Greece warned of 14.9 billion euro financing gap

Πηγή: CNBC
By Andrew Byrne and Kerin Hope (FT)
April 26 2014

Greece will still need an additional €14.9 billion ($20.6 billion) in financial help through next year despite holding its first successful bond auction in four years and posting a primary budget surplus in 2013, according to an EU report on the rescue.

The report is the first public evaluation of the Greek program for almost a year. Its publication was delayed by a lengthy dispute between Athens and international lenders over whether Greece was complying with the terms of the rescue.

Earlier this month, eurozone finance ministers signed off on a €8.3 billion aid payment that had been delayed since September – ending the stand-off.

The new report says Greece's financing gap in 2014 stands at €2.6 billion, with an additional €12.3 billion needed in 2015.

Greece is not out of economic crisis: Economist
Elena Panaritis, economist and founder at Thought 4 Action, says that while the Greek bond auction signals the country is doing better, the country needs to continue with its structural reform programs.

EU officials insisted Athens could generate income from other sources. However, were the hole to remain unfilled when the existing EU rescue ends later this year, Greece would require a third programme.

Greek finance ministry officials disputed the figure, with one saying the €14.9 billion funding gap "appears to be an overestimate." A European Commission official acknowledged there were several ways for Greece to plug the gap without resorting to a third bailout, including additional bond auctions.

"If market conditions continue as they are now, I would not exclude that at a later stage, Greece could issue further bonds," said the EU official.

But the report also warned that lower-than-expected growth projections put Athens on a course to miss its debt targets, which the troika of international lenders – the European Commission, European Central Bank and International Monetary Fund – have insisted must get "substantially below" 110 percent of economic output in 2022, from a peak of 177 percent this year.

The report shows Brussels now expects Athens' debt to fall to 112 percent of gross domestic product in 2022 due to weaker growth – a consequence of Greece's deflationary trends and lower revenue from the privatisation of state assets.

Under a hard-fought deal reached in November 2012, Greece's lenders agreed to provide additional debt relief after Athens achieved a primary budget surplus – which excludes interest payments. Jeroen Dijsselbloem, head of the eurogroup of finance ministers, said these talks were set to begin after the summer.

The EU official declined to speculate on how eurozone governments would help to lower Greece's debt levels, insisting this discussion was not part of the just-completed review. The issue will be addressed in the next quarterly review instead, the official said.

Greek and EU officials believe that, in addition to more bond auctions, there are other possible ways in which Greece can avoid a third rescue programme. Were Greek banks able to continue to raise private capital – as they have successfully done recently – they would be in the position to pay back €3bn in preferred shares held by the Greek government this year.

"If the banking sector is able to recapitalise fully from private sector sources, we will have a cushion of bailout funding to cover the gap," said the Greek finance ministry official. If the banks are all able to fund their capital shortfall with private money, this could save the Greek government as much as €11bn in aid.

Two Greek banks this month raised €3bn on the markets – enough to cover fully the capital holes identified in recent stress tests required by the troika. Greece's remaining two large banks are expected to follow suit this month. However, all four banks may be forced to raise additional capital following the ECB's stress test of European lenders later this year.

Even if Athens were able to receive cash from its banks and access the unused funds in government agencies, it would still suffer from a funding gap of €9 billion. This would have to be filled by borrowing on the market or via a new rescue package.

Greek Debt Grows as Samaras Looks to Creditors for Relief

Prime Minister Antonis Samaras said in an interview last week, “We expect by the year 2015 that we will have not simply primary surplus, but that we’re going to have a fiscal surplus.”.

Πηγή: Bloomberg
By Ian Wishart
April 23 2014

Greek state debt surged to a euro-era record last year, underscoring the urgency of Prime Minister Antonis Samaras’s push to lower the cost of the government’s bailout loans.

The country’s debt pile reached 175.1 percent of gross domestic product in 2013, up from 157.2 percent a year earlier, the EU’s statistics office in Luxembourg said today. For the euro zone as a whole, state debt rose to a record 92.6 percent of GDP from 90.7 percent.

“The surge in public indebtedness since Greece’s fiscal crisis erupted in 2009 is staggering,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. “The fact that, technically speaking, it’s still debatable whether Greece is solvent says much about the management of its crisis.”

While Greece has the highest debt-to-GDP ratio in the 18-nation single-currency bloc, Samaras may get some welcome news later today, when the European Commission decides if his government posted a primary budget surplus in 2013.

Greece’s euro-area partners said in November 2012 that when the government in Athens registers a primary surplus, which excludes borrowing costs, they will “consider further measures and assistance” to help Greece meet the targets set out in its rescue-aid agreement, which foresees a debt-to-GDP ratio “substantially lower” than 110 percent in 2022.

Two-Party Coalition

The euro pared gains against the dollar after today’s data were released, trading at $1.3842 at 11:21 a.m. in Brussels, up 0.3 percent on the day. The Stoxx Europe 600 Index was down 0.3 percent to 336.15.

Seeking to bolster a shaky two-party coalition government, Samaras is keen to obtain a political reward for his cost-cutting measures before European legislative elections next month. His government has already said it achieved a primary surplus of 2.9 billion euros ($4 billion) last year, a figure that must be confirmed by the commission.

Today’s debt data came in below the European Commission’s forecast for 2013 of 177.3 percent of GDP.

While euro-area finance ministers could kick-start discussions on debt relief for Greece at their next meeting on May 5, Dutch Finance Minister Jeroen Dijsselbloem, who leads such gatherings, has said the matter will not be taken up until after the summer.

Bank Aid

Greece’s headline deficit widened to 12.7 percent of GDP in 2013 from 8.9 percent in 2012, today’s data showed. This includes a one-time cost for recapitalization of the country’s banks. Without that added expense this year, the European Commission predicts the deficit will narrow to 2.2 percent of GDP in 2014.

“We expect by the year 2015 that we will have not simply primary surplus, but that we’re going to have a fiscal surplus,” Samaras said in an interview last week. “This means we will be able on our own to pay our debt, without borrowing at all. There are very few European countries that are doing this today.”

Greece went through the world’s biggest sovereign-debt restructuring and has so far received 240 billion euros in aid commitments. To receive payments, the country has faced a series of economic conditions including labor-market reforms and budget goals.

In recent weeks, Greece’s recovery has gained momentum. The government held its first bond sale in four years earlier this month and forecasts it will emerge from a six-year recession this year after six years of contraction.

Economic Recovery

Today’s data also confirmed that other fragile euro-area economies are still struggling to control debt levels even as recovery across the currency region takes hold. Italy’s debt mountain increased and remained as the second highest in the euro area after Greece, going up to 132.6 percent of GDP in 2013 from 127 percent the previous year.

Portugal, in third place, saw its debt rise to 129 percent of GDP from 124.1 percent, while in Ireland, next in line, debt rose to 123.7 percent from 117.4 percent. Both countries received international bailouts at the height of the euro crisis.

The data also show that some euro-area countries are struggling to reduce their budget deficits to with the EU’s 3 percent of GDP limit. France, the region’s second-biggest economy, posted a deficit of 4.3 percent, down from 4.9 percent. Spain recorded a deficit of 7.1 percent last year, narrowing from 10.6 percent the year before.

Isolated in Brussels: Merkel Clashes with EU Commission

Angela Merkel at the recent EU summit on Dec. 19 in Brussels: The chancellor has become bogged down in her attempt to lead the Europe.

Πηγή: Speigel
By SPIEGEL Staff
Jan 2 2014

Even as the euro crisis grows less acute, Europe is stuck. The European Commission is resisting any loss of its power, and many member states are tired of German dominance. Opponents of Europe, including those in Merkel's camp, sense an opportunity.

