This page has been archived and commenting is disabled.
The Trillion Dollar Gamble?
- Barack Obama
- Bond
- Central Banks
- Dow Jones Industrial Average
- European Central Bank
- European Union
- Fail
- Federal Reserve
- Germany
- Global Economy
- Greece
- Group of Eight
- International Monetary Fund
- Lehman
- Lehman Brothers
- Netherlands
- Nicolas Sarkozy
- Portugal
- Reuters
- Sovereign Debt
- Trichet
- United Kingdom
- Wen Jiabao
- White House
Reuters reports, "Shock and awe" euro rescue lifts global markets:
A $1 trillion emergency package to stabilize the euro zone unleashed a spectacular rally in world stocks on Monday but the euro wiped out initial gains as worries about the region's debt problems persisted.
The rescue plan -- the biggest since G20 leaders threw money at the global economy following the collapse of Lehman Brothers in 2008 -- triggered the biggest one-day rise in European shares in 17 months after panic selling last week.
Wall Street also surged as confidence returned, at least temporarily. The Dow Jones Industrial average jumped 3.9 percent and the narrower Standard & Poor's financial share index was up 5.6 percent amid relief among banks.
Yields paid on Greece's 2-year notes plunged to 8.7 percent from Friday's close of 22.4 percent as the plan reassured investors about the country's ability to service debt in the short term.
"For once the scope of the actions unveiled dwarfed previous leaks and speculation: this is shock and awe part II and in 3-D, with a much bigger budget and a more impressive array of special effects," said Marco Annunziata, chief economist at UniCredit Group in London.
The package of standby funds and loan guarantees that could be tapped by euro zone governments shut out of credit markets, plus central bank liquidity measures and bond purchases to steady markets impressed financial analysts by its sheer scale.
But senior International Monetary Fund official Marek Belka said the emergency package was "morphine" for the markets and should not be regarded as a long-term solution.
The euro rose as much as 3 percent after weeks of draining confidence but erased nearly all of its gains later to trade at $1.278 per U.S. dollar, reflecting concerns about Europe's long-term debt problems.
"Sentiment on the euro is still overwhelmingly negative and with any rally people will take the opportunity to sell the single currency," said Joe Manimbo at Travelex Global Business Payments in Washington, DC.
"There are still some questions lingering about the package, such as how fast it can get implemented. Not to mention that it adds to the debt load of overall heavily indebted European countries," he added.
Gold prices fell but less than 1 percent, as lingering uncertainty about the euro zone's debt crisis still supported the metal's safe-haven appeal.
For the first time in six months of a deepening debt crisis that began in Greece, European leaders appear to have got ahead of the curve with decisive action, analysts said.
"The euro zone is certainly regaining confidence," European Commission President Jose Manuel Barroso told reporters hours after EU finance ministers clinched agreement early on Monday as Asian markets opened.
"This morning's agreement will ensure that any attempt to weaken the stability of the euro will fail," Barroso said.
But the deal left many longer-term questions about whether Europe's weakest economies can manage their debt and how the European Union can develop more coherent economic and fiscal policies to underpin the single currency.
The European Central Bank immediately began implementing its part of a deal that involved EU finance ministers, central bankers and the IMF, with euro zone central banks buying government bonds in the open market.
ECB President Jean-Claude Trichet denied the bank had acted under pressure from euro zone leaders, whom he met at a summit on Friday evening as interbank lending began to freeze up in an ominous reminder of the 2008 Lehman crisis.
Only the day before, Trichet had said the bank was not even discussing the option of buying government bonds.
All euro zone banks bought sovereign bonds but in relatively small volumes. One European trader estimated the total purchased on Monday was less than 1 billion euros in mainly Greek, but also Italian, Spanish and Portuguese bonds.
In a rare show of open dissent, ECB governing council member Axel Weber of Germany, a leading contender to succeed Trichet, criticized the move and warned that it carried significant risks for price stability.
