Sovereign debt bubble thread

[MadImmortalMan]

Don't forget we all have Facebook mania atm.

[Admiral Yi]

Well, I don't know, I have my monies split amongst two banks, the main share in one of the big two of Spanish banking (BBVA) and the smaller share in the Spanish branch of Barclays, so I don't fear for those banks' survival. Most of my stuff is not in cash in a savings account, though, but in shares and a few funds, so I don't think that I could make those liquid on the short term. Personally I feel rather secure, it's not as if I had the money in one of the former cajas that are going down the drain as we speak.

I think the risk most folks are focusing on is redenomination of deposits, not bank failure.

When Argentina went off its currency peg residents had both dollar and peso deposit accounts.  Afterwards everything was a peso account.

[alfred russel]

Well, I don't know, I have my monies split amongst two banks, the main share in one of the big two of Spanish banking (BBVA) and the smaller share in the Spanish branch of Barclays, so I don't fear for those banks' survival. Most of my stuff is not in cash in a savings account, though, but in shares and a few funds, so I don't think that I could make those liquid on the short term. Personally I feel rather secure, it's not as if I had the money in one of the former cajas that are going down the drain as we speak.

It isn't just the collapse of a bank I'd be worried about, but also if you get new pesatas. Foreign shares and funds should be protected: they represent ownership of foreign entities. The Spanish share values would relate to assets that would be devalued, but then hopefully the devaluation should give them a competitive advantage.

Good luck.

[Sheilbh]

I think the risk most folks are focusing on is redenomination of deposits, not bank failure.

But the one could lead to the other.  If the banks start failing and there's a run on them because people are worried about the safety of their deposits then, short of ECB support, it may be necessary for the government to issue some alternative currency to keep the economy going - at that point Euro-collapse is a fait accompli.  The risk is we reach that point in Greece before the Greek elections which means the Eurozone leadership could have to decide whether to take extraordinary measures to keep Greece in the Euro before they know if the government will be committed to implementing the bailout programme or not.

Here's an interesting positive spin from the Bank of America, via a fiercely Euro-sceptic doomsaying Telegraph blogger:

Bank of America has a nice twist on a Greek exit, or "Grexit" as everybody now calls it.

The euro would shoot up to $1.40 against the dollar (after first falling to $1.20 in the immediate panic). It is $1.27 now.
Risk assets would enjoy a "powerful short squeeze". Bond yields in Spain, Italy, and the rest of the EMU periphery (and presumably the soft colonies of Eastern Europe too) would come down smartly.

Battered bank stocks would rally. "The Bund curve would likely bear steepen as some of the flight to quality risk premium gets unwound in the back end of the curve" (I couldn't resist quoting this Canary Wharf dialect, but that is how global banks actually talk).

Translation. Investors would come crawling out their safe-haven bunkers, blinking but happy to be alive, and suddenly wondering what the fuss was about.

The Boa team led by Laurence Boone (French), Ralf Pressuer (German) and Athanasios Vamvakidis (Greek) – ie a typical City bank – assumes that the EU and world authorities would take dramatic action to contain the damage.

Central banks around the wold would act in concert as in 2008-2009; the EU would take a big stride towards "fiscal union" (real fiscal union, not phoney German Fiskalunion); a system of pan-European deposit guarantees (ie, a euro version of America's FDIC); and capital injections to stop contagion in the banking system.

The ECB would cut rates, launch quantitative easing, blitz euroland with liquidity, and drive down Club Med yields with mass bond purchases. There may be a Swedish-style nationalisation of the banks accompanied by EMU-wide deposit guarantees. Capital controls are unlikely within the residual eurozone.

Greece's economy would contract, but only by 10pc in the first year after Grexit. This is based on IMF estimates. Given that it may contract 6pc this year anyway, that is hardly Armageddon.

The report is a good counter to the escalating alarm figures we have been hearing. It depends on the EU behaving in a rational fashion. That is a political – and psychiatric – judgment.

You need to be able to penetrate the mind of Wolfgang Schauble to assume such a benign outcome, and few of the thousands of economists opining on this issue are qualified to do so. Still, the Boa view is perfectly plausible.