On page 157 of the coalition agreement between Germany's center-right Christian Democratic Union (CDU) and the center-left Social Democratic Party (SPD), at the beginning of the section on Europe, there is an oldie that many German governments have crooned in the past. It has to do with the German language -- that is, its use in the European institutions. "German must be put on equal terms, in practice, with the other two procedural languages, English and French," the document reads.

It's a pious hope that will likely remain one, just as it was in the days of former German Chancellors Helmut Kohl and Gerhard Schröder. They too wanted to hear more German spoken in the everyday deliberations of the European Commission and the European Parliament. Of course, there has been no change to the dominance of English and French to this day.

There is no evidence that the current chancellor, Angela Merkel, has ever paid more than lip service to the decades-old language dispute. She couldn't care less whether negotiations and meetings are conducted in English or French. To Merkel, it's more important that her Europe of the future becomes significantly more German. She wants Europe to become a different place, and certainly not the Europe Helmut Kohl envisioned. Merkel's Europe is no longer dominated by the European Commission, but instead is a place where the nation states become increasingly important. This would signify a departure from the history of European development over the course of more than six decades, as well as being a part of Germany's national interest.

That would spell the end for the so-called "Monnet Method," named after the Frenchman Jean Monnet, a bold postwar visionary who, above all, was a gifted tactician. His name stands for the leitmotif of European unification, which he devised: That powers are "communitized" whenever politically feasible, and wherever it is objectively appropriate. This meant that the European Commission in Brussels, the "custodian of the treaties," would gradually become more powerful.

In practice, since the 1950s this has meant: first coal and steel, then agriculture, the large internal market for goods and services, the euro, powers in domestic and judicial policy, social issues, foreign affairs and preferably a common military. Following every amendment to a treaty, and following almost every landmark decision by the European Court of Justice, the EU's highest court, the European Commission and the European Parliament ended up with more powers than before, while the member states' powers declined.

Resistance to Merkel Grows

Anyone who wishes to depart from this principle is likely to encounter resistance, which means that Merkel needs allies. But the record doesn't look good for the German chancellor at the moment, as she faces growing resistance and is losing allies.

The Germans haven't been on such bad terms with the European Commission in a long time. Brussels is using what is probably its strongest weapon, competition law, to threaten Merkel's most important domestic project at the moment, the federal government's shift away from nuclear power and toward green energy, also known as theEnergiewende. Conversely, Merkel is hardly making a secret of her view that the European Commission should not be closely involved with the next major steps toward a closer economic and monetary union. In her view, the member states should remain in control when it comes to the further restructuring of Europe -- a challenge to the power-conscious eurocrats and their communitized powers. Commission President Olli Rehn has commented critically, that the community method is needed to fully integrate the small member states into decisions.

Berlin has no trouble accepting this conflict as a fact of life, and the chancellor and her advisers are willing to take their chances. But the Germans are now largely on their own among member states. Both small and large EU countries blocked Merkel's latest push for a reform-oriented, common economic and fiscal policy, using Germany as a model. At the EU summit in the second half of December, Merkel was confronted with harsh words from several European leaders, and the mood at the table turned against her. After the meeting, German EU Commissioner Günther Oettinger had this warning for the Chancellery: "Although Germany is the largest member state, it's still only one of 28. Following the Lisbon Treaty, majority decisions in the EU have increased. This is why Berlin must show a willingness to compromise, just like everyone else."

Brussels is at an impasse. For the moment, the chancellor has become bogged down in her attempt to lead the EU.

Commission President José Manuel Barroso was one of the first targets of her anger. At the EU summit, Merkel took the Portuguese politician aside and flatly told him that the proceedings by the Commission against Germany's renewable law -- the German Energies Act (EEG) -- on the grounds it breaches EU competition regulations was an "affront." She told Barroso that Berlin was certainly willing to discuss the exceptions for energy-intensive businesses, which had been significantly expanded recently. But a general attack on the centerpiece of the GermanEnergiewende policy was presumptuous, Merkel said. Since 2002, the European Commission had never raised any fundamental objections to renewable energy, she added, so why now?

Commission Pushes Forward

But the Commission plans to stick to its guns, and the proceeding is continuing as planned. And the EU's executive has even more up its sleeve that will further fuel the conflict. For instance, in Germany energy-intensive companies are not only largely exempt from the EEG reallocation charge, but also from fees for the use of power lines. A decision as to whether this is compatible with competition law will likely be made in the first half of 2014. For some time, Brussels has also been looking into government subsidies for many German regional airports, from Frankfurt-Hahn to Zweibrücken and Kassel-Calden. Brussels also holds a critical view of Deutsche Bahn's monopoly in the rail network, while the European Commission finds fault with the prices that private railroad operators must pay to use the routes.

And the scrutiny of large German export surpluses has only just begun. And although the Chancellery concedes that this scrutiny is formally justified, Berlin is furious nonetheless. It argues that the Commission has granted France and other countries longer grace periods than originally planned to bring their budget deficits below the admissible limit.

Some partners feel a certain sense of schadenfreude to see the Germans coming under fire, as became apparent during a recent dinner hosted by the Italian ambassador to the EU. For almost two hours, the discussion also revolved around German trade surpluses. To the great amusement of everyone present, one of the guests suggested that the surpluses could be offset by German penalty payments for the EEG.

The German representatives in Brussels are doing their utmost to defend themselves in the proceeding, but Commission President Barroso has nothing left to lose, with his term ending in the summer of 2014. And his relationship with Merkel is unlikely to improve anymore at this point, despite the critical role she played in providing him with two terms at the head of the Brussels Commission. It isn't something she wants to be reminded of today.

Critics of the Commission at the Chancellery have since prevailed, most notably the department head for Europe, Nikolaus Meyer-Landrut. From Berlin's perspective, the European Commission wants too much and is not capable enough. Berlin sees Barroso as being out of his depth and the group of commissioners as uncontrollable.

For officials in Berlin, the example of "olive oil jugs" is a case in point. In May, a spokesman for the European Commission announced that the small, open containers on millions of restaurant tables in Europe were to be completely banned. In the future, olive oil was to be served in a "special closed container that cannot be refilled." The Brussels agency argued that its aim is to improve hygiene and consumer protection, and that the new rule would prevent customers from being served bad olive oil. But the presumably well-intentioned provision was not well received. Alarmed by the public outcry, the Commission backtracked, and there was suddenly talk of a solo effort by Agriculture Commissioner Dacian Ciolos.

Part 2: An Unruly Commission

The sheer size of the European Commission is indeed a problem. But because each country ultimately wants to keep its own commissioner, in May the heads of state and government, including Merkel, rejected a plan to reduce the number of commissioners, which was in fact stipulated by treaty. As a result, the center of power in Brussels, with a total of 28 commissioners, will remain almost twice as large as the German cabinet. This leads to bizarrely structured areas of responsibility. For instance, Commissioner Androulla Vassilious, who is from Cyprus, is in charge of culture, even though the European Commission, under the Lisbon Treaty, has no right to intervene in this area. Maltese native Tonio Borg is also in charge of something that the EU has no authority to regulate: health policy. Four other commissioners share foreign policy responsibilities: Foreign Affairs and Security Policy (Catherine Ashton, Great Britain), EU Enlargement and Neighborhood Policy (Stefan Füle, Czech Republic), Humanitarian Aid (Kristalina Georgieva, Bulgaria) and Development Policy (Andris Piebalgs, Latvia).

