Get Ready for the European Double Dip?

James
Blake reports in RT, Get
ready for the European double dip:

The US
and Russia are gaining traction on an economic rebound, with China
posting rudely healthy 1Q 2010 GDP growth. But its time for Europe to
get ready for Recession - the sequel.

Jean Claude Trichet is an
urbane, intelligent and eminently reasonable man, and the ECB he leads
has, as he rightly pointed out during Thursday's Lisbon press gathering
to announce a non rate movement, done a sterling job in defending the
Eurozone against inflationary pressures for the better part of a
generation.

Surrealism

But there was an
air of surrealism that the late Luis Bunuel would have enjoyed. There
were the press representatives all revved up for quick and punchy
responses to the emerging contagion and what the ECB could offer. What
they got was the ECB President languidly going on about Eurozone growth
and inflationary pressures, and keeping the Eurozone budgetary house
in order. He offered nary a word of substance about the fire which has
broken out in its Greek kitchen, and even less in recognition of the
potential for the curtains in its Mediterranean sunrooms to become part
of the conflagration. It was sort of like a man reading out a weather
report involving light breeze, some cloudy patches and fine and mild
conditions in general – whilst on fire, and in heavily French accented
English.

The truth be told, nothing more should be expected of
him. His job is, as head of the ECB, to keep inflation rates at or
about 2% first and foremost, issue warning about potential deviations
from the inflationary comfort zone, and bend ECB monetary policy to
maintaining or seeking it. He shouldn’t be expected to don red
underpants and cape and try to be superman.

What he did say was
that default wasn’t an option as far as he was concerned for Greece,
but he also couched that by noting it was up to Greece, the nations
lending to it, and the IMF to come to an arrangement to head that off.
When asked directly about whether inflation or the Euro was the prime
focus for the ECB, he was emphatic about the former.

Somewhere in
the back of his mind however he must surely be countenancing the
possibility of a further return to recession in Europe, and the
likelihood that in the medium term he will need to cut rates once again
in order to head off deflation rather than inflation, and to try again
to get the Eurozone some traction on an economic recovery.

Borrowing
costs heading north

For the simple matter is that the
Greek debt, and the Eurozone response to it, is already starting to
lift borrowing costs, and they could indeed jump considerably higher if
the contagion he didn’t want to speak about yesterday were to, as
appears increasingly possible, take hold in Spain, Portugal and Italy
in particular.

This week already sees
overnight and 3 month dollar LIBOR up, along with the LIBOR-OIS spread,
as ‘Club Med’ CDS have widened sharply, and Greek Portuguese and
Spanish government bond yields have pushed higher – to record levels
for the latter two against the 10 Year German Bunds. A couple of
screens away one can observe Greek three year bonds rising from 11-17%
in a week, and other 3 year bonds from Spain and Portugal up a percent.
Whilst it isn’t Lehman Brothers panic mode, there is still some way
to go, and there is a faint whiff of counterparty risk coming from
somewhere.

Lots of Eurozone debt

The
reason for this is quite simple. A lot of Europe has far too much
debt, and most nations have structural budget deficits adding to it.
Greece might be out in front, but Portugal, Spain and Ireland are in
the pack not far behind it, and the Italians are at best a half length
behind them. The exposure of European banks to these nations is well
over 2 trillion dollars. 2 trillion is also the total European debt
rollover requirement of this year, with more than a trillion of that
belonging to the Club Med watching their yield and CDS needs start to
get pointy. Spain alone is mulling more than $550 billion.

Now
at this point the first thought is that the Germans are the first
logical place to look in terms of bailing all of this out and making
sure that the liquidity keeps flowing. Notwithstanding the quite
reasonable concerns of German taxpayers about bailing out what they see
is profligate sun drenched laggards, and the pragmatic thought that
German banks are amongst those where the money will end up, which is
essentially socializing potential losses for them, with those same
taxpayers picking up the tab, there is another fly in the ointment.
Last year Germany passed a law limiting its federal government budget
deficit to 0.35% of GDP from 2016. That means that opening the sluices
now to help anyone too much could pressure that need.

This
leaves – without wanting to point fingers of blame at anyone – a
dysfunctional Eurozone large in any consideration of the future. And
that counterparty risk starts to take a more overt shape.

