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Review Of Europe In 2010, And The 2011 Continental Outlook From The Rosy Prism Of Erik Nielsen; Is A New European Brady Plan Coming?
Reading Goldman's economic thoughts as recently as 1 month ago used to be insightful, and in many ways educational (this included its trading recommendations as well: after all, as the saying goes, someone who bats 0.000 - with perfect consistency - is just as valuable as someone who does 1.000). Unfortunately, ever since the firm, buckling under the demands of someone or something, or merely as an expression of its latest counter-agenda, flipped by 180 degrees, we are sad to say that it is nothing less than a complete chore to go through what is now an endless stream of Kool Aid, which while at least trying to be somewhat objective previously, is now like sitting through a Third Reich propaganda movie circa 1940. Which is why we scanned Erik Nielsen's latest "thoughts" on what happened in Europe in 2010 and what he expects to happen in 2011 with only a cursory focus. We present them here for those who care to know what the greater fools will be influenced by (to a little or greater extent). The key topics covered are: "Some thoughts on 2010, what we got right and what we got wrong; Will early 2011 be as bad as everyone seems to expect?; Reiterating my views on rescue or no rescue for Spain and Portugal; And the two key conditions for the longer term." The only really interesting observation is Nielsen's take on the European Plan B should all other measures fail: a Brady type of debt buyback. To wit: "The only real suggestion I have seen so far on this issue was the suggestions by the ECB’s Bini Smaghi, who pointed to a Brady style buyback of debt in the secondary market using loans from the official sector. I like that. As some of you know, I worked on the Brady plan at the World Bank years back, and this venue worked well in several cases." The bottom line is that even according to Nielsen, Europe has to become increasing more entrenched as not only a monetary but also fiscal union, with perpetual backstops at every stop. And since the dollar funding shortfall in the world amounts to over $6 trillion per last year's BIS analysis, said backstop will ultimately have to be funded by the Fed (with the respective consequences to the dollar as the Fed is engaged in printing nearly double digit trillion amounts of US currency). That said, Nielsen is certainly right about one thing: there will be some "amazingly interesting" events in 2011...
From Goldman's Erik Nielsen
Happy Sunday from a snow-covered Chiswick,
This will be the last of my Sunday notes for this year, so it seems a good opportunity to take stock of the year that passed – and outline what 2011 might look like; there seems no doubt that it’ll be a both very interesting and a very important year in so many ways.
- This past week turned out to be a beautiful mirror imagine of 2010 as a whole.
- Some thoughts on 2010, what we got right and what we got wrong (paras 2-4)
- Will early 2011 be as bad as everyone seems to expect?
- Reiterating my views on rescue or no rescue for Spain and Portugal.
- And the two key conditions for the longer term.
-1 This past week shaped up as a virtual mirror image of 2010 in Europe as a whole: (a) Great – but divergent – growth, although none of the predicted growth disaster in the periphery (specifically, the Euro-zone PMIs moved higher again this past week and the German Ifo hit a new high, while Ireland printed strong Q3 GDP numbers); (b) Hopelessly behind-the-curve credit rating agency decisions (latest, Moody’s downgrade of Ireland by a whopping 5 notches after a month of better news!); and (c) A reactive policy response from core Europe that is enough for now, but most likely fails to put the whole thing to rest (i.e. the EU Summit’s pledge that there’ll be enough support regardless of what might happen and its decision to establish a permanent rescue mechanism from 2013 – but also the decision to increase the ECB’s capital – and the ECB’s £10bn credit line to the Irish banks.) Much of 2010 was indeed characterised by this fight between strong growth numbers and continued market pressure on a few Euro-zone peripherals, interspersed by policy reactions; I’ll return to the issue of whether this can continue in 2011.
-2 For me, 2010 can be divided into three phases: We started the year with two big stories: Greece was in trouble and would need help, and Europe - both the Euro-zone (excluding the periphery), and virtually all of the surrounding countries would experience a much stronger growth recovery than almost anyone thought likely, which would lead most European central banks to start their exit strategy towards the end of the year. We didn’t experience much headwind among market participants (but some among policy makers) on the Greek story during Q1, but the pushback on our growth forecasts was huge. In retrospect, we were broadly right on growth, but less so on our rates calls: The ECB did start its exit strategy, but Eonia hasn’t moved quite as much as we originally thought it would have done by this time of the year. We got the Scandinavian and Central European central banks mostly right, but we misjudged the Bank of England’s MPC’s reaction function in face of the robust recovery and more than robust pick-up in inflation in the UK. Their continued apparent denial of the recovery and their disrespect for the inflation numbers is something that continues to greatly puzzle me.