Berlin officials feel that the Commission is not taken seriously where it should be. Only 10 percent of the Commission's recommendations to EU member states on issues of economic policy were actually implemented in 2012. The Commission skeptics at the Chancellery suspect that there is something very fundamental behind this. They note that in the wake of the acute euro crisis, major reform decisions are now on the agenda, which will no longer be assigned to Brussels officials, because only national governments can justify them to their parliaments and citizens. "Only nation states can justify the reforms that are now truly necessary," says one of Merkel's key advisers. A pension reform in one country and a relaxation of protections against employee dismissal in another are not the kinds of issues that can be entrusted to the "communitized competency" of the European Commission, say German officials. Decisions with such explosive domestic force for national governments can only be made by the governments themselves -- within the European Counil, the powerful body comprised of the leaders of the 28 EU member states.

In this context, Merkel recently came out as either a winner or a loser. But in most cases she was largely alone.

The Germans prevailed with her ideas for a banking union, against the conceivably broad resistance of the remaining 17 euro countries. For months, German Finance Minister Wolfgang Schäuble (CDU) had been reluctant to grant the European Commission the last word in the liquidation of ailing banks, and he prevailed in the end. In the future, representatives of national liquidation agencies will decide which lenders are to be shut down, if necessary. Although the European Commission can oppose the vote, the finance ministers of the member states, that is, Schäuble and his counterparts, can remove the Commissioners' objection.

The decision on the banking union paves the way for more extensive and deeper integration. But in a departure from the policies of the past, the step chiefly strengthens the rights and powers of the member states, not the Commission. The move had Germany's handwriting all over it, but it also led to new tensions. When the finance ministers were about to toast the agreement with sparkling wine, a Southern European diplomat reportedly turned away, according to the Süddeutsche Zeitungnewspaper. Everything tasted German on that evening, the diplomat apparently said, and "I don't drink German sparkling wine."

An Unresolved Euro Crisis Dispute

This resentment stems from the unresolved dispute over the right approach in the euro crisis and the lessons to be drawn from it. In 2010, to be able to monitor debtor nations more closely, Merkel almost singlehandedly ensured that the IMF would assume part of the control over bailout programs, and not the European Commission alone. Since then, Germany, using its domestic "Agenda 2010" -- a package of reforms undertaken by former Chancellor Gerhard Schröder to reduce long-term unemployment benefits and otherwise streamline the social security system -- as a model, has pressured the southern countries to implement reforms and austerity programs. They, in turn, want Berlin to promote German domestic consumption more heavily, invest more and export fewer goods to other euro countries.

No one can force Germany, the perceived class geek, to do so. But at the most recent summit, the other EU leaders at least had the strength to put a stop to Merkel. She had emphatically proposed a common, coordinated economic policy in which the euro countries would commit themselves to structural reforms in individually tailored agreements. "If we do not embark on further reforms, we will eventually run into trouble again," Merkel warned at a dinner of the heads of state and government. But not even traditionally pro-German countries like Austria, the Netherlands and Finland agreed with her proposal, let alone the Southern Europeans.

"I don't need these reform agreements," Spanish Prime Minister Mariano Rajoy snapped. "I don't need anyone else to tell me about reforms, because I've already done that." Merkel's concept was "simply half-baked," Austrian Chancellor Werner Faymann said critically. Merkel continued to pursue the idea and bluntly warned that if individual countries ran into trouble again soon, they could not expect to see any German money. "Don't think that the Bundestag will rush to their assistance again." But her arguments fell on deaf ears. Her idea was postponed, in a serious setback for Merkel.

At the beginning of 2014, Merkel's new, German Europe is still up in the air, facing resistance from the Commission and with hardly any support from other member states. And her next move is to mobilize the Christian Social Union (CSU), the CDU's Bavarian sister party, to take a more general anti-European approach.

The CSU is planning a European election campaign that is decidedly anti-Brussels, as indicated by a four-page strategy document drafted by the CSU regional committee for the traditional meeting of its members of parliament in the Bavarian resort town of Wildbad Kreuth. "We need a withdrawal therapy for commissioners intoxicated with regulation," the document, titled "Europe's Future: Freedom, Security, Regionalism and Public Responsiveness," reads. One of the stated goals of the document is to reduce the size of the European Commission. The CSU proposes the establishment of a new court to take tougher action against the Brussels agency exceeding its authority. "Disputes are to be decided by a European competency court, which would include constitutional judges from the member states." The CSU proposes that referendums be held for important EU decisions, and that EU powers generally be transferred back to the member states. "This could apply to parts of the overregulated internal market, as well as regional policy," the document reads.

The chancellor doesn't want to go that far. But her pivot away from Germany's traditional policy on Europe is also easy to misunderstand. Merkel wants less "Brussels" but "more Europe." But to bring joint control into the Brussels body to which she belongs, the European Council, Merkel must publicly confront the European Commission with its mistakes, so as to deprive it of some of its power. The opponents of Europe are just waiting for that, even in their own camp -- and they are far from satisfied with merely a little more emphasis on the German language in Brussels offices.

BY NIKOLAUS BLOME, PETER MÜLLER, CHRISTIAN REIERMANN, GREGOR PETER SCHMITZ AND CHRISTOPH SCHULT.

Translated from the German by Christopher Sultan.

Deficit-cutting is European, not German policy: Wolfgang Schaeuble

Πηγή: Economic Times
By AFP
April 21 2013

WASHINGTON: German Finance Minister Wolfgang Schaeuble insisted Saturday that Germany's European partners agreed with deficit reduction, as pressure grew on Berlin to back a less austere, more growth-friendlyeconomic crisis approach.

"Nobody should have the misunderstanding that there is an alternative for reducing deficits," Schaeuble said to reporters at the spring meetings of the International Monetary Fund and World Bank.

"It is not a German position, it is a common position," he said.

"We are totally united."

Germany was pressed at the IMF meetings to ease off pressure on the eurozone's troubled periphery countries to cut spending to right their finances quickly, with IMF experts and other members saying that growth needs more demand stimulation.

Berlin has repeatedly turned back some claims, saying the austere debt and deficit reduction programs of countries like Greece, Portugal, Ireland are essential to rebuilding the eurozone economy.

Schaeuble warned of "unrealistic" expectations for growth in the European Union, which remains deep in recession.

Europe will not be "the big driver of growth," he said. He forecast long-term growth in Europe to be at 1.0-1.5 per cent, "rather than significantly higher."

"We are very successful," he said. "We don't have enough growth actually, but we are on the right path."

"We have made progress to overcome the crisis of confidence in the euro. We have made a lot of progress through structural reforms."

Opposing views between France and Germany

Πηγή: New Europe
By KARAFILLIS GIANNOULIS
April 5 2013

The Finance ministers of France and Germany, Pierre Moscovici and Wolfgang Schaeuble met on April 4. Moscovici, asked from Germany to boost demand, while Schaeuble insisted that Member States should restore their financial order. The finance ministers spoke to students at government and management school ENA in Strasbourg.

“Right now, all countries are consolidating, which means hitting the budgetary brakes, even in countries running surpluses,” Moscovici said. However, indirectly he asked from Germany to focus on growth policies as he stressed that “If we all hit the brakes together, we all get stuck together.” On the other hand, Schaeuble replied that the debate between austerity and growth in Europe is not substantial. “We need to stop this debate which says you have to choose between austerity and growth,” the German finance minister said and added “growth is indispensable.” In addition, Schaeuble rejected the term austerity and he stressed that in Germany they simply call it “deficit reduction.”

However, Moscovici asked from Germany to understand that deficit reduction in France needs to be gradually done. He underlined that the French government cannot cut the national deficit below the EU limit of 3 per cent in 2013 as this would put the country into a recession. “No one can deny that there’s a link between austerity and unemployment. What this government asks for is a re-balancing of policies toward growth,” the French minister stressed.

The national finances of France and Germany are not the same as the budget deficit in Germany will be near balance in 2014 while the country runs a trade surplus. On the other hand, the French government has said it won’t hit its target of bringing its deficit down to 3 per cent during 2013 because the cuts would push the country into recession.