"Buying government bonds entails considerable stability policy risks, and thus I regard this part of the ECB council's decision critically in this exceptional situation," he told the business daily Boersen-Zeitung.
"ASSERTIVE ACTION"
The deal won global endorsement from the Group of Eight and G20 major economies.
The White House said President Barack Obama supported the Europeans' "assertive action" to address the situation. Chinese Premier Wen Jiabao said Beijing would support actions to help Greece overcome its sovereign debt crisis.
Germany and the Netherlands, sticklers for budget discipline, insisted the rescue program was linked to the same kind of draconian austerity measures already imposed on Greece.
German Chancellor Angela Merkel, who for months resisted pressure to aid Athens over a debt crisis that sent market tremors around the globe, said the measures were necessary to guarantee the future of the euro.
"This package serves to strengthen and protect our common currency," she told reporters in Berlin.
Merkel consented to the massive plan after her center-right coalition lost a regional election on Sunday and Obama and French President Nicolas Sarkozy telephoned her to ensure Europe would take the necessary steps to support the euro and keep global liquidity flowing.
A German government spokesman stressed the EU was not turning into a "fiscal transfer union" and it was possible that not all member states would take part in bilateral aid.
Dutch Finance Minister Jan Kees de Jager told parliament Spain and Portugal had made a commitment to cut their budgets substantially in 2010 and 2011 as a condition for the safety net. EU Monetary Affairs Commissioner Olli Rehn said both states must commit themselves to further savings this year too.
Spain said it had no intention of drawing on the funds.
CONCERTED ACTION
In concerted action, the U.S. Federal Reserve reopened currency swap lines with several central banks to try to assure markets of dollar liquidity, and the ECB said it would buy government debt to steady investor nerves.
That decision, urgently sought by anxious European banks, reversed a long-standing reluctance to use what many economists call the "nuclear option."
Skeptics questioned whether the euro zone could hold together over the long term and buttress a fragile currency union with stronger political and fiscal instruments.
Former IMF chief economist Kenneth Rogoff told BBC radio that weak euro zone economies such as Greece and possibly Spain and Portugal would still have to restructure their debts to make them sustainable, despite vehement official denials.
The emergency measures are worth much more than any previous attempt by the 27-nation European Union or the 16-state single-currency group to calm markets.
The agreement was reached after the crisis over debt-laden Greece drove sovereign debt yields and insurance on this debt to record levels, which Sweden's finance minister blamed on the "wolfpack behavior" of financial markets.
The $1 trillion package consists of 440 billion euros in guarantees from euro area states, plus 60 billion euros in a European stabilization fund that could be disbursed to help euro zone states if needed on strict austerity conditions.
EU finance ministers said the IMF would contribute up to 250 billion euros for a total of 750 billion, about $1 trillion.
Will Europe's version of "shock and awe" be enough to tame markets? Well, think about this way. Let's say you are a big global macro hedge fund that was actively shorting sovereign debt of southern European nations. Will you continue knowing that the ECB can squash you like a bug at any time? Highly unlikely. What's more likely is that you will move on to your next target, which might be the UK.
As far as the euro is concerned, I'm not so sure European leaders want it to be back at 1.50 any time soon. A weaker euro stimulates European exports and will benefit tourism in Greece and other European countries. In short, a weaker euro is exactly what Europe needs at this time.
So was this a trillion dollar gamble? As I have already stated, they didn't have a choice. Speculative attacks were threatening the stability of the bank funding system. I also believe the lessons of Lehman played a pivotal role in taking these decisive measures. Letting Greece fail was simply not an option.
Finally, below, Stephen Wood, chief market strategist at Russell Investments, talks with Bloomberg's Lori Rothman about European policy makers' plan to end the region's sovereign debt crisis with an almost $1 trillion loan package, and the outlook for the U.S. economy and stocks.
