Sovereign debt bubble thread

[MadImmortalMan]

BofE is planning to flood the UK with cheap pounds too.

[Neil]

It's hard to deflate the bubble that is the modern economy.

[Sheilbh]

The Telegraph blog posted this, from Lombard Street Research:

The head their described it as showing the effect of Europe's 'fiscal suicide pact'.  The Netherlands is a creditor country, with a strong current account surplus imposing austerity because their budget, surprisingly, failed to meet EU targets.  That with bank deleveraging and tight money from the ECB looks like driving them into a recession - worryingly the housing market's falling too and the Dutch have a lot of personal debt.

Here's more from Lombard's Chief Economist, who is trenchantly anti-Euro and a bit negative generally.  But I don't think his views are out of the mainstream in the City:

Mrs Merkel has very little time left to get a grip. The point the German leadership has yet to hoist on board is that continuation of current euro membership (with or without Greece, but with Spain and Italy in) will only be possible without a prolonged Mediterranean depression if several conditions are met:
GERMANY PAYS. The German leadership thinks it has agreed to pay (provided everybody commits economic and political suicide) but it does not understand what paying means. The money has to be given to Club Med, not lent. (See below for how this affects the recent Spanish deal.)
The requirement is broadly comparable to what has been needed for East Germany since 1991 – except that the Eurozone, unlike pan-Germany after 1991, is not a political union. Is this a rough deal for Germany, ordinary Germans? Yes. But that is what is going to be required, to keep Club Med in.

GERMANY INFLATES. Rebalancing relative costs between Germany/Holland and Club Med requires either breaking Mediterranean society (and probably politics) to destroy long-established wage-formation habits, inevitably entailing depression, or German inflation of 4% or so for at least ten years.

BUDGET DEFICITS. Germany can only inflate if it overheats with excess demand. But the Chinese investment growth of the past few years has been the mainspring of the good recent recovery, supported by strong capex in export industries. This is now likely to stagnate, as China grows more slowly and lowers its grotesque, 49%-of-GDP investment rate. Other German exports are falling. There is a modest construction upswing owing to extremely low interest rates, but the demand necessary to achieve 4% inflation will probably require government deficits, now banned by constitutional amendment – one of the follies of the previous "Grand Coalition" government.

The chances of Germany accepting this programme are nil. But Mrs Merkel is being inched down that road, "crisis by crisis", and if she does not get a grip soon she will be wiped out as Chancellor next year. The Spanish bail-out was a typical example of half-measures.

It seemed clever to insulate Spain a week ahead of the Greek elections, so that "Grexit" could be possible without immediate major contagion into Spain. But Spanish banks needed equity, not debt funding that would leave them as insolvent as before.
So the provision of debt funding by the Eurozone required the Spanish government as intermediary, to turn the debt – now effectively national debt – into equity for its banks. So private holders of Spanish government debt have effectively been subordinated – and will be for each further tranche of aid that is needed in future. Thus contagion was worsened, and quickly spread to Italy, which can only too clearly not afford its share of the Spanish bail-out.

The truth of the matter is that any policy that holds Club Med in the euro will ensure that Mrs Merkel's Christian Democrats are annihilated next year, as it involves entirely unreasonable burdens for ordinary Germans. So Berlin should be rooting for Grexit after Sunday's elections and an anti-euro balance of power in the new Dutch parliament, to provide cover for German exit from this failed euro-project.

Edit:  One interesting point I read this morning was about a UBS survey of central bank reserve manages. Apparently most think someone will leave Eurozone and reserves are being gradually biased towards non-Euro currencies.