Overall, during the speech of the two ministers the lack of consensus between France and Germany regarding the economic policies in EU Member States was observable.

Fed Injects Record $100 Billion Cash Into Foreign Banks Operating In The US In Past Week

Πηγή: Zero Hedge
By Tyler Durden
March 9 2013

Those who have been following our exclusive series of the Fed's direct bailout of European banks (here, here, here and here), and, indirectly of Europe, will not be surprised at all to learn that in the week ended February 27, or the week in which Europe went into a however brief tailspin following the shocking defeat of Bersani in the Italian elections, and an even more shocking victory by Berlusconi and Grillo, leading to a political vacuum and a hung parliament, the Fed injected a record $99 billion of excess reserves into foreign banks. As the most recent H.8 statement makes very clear, soared from $836 billion to a near-record $936 billion, or a $99.3 billion reserve "reallocation" in the form of cash - very, very fungible cash - into foreign (read European) banks in one week.



Furthermore, as we first showed, virtually all the "reserves" created by the Fed end up allocated as cash at commercial banks operating in the US: both domestically-chartered (small and large), but more importantly, foreign. And of the $1.884 trillion in very fungible cash parked in various domestic and international US banks, just half of it, or $949 billion is actually allocated to US banks. The other half, or $936 billion, is parked within, again, very fungible cash accounts of foreign (read European) banks operating in the US. This is shown in the chart below (green area is cash of foreign banks), and what is also shown is the total change in the Fed's excess reserves, which proves, once more, that the Fed continues to fund European banks with hundreds of billions in cash on a week by week basis. And what is perhaps most important, is that of the $250 billion in new reserves created under QEternity, all of it has gone to foreign (read European) banks.

It may anger American to learn that by the time the Fed is done with QEternity (if ever), all of the newly created cash will have gone to mostly European banks. Because with every passing week, whatever new reserves are created by the Fed in exchange for monetizing the US deficit, end up as cash solely at European banks: a sad reality we have seen non-stop since the advent of QE2 when US bank cash balances remained relatively flat in the ~$800 billion range, and every incremental dollar went straight to Europe.

As a reminder, we don't know how, via assorted shadow banking and other repo pathways, these banks manage to use said cash in other fungible activities. Recall that as we said, "So whether European banks will continue buying the EURUSD, or redirect their Fed-cash into purchasing the ES outright, or invest in other even riskier assets, remains unknown." It is also unknown is the Fed's reserves, reappearing as cash, and then siphoned over to European bank HoldCo via payables, is then used by, say, Italian and Spanish banks to purchase BTPs and Bonos, and give the impression that all is well. Because unlike before, keeping the EURUSD high is not as critical any more. But what is critical is to give the impression that Italian and Spanish sovereign risk is contained. And after all, let's not forget that as of January, Italian bank holdings of Italy state bonds just hit a record of EUR200 billion.

Is it possible that the Fed, in all its generosity, transferred over several hundred billion over to these same Italian banks, courtesy of the cover provided by QE, so that the same Italian banks may monetize Italian bank bonds? And the same for Spain. Any wonder then that we got news of how flyingly great Spanish and Italian bond auction were in the past week?

After all, in Europe Germany has a heart attack whenever anyone perceives the ECB as monetizing, or even greenlighting the monetization of local sovereign bonds. But Germany has never said what it thinks about the Fed, indirectly, doing the same, using Italian and Spanish banks as conduits.

Finally, while we don't know what the cash is being used for, we know that sooner or later, sometime around December 2013, when European, pardon, foreign bank holdings of US reserves, i.e., USD cash, hits well over $1.5 trillion, and when the Interest on Excess Reserves starts going up and the Fed is directly providing tens of billions in interest payment to European banks, some Americans may be angry to quite angry with that development.

But for now, everyone is blissfully unaware and even if they were, nobody cares. Why just look at the Dow Jones Industrial Average: how can one possibly allege that all is not well with the world...

Source: H.8

Greece, Portugal and Spain really have benefitted most from the euro

Πηγή: FT
By Masa Serdarevic
August 17 2012

Has the single currency been good to you? It’s a question sure to inflame people across Europe, many of whom seem to believe they’ve suffered while others have made out like bandits.

The answer is pretty straightforward, according to Paul Donovan at UBS. If you look at the growth in household real disposable income between 2000 and 2010, those living in peripheral countries have benefited the most.

Donovan and his team at UBS have looked at eleven of the larger eurozone countries, breaking down income levels in deciles to get an insight into how income inequality has changed over the decade within countries and between countries.

To do this more accurately, they sought to identify income-specific inflation rates because headline figures only offered average rates, reflecting average spending patterns. The latter are not much use if you’re trying to understand income growth across income levels as a country’s high-spenders have a disproportionate impact on its inflation rate:

This matters because the last two decades have seen a growth in inflation inequality. Essentially, it is more expensive to be poor, because the goods and services purchased by lower income households have tended to rise in price by more than the goods and services purchased by higher income households. Lower income households tend to have a higher concentration of food, energy and housing in their consumer baskets. This is not a Euro-specific phenomenon, but something that has been observed across industrialised countries since the mid 1990s.

The team used data from Eurostat to re-weight the composition of headline CPI, to try to better reflect the spending patterns of the different income quintiles. Granularity, as they admit, is not fantastic, but it’s better than no granularity.

What Donovan and co found is that the lowest-income sections of the more “core” countries saw negative real disposable income growth, while those at the other end of the income scale saw incomes rise still further. In other words, in the core countries, the rich got richer, the poor got poorer.

But the “peripheral” countries tended to have higher overall levels of income growth, and all sections of their society enjoyed growing incomes. So, everyone got richer. (The authors stress that the data set ends in 2010, so the impact of the more recent austerity measures is excluded.)

For example, this is the Netherlands:



And this is Portugal:



Looking at Europe as a whole, where the lowest income decile is to the left of each country’s section, the pattern described above is roughly repeated.



Click to enlarge.

We’d note the particularly cruel decade suffered by Austrians, while Finland seems to have bucked all expected trends.

There’s no immediate explanation for that. But in the meantime, the authors sum up:

Germany, Ireland, most of Italy and the French middle class all experience a decline in their standards of living. In most of these countries, the highest income groups do relatively well.

What stand out are Greece, Portugal and Spain. These economies have benefited from increased standards of living under the Euro (at least, until 2010), as nominal incomes have overcome inflation pressures. There has also been a concentration on improving the lot of the lower income groups in these societies.

These are the sort of findings sure to play into the hands of the nationalist parties in the many of the core countries, brewing bitterness and resentment just as the troika-enforced austerity now assures the same in the periphery.

UBS, at least, don’t think that’s quite fair:

The countries that have experienced some moderation in their living standards are generally those that had the highest absolute disposable income levels in the first place. Someone occupying the bottom decile of French income distribution has twice the level of income of someone in the bottom decile of Greek income distribution in 2010.

The problem is that the debate works both ways, using exactly the same argument:

Why should one group of countries force another group of countries to accept lower living standards? This question could be asked by Germans of the Greeks (why should we see our taxes rise / disposable income fall to maintain your level of disposable income?). This question could be asked by the Greeks of the Germans (why should we see greater income inequality when we are already amongst the poorest in the Euro area, and suffer from a Germanocentric rather than a Helleno-centric monetary policy?). Both questions have a degree of validity.

While the authors point to the move toward greater income equality between nations during this period as a positive trend, they also cautiously argue that their findings suggest that the core countries should not be expected to continue financing the rise in peripheral living standards:

Looking at the growth of real incomes over the first few years of the Euro’sexistence, it is hard to argue against the idea that the peripheral countries shouldbe taking more pain now. Core countries have had to accept a decline in real living standards, and it seems unrealistic to expect them to finance an increase in living standards for others.