»
- advertisements -
You could look at this the other way around too. American speculators, whom were mostly behind this feverish "euro must DIE!"-attack, just effectively shot themselves in the foot. Typical ready-fire-aim action. They gave European exporters a nice 10-15 percent boost because of euro falling and gave the middle finger to AMERICAN ones! Eurozone industrial orders have been already rising for some time, not at good level yet but improving. Thank you, USA. Now go clean up your own barn.
please explain how the "speculators" who sold their Euros from 1.51 down to 1.27 have shot themselves in the foot ?
did it ever occur to you that it may have been people LONG Euro's who've been selling ?
can.......not......compute.......ahhhh
SOLAR BABY!!!!!!!!!!!!!!!!!
"will benefit tourism in Greece and other European countries" ... just where I want to go this year
I don't entirely folloe the reasoning here, and I wish I did, know something I can read to get to grips with your working model. I've been 'convinced' that the sea-level of liquidity over the last decade has pushed prices and wages into an inequitable disparity: that govt. projects basic costs, wages on certain professional services, when contrasted with other industrial sectors (e.g furniture-making) are incompatible with a value-added economy- something that comes out when utilities and services manage their price-discovery, leading to inflation over the last decade. Meanwhile, banking has been chasing the dragon by funding the richer part of the economy, thereby encouraging the inflationary effect.
Does ayone else think this a fundamentally solid argument?
May I sum it up for you? The rich get richer and the poor get shit on. This is why my bumper sticker blares nOpe...hopey hates the middle class. Your argument is sound. Economic growth came at the price of destabilizing society.
"I also believe the lessons of Lehman played a pivotal role in taking these decisive measures. Letting Greece fail was simply not an option."
If there's one thing policymakers and economists know how to do in a crisis, it's learning exactly the WRONG lesson.
Greece & the other PIIGS and just about everyone but Finland has already failed spectacularly. It's just instead being penalized for failure, failure like it has in many other venues has been eliminated as a reality. You don't "pass" or "fail" anymore. You are thru a liberal postmodern deconstruction morphed magically to a success. Like Goldamn Sucks and all the other financial mavens who are being given bonuses for throwing the economies of the world into a black hole.
This is the equivalent of giving your kid a bottle of Jose Cuervo, the car keys, and a black AMEX card after she brings in a 1.9 for the four years she spent at Lotsafun University.
A great many people with integrity, a sense of honesty and personal responsibility made a monstrous tactical error by NOT borrowing every cent they were capable of during the fat years when money was being handed out for 13 months with no interest due for a year. Those who have been the most irresponsible (countries and people) have acquired for themselves trillions of dollars of stuff with non-recourse loans.
If I could go back in time and borrow a couple of million dollars knowing what I do now about how the savers of this world would be forced by governments to bail me out I would do it in a heartbeat, and character, credit rep, and honor be damned.
No. Character and honor still count. We savers, on the average, will win in the end.
Still, it looks like we savers have a Global Jubilee to look forwad to.
Sorry to disturb with this irrelevant question but does anyone know what happened to the "search" button on this site?
I think it is quite self descriptive. Keep looking.
Actually Leo, they did have a choice. They could have come clean about the true state of their finances, elected a central fiscal policy head, then put the money to work. That way, at least the money would have had some credibility in the markets. I, for one, am quite comfortable shorting on top of this bailout with the proper risk managment precautions in place. This does nothing, and I mean nothing to solve the structural issues which brought us here in the first place. As a matter of fact, it actually deepens them since nearly all of the countries backing this trillion dollar set of loans and guarantees need loans and guarantees themseves.
Just imagine a bunch of highly indebted guys who just got a paycut as their expenses rose get together to create a loan package to give to themselves so they can pay their bills. The only caveat being they have to borrow money from you to create the loan package to fund their bill paying to create a money pool to fund the bailout package that they just came up with so they can create the extra debt needed to fund their bill payments!
WTF!!!!
Exactly!
See http://boombustblog.com/reggie-middleton/2010/05/11/as-i-warned-yesterday-it-appears-the-market-is-calling-the-europeans-bluff-its-now-put-up-or-get-put-down/ for m take on this.