[Ed Anger]

The euro would shoot up to $1.40 against the dollar

SONOFABITCH

[Habsburg]

If this does intensify in Spain then we're at the point when moral hazard needs to be thrown out to restore confidence.

I think we are at a major tipping point now, but what is crazy is in the US at least this is getting almost no mainstream attention. Donna Summer is the top story on CNN, on Fox News it is some space story, and neither has this featured prominately--CNN doesn't even have it in the business section on the first page (and Fox tangentially as a cause of falling stocks).

I'm interested to see how this plays out, especially since Greece doesn't have a government. I'm not as up on this as some people, but it seems likely some hard decisions are going to need to be made before then.

Thought not mainstream, this morning CNBC was very much covering Europe.  Bloomberg was almost all about the Facebook IPO.

[citizen k]

Everything You Need To Know About Europe's Dilemma In 4 Minutes:

http://www.youtube.com/watch?feature=player_embedded&v=_o9KV477qO8

[Zanza]

Edit:  Also I can't think of another example of the sort of public pressure being put on Merkel.  Obama, Cameron, Hollande have all publicly stated that there needs to be a change of policy - the Canadians have said it before.  Get Monti and the Japanese involved and that's the entire G7.

Edit:  Apparently Monti and the Japanese said there needs to be a change.  So that's everyone.

Merkel agrees that there needs to be a change in policy towards stimulating growth. It's just that she has different measures for that in mind than most of the others probably have.  And I am sure she doesn't really care what Obama, Cameron, Harper or the Japanese PM think anyway. Hollande and Monti will have an influence, but not outsiders.

[Sheilbh]

I could be wrong, but I feel we're moving rapidly beyond the growth-austerity debate into a crisis of confidence that needs bold leadership.  Really I think it needs the kind of leadership that Merkel's failed to provide for the past 2 years which has allowed this to drag on.  I think she may not listen to 'outsiders' though I hope she does, having said that I've seen no evidence she's listened to Monti while he's been in office. 

On the growth thing though I've read that the German government's most keen on Hollande's idea of project bonds.  Which of all the 'growth' policies I've seen looks to me the most set to be an unhelpful distraction and a possibly a disaster

[Zanza]

I thought we had a crisis of confidence for the last two years already. What's new?

The hysterical panic peaks of the English media are not really reflected over here and I don't really see what has changed that this time is really the time where it all comes to a climax.

[Sheilbh]

I thought we had a crisis of confidence for the last two years already. What's new?

What's new is that I think the probability of a Greek exit is significantly higher and I think the market response to that reflects a serious lack of belief in the Eurozone's preparedness for that, or ability to deal with it.  I also think that the Spanish banking crisis is starting to come to a head which, if it is solved by the Spanish government bailing out the banks, would cause the sovereign debt problems to become far, far more serious.

I think so far the problem's been about sovereign debt - and the banking sector.  Behind that all has been a gnawing confidence crisis.  I think they've now switched round, and I could be wrong, but I think the doubts are becoming stronger.

The hysterical panic peaks of the English media are not really reflected over here and I don't really see what has changed that this time is really the time where it all comes to a climax.

The media 'panic peak' just reflect what's going on in the market.  I think Schauble said this morning that market turmoil could go on for another 2 years which just doesn't seem sustainable, especially because each bit of turmoil seems to be escalating.

They're reporting the repeated falls of market confidence in the Eurozone followed by summits that produce temporary rallies before the doubts return, Dan Drezner called it Eurogoggles:
http://drezner.foreignpolicy.com/posts/2011/10/28/a_very_importantr_post_about_eurogoggles

I think his jokey prediction about a Greek exit rings true too:

1.  Greece's departure is announced at the same time as an EU summit announces a boost to its new rescue fund and modest pro-growth German policies.  Markets initially react to this news favorably.

2.  Within 48 hours, negative news about the Spanish and Italian economies, combined with a second wave of stories revealing that the rescue fund isn't as big as anyone thought it was, rattles financial markets and triggers the behavior described by Krugman.

3.  The ECB does nothing, calling on Merkel European political leaders to take "decisive action."

4.  After a week or two of agnonizing non-action, Germany announces half-measures that end the immediate panic gut set up Spain for more stagnation and a new crisis in 2013.