Hmm…

More on this in the usual place.

The Euro’s Latest Reprieve

Πηγή: Social Europe Journal
By Joseph Stiglitz
July 4 2012

Like an inmate on death row, the euro has received another last-minute stay of execution. It will survive a little longer. The markets are celebrating, as they have after each of the four previous “euro crisis” summits – until they come to understand that the fundamental problems have yet to be addressed.

There was good news in this summit: Europe’s leaders have finally understood that the bootstrap operation by which Europe lends money to the banks to save the sovereigns, and to the sovereigns to save the banks, will not work. Likewise, they now recognize that bailout loans that give the new lender seniority over other creditors worsen the position of private investors, who will simply demand even higher interest rates.

It is deeply troubling that it took Europe’s leaders so long to see something so obvious (and evident more than a decade and half ago in the East Asia crisis). But what is missing from the agreement is even more significant than what is there. A year ago, European leaders acknowledged that Greece could not recover without growth, and that growth could not be achieved by austerity alone. Yet little was done.

What is now proposed is recapitalization of the European Investment Bank, part of a growth package of some $150 billion. But politicians are good at repackaging, and, by some accounts, the new money is a small fraction of that amount, and even that will not get into the system immediately. In short: the remedies – far too little and too late – are based on a misdiagnosis of the problem and flawed economics.

The hope is that markets will reward virtue, which is definedas austerity. But markets are more pragmatic: if, as is almost surely the case, austerity weakens economic growth, and thus undermines the capacity to service debt, interest rates will not fall. In fact, investment will decline – a vicious downward spiral on which Greece and Spain have already embarked.

Germany seems surprised by this. Like medieval blood-letters, the country’s leaders refuse to see that the medicine does not work, and insist on more of it – until the patient finally dies.

Eurobonds and a solidarity fund could promote growth and stabilize the interest rates faced by governments in crisis. Lower interest rates, for example, would free up money so that even countries with tight budget constraints could spend more on growth-enhancing investments.

Matters are worse in the banking sector. Each country’s banking system is backed by its own government; if the government’s ability to support the banks erodes, so will confidence in the banks. Even well-managed banking systems would face problems in an economic downturn of Greek and Spanish magnitude; with the collapse of Spain’s real-estate bubble, its banks are even more at risk.

In their enthusiasm for creating a “single market,” European leaders did not recognize that governments provide an implicit subsidy to their banking systems. It is confidence that if trouble arises the government will support the banks that gives confidence in the banks; and, when some governments are in a much stronger position than others, the implicit subsidy is larger for those countries.

In the absence of a level playing field, why shouldn’t money flee the weaker countries, going to the financial institutions in the stronger? Indeed, it is remarkable that there has not been more capital flight. Europe’s leaders did not recognize this rising danger, which could easily be averted by a common guarantee, which would simultaneously correct the market distortion arising from the differential implicit subsidy.

The euro was flawed from the outset, but it was clear that the consequences would become apparent only in a crisis. Politically and economically, it came with the best intentions. The single-market principle was supposed to promote the efficient allocation of capital and labor.

But details matter. Tax competition means that capital may go not to where its social return is highest, but to where it can find the best deal. The implicit subsidy to banks means that German banks have an advantage over those of other countries. Workers may leave Ireland or Greece not because their productivity there is lower, but because, by leaving, they can escape the debt burden incurred by their parents. The European Central Bank’s mandate is to ensure price stability, but inflation is far from Europe’s most important macroeconomic problem today.

Germany worries that, without strict supervision of banks and budgets, it will be left holding the bag for its more profligate neighbors. But that misses the key point: Spain, Ireland, and many other distressed countries ran budget surpluses before the crisis. The downturn caused the deficits, not the other way around.

If these countries made a mistake, it was only that, like Germany today, they were overly credulous of markets, so they (like the United States and so many others) allowed an asset bubble to grow unchecked. If sound policies are implemented and better institutions established – which does not mean only more austerity and better supervision of banks, budgets, and deficits – and growth is restored, these countries will be able to meet their debt obligations, and there will be no need to call upon the guarantees. Moreover, Germany is on the hook in either case: if the euro or the economies on the periphery collapse, the costs to Germany will be high.

Europe has great strengths. Its weaknesses today mainly reflect flawed policies and institutional arrangements. These can be changed, but only if their fundamental weaknesses are recognized – a task that is far more important than structural reforms within the individual countries. While structural problems have weakened competitiveness and GDP growth in particular countries, they did not bring about the crisis, and addressing them will not resolve it.

Europe’s temporizing approach to the crisis cannot work indefinitely. It is not just confidence in Europe’s periphery that is waning. The survival of the euro itself is being put in doubt.

Greece: ‘The Day After”

It was as early as that the exit polls were disclosed that the two biggest parties (PASOK and ND) decided to make a common communiqué stating that there will be no new elections in the near future suggesting “safely” that the outcome would permit a new government formed by the “duo” as a basis with the support of some other party though finally more than one-third of ministers from the interim government didn’t secure seats in parliament. But despite the distorting electoral law that grants the first party with a 50 seats bonus this proved to be impossible and if normality shall prevail a new round of elections should be on the cards soon.

The two main losers, namely those that have ruled the country for 37 years and brought it to the brink are acting still like legitimate representatives of the “nation’s will” hoping – in vain – that a broader coalition could be formed to save the country from the present ‘anarchy” permitting them to survive, Since 2009, in Greece were implemented unprecedented austerity measures first by PASOK that enjoyed a great majority but on the false promises and assumptions that Mr. Papandreou made in his pre-election campaign to “find out” that there are not money and that Greece is bankrupted.

So these are the first elections with people informed about the truth of Greece’s economic tragedy and here we are: Even banks are making statements about how grave will be the situation if Greece will not implement it’s obligations and finally gets out of the Euro zone following the study published by UBs on last September which estimated that the cost for Greece living the eurozone would be 50% of the GDP or around EUR9,500 to EUR11,500 per person in the exiting country during the first year. That cost would then probably amount to EUR3,000 to EUR4,000 per person per year over subsequent years. Nevertheless. many Greeks seem unfazed by the crisis created by the election as the conservative daily Kathimerini wrote in an editorial: “Greeks have lived through more than two years of constant fear and threats about what may be around the corner. It may be that they're immune to it now”.


Unemployment is soaring in new heights reaching 42% in February and the collapse of industrial production is evident: January-5%, February -8.3%, and now March -8.5%. Meanwhile, some bookies suspended betting that Greece will leave the euro by the end of the year stating that “With Greece in particular, and a number of other Euro countries, apparently in political turmoil and an unknown quantity taking over in France the long term future of the Euro hardly looks secure.” and Miss Papariga president of the mainstream left-wing KKE party that remains “stable” to the ideals which adapted some 50 years ago, stated that she is hoping that the voters will “correct” their votes in the forthcoming elections meaning that KKE will get out of the present dump. From the other side there was a big surprise with the prominence of the ultra-nationalist Golden Dawn party which took a 7% of the votes and its leader Nikolaos Mihaloliakos that marched down the street on Sunday flanked by muscular men with shaved heads and tight t-shirts, and yelling "liars!" at the foreign journalists following him. But what do you expect after decades of complete lack of any policy on the hot issue of immigration in a small country that happened to be at the border of the EU and forced to accept millions of immigrants?