That doesn't buy votes though :)
The only ones who win are the bankers funding it, and the lawyers who will litigate the terms of the bankruptcies
Oh..you mean the US ( no credit investigation/qualifing) home equity loans, and 150% new home loan programs that were so loved by the banks?
This is cooking 202 with famous chiefs! "Let's take it up a notch"!
I think they can't come clean, because doing so would amount to admiting that their Capitalist system has failed. They will never allow the governments they own and control to admit such a thing and will keep it running even if it leads to the collapse of entire states, their democratically elected government and society as a whole. Capitalists never liked Democracy anyway, they prefer Fascism.
I think they can't come clean, because doing so would amount to admiting that their Capitalist system has failed....Capitalists never liked Democracy anyway, they prefer Fascism.
And yet it was the European fascists who called themselves socialists.
European states are on the brink of bankruptcy because their public sectors and their governments are too large vs. what they can suck out of the private sectors for support.
The rioters in Greece are mostly government employees and recipients of government benefits who are incensed that their risk free lunches might suddenly disappear.
That ain't capitalism.
Go ahead, explain for the class how you can spend more than you have forever unless evil financial instruments are allowed to pull the rug out from under you.
It's state capitalism. This is what you get when Capitalists take over the government and regard it as their private property. Fascism is next.
Good luck.
Nice try. Most Americans think that Communism, Fascism and Socialism are interchangeable concepts, that Capitalism is alone dedicated to the common good, and that our Armed Forces are used only for defense. They would be shocked at any suggestion that we are an imperial power, although they believe that our quality of life is superior to anything found elsewhere.
Comm, Fasc. and Socialism all end up being the same thing for it's subjects to varying degrees - regardless of what the fine print says.
I would define 'Capitalism' as a system where abstract representations of capital are the underlying electricity that makes everything run. This probably first happened in the Medici era and at this point all developed economies are 'capitalist' in this respect. Where the rubber really meets the road is answered by the question: to what extent does the government facilitate things like the rule of law, civil rights and especially Free Enterprise?
The US isn't an imperial power in the traditional sense of the term. Any imperial power worth it's salt would have flattened Iraq, installed a governor and sucked it's oil dry long before today.
If US quality of life weren't superior to most alternatives it wouldn't have an immigration problem.
And aside from the sucking of their oil (which is in the works, and an ongoing project), how does any of what you laid differ from the actual fact?
Oh, wait, I forgot, "We're fighting the terrorists there so we don't have to fight them here", right?
Or is it "We're bringing the Iraqi people freedom and democracy"?
Or "We're denying Saddam Hussein his (edit: non-existent) weapons of mass destruction"?
Or are we still "Fighting for Americans' freedom"?
I get so mixed up by all the different "truths" --- please help me out!
An imperial US would be putting up with a lot less BS in Iraq is really the bottom line. No pretentions to "helping" or "bringing" of anything.
The most you (not me) can say is that the US would like to be an imperial power. As we're in no danger of turning a profit in Iraq, any pretentions to actual imperialism are just wishful thinking.
So when state socialism becomes so large in scale that it proves to be unsustainable and/or it becomes overrun with fraud, bribery and rent-seeking - it gets renamed "state capitalism." Got it.
Let me guess: unsustainable socialism didn't bring Greece down because [all together now boys and girls] 'real socialism was never achieved in Greece!' - otherwise, by definition it would have all worked out. See?
I'm betting that Greece's fate won't befall the infinitely more capitalist Singapore.
So when state socialism becomes so large in scale that it proves to be unsustainable and/or it becomes overrun with fraud, bribery and rent-seeking - it gets renamed "state capitalism." Got it.
And on the other side of the coin:
When capitalism becomes so large in scale that it proves unsustainable and/or becomes overrun with fraud, bribery, and profit seeking - it gets renamed "socialism" even though there is little or no benefit but to those at the very top.