Euro
Banks bracing for a hit

Any possibility that Greece,
and then possibly other nations, may either default, or restructure in
some other way, is going to see the lenders – the banks – get less in
the Euro than they are currently exposed for. That means potentially
large writedowns. From there the next logical step for the banks is
that they lend a lot less, and presumably jack up interest rates on
what they have already lent. In the case of European banks there is an
added issue in terms of their underlying capital base, which is in
many cases less than their US counterparts. So that leaves the prospect
of either a financial sector tightening due to higher borrowing costs
for the state and major lenders, if not a financial sector tightening
due to capital flight, a financial sector tightening due to banks
having holes blown in their balance sheets, writedowns, or in the worst
case, financial sector tightening due to banking collapses and
corporate or state insolvencies.

With the increasing likelihood
that Eurozone banks are likely to take a hit one way or the other,
there isn’t a great deal the ECB can look to do. It could look to
monetize debt by printing money, but that would let the inflation dog
out of the bag and involve a lengthy negotiation process with a number
of politicians from across the EU to get agreement on. It could look
to buy any debt from banks and try and get banks in turn to buy
sovereign debt, which would be the first step in taking over whole
national banking systems and presumably would require a lot more
lengthy political discussion – and Trichet did note at Thursdays press
conference that the move to help Greece out this way announced last
weekend had been arrived at as a one off. If the process of getting a
game plan together for the Greeks together is any indication then any
political approval process is likely to take time.

Mire
the mail

In the short term, with costs already rising
for the borrowers of Europe, the austerity measures now being asked of
in Greece are unlikely to be the last asked of inside the Eurozone. It
is now time for Europe to start thinking in terms of that return to
recession, and how to minimize the impact, and for the global economy
to look further afield for drivers of growth, while hoping the
contagion, and likely financial chaos, can be fenced off.

Citigroup is also bearish, predicting that fears of sovereign debt
contagion over Greece could trigger a near-term
correction of up to 20%. They said that while there have been
financial crises with international implications in the recent past --
Northern Europe in 1992, Southeast Asia and South Korea in 1997 -- the
Greek crisis is "graver than these were."

The worst
crisis to befall the euro area has led economists at Societe Generale
SA and Royal Bank of Scotland Group Plc to suggest the ECB should
consider
the “nuclear option” of buying government bonds to restore
confidence in markets, support banks and lower borrowing costs:

My
thoughts are that the ECB is already behind the curve, allowing
speculators to attack sovereign debt of fiscally vulnerable European
nations.

At this juncture of the crisis, there are only two
choices: 1) do nothing and let the world sink into a deflationary
hellhole or 2) do anything it takes to shore up the global financial
system and look to restructure debt as the world economic recovery gains
traction.

I believe the Fed and the ECB will opt for the second choice. There will
be protests, some people will worry about inflation, but when facing a choice between two evils, central bankers will opt for reflation-inflation over
debt deflation.

Take the time to watch Charlie Rose's
interview with Barton Biggs, Byron Wien and Roger Altman and then
watch the Bloomberg interviews with Rod Smyth, chief investment
strategist at Riverfront Investment Group and John
Herrmann, a senior strategist at State Street Global Markets.

Comments

[DB Cooper]

There are no options left.  The train is coming off the tracks and the Fed, the banksters, and the impotent ECB cannot build track underneath it. 
 

[Graphite]

"At this juncture of the crisis, there are only two choices: 1) do nothing and let the world sink into a deflationary hellhole or 2) do anything it takes to shore up the global financial system and look to restructure debt as the world economic recovery gains traction."

The reason picking 2.) is so pernicious, destructive, and irresponsible is that it appears to work for awhile while only making the ultimate form of 1.) to be suffered even more frightening and hellish.

[Kayman]

Face it, choice #2 leads directly to the consequences listed in Choice #1. 

YOU CANNOT BORROW YOURSELF OUT OF DEBT.

Worthless "assets" need to be written down along with the unsupported debt created by  Central banks and the banksters.