Furthermore, Germany that accepted Greece’s entrance into the eurozone – even without satisfying the “Maastricht’s criteria” – is now threatening Greece with an indirect expulsion from the eurozone saying that there will be no more money if there will be a new government that fundamentally opposes the bailout’s terms. Most of it is due to the fact that Germany is trying to avoid the break up of the euro mainly because if it happens its currency will rise against all the EU countries, as against the Dollar and the Yen. In this attempt, Germany is backing the two parties scheme in Greece even leaving open options for few small compromises that could be enough to give those politicians a scrap of political cover. So the fact is that the big losers of the first elections were wished to become a winning coalition at the next, and consequently those who managed to avoid any legal punishment through a possible “debt audit”under the shield of Greece’s creditors should be essential ingredients of the new government and the people should vote the same politicians that everybody is blaming for the creation of the present grave situation.

While the downturn of Greece’s GDP for the first three months of the year is -6,2% which is the lowest point for the last 7 years and more than 10,000 businesses have been closed at the same period – those who closed are more from those which opened for the first time – and the entrepreneurs warned the party leaders that they are going to stop the payments to their employees, a new gallup-poll for “Epikera” magazine estimates the outcome of the forthcoming elections as follows: Siriza 20,3%, ND 14,2%, PASOK 10,9%, DIMAR 6,1%, Communist Party of Greece 4,4%, Independent Greeks 3,7%, Golden Dawn 2,2%.

 According to Reuters German and French bonds are grabbed on “Greek fears” followed by Asian shares while investors scared by Greek crisis seek safe havens and ECB president Mario Draghi said on Wednesday that the European Central Bank wants Greece to remain in the euro zone while the decision for Greece's possible exit from the currency union isn't an issue that the ECB would need to decide on.
But this is not all as panic for the future push Greeks to pull-out their euros from Greek banks - an average of €700 million each day and sent their euros elsewhere for safekeeping - that is possible to face insolvency triggering default and exit from the euro according to the Washington Post, which is before 2013 as many policy-makers hoped for, when the European Stability Mechanism (ESM) should provide the institutional framework and legal basis for a planned state insolvency.

And all this while suicides jumped by more than 22 percent during the 2009-2011 period or 1,727 people in the country committed suicide during that two-year period. German Foreign Minister Guido Westerwelle said on Wednesday that Greece's new elections are a vote on the country's future in Europe and the euro stating that "If we want to fight the debt crisis, then we need to build confidence and confidence comes only through competitiveness and reforms that lead to more growth and jobs".

Is Germany’s Euro Crisis Strategy Actually Working?

German Federal Chancellor Angela Merkel speaks during a press conference at the end of a two-day European Union summit on March 2, 2012 at the EU headquarters in Brussels.

Πηγή: Time
By MICHAEL SCHUMAN
March 5 2012

I have been guilty, on many occasions, of eviscerating the strategy taken by the leaders of the euro zone to combat its dangerous debt crisis. They have routinely acted too late with too little, causing contagion to spread through the zone, because they have been unwilling to put the interests of the euro over their own political careers. I have been far from alone in forwarding such a critique. Everyone from George Soros to Timothy Geithner has expressed their concern over Europe’s lack of action. The primary target has been German Chancellor Angela Merkel, who is really driving the entire effort. Her insistence on austerity would send Europe into a tailspin, critics contended, while her continued resistance to steps many believe would halt the crisis – such as a bigger bailout fund, or jointly issued Eurobonds – was putting the entire monetary union at risk.

But sentiment appears to be changing. There seems to be growing optimism in Europe that the worst of the debt crisis is behind them. French President Nicolas Sarkozy was practically giddy at last week’s summit of European Union leaders. “We’re turning the page on the financial crisis,” he said at a press conference. “The strategy we’ve implemented is bearing fruit.” Now I find myself under attack. One former TIME editor is bombarding me with emails saying that my continued gloom about Europe’s future is more and more misplaced.

So is Merkel’s debt crisis strategy actually working? Have its many critics been wrong all along? Well, in my opinion, the answer depends on what we mean by “working.”

Clearly, Merkel’s policies have brought Europe back from the brink of true disaster. Back in November, the monetary union appeared to be on the verge of unraveling, with the banking sector facing a destabilizing credit crunch, the Greek crisis intensifying, and contagion spreading to Italy. Today, the situation has greatly improved. Italy’s 10-year bond yield, which late last year soared over 7% – a rate which the country would eventually find too expensive to bear – has dipped under 5%, thanks to the bold reform efforts of new Prime Minister Mario Monti.Greece, after much drama, looks likely to get both a restructuring of its debt and a second, $170 billion bailout. An emergency cash-injection program by the European Central Bank has eased conditions in the banking sector. And the leaders of the euro zone have agreed to other significant reforms to the monetary union, including tougher rules on deficits and debt (a step towards much-needed fiscal union) and the faster introduction of a permanent bailout fund. There is also talk of other important reforms, such as steps to deepen Europe’s common market, which could help spur growth. Investors are obviously pleased. Even as the Greek bailout hung in the balance, the euro was strengthening — a signal that market players have begun disassociating the debt crises in the zone’s peripheral countries from the survival of the 17-nation common currency itself.

Though I will give credit where credit is due – a lot has been achieved in just the past few weeks – I’m still not prepared to hang up a “Mission Accomplished” banner just yet either. What continues to concern me is that most of the serious problems facing the euro zone remain unresolved. I fear investors are looking at the bandages and not noticing that the wound underneath isn’t healing.

First of all, we have to question if the bailout programs are actually achieving what they are supposed to achieve – restoring confidence in the debt-laden economies of the euro zone. There are still serious doubts about the viability of the second Greek bailout for three key reasons: (1) concerns remain that the Greek government will not be able to hold up to its reform commitments; (2) there is a strong likelihood that the government brought in by the upcoming Greek elections will try to renegotiate parts of the deal; and most importantly (3) the bailout may not improve the debt sustainability of Greece’s government. A recent IMF assessment figured that the bailout was based on unrealistic assumptions and that Greece’s government debt (relative to the size of the economy) might be at the same level in 2020 as it is today. That raises the possibility that Greece won’t be able to return to capital markets for funding any time soon, which could mean the country might require yet a third bailout. The problems with the European bailouts don’t end there.Portugal, which has implemented reforms more aggressively than Greece, is still suffering from bond yields at extremely lofty levels, raising concerns that it, too, might require another bailout. And the IMF warned last week that even Ireland, the poster child for euro zone reform, might not be able to fund itself in financial markets after its bailout starts running out in 2013. So the euro zone still runs the risk of having to keep one or more of its members on continued financial life support. And we have to ask if the richer members of the euro zone will be willing to keep shelling out more and more money. Just look at the wrangling over the second Greek bailout, in which some members, especially Germany, were actually considering allowing Greece to default rather than throwing more good money after bad.

Secondly, the austerity measures demanded as part of the German-led reform agenda continue to send several countries in Europe into a “deflationary debt spiral.” Economies are contracting across Europe as the pain of higher taxes and reduced government spending bite into growth. As a result, deficit targets become harder to meet, and debt more difficult to stabilize. That reality hit home last week when Spain announced that it would miss its deficit target for 2012 as the economy is now expected to contract more sharply than initially forecast. What this also shows is that the tighter rules of the new fiscal compact, agreed to at last week’s EU summit, can do very little to alleviate the debt situation of these countries today. Investors seem to have forgotten how severely austerity is damaging growth and employment prospects in much of Europe, and how that will keep the debt crisis very much alive.

Third, we shouldn’t kid ourselves that the European banks are out of the woods either. The ECB averted disaster in the banking sector by slathering it with liquidity. According to the Wall Street Journal, the ECB has granted more than $1.3 trillion of low-interest loans to hundreds of banks since December. But that cash is no substitute for true balance sheet repair. Research firm Capital Economics argued in a recent report that the ECB’s lending program “might have prevented an outright collapse in some banking sectors” but then added that those who believe the loans will alleviate the wider crisis “are likely to be disappointed.”

