Sovereign debt bubble thread

[Sheilbh]

No doubt to keep the bonds of the stressed euro nations inside the definition of valid collateral.

I don't think so.  My understanding is that the ECB accepts all EZ sovereign debt as valid collateral subject to a haircut in some cases. I believe that their acceptance of Greek debt has only been 'suspended' before and even that was only during the PSI-deal.  No doubt this is necessary though, without that we'd see a far wider banking collapse in, at least, Spain, Italy and Belgium which would have Euro-wide effects.

I think this is more to keep the Spanish banks safely able to operate as more and more Spanish mortgage backed securities get junk status. 

It is worth saying that this move only makes the ECB operate in the same way that the Fed and BofE have been operating for years, they've always accepted these securities as collateral, subject to a haircut.  So it's not even anywhere near unconventional monetary policy that could help the EZ.

Edit:  Incidentally has anyone else read about the Russians offering money to bailout Cyprus and they might do the same for access to Piraeus, especially to get out of Syria. 

[Iormlund]

AFAIK they have already loaned money to Cyprus once. I had not thought of the Med port angle but it makes sense.

[Tamas]

I read that the new greek government will ask for a two years delay on making good on the stuff they promised to the EU

[MadImmortalMan]

I read that the new greek government will ask for a two years delay on making good on the stuff they promised to the EU

Does that imply two more years' worth of bailout cash too? If not, how will they fund themselves?

[Sheilbh]

Does that imply two more years' worth of bailout cash too? If not, how will they fund themselves?

Almost certainly.  But everyone at the time of the second bailout said that they would, inevitably, need a third bailout.

I read that the new greek government will ask for a two years delay on making good on the stuff they promised to the EU

Still not enough.  They need to default.

[DontSayBanana]

Still not enough.  They need to default.

Seriously.  That faucet that the ECB turned on was leaky to begin with, and now nobody seems to be able to turn it off.

[MadImmortalMan]

Greek finance minister has resigned. I guess it's health issues. He saw the balance sheet and had a heart attack.

[MadImmortalMan]

ONly 3 days to Armageddon!!!111

Soros' Countdown to EU Armageddon: 3 Days
June 25, 2012 1:10 PM EDT



Billionaire investor Geroge Soros made a dire prediction about the situation in the eurozone today. Soros, famous for being a brilliant investor and something of a guru, said that unless officials in Europe take the necessary steps to solve the crisis in the next three days, then the summit will turn out to be a "fiasco" and ultimately "fatal" to the European union.

His comments came during an interview with Fancine Lacqua of Bloomberg TV, where he weighed in on the ongoing difficulties leaders in Europe are having managing the a financial crisis that is threatens to splinter the European Union.

"Basically there is an interrelated problem of the banking system and the excessive risk premium on sovereign debt - they are Siamese twins, tied together and you have to tackle both," he said. "It's the beginning of a banking union and there is a disagreement on the fiscal side and unless that is resolved in the next 3 days then I am afraid that the summit could turn out to be a fiasco, and that could be fatal."

Soros believes that Germany is doing Europe a disservice by standing in the way of fiscal reforms. The tragedy of it all, in his view, is that Angela Merkel is acting in good faith, but she is leading Europe in the wrong direction. Instead of an open society, if it survives, the EU will be "transformed it into a hierarchical system where the division between creditors and debtors would become permanent... It would lead to Germany being in permanent domination. It would become like a German empire, and the periphery would become permanently depressed areas."

[Zanza]

http://online.wsj.com/article/SB10001424052702304870304577487673011875972.html

France Is Main Obstacle To A Euro Solution
By SIMON NIXON

Two statements last week following the four-way summit in Rome between the German, French, Italian and Spanish leaders capture the essence of the euro crisis and show why a solution is as far away as ever.

Responding to the latest demands that euro-zone bailout funds be allowed directly to recapitalize Spanish banks, German Chancellor Angela Merkel replied: "If I give money to Spanish banks, I'm the German chancellor but I can't say what these banks do." Later, French President Francois Hollande was asked about his willingness to accept further political union as the price of greater pooling of debt, he replied: "There can be no transfer of sovereignty if there is not an improvement in solidarity." Boiled down, this is a debate over whether Germany should write blank checks.

There is no chance of this debate being resolved at this week's summit of European leaders. The euro zone is now at one minute to midnight. Its financial system has fragmented, confidence is evaporating, demand is drying up and deposits are leaking out of the banks. There is now an international consensus on the measures needed to halt the immediate crisis: Massive bond buying by the European Central Bank, the direct recapitalization of banks by bailout funds and the creation of common euro-zone bonds.

But none of this is likely to be agreed at Wednesday and Thursday's European Council meeting. Expectations are low and unlikely to be exceeded, according to people involved in preparations for the summit. At best, the leaders may agree a timetable for common supervision of euro-zone banks: Useful, but hardly enough to satisfy the markets.