Well said. It is not socialist but capitalist behavior that has led us to this sorry pass. The world economic systems are a mess not because of Greeks living off the public dole, but because of capitalists run amok, trying to create wealth out of thin air, which permitted people to borrow and live far beyond their means. It's amusing to see rants against "socialism" which had nothing to do with the financial instrument madness that precipitated and still haunts the ongoing crisis.
I think the bigger problem, Zaku, is that we electorates have let our .govs run wild with spending taxpayer money and when they don't have that, they borrow. Spending other people's money is practically the DEFINITION of Socialism. It is government that is trying to create wealth out of thin air more so than the Bankstas.
This not the fault of Capitalism (defined here as liberty to work and invest as unfettered as possible).
Socialism... Has already arrived at almost every country! Besides, the banks have prospered more than anybody else in our new Socialist era.
State Capitalism, not Socialism is what you are looking at here.State Capitalism is when your state becomes the private property of the Capitalists and by it own and control the means of production, distribubtion and exchange and other capital.
Socialism, by the way, is defined as:
"an economic theory or system in which the means of production, distribution and exchange are owned by the community collectively, usually through the state. It is characterised by production for use rather than profit, by equality of individual wealth, by the absence of competitive economic activity, and usually, by government determination of investment, prices, and production levels."
That's not what's going on here by a very long shot.
Not so, chica. Politicians are always an inconvenience. But to an investment banker, they are a minor nuisance at best.
I'm not sure how they all became such weaklings. Just downgrade some of their biggest donors and bring them to heel. The fact that these retarded "Financial Regulation" bills got through is just a sign that they are all living in fairy land thanks to the discount window.
Let them die. There are plenty of hungry ones that will pick up where the old men left off.
Reggie,
Europe's structural problems are well known, but this bailout is what I am discussing here. I ask you in all seriousness, what if they did nothing? Would you be able to live with yourself as a European leader knowing your inaction is are causing human misery? Let's get serious here and stop wishing for utopia. It doesn't exist. They were late, but they did the right thing. Only a fool would short the sovereign debt of an EMU member right now.
Heh, you get junked into oblivion on your own threads.
Where did Reggie suggest they do nothing?
You are attempting to limit debate to two options; both of your choosing.
As in the US, the EU most certainly does need banks.
Also as in the US, they most certainly don't need the existing banks.
"Europe's structural problems are well known, but this bailout is what I am discussing here. I ask you in all seriousness, what if they did nothing?"
Nobody is suggesting do nothing. I at least, am suggesting do the right thing. That is, stop the pretend valuations, stop the absurd undeliverable promises to the electorate, live within the earning power of the countries concerned, rebuild trust that governement and citizen finances will be properly run and sensibly regulated, etc etc.
Why, precisely, is that not an option?
<Never mind>
"They could have come clean about the true state of their finances, elected a central fiscal policy head, then put the money to work. That way, at least the money would have had some credibility in the markets"
Well, you haven't reallly been reading what is happening, have you? They are basically doing just that. All bailout nations will be basically in the receivership. If they want money, we'll LOAN you that BUT we (ECB and/or some other institution probably IMF partly) will take over the budget.
No more free money or blanck checks (FROM SPECULATORS!). The details will come out little later, deadline is now October. But I'd bet we will hear already within a couple of weeks about the basic framework at least. That is much better than anything Americans have thrown this far to the crisis (printed money after good money after bad money)...
DREAM ON! Reggie is 100% correct. There is absolutely NO chance of every, and I mean every, eurozone country reducing its deficit to less than 3%. Remember the lowest eurozone government deficit is twice the "allowable" limit.
If you think that the Italian/Spanish/French/Belgian/Dutch/Greek governments are actually going to do this, when for 10 years of good times they were incapable of it, you certainly are wholly mistaken. The "print now and also become fiscally prudent" message is just PR smoke to reduce the outcry expected from Germany and help Angela Merkel keep and straight face in the German parliament - while she, like all the others, actively avoids any sort of "live within your means" adjustments.