Even if banks have more money to invest, we are not convinced that they will stash it in risky government bonds. Recent data have also shown continued acute weakness in lending to both firms and households. Admittedly, it might take time for banks to use their new funds to increase lending. But January’s ECB bank lending survey…revealed that banks intended to tighten their lending criteria further.

Nor is the liquidity boost a substitute for real bank reform. The promised euro zone-wide recapitalization program has yet to materialize, and even that might prove insufficient to fix the banks. Joao Soares, a partner at consulting firm Bain, points out that the deteriorating economic conditions in the weaker European economies will only further undercut the health of the banks going forward. As economies contract, more companies suffer, and bad loans at banks increase. That in turn could put more pressure on governments to aid the banks – increasing the strain on debt-heavy sovereigns trying to cut deficits. Europe could end up in another nasty downward spiral, with deteriorating banks placing a heftier burden on government budgets, leading to heightened fears of both a banking crisis and a sovereign debt crisis. Soares adds that Europe has been much too slow in addressing the problem of its banks, which he expects will make the banking problem a long-term drag on Europe’s recovery. “We’re looking at a very protracted (banking) crisis like Japan’s,” Soares recently told me.

So let us return to our original question: Is the German debt crisis strategy working? Yes, in terms of bringing Europe back from a near-death experience. No, in terms of actually solving the debt crisis. The question now is: Will Germany’s efforts continue to bolster confidence even as the underlying problems persist? I wouldn’t count on that.

Merkel Seeks China’s Backing on Iran, Gets Hints of Help on Debt Crisis

German Chancellor Angela Merkel tours Nanluo Guxiang which is a traditional Chinese Hutong (courtyard houses) area in Beijing on Feb. 2, 2012.

Πηγή: Time
By AUSTIN RAMZY

Feb 3 2012

German Chancellor Angela Merkel’s fifth official visit to China, a three-day trip that started Thursday, saw her seeking help from the emerging economic superpower on the European debt crisis, reining in Iran’s nuclear ambitions and curtailing the ongoing violence in Syria. So far China has signaled a willingness to help on one of those issues. On Thursday, Chinese Premier Wen Jiabao said China was considering “involving itself more deeply” in efforts to support the euro, state media reported. Europe is China’s largest trade partner, and China, with $3.2 trillion in foreign reserves, has said it would be willing to help in bailout efforts but says it expects Europe to take the lead and wants to see fiscal reforms.

China “supports efforts to maintain the stability of the euro and the euro zone,” Wen said, and asked that Europe should seek more ways to win support from the international community. He said that China was considering further involvement in the existing bailout fund, the European Financial Stability Facility, or through its successor, the European Stability Mechanism, though he didn’t give details.

Shortly after her arrival Thursday in Beijing, Merkel spoke at the Chinese Academy of Social Sciences, a government supported research institution, where she gave a strong endorsement of the euro. “As our common currency, the euro has made Europe stronger, and Germany itself has benefited from the currency,” she said, according to the state-runChina Daily. “The European Union, especially those states that have adopted the euro, has made considerable progress in the last two years.” While not publicly asking for help with bailout funds, she sought to assure China that steps taken to ease the debt crisis by enforcing fiscal discipline would succeed. It’s a theme that the Chinese can expect to hear more about as Merkel is but the first of several European leaders set to visit in February for talks dominated by the economic crisis.

Merkel also pushed for Chinese help with Iran and Syria, as the German Chancellor wants them to “make Iran understand that the world should not have another nuclear power.” Last month the European Union enacted an oil embargo on Iran in an effort to pressure it to curtail its nuclear pursuit. The U.S. has similarly passed legislation that would punish firms that do business with Iran’s central bank—its main processor of oil revenues—by excluding them from the U.S. financial system. China, which is the leading importer of Iranian oil, has opposed the sanctions. Some observers say Chinese oil traders are even trying to leverage the sanctions to win better deals from Iran.

Speaking at a press conference with Merkel on Thursday, Wen reiterated China’s opposition to sanctions, which he said wouldn’t solve the fundamental dispute. He said that China rejected efforts by Iran or any other state in the Middle East to develop nuclear weapons, but said the issue should be resolved through dialogue, according to the state-run Xinhua news service.

Merkel also touched on human rights during her talk at CASS and the joint press conference with Wen, in which she raised Germany’s ongoing formal dialogue with China over the development of its legal system and also emphasized the need for free expression. “We are talking about how our societies can develop further, under very different conditions and with very different histories, in the direction of economic freedom, social security and environmental necessity,” she said. “We live together in a globalized world and know that we therefore have a mutual responsibility for each other.”

The Global Times, a tabloid run by the Communist Party-owned People’s Daily, argued in an editorial Friday in its English and Chinese editions that Merkel’s latest visit showed China’s growing strength had pressured European leaders to moderate their criticism on rights issues:

When she first took office as Chancellor in 2005, Merkel had one of the staunchest positions on human rights and Tibet, reversing the previously pragmatic policy toward China by meeting with the Dalai Lama and adopting a hard-line China policy. Now it seems that Merkel is back to the traditional pragmatic approach.

This policy adjustment has been forced upon Germany by China’s economic influence. As German Chancellor, Merkel is responsible for Germany’s realistic interests. The diplomacy of values toward China has become a political show that is too expensive to stage.

During her 2007 trip, Merkel spoke with outspoken journalists including Li Datong, an editor who had been dismissed for aggressive essays he published in a special section of the China Youth Daily. Later that year in Berlin she met with the Dalai Lama, the exiled Tibetan spiritual leader reviled by the Chinese government.

On this visit to China, a lawyer invited to dine with Merkel, the rights advocate Mo Shaoping, said he was blocked by authorities from attending, Reuters reported. Another invitee, editor Wu Si of the reformist magazine Yanhuang Chunqiu, was able to attend, Mo told the news service.

Where Greece Is Right and Germany Is Wrong

Illustration by Jiro Bevis

Πηγή: Bloomberg Business
By Peter Coy

Dec 22 2011

Merkel's hard line on fiscal responsibility is a growth inhibitor. Spending will help prevent a European recession.

The patient, E.Z., is in failing health, and the European surgeons are arguing bitterly at the operating table. The Greek doctors call for a feeding tube, oxygen, antibiotics, the works. Nonsense, say the Germans. Get the patient up on his feet and slap him around a little. What he really needs is to lose some weight.

Never mind that each is acting in accordance with his own self-interest. It’s the profligate Greeks, whose screw-ups helped drag Europe into its deepest crisis since World War II, who are mostly right in this argument—and the disciplined, hard-working Germans who are mostly wrong. Europe’s economy is already so weak that Teutonic belt-tightening, however meritorious in ordinary times, threatens to push the Continent into a deep and long-lasting recession.

The European stimulus-vs.-austerity debate that raged throughout 2011 is a replay of the one from the Great Depression. Then it was a Briton, John Maynard Keynes, arguing the case for boosting demand and an Austrian, Friedrich Hayek, wanting to purge the rottenness from the system. It’s a measure of the discipline’s meager progress that economists and policymakers haven’t managed to settle this dispute in the intervening 80 years.

The very human tendency to mix up economics and morality is what makes the Keynesian case for expansionary government policy hard for politicians to defend. From the standpoint of righteousness and clean living, the Germans are way ahead of the Greeks, the Portuguese, the Spaniards, and the Italians. Saving and investing are virtuous for families; it’s hard for people to imagine that on the scale of nations, too much frugality can cause problems.

Frugality can backfire, however—and in 2011, it did. Keynes had put his finger on the problem, calling it the “paradox of thrift.” One person’s spending is another’s income, he observed. So when everyone spends less in a recession, incomes fall. The more people try to save, the more the economy slows, and the harder it gets to put money aside.