[Crazy_Ivan80]

"The money has to be given to Club Med, not lent"

not without receiving control over how and where the money is used. Otherwise it will be wasted, the giving will last forever and the southrons will call you fascist if you indicate that maybe they should -you know- actually do something decent with it instead of wasting the money (for all points: see Wallonia)

[citizen k]

Whatever euro's fate, Europe's reputation savaged

LONDON (Reuters) - Whether the euro lives or dies, the chaotic way Europe has tackled the crisis could undermine the region's geopolitical clout for years to come and leave it at a distinct disadvantage in a rapidly changing world.
With an apparently never-ending series of last-minute summits and telephone calls, Europe's leaders and finance ministers have held the bloc together in the face of growing strains between states, a rising political backlash and market alarm.
But with hindsight, outsiders say each measure proved too little, too late. US officials in particular complain European leaders have either failed to grasp the scale of the problem or proved unwilling to countenance the awkward political decisions necessary to fix it.
As a result, they say, what should have been one of the most stable parts of the world has now become one of the most unpredictable.
At one extreme, the euro area might be about to embark on a journey towards further fiscal and political union as an almost totally unitary "super state". At the other, it could unravel and collapse into an unstable mess of regional rivalry.
"From almost every conversation I've had in the last year - with Chinese, with Indians, with just about anybody - the message is always the same," says Fiona Hill, a former senior officer for the US National Intelligence Council and now head of the Europe program at Washington think tank the Brookings Institute. "Europe can no longer be trusted. It seems to be moving from being a source of stability to a driver of instability"
Long-held certainties were being challenged, she said. Even non-euro member Britain suddenly appeared at risk of breaking up, with Scotland due to hold a referendum on independence that experts say could yet go either way.
The slow burning euro zone debt and banking crisis is accelerating. Last weekend brought a decision by euro zone political leaders to bail out Spain's banks. This weekend Greece holds a parliamentary election which many observers fear could spell the end of its euro membership.
Some argue it is too soon to write Europe - or the EU institutions - off altogether. Under foreign policy chief Catherine Ashton, some credit Europe with making real progress in talks with Iran and other powers over the future of its disputed nuclear program. But their energy for anything beyond their immediate problems is seen decidedly limited.
"The Europeans are completely consumed with a battle to save the euro zone," says Ian Bremmer, president of political risk consultancy Eurasia Group. "It's a deep and ongoing crisis bigger than any they've experienced in decades... it's an environment where European leaders could hardly be expected to prioritize anything else."
That could leave the continent being increasingly sidelined as emerging powers - not just the BRIC powers of Brazil, Russia, India and China but other states such as Turkey, Indonesia and South Africa - grow in importance.
At the very least, it could undermine the ability of the continent's leaders to persuade the rest of the world to take them seriously on a range of issues, from trade to the importance of democracy and human rights.
"Europe probably isn't going to stop preaching to the rest of the world," says Nikolas Gvosdev, professor of national security studies at the US Naval War College. "But it's much less likely that others are going to be inclined to listen."
EUROPE AT CROSSROADS
At the Copenhagen climate summit in 2009, European states suffered the indignity of being outside the room when the final deal was struck between the United States and emerging powers. In the aftermath of the euro zone crisis, it's a position European leaders may simply have to get used to.
But for the rest of the world, it's not just the continent itself that is rapidly losing its shine. The whole European political model - generous welfare systems, democratic decision-making, closer regional integration and the idea of a currency union as a stabilizing factor - no longer seems nearly as appealing to other, still growing regions.
"Europe is at a crossroads, with the very future of the EU at stake," says Brahma Chellaney, professor of strategic studies at New Delhi think tank the Centre for Policy Research. "If the euro dies, it will mark the end of the European experiment in forging closer financial and political integration. But it will also have wider international implications."
Not everyone agrees what those will be, however. Chellaney argues the demise of the euro might help secure the primacy of the dollar - and therefore perhaps of the United States itself - for years to come.
But others believe a European collapse would be a sign of things to come for the US as well. Bharat Karnad, a colleague of Chellaney at the Centre for Policy Research, argues that whatever happens powers such as China are on the rise and that the West will be increasingly challenged regardless of what happens to the euro.
"The health of the euro or the EU, for that matter, will have a marginal impact on gold and power that is tending any way towards Asia, especially China," he said.
Washington takes the potential threat of Europe's unraveling very seriously. In the short-term, the Obama administration is clearly concerned over the electoral fallout should the crisis in Europe cross the Atlantic before November's presidential election.
But in the longer term, whether the euro survives or not US planners are beginning to face up to the fact that the continent will likely be poorer and rather more self-centered than Washington had hoped.
Washington has long been pushing European powers to take more responsibility for their own immediate neighborhood. While Britain and France took the political lead in Libya last year, US Defense Secretary Robert Gates complained European NATO forces were in fact almost entirely dependent on US munitions, logistics and other backup.
But the change in European thinking and the additional defense spending Washington called for now looks all but impossible in this time of austerity.
WASHINGTON WORRIED
"It's doubtful any future US Defense Secretary is even going to bother to make that kind of pitch," says Gvosdev at the US Naval War College. "We'd hoped Europe could take the lead in some parts of North Africa as well as the Balkans and Eastern Europe. That now looks very unlikely."
US planners were also waking up to the fact that European states were no longer likely to match US donor pledges when it came to humanitarian or financial aid for war zones and troublespots, he said. Then, there were longer term strategic concerns.
Washington's military "pivot " towards Asia, he said, had been based in part on the assumption that Europe would remain stable and wealthy and the US now had little or nothing to worry about on its North Atlantic flank. A weakened Europe could make US planners much less confident of that, particularly if China extends its influence.
Beijing has upped its investments in Europe in recent years, including major port projects in Greece and Italy.
Some political analysts contend the weaknesses and drivers behind the euro zone crisis go much further and can be found in most western economies - including the United States itself.
"The jettison involves essentially the ballast which used to provide stability to the vessel of post-war society," Jin Liqun, chairman of the supervisory board for China's sovereign wealth fund the China Investment Corporation, wrote on May 21 in Communist Party-run newspaper the People's Daily, making it clear he saw similar problems in the US.
Some waning of Europe's international influence was always likely, experts say, with an ageing population chewing up ever more resources and emerging economies inevitably growing faster. But the current crisis could supercharge its decline. Whether the continent's leaders realize that, however, is another matter.
"Europe's main source of influence (should) be the success of its political and economic model in providing high living standards and democratic freedoms," says Jack Goldstone, professor of international affairs at George Mason University near Washington DC "If the current crisis undermines both of those as well, Europe will look like a rather weak, badly run system of ageing and economically stagnant states. Irrelevance awaits."