[RichardENixon]

Here's why #2 will be the choice. Say you are in charge and your choice is to tell the guy waiting for his first social security check "Sorry, I know we promised you $1500 a month but because we have to fix the problem of excessive credit expansion by cutting your benefit to $150" OR "here's the $1500 we promised you, we realize you can't buy anything with it but a bag of pork rinds, but at least we gave you what we promised." #2 will be the choice because you are at slightly less risk of being tarred and feathered and dragged through the streets behind a pickup truck if you chose #2.

[fireangelmaverick]

Leo,

Should I add to Chinese Solars?

[Leo Kolivakis]

I did, but wish I had more powder left. -)

[AN0NYM0US]

Herrmann is a perma bull so his comments are particularly interesting

and Leo, thanks for your contributions, you and some of the other contributors add a great deal of value to the ZH idea e.g. Krasting

[greenfire]

I pick option one, as it reflects what capitalism was supposed to be about, not TBTF.  Yes, I understand the pain and suffering it will cause, and I say bring it.  How much longer will we punish the savers and those w/o debt, while bailing out the ossified elites that failed being useful generations ago? 

[DoChenRollingBearing]

Well, I agree greenfire.  I (and my wife) have saved, we have extremely low debts (credit card paid off each month).  We have gold.  We PAY more taxes to .gov than we ever get back.  We...

And yet, the freeloaders, the elites and the TBTFs are likely going to get a Global Jubilee (it was another ZH-er not me who came with that term).  I do not see any easy way out of this mess, we will likely all suffer, except the scum who perpetrated all of this upon us.

Going to have to crack open that bottle of Xenta Absenta (140 proof) I recently bought at Milan Airport's Duty-Free store.  It's going to be a rough year for us all...  And Europe this time, where we have friends, will be the epicenter.

[dumpster]

bring out a couple more  glasses,, with some ice  and a squize of lime ,, see you in 15.. lol if you dont mid a drinking partner

dnrbearing  

[37FullHedge]

I am totally fxxxed off. The Telegraph has just posted an article over a bailout fund using the Lisbon treaty, The argument is poor siting natural desasters to force the UK to pony up 10% of this fund, Accounting fraud and overspending is a natural disaster? I suppose so with corrupt politicians, Probably 200bn to this blackhole using 2trn red ink coming in, It looks like the BOE will dust off the printing press and devalue sterling, GBP/USD looks a no brainer.

[Augustus]

When I read the article I was a bit flabergasted at how they have found a way to interpret the language.  That is what attorneys are for, make up a legal way of doing it.  And the only option for Britain is to leave the EU or pay up.  If the troubles were not enough already, not they get Greeked.  Did you enjoy the party?  It seemingly went on your credit card.

I'm reminded of how the Commerce clause has been used here to justify about any Federal interpretation of any power it wants to use.

[fuggetaboutit]

"The US and Russia are gaining traction on an economic rebound, with China posting rudely healthy 1Q 2010 GDP growth. But its time for Europe to get ready for Recession - the sequel"

BTW marvel at the absurdity of this. US GDP has already peaked for this cycle and it has done so 50% lower than basically every other recovery in post war era and only managed that because, wait for it, the government threw taxpayer money to OTHER taxpayers to buy houses and cars they dont need and likely cant afford.

This recovery is a mirage as are the laughable "earnings estimates" that shake off it by braindead wall street types who appear to make $500K a year for taking a ruler and straightlining the last piece of information force-fed to them.

And if anyone happens to know the Editorial staff at the FT, remind them the Chinese stock market peaked almost a year ago and has been down about 23 of the last 25 trading days as the wheels come completely off over there, as it turns out running really fast in a circle isnt actually a sustainable economic solution either (who knew?)

[John_Coltrane]

Nice to see a realistic appaisal of the situation.  Can't solve a debt problem with more debt though many fallen empires have tried.  The solution to debt-austerity, spending less than you earn, avoiding credit/debt as much as possible, hard work, savings, productivity and scientific and technological progress.  In other words, its hard and takes a lot of time and can't be engineered by central planners in the government.  Our phoney "wealth" ponzi has been inflating for the last 30 years and it will likely take at least that long to deflate it, so let's get started.

[ThreeTrees]

+1  

This "recovery" dies without credit expansion.  