There’s even a related “paradox of toil.” It says that when an economy is stuck in a rut, with interest rates at or near zero, cutting wages can backfire. Wage cuts lead to expectations of deflation and cause employment to fall rather than rise, says the person who coined the new paradox, Gauti Eggertsson, an economist at the Federal Reserve Bank of New York. That’s a scary thought for the Greeks, who are hoping they can keep the euro but effect an internal devaluation based on lower wages, and in the process make their economy competitive again.

Austerity got a fair shot in Europe in 2011, and it’s failing. Countries on the periphery are attempting to close budget deficits through a combination of tax hikes and spending cuts. The hope is that evidence of financial probity will impress the financial markets, lower interest rates, and give the private sector the confidence to spend and invest, revving up growth.

Instead, nearly the complete opposite is taking place. Government retrenchment sucked demand out of the economy, depressing tax revenue and making balance even harder to achieve. Private forecasts of European growth sank throughout the past year as this dynamic played out. A 2012 recession is highly possible, although as of late November the European Central Bank staff economists were still predicting growth of 0.4 percent to 1 percent in the coming year.

There’s no doubt that Southern Europe needs to earn its way out of debt by running trade surpluses instead of chronic deficits. In other words, it needs to act more Germanic. But it’s impossible for every country to run a trade surplus, just as it’s impossible for every person to be a better-than-average driver. Italy and the others can manage to run trade surpluses only if Germany agrees to do the opposite, importing more than it exports. If we’re going to expect the Greeks to act like Germans, the reverse needs to happen as well. Germany needs to live a little, spend more, relax in Mykonos—in other words, be more Mediterranean. That’s a lot to expect, since the German people have been convinced by the current crisis that laxity is the road to ruin.

As 2012 beckons, it seems increasingly likely that the euro zone is headed for a crackup. Stephen A. King, the chief global economist of HSBC (HBC), believes that the only solution for Europe is for creditors and debtors to focus on their mutual interest in healthy economic growth. A pro-growth consensus would break down the inhibitions against aggressive fiscal and monetary stimulus. Yet nothing of the sort will happen, King says, until it’s blatantly obvious that only dramatic action will prevent a breakup of the common currency. “The world has to go crazy before you can do crazy things,” he concludes. “That’s what the Fed waited for, and that’s what the ECB will have to wait for.” Stand back from the operating table—here comes the defibrillator.

ECB lends banks $639 billion over 3 years

European Central Bank (ECB) President Mario Draghi, center, prepares to take his seat during a meeting of the Economic and Financial Committee at the European Parliament in Brussels, Monday, Dec. 19, 2011. The ECB has faced calls to step up its bond-buying program in an effort to stem the eurozone debt crisis but appears determined to limit its support for indebted governments as they try to dig their way out of trouble.

Πηγή: AP
By DAVID McHUGH

Dec 21 2011

FRANKFURT, Germany (AP) -- The European Central Bank loaned a massive euro 489 billion ($639 billion) to hundreds of banks for an exceptionally long period of three years to shore up a financial system that is under pressure from the eurozone's government debt crisis.

It was the biggest ECB infusion of credit into the banking system in the 13-year history of the shared euro currency.

Wednesday's loans to 523 banks surpassed the euro 442 billion ($578 billion) in one-year loans from June, 2009, when the financial system was reeling from the collapse of U.S. investment bank Lehman Brothers.

The ECB is trying to make sure that banks have enough ready cash so they can keep on lending to businesses. Otherwise, a credit crunch could choke off growth and spread the debt crisis to the wider economy through the banks.

Markets rose modestly on the outsized amount of credit support, which was far higher than the euro300 billion ($392 billion) expected, but the advance soon faded as the loans highlighted the problems facing Europe's banks. The Stoxx 50 of leading European shares was down 0.2 percent while the euro was trading 0.4 percent lower at $1.3063.

"The good news is, the ECB's efforts to increase liquidity are working," said Jennifer Lee, an analyst at BMO Capital Markets. "The bad news is, high demand for the loans creates worries that banks are urgently in need of funds to boost liquidity ."

Helping the banks may be crucial in the year ahead, as many economists think the eurozone may be headed for recession. Slowing growth would make it even harder for the over-indebted governments that are at the heart of the eurozone's crisis to get a handle on their debt burdens. A recession in Europe would lower tax receipts and make government debt burdens even harder to handle.

A default on debt payments by a country such as Italy or Spain could cause a new financial crisis and send the global economy into a slump.

While the loans support the banking system they do not address the deeper problem of too much government debt and the lack of a financial backstop big enough to assure markets that governments will be able to pay their debts.

Italy and Spain have been at the center of investor concerns in recent months as their borrowing costs have risen. Those two are considered big to bail out with the current eurozone bailout funds, which have some euro500 billion ($654 billion) in financing. Some of that is already committed to bailouts of smaller Greece, Ireland and Portugal, which have all sought outside financial help after default fears drove their borrowing costs so high they could no longer refinance their debts as they came due. Italy has some euro1.9 trillion in outstanding debt.

The 37-month term of the loans permits the banks to stock up on money for a much longer period and reduces stress on their finances. Many banks have had trouble borrowing from other banks or by issuing bonds as they do in normal times. That is because lenders fear the banks may suffer losses from the crisis and not pay them back.

Of the euro 489 billion ($639 billion) loaned out, some 61 percent was rolled over by banks from other ECB credit offerings, meaning about euro 200 billion ($261 billion) represents new liquidity that wasn't previously in the banking system, according to analysts at the Royal Bank of Scotland. One likely use for at least some of that fresh money is to pay off euro 230 billion ($301 billion) in bank bonds coming due in the first three months of 2012.

The concern has been that if banks cannot borrow to refinance those obligations they will find the money by cutting back on loans to businesses. Those loans enable businesses to operate day to day, expand their operations and hire people.

There was some speculation that the loans would help governments since banks could borrow money cheap from the ECB operation and buy higher-yielding government bonds.

But many analysts think it is unlikely they will increase their exposure to government bonds amid fears of default. Many banks have cut their holdings of debt from governments that are in financial trouble.

"We still believe it is difficult to reconcile a government desire for banks to continue buying debt with the need for banks to reduce risk exposure associated with government debt," said Chris Walker, an analyst at UBS.

In making the loans, the ECB was playing its role of supplier of liquidity, or ready money to operate with, to banks. That is a typical job for central banks, especially in a crisis.

ECB president Mario Draghi has stressed the central bank's role in supporting the banking system even as it has refused to play that role for the indebted governments themselves by buying large amounts of their bonds.

Draghi says governments must be the ones to reduce their spending and deficits, and should not depend on a central bank bailout.

In contrast to its tough line with governments, the bank has made easy and abundant credit to banks its main tool in dealing with the effects of the eurozone's two-year-old financial crisis.

Alongside its efforts to shore up the banks, the European Central Bank has also been cutting interest rates to support the ailing eurozone economy. It has reduced its main refinancing rate from 1.5 percent to 1.0 percent over the last two monthly meetings in the hope that lower borrowing costs will stimulate growth by making credit cheaper for businesses.

Under the terms of Wednesday's loans, the banks will pay the average refinancing rate over the three years. The ECB reviews the rate each month and it will almost certainly change. Banks also have the flexibility of repaying the money after a year if their situation improves.

Still, the credit infusion only treats one of the symptoms of the debt crisis. It does not remove the reasons banks remain wary of lending to each other - especially, their thin levels of capital reserves against potential losses. And it doesn't cut the large levels of debt carried by governments.

European officials have said banks need to raise euro115 billion ($150 billion) in new capital - but finding that money is not an easy task in the current environment of fear. Investors are leery of putting more money into banks. It would be politically unpopular for governments to do it, and their finances are stressed as well.