-3 I think of the 2-3 months following the Greek rescue in early May as my “second phase”; a period I am not particularly proud of. We had correctly expected contagion to the other Southern European countries, but not to the extent that materialised – and we didn’t get Ireland right. From a macro perspective, we underestimated the hole in the Irish banking system and the damage it did to the sovereign, including via the valuations used for the transfers to Nama (something we think was – maybe appropriately – conservative) and the cross-default provisions and other stuff that led to the decision to leave senior creditors untouched in the rescue package. There is no doubt in my mind that Ireland extended and deepened the pressure on Southern Europe, but – after having re-visited our analyses - we maintained that the size of the balance sheet problems in Spain were considerably smaller than in Ireland. We have met (and continue to meet) a lot of scepticism on this one, although nobody has shown us any new information or new analyses to that effect. Meanwhile, the Spanish authorities have acknowledged that transparency is insufficient, and have announced several measures to improve it. But sometime market scepticism becomes self fulfilling prophecies, so we’ll see.
-4 And that leads me to the third or topic of 2010, namely policy responses. From the start, our view was that European policymakers would respond as necessary to prevent a default or restructuring (there’ll be no “European Lehman”), but that they would fail to take the big leap forward to put the issues to rest – and that the periphery would implement tough measures to begin address the imbalances, and that the private sector would respond pretty well. Also here did we get a lot of pushback, but I feel very good about this part of our 2010 call. I have been told umpteen times this year that the Germans wouldn’t commit the necessary resources to even kick the can down the road and that, surely, the Greeks – or country x – wouldn’t implement the adjustment program but go for a restructuring instead – and yes, there were people arguing that the crisis countries were just about to vote themselves out of the Euro-zone! In the event, Germany provided help every time it was needed: First to Greece then to the EFSF; they agreed to the ECB asset purchases, and latest to the ECB capital increase. And this past week the leading German opposition came out and offered even more pan-European support than the government has done. Meanwhile, Greece has implemented an unprecedented amount of adjustments, which – regardless of the debt issue – will stand them well in the future. And the Spanish government made huge changes to their policy framework, and the Spanish private sector undertook an adjustment of it balance sheet of a magnitude that I have never seen in an industrialised country before; with or without an FX adjustment. Were there demonstrations and strikes? – sure, but not distinctly worse than what we saw in the UK these past two weeks. Fiscal tightening is never popular, and – importantly – so much more of the adjustment is taking place throughout Europe on the expenditure side this time. This cannot be bad for the long term!
-5 But let’s move to 2011. First of all, with both sovereign and bank funding needs picking up again in early 2011 and investors coming through year-end, the recent relative calm will probably come to an end in Q1, and new stresses might emerge. While I thought we could get through 2010 by policymakers kicking the can down the road – reacting to events – I’m not so sure that that’ll work for 2011. We can’t have another year of countries - which face flat to marginal growth as they go through their internal devaluations - borrowing at 5%-7%. Either the market will calm down, or it’ll blow out – and with the ratings agencies staying well behind the curve putting renewed pressure on real money allocations, the risk may well be skewed towards a deteriorating market. That said, I have been overwhelmed by the fact that this is such a consensus view (indeed virtually unanimously held among everyone I have spoken with in recent weeks) that it makes me wonder. I know we are coming up to year-end, but if everyone expects that things get worse in January, then it’s a bit strange if it’s not priced at all.
-6 But neither does it feel right to think that everything simply calms down now. So, as I have argued in recent weeks, the EFSF-EFSM-IMF troika might need to ride to the rescue of Spain and Portugal – and here my view differs from most in the market: I think Spain will be easy, while Portugal will be more complicated – and the reason is conditionality. Spain has basically done what they need to do, so – as I suggested a few weeks ago – a precautionary credit line, e.g. for 12-18 months financing needs - would be a very good move as they go through the next leg of their bank clean-up. And why not shock the market with it before we all get out of bed on New Year’s Day? Portugal is trickier; less money is needed, of course –maybe €60bn for a two year program – but it would have to come with a lot of structural reforms to regain competitiveness. I surely don’t hope the authorities will hold Spain hostage to a deal with Portugal.
