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The Euro-Zone Becomes the Twilight Zone

RobertBrusca's picture




 

Rod Serling is not doing the narration for the e-Zone unravel. And he will never turn the control of your television set back to you. It’s just going to start getting weird and keep getting weirder.

Events in the euro Zone have taken on a strange twist. It’s not that Greece’s problems are not unanticipated. Indeed, when Greece secured its bailout, the stepwise doling out of funds anticipated just such an event in Greece; that the dominant parties might be ejected for what they agreed to putting minor players in control –players who did not sign on for austerity and will not sign on for it.

So we may be in some odd place but it is hardly unexpected to anyone who has been thinking ahead. But thinking ahead isn’t enough…

Seeing this impasse in train is not the same as having a solution for it. Even Europe is at odds seemingly with itself.

Thinking about blocking the next €5 billon payment that is supposed be squeezed in a ahead of Greece agreeing to post any more austerity measures is one of the odd twists that someone somewhere in euro-land thinks makes sense. It is odd because the bulk of this payment is supposed to service debt at the ECB. So if this payment is withheld Europe would apparently cause Greece to default on its payments to the ECB. How when Greece has not done anything wrong (yet) Europeans would justify this is beyond me. I think it’s just a bunch of knee-jerk chain jerking.

Without a government Greece has no way to respond to or deal with such threats. More to the point what would such a thing accomplish? It would ‘prove’ to Greece that the bailout was about funneling monies to save banks and that in the end Europe never intended to give Greeks any opportunity to manage their own affairs, cutting them off before they could even make a decision on their own future.

Agree or not with my take on this, it’s one of the odder threats since while it would put Greece in default it would deprive the ECB of payments that previously had been all-but secured.

This brings us to another reason why this whole episode that may be leading to EMU disintegration is so strange. The German target2 claims represent a huge slug of funds at risk. But that pile of funds may not be quite what you think. And target2 is hotly debated.

The Bundesbank’s Weidmann has said this about those balances: “As I see it, the Bundesbank’s Target2 claims do not constitute a risk in themselves because I believe the idea that monetary union may fall apart is quite absurd. Whether and to what extent losses arising from liquidity provision actually impinge on the Bundesbank’s balance sheet does not depend on the volume of the Bundesbank’s Target2 claims. This is also true for the hypothetical scenario, which has sparked much public debate, of a member state with a negative Target2 balance potentially exiting monetary union.
Even in such a case – which I consider to be highly unlikely – the risk remains rooted in the nature and volume of the liquidity provision. This might result in partial defaults on the ECB’s claims. However, any losses sustained by the ECB would have to be borne jointly by all Eurosystem central banks, irrespective of the size of their Target2 balance.”

Extrapolating from that, Weidmann sees the loss of net liabilities by a departing member as THE loss to the system that would be shared by member banks regardless of each country’s target2 position. The Bundesbank’s target 2 balances are not at issue. Should a net liability holder leave, the EMU it would foist losses on the members that remain in EMU. That suggests that as long as the euro leavers are few and their net liability positions on target2 balances are small enough, EMU secession is tolerable. To Weidmann what matters is the size of the balances on the balance sheet of the bank that leaves the Zone.

This puts a new dimension on Greece’s problems. And it puts a new dimension on the risk or costs of knock-on effects. If Greece left and if enough other members followed (with negative target2 balances) that could shift a large burden back onto not just Germany but all remaining EMU members.

One wonders if there is not some calculation here whereby the burden of staying in the euro and accepting the distribution of these losses would make leaving a more viable option.

Put another way we wonder if there is a systemic instability in EMU? Is it something akin to the Titanic hitting the iceberg that just could not exist and could ever do that kind of damage to such a wundership? In retrospect the safest thing would have been to sleep in a life boat...but only the right lifeboat. What is the analog for the e-Zone of the right lifeboat?

I have for some time been captivated by this analogy of EMU to the Titanic. When something that can’t happen does happen it is a true regime change. And just as I would point out that there was no safer cabin on the Titanic when it sunk, is there a safe place to hide in the euro-Zone if it is going to split apart? If it splits will the cracks magnify or not?