Edit:  I suppose if you think they're panic peaks - which, you know, they could be - do you think the crisis is basically solved it's just a case of following policies already established?

[Zanza]

What's new is that I think the probability of a Greek exit is significantly higher and I think the market response to that reflects a serious lack of belief in the Eurozone's preparedness for that, or ability to deal with it.  I also think that the Spanish banking crisis is starting to come to a head which, if it is solved by the Spanish government bailing out the banks, would cause the sovereign debt problems to become far, far more serious.

Both of these aren't exactly new. Greece leaving the Euro and Spain having to bail out its banking sector have been discussed for years now.

I think so far the problem's been about sovereign debt - and the banking sector.  Behind that all has been a gnawing confidence crisis.  I think they've now switched round, and I could be wrong, but I think the doubts are becoming stronger.

Both the sovereign debt crisis and the banking sector problems are about confidence since day one. What do you think people are losing cofidence in now that they didn't before?

The media 'panic peak' just reflect what's going on in the market.  I think Schauble said this morning that market turmoil could go on for another 2 years which just doesn't seem sustainable, especially because each bit of turmoil seems to be escalating.

I don't see the escalation really.

1.  Greece's departure is announced at the same time as an EU summit announces a boost to its new rescue fund and modest pro-growth German policies.  Markets initially react to this news favorably.

2.  Within 48 hours, negative news about the Spanish and Italian economies, combined with a second wave of stories revealing that the rescue fund isn't as big as anyone thought it was, rattles financial markets and triggers the behavior described by Krugman.

3.  The ECB does nothing, calling on Merkel European political leaders to take "decisive action."

4.  After a week or two of agnonizing non-action, Germany announces half-measures that end the immediate panic gut set up Spain for more stagnation and a new crisis in 2013.

Possible, except that Germany most certainly won't do any stimulus or whatever is meant in point 1. But that's hardly the end of the world, is it? The expectation that Merkel can somehow solve this economic crisis by just showing "bold leadership" at the next EU summit is naive and silly.

Edit:  I suppose if you think they're panic peaks - which, you know, they could be - do you think the crisis is basically solved it's just a case of following policies already established?

Yes and no. We should follow the policies already established, but I am sure there will be more policy initiatives necessary. But I don't see a reason for hysteria really. But that obviously doesn't sell newspapers.

[Tamas]

All I know is that the stockmarkets have been surprisingly depressive these last few days, steadily grinding themselves down.
A rip up must come or this will become highly unusual and worrying.

[Zanza]

Oh noes. The stock markets were depressive these last few days. The end is nigh! Really?

Anyway, I find the unemployment numbers in the Southern countries much more depressing than some stock market movements. That's real economic pain.

[Sheilbh]

Both of these aren't exactly new. Greece leaving the Euro and Spain having to bail out its banking sector have been discussed for years now.

They're not new but the chances of Greece leaving the Euro are significantly higher than they were a fortnight ago and, not unrelatedly, the problems in Spanish banks are escalating.  There's good news in Spain this morning, but the central bank's still confirmed that bad loans are at their highest level since 1994, and escalating, and deposit insurance in Spain is at a record high.

Despite these problems not being new I don't think anyone has any real confidence that the EZ's put enough in place to address them, which is why as the probability of a Greek exit or Spanish banking crisis increases, so does market concerns and the flight to safety.  We've been discussing them for years and the sum total of the EZ response is the same.

Both the sovereign debt crisis and the banking sector problems are about confidence since day one. What do you think people are losing cofidence in now that they didn't before?

Increasingly, I think, the Euro.

I don't see the escalation really.

Well investors are looking for safety, bunds and gilts are both at record lows.  Here's a chart of bund yields:

I don't think this is a media storm I think the media's reflecting the market.

Possible, except that Germany most certainly won't do any stimulus or whatever is meant in point 1. But that's hardly the end of the world, is it? The expectation that Merkel can somehow solve this economic crisis by just showing "bold leadership" at the next EU summit is naive and silly.

I don't think Merkel can solve the economic crisis, but I think she is the largest obstacle to solving the confidence crisis in the Eurozone largely because I think it's a political not an economic problem.