-7 Longer term, the European project, including the Euro, is highly unlikely to be in jeopardy. I see absolutely no meaningful questioning of the project among anyone of importance – or in the general public – and I strongly doubt that events would occur that will bring such change of heart into play. And I completely disagree with those questioning the German commitment to Europe. What we have now is a fierce debate about the shape of European policies – not about Europe or the Euro – in which Germany and the other net-savers are calling for policy adjustments in the periphery with imbalances, aided by official financing, as necessary, while others are arguing for various forms of fiscal federalism (sometimes in disguise), to which – surprise surprise, the prospective net contributors oppose. That said, of course, one can construct a scenario in which at some future date the demand for policy reforms exceeds what’s politically possible, and after numerous back-and-forths, the Troika stops disbursing and maybe someone starts issuing IOUs for a period of time, just like California did.
-8 More importantly, two things need to happen in the Euro-zone: First, a Euro-zone-wide arrangement for the financial system needs to be agreed. I don’t believe that the Euro-zone needs fiscal federalism in general (hasn’t really worked that well in Belgium, has it?) but they need a federal underwriting of the financial system (with all the right provisions, regulations, burden sharing etc, of course.) The sooner this happens, the better – and while it’s probably too optimistic to think its going to get sorted in 2011, one must hope. Second, some sort of debt relief will almost certainly be needed in some cases in order to restore debt sustainability. This will not happen in 2011. I hear, and read the many calls for imminent debt restructurings, but I haven’t heard anyone explain how it would work in practice, followed by a persuasive story of the economic aftermath. For sure, I don’t think very many would argue against debt restructuring in principle (who would argue against proper burden sharing?) if it could happen in an orderly way, but how does one get meaningful cash flow relief from an orderly restructuring of bonded debt without CACs or other facilitating provisions? Second, all the crisis countries will still be running primary fiscal deficits during 2011, which is not exactly a great starting point for a disorderly restructuring. The only real suggestion I have seen so far on this issue was the suggestions by the ECB’s Bini Smaghi, who pointed to a Brady style buyback of debt in the secondary market using loans from the official sector. I like that. As some of you know, I worked on the Brady plan at the World Bank years back, and this venue worked well in several cases.
-9 If we don’t get to that, here’s my suggestion: The ECB is already running “shadow Stand-bys” with several countries, and as long as policy adjustments are moving forward at a good clip, but as the market doesn’t reward the policies, the ECB may keep buying sovereign debt. So far, the ECB holds some 20% of Greek, Portuguese and Irish sovereign debt, but if they believe in the policy adjustment then there should be nothing preventing them from buying a lot more – and when the time is ripe, the ECB can sell it back to the country in case at the price it bought the debt, hence transferring the gain back to the country. Yes, I know that it’ll further blur the line between fiscal and monetary policy, and yes, I am worried about the lack of explicit conditionality in the “shadow Stand-bys” etc etc, but the world – including the Euro-zone – is not a perfect place, and extra-ordinary situations call for extra-ordinary measures. More on this another time.
On that slightly spooky note, I wish you all a very happy holiday season, whatever you celebrate if anything, and my very best wishes for 2011. I look forward to following all these amazingly interesting events in the years to come, and I hope you do too – and that we’ll continue to exchange views on them as they unfold. With that, I sign off for 2010 from beautiful snow-covered Chiswick!
Erik F. Nielsen
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"If we don’t get to that, here’s my suggestion: The ECB is already running “shadow Stand-bys” with several countries, and as long as policy adjustments are moving forward at a good clip, but as the market doesn’t reward the policies, the ECB may keep buying sovereign debt. So far, the ECB holds some 20% of Greek, Portuguese and Irish sovereign debt, but if they believe in the policy adjustment then there should be nothing preventing them from buying a lot more – and when the time is ripe, the ECB can sell it back to the country in case at the price it bought the debt, hence transferring the gain back to the country. Yes, I know that it’ll further blur the line between fiscal and monetary policy, and yes, I am worried about the lack of explicit conditionality in the “shadow Stand-bys” etc etc, but the world – including the Euro-zone – is not a perfect place, and extra-ordinary situations call for extra-ordinary measures. More on this another time."
Holy shit! What planet does this fucking guy live on?
What absolute, utter nonsense!
EUR/USD heading down .....
Here is Nigel Farage wishing the EU a happy holidays and describing the euro crisis as a slow motion car crash:
http://fedupmontrealer.blogspot.com/2010/12/nigel-farage-euro-crisis-is-like.html
notice how that incompetent truffle of a man , barroso, is laughing!
"a slow motion car crash:"
Bingo. This will push the dollar up all year and the issues in China. Many Commodities will be monkeyhammered.
+10
Forsooth! What apparition there passeth shite as knowledge?