[Deep]

where you been? I enjoy your posts. thought you left

[Hulk]

Spot on, both posts.In response to your first post, I am stunned and amazed that most folks do not know or comprehend  that we were hours away from complete financial destruction in the fall of 08. The chance of such a failure is greater today and the TBTF's are much bigger now.

[sangell]

" restructure debt as the world economic recovery gains traction..."

The former precludes the latter.

[exportbank]

Leo... The main problem in North America and Europe are these built in structural deficits that will be difficult to overcome. The lack of truth coupled with common sense at all levels is astounding. Look at your specialty (pensions) - does any government anywhere show a one million dollar per employee entry to disclose the cost of that employees pension and health costs over their 25-years of retirement? Is there an entry for promises they've made to the rest of the citizenry - no. They don't want a collapse so they'll print money and debase that segment of the population that saved and lived within their means as they transfer all debt unto future generations. What an example we're leaving behind for them - the financial elite own the political elite any they are jamming all their bad bets onto the backs of "non-elite".

[Lower Class Elite]

Hey, I resemble that remark...

[fuggetaboutit]

I continue to be in awe of people who are older than 11 years old, have lived through the outright economic catstrophe that has been the last decade of free money bail out policies, and who think there is some way to stop all this.

How in the world did Ireland get to where they are? How about Dubai? How about Greece? How about Spain? Portugal? The UK? The US? Spending substantially more money than A) they had and B) they could ever hope to pay back.

Why'd that happen? Because flooding the system with "money" has REPEATEDLY been the best and only idea generated by a bunch of people NO ONE ELECTED yet are somehow unilaterally in charge of these things.

So, now the solution to this giant and growing problem is to lob more debt on it? I can't even summon the strength to guess at the ignorance and stupidity underlying that suggestion. It is INCOMPREHENSIBLE. 

There is no way to "grow" out of this. This will resolve itself through substantially lower consumption for a SUSTAINED period of time plus those people who lent money (or provided equity) to entities that cannot repay it losing most if not all of what they lent or provided. Pure and simple.

You think the term "good money after bad" doesn't have a root cause? There is a time to realize that policy has failed, a situation is untenable and unsustainable, and while it will entail great loss to those caught up in it, the only way out is to let it happen.

If we had done this two years ago, we would have far lower "GDP" (which is all fake bullshit stimuli and transfer payments) and be on a path to a materially more healthy system globally.

There is no "fix", its over. The Fed has a $2.5 trillion balance sheet, interest rates cant go down anymore, we have a deficit that is about 15% of GDP -- and you want MORE spending? THAT is the lesser of two evils??

Leo, in all sincerity you seem like a quasi intelligent guy despite the fact you are a mo mo head with an investment approach that makes me pray nightly that you aren't in charge of anyone elses' money. "There will be a little bit of protesting"..? These actions will result, in a rolling basis, on heightened nationalism, the end of free trade and ultimately a materially worse repeat of the Great Depression because the world is far more interconnected now vs then and this Depression will BEGIN with the system massively overlevered.

I honestly popped this posting open expecting a mea culpa from you on the baseless stupidity that the last year has been. You should work for the Fed.

[anony]

"............interest rates can't go down anymore..."

Certainly they can. The can be negative as well as positive. I have money, I don't need it, or I can create it. I lend out $10,000.00 and pay the 'debtor' to take the money.  I think I can lend a hell of a lot of money that way.

In a world of 6 billion people, growing to 7 billion, absent some errant asteroids killing off a few billion, most of whom are unemployed, can't find work to do even if they wanted it, not enough work to keep them busy at anything but exchanging O2 to CO2, there's a crying need for some innovative economic thinking, that only yesterday would have seemed insane.

We will have to dismiss utopia, but we can learn from Las Vegas.

[dumpster]

leo the quasi fed Keynesian

THERE IS NO MEANS OF AVOIDING THE FINAL COLLAPSE OF A BOOM BROUGHT ABOUT BY CREDIT EXPANSION. THE ALTERNATIVE IS ONLY WHETHER THE CRISIS SHOULD COME SOONER AS THE RESULT OF A VOLUNTARY ABANDONMENT OF FURTHER CREDIT EXPANSION OR LATER AS A FINAL AND TOTAL CATASTROPHE OF THE CURRENCY SYSTEM INVOLVED.”