As for Trichet, 'Sarkozy's poodle' wildly overstates that man's honesty, integrity and independence from France's requirements.
All that has to happen for the markets to stabilise is the much vaunted eurozone-wide austerity package to be put into place on its own. Ask yourself, why has it not been?
"DREAM ON! Reggie is 100% correct. There is absolutely NO chance of every, and I mean every, eurozone country reducing its deficit to less than 3%. Remember the lowest eurozone government deficit is twice the "allowable" limit."
Except it is not, you get your news from Fox? Finland had about two percent in 2009 and although other Nordics are not in the zone, there are also doing ok. And Germany: "German exports in March 2010 rose 23.3% on March 2009; Exports up 10% in month - - imports rise 11%".
Eastern European countries have big deficits but on the other hand they got the lowest ratios: "At the end of 2009, the lowest ratios of government debt to GDP were recorded in Estonia (7.2%), Luxembourg (14.5%), Bulgaria (14.8%), Romania (23.7%), Lithuania (29.3%) and the Czech Republic (35.4%). Twelve Member States had government debt ratios higher than 60% of GDP in 2009: Italy (115.8%), Greece (115.1%), Belgium (96.7%), Hungary (78.3%), France (77.6%), Portugal (76.8%), Germany (73.2%), Malta (69.1%), the United Kingdom (68.1%), Austria (66.5%), Ireland (64.0%) and the Netherlands (60.9%)."
USA is pushing close to 80 percent but that does not even begin to count all the unfunded future liabilities from SS and Medicare...so the situation is not that bad in eurozone what Yanks and Brits continuosly like to imply...
Will you kindly try answering the points made? I am talking of the euroZONE, not the EU.
Bulgaria, et al have nothing to do with the points at issue. Singapore is doing well too, but hardly relevant either.
The point is that the EUROzone 'reforms' you are busy advertising are a complete paper tiger and will not happen. What makes you think that they will?
Because you are like fucking typical American, never mind the ACTUAL FACTS! Just parrot the latest soundbyte, it must true, it was in the Faux News!
Time for actual facts then, Tim. You mentioned debt to GDP ratio. Look up Ireland. Now tell me that the country is not insolvent.
Such replies demean the writer. I still wait your refutation of my (and Reggie's) original points.
Meanwhile, the facts remain as they are: the eurozone countries are over borrowed (often both government and citizens); are running huge deficits going into an ever worsening outlook; and their banks are deliberately over-valuing their 'assets'. This 'bailout' is not real cash because the countries concerned have not got it to give. The ECB money printing has started. Unemployment is high.
Tim, keep drinking the kool aid my small minded friend, tilt your head back , let it all wash over you , there.... it's refreshing isn't it ? Let it all out Timmy.....relax, things'll get better
I don't see Leo's reply here
You don't need to hear it from me....but outstanding Sir.
This package doesn't bail out Greece, it bails out the Greek bond holders (Goldman, JP Morgan, etc., the usual suspects). Greece doesn't want the bailout. We shouldn't give them what they don't want. This bailout only postpones the inevitable collapse to a time when we have a worse situation.
Writing from the Republic of Yemen.
CEO of the Sofa
Yes, this is clear thinking. It's not "bailing out" Greece, which is impossible; I sum it up for myself by saying, "it's a bail-out of the Bond Owning Class, by the taxpaying class. This really includes a lot of very wealthy individuals whom the prime ministers and Brussels politicians don't want to inconvenience. The obvious thing to do was for Greece to go ahead and default; in toto; re-issue the Drachma and go on about their business and affairs. All that Brussels would need to say is bye !; it's been nice, don't let the door hit you in the ass on the way out.
I agree with 145.
And here I thought "kick the can" was just an American obsession! My mistake.
I am once again reminded of those profound words of Albert Einstein:
"Two things are infinite: the universe and human stupidity; although I am not sure about the universe."
Maybe 2 trillion will help?
LET'S DO THIS PEOPLE!!
THEIR Math:
Tell a fat person to eat more donuts to lose weight.