Dollar negative, Euro and gold positive.
........"
We pondered gold and silver, he lit a cigarette with an old gold miner derivative I.O.U'
Said these damn things will kill me yet
But Ben is great, the dollar is strong, and doomers are crazy
Last call is $1,430.00, I said goodbye to that
I never seen that price again
Then one sunny day, I saw the old mans face
Front page IBD, he was a millionaree
He made his fortune on shorting gold
Mr.T was mad as hell, but me, Im doing well
And I dropped another $100,000 on US Steel today, to make my year
Ben is great, dollar is strong, and the doomers are crazy .... " ....
Jonny Bravo's famous last words. Are you going to do the honerable thing and kill yourself too ?
Gold minimum 1600 latest end of March 2011, Silver greater 40, WTI greater 100, Dollar OR Euro losing minimum 8 percent
Place your bets gentlemen!
Nothing is going to stop the ECB from bailing ppl out until some bullets fly in the riots. Only that will stop what's happening.
Until snipers administer head shots to bankers, governments will keep sending them money.
It's clear that the Fed is willing, and that Europe expects, American dollars to help fund a temporary solution to the European crisis. It's not unlike Greek expectations of a German bailout: Europe absorbs US exports, therefore it is in the US interest to bail out European economies. The Fed is now a global central bank, with competition only from China as the arbiter of global monetary policy.
Nope
Europe is a net creditor.
doesn't that Smaghi guy come from GS..????. The ECB should kick him out of his job if he is..; Return to sender
http://www.ecb.int/ecb/orga/decisions/html/cvbinismaghi.en.html
The Change:
http://www.youtube.com/watch?v=9b7RmJJP5uM&feature=player_embedded
More like a slow motion train wreck. stay short eur/usd . to death do us part..ha!
its different this time...
http://www.businessinsider.com/hooray-europe-just-kicked-the-can-down-the-road-2010-12
Every time a banker goes down, the politicians will raise up another.
If one goes, the others must follow.
French Economy Minister admits they "violated all the rules" in May.
http://www.reuters.com/article/idUSTRE6BH0V020101218
The German version of this Reuters article says "Rechtsvorschriften" (laws) instead of "rules".
http://de.reuters.com/article/topNews/idDEBEE6BH05H20101218
"Happy Sunday from a snow-covered Chiswick", giggles Goldman's Erik Nielsen as he makes snow angels. Whee!
Hey Erik, it's slush, not snow. Get out of the gutter before your ass freezes to the pavement.
Roubini wonks in his latest, that to save the EU they must increase their machinations to overcome lack of the Euros shortcomings and real fiscal union.
Why?... as in why save the EU? Let the EU go gracefully so they'll be out of the way. Save the sovereigns and the people. Farage identified them correctly as a sociopathic organization.
We just need a few more stress tests of the banks to prove that everything is fine and then people will feel better. /
stripped treasuries is sure to reassure the market
WIRTSHAFT IST TOT
http://www.youtube.com/watch?v=y7cwV6ls7hA&feature=related
“We have to stop this Law from coming into force, because it will destroy our children’s future, it will rob them of any happiness. It’s a disgrace!” - Anon male mid-40s protester Athens, DW TV, 15th Dec 2010
“The workers have a responsibility, a duty, to react to this and organize resistance to these policies and fight back against the politicians.” - Anon male mid-50s protester Athens, DW TV, 15th Dec 2010
“If a country is unable to service its debt, then - and I’ll say it again - Private creditors will have to bare a share of the burden. It’s import to me, that in the future, financial aid must remain a last resort.” - Angela Merkel, 15th Dec 2010
Yeah, another BS Bank Stress-Test will make all the difference. And I have a real nice bridge to sell you as well.
I've heard it mentioned that some of this Euro crisis might be an attempt to keep creditors from looking too closely at the US and that it may be more disinformation than reality but since fiat currency is all about faith - well I guess you can figure out if they harp on it long enough....
"Longer term, the European project, including the Euro, is highly unlikely to be in jeopardy. I see absolutely no meaningful questioning of the project among anyone of importance – or in the general public – and I strongly doubt that events would occur that will bring such change of heart into play. And I completely disagree with those questioning the German commitment to Europe."
Anyone of importance? Who does Nielsen see as people of importance? The same people who were blindsided by this whole crisis? And the public? What do the general public now about the euro except say the curent exchange rate, which they may need for the purchase of some 3 star spanish getaway.
The Germans are committed to europe but if it gets worse, then they'll be gone.