We see this tradeoff immediately in the FX market. With all the troubles in Greece surely the euro should go lower (as it has finally been doing). But if the euro losses its weakest members won’t the ‘euro’ that remains be stronger? So shouldn’t this news, perversely, be ‘good’ for the euro? Well not if leaving the Euro destroys the strong and pushes huge losses onto even the financially strongest EMU members.

For those opting for bunds as a safe haven remember that there have been several instances of bund yields so low that the German offering was undersubscribed. At the end of the day if the damage to the Zone is bad enough the financial burden will be borne by those with financial resources. This is a bit like the market axiom that explains why in a market panic good asset prices fall along with the bad. You sell what you can. In the e-Zone you will get support where you can. While some look at the Germans as preparing their own backstop fund for banks as evidence that they would leave, Germany leaving the Zone would not be possible- there would be nothing left.

Angela Merkel is variously described as controlling the e-Zone and setting its austerity agenda and surely she is under pressure at home to stop the excesses of the ECB which come back to haunt the German taxpayer one way or another. But in truth I think she has been more desperate than many of us realize. Germany’s financial strength is not up to the pressures of the Zone’s demands. Just like the Titanic was not up to the stress of hitting that iceberg. Germany is desperate and trying not to sound so. It helped to engineer a system that it could dominate in trade but it took a lot of financing which Germany was happy to provide. But when you lend customers the funds to buy your goods and they can’t pay you back that business model fails. I don’t think we know yet how failed this model is in Germany and elsewhere in the Zone. Greece was only part of the problem.

I have argued for some time that basic inflation, and now price-level differences, and basic differences in unit labor costs within the Zone have become unsustainable. The idea of having enough austerity to reset the various price levels to previous parities is turning out to be comically stupid. Anyone who has used the terms ‘internal devaluation’ should have their mouth washed out with soap. It’s deflation; deflation, pure and simple, deflation. And it’s so painful no one will stick around to do it long enough to make it work. Ironically, while Bern Bernanke is doing all he can to prevent it in the US Europeans made deflation the snake oil of choice.

When the IMF imposes such programs on countries some of the return of discipline is achieved by depreciating the exchange rate. That works though market forces and leaves no clear finger print on the ‘creative destruction’ it wreaks. But in this instance politicians are being asked to sign in their own blood and leave their own fingerprints on every single revenue raising act and each cut in the budget. That is a world of political difference. Indeed, if Greece blows out of EMU it will have the same austerity forces on it this time from market forces and prices will shoot up as the new Drachma plummets and energy and food costs soar through the roof. Then who will they blame?

You can impose austerity for a year or two… But not for a generation. In that sense Europe has no plan for Greece, or Spain or for Portugal. Its attempt to bully Greece by withholding funds it already agreed to advance them is act of desperation. It is an admission I think of how dangerous dissolution of the euro would be. Since there are no rules no one knows how it would go. You can be sure that given the risks, the remaining EMU members would make things as hard as possible on Greece to make them an example that would keep others from leaving.

And that is the sort of power-geopolitics of it all. But with such vast differences in price levels and in competitiveness and in unit labor costs even with a big stick how do you keep the rest of the Zone together? You don’t. And that is the conundrum. Having it come apart will be a disaster Europe will try to avoid. But keeping it together is impossible.

 

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Thu, 05/10/2012 - 07:14 | 2412550 Nukular Freedum
Nukular Freedum's picture

Hi Bob, agree with your analysis here. But dont you ever think all this endless irresponsible and elitist Keynesian control of money, interest rates and free-markets generally has to stop somehow?

Thu, 05/10/2012 - 12:03 | 2413460 RobertBrusca
RobertBrusca's picture

yes.

hopefully soon.

No more QE- please.

Thu, 05/10/2012 - 04:33 | 2412453 GeneMarchbanks
GeneMarchbanks's picture

When you're always piling shit, and you don't know when to quit.

Brusca-rrhea!