The conventional wisdom blames Germany and its leader Ms. Merkel for this impasse. She has been harangued by world leaders, attacked in print and lampooned on magazine covers for saying "nein" to the pooling of euro-zone debt while focusing instead on long-term reforms. On Ms. Merkel's insistence, much of this week's summit will be taken up with discussions of proposals by the presidents of the European Council, European Commission, ECB and Eurogroup for banking, fiscal and political union. The case against Ms. Merkel is that this agenda is focused on preventing the next crisis rather than solving the current one.

But the idea the euro zone can pool debt without significant sacrifices of sovereignty is a dangerous illusion. To create a fiscal and banking union without a political union would multiply the original mistakes in the creation of a monetary union. And there is one country that has historically said "non" to the transfers of sovereignty that might put the euro zone on a long-term stable footing: France.

France has always been reluctant to cede sovereignty to the European Union. It prefers intergovernmental -- as opposed to supranational -- solutions to European challenges, reflecting its long history as a centralized state. That is why the euro zone was largely designed along French lines, as a club of sovereign states.

In theory, it wasn't a bad plan: a no-bailout rule and a ban on the ECB financing governments were supposed to force countries to manage their economies prudently. Unfortunately, this plan didn't survive contact with reality. Governments didn't manage economies prudently during the boom and are unwilling or unable to address economic weaknesses now. But if France now believes the answer to the current crisis is a monetary union where responsibility for debts are shared then it follows that a new set of political arrangements are required in which responsibility for economic decision-making is also shared. The inter-governmental model in which one currency is backed by 17 sovereign nations is surely obsolete.

Nothing in the euro zone's history suggests the offer of blank checks, whether from the ECB or bailout funds, will do anything other than buy time -- time that will be squandered rather than used to address deep structural problems arising from inflexible labor markets, inefficient bureaucracies and unaffordable welfare systems.

Greece has failed to implement many of the structural reforms agreed as a condition of its two bailouts. Italy's reform effort quickly ran out of steam the moment the ECB made its offer of cheap, long-term loans to banks, while Spain offered only a half-baked reform of its banks. Even when governments do try to be virtuous, voters may have other ideas. No incumbent has won re-election since the start of the euro crisis. The new Greek government is vowing not to lay off a single civil servant, despite the previous government's commitment to cut 150,000 jobs by 2015. Meanwhile Mr. Hollande won election on a platform that made no concessions to the deep structural challenges facing the French economy, promising to lower the retirement age from 62 to 60 for some workers, introduce a new top tax rate of 75% for the highest earners and make it even harder to fire workers.

Against this dysfunctional political backdrop, it makes no sense for Germany or the ECB to agree to pool debts, even assuming the legal obstacles could be quickly overcome. The markets won't be fooled for long if there is no robust mechanism to ensure countries address long-term solvency problems and or to allocate losses if all the debt sours remains unresolved.

Those calling for immediate action may be right that losses should fall mainly on creditors in the form of higher inflation and fiscal transfers since the alternative of forcing citizens of indebted countries to bear the cost of adjustment is politically impossible and likely to lead to a collapse in the euro. But this cannot be decided by stealth: The allocation of losses is an act of violence against individual property rights. Only a supranational body with a high degree of public trust can decide, for example, what proportion of the losses from Spain's banking bust should be borne by Slovak pensioners as opposed to the investors, managers and employees of those banks. To allocate losses any other way would be a recipe for long-term political and financial instability.

Mr. Hollande is wrong: The debate over sovereignty isn't a peripheral issue. It goes to the heart of the debate over solidarity. And France is the biggest obstacle to a solution.

[DGuller]

Does anyone still remember the time when dollar's value kept falling, and Euro seemed like a potential competitor to the status of the world's currency?  What happened to that notion? 

[alfred russel]

Does anyone still remember the time when dollar's value kept falling, and Euro seemed like a potential competitor to the status of the world's currency?  What happened to that notion? 

What about the when the crisis was just starting and members of the Greek government said the apparent trouble was just due to unfounded attacks by speculators?

[Crazy_Ivan80]

again the french. always the french.

[Ed Anger]

Does anyone still remember the time when dollar's value kept falling, and Euro seemed like a potential competitor to the status of the world's currency?  What happened to that notion? 

I'm still awaiting America's decline. We ARE DOOMED.

[derspiess]

Does anyone still remember the time when dollar's value kept falling, and Euro seemed like a potential competitor to the status of the world's currency?  What happened to that notion? 

I'm supporting the drachma when it returns.

[Neil]

Does anyone still remember the time when dollar's value kept falling, and Euro seemed like a potential competitor to the status of the world's currency?  What happened to that notion? 

I'm still awaiting America's decline. We ARE DOOMED.

It already happened.  It's been done.