek economy. Brown’s reply was unclear but the quick answer has to be “yes”.   For instance, if the IMF is asked to loan Greece several billion, some of the money will inevitably be British money because the United Kingdom is an IMF contributor.

However, the most likely outcome will be that some of the more powerful EU members such as France and Germany may decide to stand as Guarantor for any future Greek loans.

It is a widely-held view that Greece will not be able to either service or repay its loans. For instance, nearly 12% of its current GDP is used to service the current money it owes. It owes about £250 billion and will need  to borrow another £48 billion this year, just to balance the books.

British Treasury officials and politicians are probably watching this modern Greek Tragedy very carefully.  Let’s hope that they recognise it as the Case Study which it undoubtedly is.

 

 

 

 

 

 

 

 

It’s all Greek to me.

 

“We is well an’ truly init, matey peeps.”

We may be thinking that Hector Sants’ late-night departure from the FSA is today’s most important financial news but it seems as if a more worrying storm is brewing on the financial markets – and it will eventually affect us.

The euro is under siege — and the next few days will be crucial.

Financial markets are betting heavily that Greece’s crushing debt could drag down the entire eurozone, and that could force reluctant EU leaders into an embarrassing bailout. The handouts to Haiti will be nothing compared to what the Greeks need and George Michael might as well get into the studio now and start recording the Greek Charity single.

If EU leaders don’t take some kind of decisive action this week at their summit meeting, the euro will continue its slide — and Greece’s economic woes could spread to other flailing countries in the 16-nation eurozone. Countries  like Portugal, Spain or even  heavily indebted Italy and Belgium.

European Union leaders will issue a statement on Greece after the meeting, officials said today, but added that the contents had not yet been discussed and would not say if it would lay out details of a bailout.

This Thursday’s EU summit is the real litmus test  and if it fails to come up with any debt restructuring package or quasi-bailout, then the pressure on the euro will increase.

The Greek experience will highlight exactly how inextricably linked the euro states are.

Investors have turned increasingly pessimistic on the outlook for the euro, so much so that speculative traders’ short positions, or bets against the single currency, have reached a record.

(Borrow one million Euros, sell them for dollars. Watch the price of the euros drop and buy them all back at the cheaper price  with just some of the dollars that you received in the first place. Hand the Euros back to where you borrowed them. That gives you a dollar profit)

A new commission — the EU government — has been formally approved by the European parliament, and must immediately confront a gathering sense that the euro’s fundamental weakness  has been exposed.

The fundamental weakness is quite…. well… fundamental. The countries which have the euro as their currency have no common fiscal policy.

The European Union’s own government-backed lender has said that its rules do not permit it to bail out Greece or any other European country that can’t pay its debts. That certainly  narrows the  leaders’ options and will probably mean either a rule change or perhaps the remaining states will act as some sort of guarantor for the Greek government.

The euro is now trading near an eight-month low . European stocks have inched up slightly on speculation that heads of state and government will have to announce something at Thursday’s summit. 

The bounce in European stocks  followed news that European Central Bank President Jean-Claude Trichet had left a banking conference in Australia to attend the summit, stoking expectations of some kind of bailout  for Greece.

Some were sceptical that the meeting could stop the slide in sentiment.

Jittery markets are piling the pressure on EU nations to state clearly what they would do if a euro member defaulted. There is, as yet, no written-down policy on state defaults.

There have been  repeated assurances from both the EU and the Greek government that Greece can pull itself out of its debt crisis with a harsh austerity program but the markets remain unconvinced. Probably because so far, there has been a lot of talking but not enough of the right kind of action.

A bailout could be expensive, but a default would be worse. The downside of market scepticism is that Greece and other troubled countries will have to pay higher interest rates to borrow, making it even harder to dig themselves out of trouble.

The same will happen when the speculators train their beady eyes on the United Kingdom and the States.

The crisis shows one of the vulnerabilities of the 10-year old currency union, in that it lacks an effective central authority to enforce limits on budget spending by its individual members .

With budgets in the hands of 16 separate governments, the euro relies on a set of rules limiting deficits to 3 percent of gross domestic product. Large deficits can undermine the  currency and that of course  will affect all participating countries.

Greek Prime Minister George Papandreou has held government talks on accelerating cuts to pensions and wages in a desperate effort to show the markets that Greece can and will make long-term spending reductions and not need a bailout. However, it could be too late and speculators may continue to dump the euro. In addition, Papandreou is risking civil unrest which the markets never find comfortable.

The EU’s executive commission has backed the Greek programme and says that no bailout will be needed. European Union nations say the same, rejecting reports that they are talking about possible bailout plans.

The bailout options are limited — but not impossible and everyone’s protestations are doing nothing to ease market jitters.

European Union agencies — such as the European Commission — can’t take on debt for governments.  It is not allowed to do so under its own rules. Neither can the EIB, it said. It has 75 billion euros to lend for infrastructure and economy-related projects, usually to the poorer EU nations. That fund cannot be used as bailout money.

Three EU members that don’t use the euro — Hungary, Latvia and Romania — have secured bailouts from the International Monetary Fund and the EU. But EU officials have said  that IMF help won’t be needed for a euro country.

They may live to regret such macho posturing.

That leaves the ball firmly in the EU governments’ court. Legally, governments can rally round  if a member state “is seriously threatened with severe difficulties caused by … exceptional occurrences beyond its control.”

What remains is deciding how to structure a bail-out — and what taking on Greek debt could do to the richer nations.

EU governments could cut the costs of Greek spreads overnight by agreeing to jointly underwrite Greece’s debt — but this could hike the cost of their own borrowings because technically they will all have taken-on more debt – even if technically, it is not their own.

They could also provide a loan to Greece — but it is uncertain that they could or would provide enough to give Greece long-term relief. Greece is looking to borrow some euro 51 billion from bond markets to plug  its budget gap for this year.

Another option would be bonds (IOUs), issued jointly by European governments to raise money from markets. EU and ECB officials have talked this down but European socialists are keen — including Greece’s current government — because it could ease harsh spending cuts.

What is clear is that EU governments do not want to let Greece off the hook — and that any option would force Greece to make long-delayed reforms to endemic rife tax evasion, rigid labour market rules and an inefficient and high-spending pension and health care system.

Such are the costs  and consequences of  uncontrolled Socialism.

Perhaps the Greeks are wishing that they had held onto the Drachma?