Ludwig von Mises

[Sespian]

You think the term "good money after bad" doesn't have a root cause?

I wonder if future history books will label this era of economic catastrophe "The Money Pit" (1), or perhaps "The Century of Illusion"(2).  

(1) The Money Pit © I Might Write A Book With This Title Someday, Inc.

(2) Century of Illusion © I Might Write A Book With This Title Someday, Inc.

[Atoyota]

Thanks Leo

[Bruce Krasting]

Leo says:

there are only two choices: 1) do nothing and let the world sink into a deflationary hellhole or 2) do anything it takes to shore up the global financial system and look to restructure debt as the world economic recovery gains traction.

Don't worry Leo we are going to #2. They are going to double down with more debt. The more I think of it I am sure the US is part of this. So when the next few trillion of debt is created and funded by us it will suck us down too.

Leo, Do you ever get to a point and say, "Okay, no more of that"? We are at that point. You have said that the sovereign debt issue will come to America. You want to speed up the process?

[Miles Kendig]

You want to speed up the process?

Oh, most definitely... Only one real outcome will address our penchant for surrendering individual sovereign power to private money centers of power.  A global resolution process through the total and complete collapse of the current geometrically premised debt fueled structure.  Bruce, this is a wild fire that has much, much further to grow and more to consume before we can begin to think it will burn itself out.  The only thing policy makers know to do is pave over their fire breaks with petro based compounds with the occasional nuclear tipped bazooka embedded within.

[jbcorwin]

Miles,

I still don't understand WHY we, the U.S. tax payer, always seem to rescue everyone. What is the reason we get to foot the bill?

Just blows my mind.

[RichardENixon]

Because the US taxpayer doesn't pay enough attention to what's going on to realize how many ways he is being fleeced. Because even if the US taxpayer is paying attention he does not have the education necessary to really understand what is going on. Because the media in the US is too incompetent and corrupt to accurately report what is going on. Because citizens in the US are currently among the most passive in the world. Because the US controls the world's reserve currency and can print more of it. These are some of the reasons. By the way Tyler, those CATCHA questions are getting a little too tricky, I'm getting old and senile. I can't get off the sofa and grab a calculator every time I want to post a comment.

[Miles Kendig]

:)  start/programs/accessories/calculator.  Ya, I am a big fat lazy fuck.  You're partially right.  Many Americans would get it if anyone ever bothered to put it all together for them.  After all, I am the prototypical graduate of the 9th grade, GED holding, former army enlisted and permanently unemployed guy that is sitting in the fourth bedroom of a relatives home commenting on the interwebs and even I manage to get it.  All of this is of course part of what ZH has picked up along the way to discussing topics of the day for the financial services sub-segment of society. WhoT!

JB - The deal is that we as a people have been conditioned to believe in the fracturing of society through micro specialization and in trusting others to know their slice.  The sad fact is that throughout the professions folks have come to appreciate that much of what they do professionally is sheer stupidity fueled by others outside of their slice of the pie "interfering" with theirs.  As this process is reaching epic proportions we are being confronted with the reality that TBTF private money power has subordinated the functioning of government and indeed world society.  Since we have the biggest engine (the reserve currency) we are being volunteered or are willing volunteering (In the case of Harry and his co-dependency issues) to take it up the ass to sustain these morbidly obese 1,000 pound persons that the TBTF institutions and their political junkies have become in their status quo. 

[Gully Foyle]

http://theautomaticearth.blogspot.com/2010/05/may-8-2010-stoneleigh-impe...

Stoneleigh: The Imperial Eurozone (With All That Implies)

In the light of events in Greece, I want to address the structure and prospects for the eurozone, and specifically how the structure pre-determines the prospects. Talk about long term austerity measures in southern Europe by no means covers a worst-case scenario.

All aggregate human structures at all degrees of scale are essentially predatory. They all convey wealth from a necessarily expanding periphery towards the centre, where wealth is concentrated. The periphery may be either forced or enticed to join the larger structure, but that does not affect the outcome. Such structures are all inherently self-limiting, as the fundamental dependence on the buy-in of new entrants grounds them in Ponzi dynamics.