[Zanza]

@Sheilbh:

The truth of the matter is that any policy that holds Club Med in the euro will ensure that Mrs Merkel's Christian Democrats are annihilated next year, as it involves entirely unreasonable burdens for ordinary Germans.

This part here shows how little the Chief Economist of Lombard understands about German domestic politics. It's possible that Merkel's party loses, but if so, it won't be because of her handling of the Euro crisis, but rather for purely domestic reasons.

[Iormlund]

You think giving in on Eurobonds, QE and other transfers wouldn't lose her the election?

[Zanza]

No, that's way too abstract.

[Scipio]

This guy is quite interesting.

http://yanisvaroufakis.eu/

[MadImmortalMan]

This guy is quite interesting.

http://yanisvaroufakis.eu/

The video there suggests that the European Redemption Fund is a great big con for Germany to take everyone's gold.

[Sheilbh]

First projections of Greek election from state broadcaster:
Skai TV gives first seat projections from their exit polls: Syriza 28% 124 seats, ND, 27.5% 73 seats, Pasok 13% 33 seats.

Difficult to see a government emerging.  And, apparently, the leader of Syriza's wife has given birth to their second kid

[Iormlund]

Tsipras has conceded the election. The question now is whether ND can form a government.

[Queequeg]

Tsipras has conceded the election. The question now is whether ND can form a government.

[Sheilbh]

Tsipras has conceded the election. The question now is whether ND can form a government.

There was an analyst area who said it looked like whoever won would get 130 seats - both Syriza and ND were around that level according to exit polls.  But that it would depend on how their potential coalition parties do. 

ND want a grand coalition.  PASOK have apparently said they won't form a government without Syriza (presumably they want to drag them down too) while Syriza are probably looking forward to aggressive opposition.

[Queequeg]

Sheilbh, who is that in your profile picture?