 

Thu, 05/10/2012 - 05:00 | 2412475 Jack Sheet
Jack Sheet's picture

Either Tylers Durdens are short of cash or they have an extremely twisted sense of humor

Thu, 05/10/2012 - 04:13 | 2412440 Jack Sheet
Jack Sheet's picture

I did not read this post.

Thu, 05/10/2012 - 03:03 | 2412396 GreetingsFromGermany
GreetingsFromGermany's picture

Current article in Financial Times Germany:
"Bundesbank duldet höhere Inflation", this means: "Bundesbank will tolerate higher inflation" 

http://www.ftd.de/politik/konjunktur/:geldpolitische-kehrtwende-bundesba...

So austerity and the tight monetary policiy step by step comes to it's end, bowing to the facts. Berlin is giving up more and more principies... 

 

Thu, 05/10/2012 - 01:15 | 2412297 ElvisDog
ElvisDog's picture

Greece is crazy to keep to this agreement with the troika. If I understand it correctly (and I may not), the ECB wants to loan Greece billions of Euros, and then Greece is expected to immediately turn most of that money over to European banks that it previously owed money. So, the banks get paid off and Greece gets stuck with the debt. The most obvious solution is to just say "no mas".

Thu, 05/10/2012 - 00:56 | 2412271 Joe The Plumber
Joe The Plumber's picture

" never intended to give greece the opportunity to manage their own affairs"

Bull fucking shit

The rest of the Eurozone has bent over backward, and given greece numerous opportunities. Greece does not need a government to respond to anything. Greece signed a deal. There is nothing more to renegotiate. There is nothing to discuss.

Greeks need to keep their promises or they are out.

Wed, 05/09/2012 - 23:59 | 2412193 q99x2
q99x2's picture

Bankster's threatening not to pay themselves. Seems like I say something like that in Blazing Saddles.

Thu, 05/10/2012 - 03:59 | 2412434 Money 4 Nothing
Money 4 Nothing's picture

Just shoot the Hostage and get it over with already.

Wed, 05/09/2012 - 23:37 | 2412163 mendigo
mendigo's picture

In summary, the Greek "bail-out" was really a somewhat convoluted scheme whereby the insolvent nations of Europe pooled thier nonexistent funds to loan to Greece so that Greece would have funds to pay back loans from marginally solvent banks inthose member nations . Bob is claiming that it was heretofor unthinkable that this would not work. I was claim it is more accurate to say that the eurocrats and politicians were/are lying to the public and the feign amazement when the whole thing is exposed as a sham. But then I am not an economist and cannot hope to understand these things.
I would say its less like Titanic and more like Deliverance.

Thu, 05/10/2012 - 00:16 | 2412222 wareco
wareco's picture

Weeeeeeeeeeeee!   Weeeeeeeeeeeeeeeeeeeeee!

Wed, 05/09/2012 - 23:32 | 2412148 billsbest
billsbest's picture

Understandably, this will send many of you to dreamsville. For others it’s a clear illustration of why one central bank and one currency cannot be forced upon countries (people) with different customs, languages, values, etc. They need to remain individually sovereign with their own banks and currencies which they can print as their individual desires demand - - or debauch them independently anyway.

Would you want to pay the bills for your neighbor’s new indoor pool, Ferrari, or schooling for his children while you swim at the community pool, drive a Toyota, and homeschool?

Of course not; because the family unit is a member of a neighborhood, but is still a sovereign institution!

Thu, 05/10/2012 - 02:47 | 2412378 OldPhart
OldPhart's picture

"Would you want to pay the bills for your neighbor’s new indoor pool, Ferrari, or schooling for his children while you swim at the community pool, drive a Toyota, and homeschool?"

Absolutely NOT!  But as one of the few remaining, middle class working schmucks, I have been paying those bills for about five years.  Unfortunatly, it's a balloon payment that keeps increasing every month.

Wed, 05/09/2012 - 22:36 | 2412020 Ned Zeppelin
Ned Zeppelin's picture

Complete and utter mind-insulting gibberish. Why do I keep clicking on this guy? Oh, that's right, the same reason I can't turn away from a car accident on the turnpike.

Maybe there's a point in there, it's the writing for sure that I find a problem. Bus of thought. Keeps stopping.