The Eurozone project is no different. The European periphery was sold an impossible dream - that they could by fiat have the same living standards as northern Europe. Perhaps the architects of the project believed that equalization by fiat would work, but whether their intentions were honourable or not is immaterial to the outcome.

The Ponzi scheme was very effective, because the impossible dream was so appealing. The euro project gave people and companies and governments in the periphery access to far lower interest rates than they had ever seen before, and encouraged them to enter the gingerbread palace. The result was a manic period of credit expansion where people borrowed vastly more than they could ever hope to repay, just like the US subprime borrowers who indulged in the same dynamic. Attempting to borrow yourself into wealth absolutely never works, no matter where you live. The developing debt slavery further enriches the centre in the meantime, though.

As we have discussed at The Automatic Earth many times, credit expansions create outward appearances of great real wealth. They do this by creating multiple and mutually exclusive claims to the same pieces of underlying real wealth pie. Many people feel wealthy, but that is perception, not reality. This wealth is virtual. The structure is Enron-esque. At maximum expansion it appears robust, yet it is destined to implode rapidly.

When such expansions happen on a small scale, borrowers can end up in long term debt slavery but a centre can hold, albeit after taking a haircut and perhaps seeing a change of control to some larger external entity able to absorb the impact. When the same thing happens on a large scale, or indeed an all-consuming scale as it has this time, it will take down both borrowers and creditors alike, in a climate of mutual recrimination. The debt exposure to the periphery is simply too large to avoid taking down the centre as well, especially as there is no external structure large enough to absorb the impact. This time we have created the first truly global Ponzi scheme, with a myriad local manifestations.

To revisit an earlier essay on Adaptive cycles in natural and human systems, the effect of a cycle turning to the downside depends on where it is positioned in relation to both the smaller-scale cycles it is composed of and the larger-scale cycles within which it is embedded. The deepest collapses occur when cycles at many scales move to the downside in a coordinated fashion, so it is not possible to cushion the fall. The erstwhile European Imperium is destined to fail, and it will by no means be alone in this, as it is but one component of a global financial structure of the same nature and at the same position on the brink.

A credit expansion requires two sides - a predatory lending structure at the centre and and gullibility and greed in the periphery. They are mutually responsible for the outcome. In a collapse, the center attempts to blame the periphery and impose all the consequences upon it, while holding on to all the perceived wealth. This is toxic to the larger structure. The socioeconomic disparities created in the attempt to contain the consequences in the periphery will be politically impossible to sustain. Germany will not be able to continue business as usual while expecting the Greeks (and the Portuguese, Spanish, Irish, Italians, British, Eastern Europeans etc.) to live with drastic austerity measures for years.

The extent to which the attempt to do this will inflame destructive old hatreds is very much larger than people currently suppose in a place as apparently civilized as Europe. Collective memory is long. Remember Sarajevo - the veneer of civilization is very thin when push comes to shove.

[ConfederateH]

Stoneleigh is way off the mark on this.  She says "The euro project gave people and companies and governments in the periphery access to far lower interest rates than they had ever seen before, and encouraged them to enter the gingerbread palace."

It was Greenspan and the Fed who provided these low interest rates in order to prop up their fiat order.  Since the dollar is and was the worlds reserve currency, everybody else was forced to follow suit or face the destruction of their domestic industry through and over-valued currency forced on their country through Fed originated debasement.

[Dark Helmet]

"Double down" is the only trick these guys know. Lose? Double down! Lose again? Double down! Pants on fire? Double down! House burning down? Double down!

[anony]

Theoretically you have to win one of those bets and with the double down strategy, you will wind up the ultimate victor.

Seems like a great strategy to me as long as you have enough long money, or can create it to beat the house.

What's not to like about that?

[AN0NYM0US]

"With Greece (as well as Portugal and some other countries) now visibly drowning in a sea of debt, the question is whether the rescuer (EU/IMF) can pull off the rescue or, instead, get pulled down with all parties drowning. ... Has the rescuer been bolstered enough to pull out the drowning parties, or will the latest rescuer be pulled down too?"

from El-Erian's article at FT earlier today