Thu, 05/10/2012 - 04:57 | 2412470 Jack Sheet
Jack Sheet's picture

putting it politely: "no value added"

Thu, 05/10/2012 - 00:09 | 2412210 giovanni_f
giovanni_f's picture

"Robert Brusca", this confused avatar of Jon Nadler, did it again.

Wed, 05/09/2012 - 22:41 | 2412042 Eireann go Brach
Eireann go Brach's picture

Brusca, how much do you pay ZH to post your dribble on here? Because ZH would surely not post this stuff for free!

Wed, 05/09/2012 - 21:30 | 2411909 navy62802
navy62802's picture

Speaking of the Twilight Zone ... I think I'm going to go watch a couple of episodes.

Wed, 05/09/2012 - 20:13 | 2411746 gopher
gopher's picture

BZzzzzzzzzzzzzt

They're only withholding the non-interest part of the payment.

http://www.bbc.co.uk/news/business-18014075

Greek bailout: Eurozone holds back 1bn-euro payment
Wed, 05/09/2012 - 19:51 | 2411696 Hedgetard55
Hedgetard55's picture

"Robert Brusca" is either a mental midget that cannot put two logical sentences together, or, as I believe, a software program paid for by the FED.

Thu, 05/10/2012 - 00:14 | 2412220 giovanni_f
giovanni_f's picture

"Robert Brsuca" is the product of the same unsophisticated software as "Jon Nadler" with a slightly modified config file

Wed, 05/09/2012 - 19:43 | 2411683 schatzi
schatzi's picture

where are the pictures?

 

apart from that, this is quite naive though: "Extrapolating from that, Weidmann sees the loss of net liabilities by a departing member as THE loss to the system that would be shared by member banks regardless of each country’s target2 position"

 

imagine the system collapsing, every €-zone country scrambling to save their ass and Germany expects the rest to pay back unsecured claims in a now defunct currency? The German taxpayer can kiss those 650 billion € goodby, no matter what some bureaucrat promises or claims.

Wed, 05/09/2012 - 23:35 | 2412156 LowProfile
LowProfile's picture

EU to Germany:  "So long, and thanks for all the expensive cars!".

Thu, 05/10/2012 - 02:25 | 2412359 SAT 800
SAT 800's picture

Yes to your post and the one above you; the article is very naive. Once a country removes itself from the system; the resulting upheaval will insure the system ends.

Wed, 05/09/2012 - 19:39 | 2411673 fuu
Wed, 05/09/2012 - 19:33 | 2411663 FrederickTheGreat
FrederickTheGreat's picture

Has the euro finally collapsed?

Wed, 05/09/2012 - 19:26 | 2411654 TideFighter
TideFighter's picture

Bruscatrovan- 500mg. of Melatonin, 500mg. of Valerian, 500 words from Bob Brusca will put your ass to sleep, right now.

 

Wed, 05/09/2012 - 22:25 | 2412011 riphowardkatz
riphowardkatz's picture

or make you really confused

Wed, 05/09/2012 - 21:54 | 2411959 Xanadu_doo
Xanadu_doo's picture

I'll drink to that (after the codiene pills of course).

:)

Wed, 05/09/2012 - 19:17 | 2411642 Hedgetard55
Hedgetard55's picture

Huh?

Wed, 05/09/2012 - 18:41 | 2411566 Stack Trace
Stack Trace's picture

Thanks Robert for your well written and thoughtful post. While I have generally disagreed with your perspective in the past I find myself struggling to disagree with much of anything in this post (except for maybe stating that the "greece hasn't done anything wrong yet" (but even there I understand your intend it to be limited to he context of the current debate over the next disbursement of blood money for the banks).

Wed, 05/09/2012 - 18:34 | 2411553 piceridu
piceridu's picture

Bob, I'm giving you a pass on this post...

Wed, 05/09/2012 - 18:11 | 2411495 illyia
illyia's picture

Brusca I gave you a 5 to even out Mac&Cheese's 1... you are making progress.

 Geez, ZHers really - cut the guy a break, he is really trying! He'll come over to the dark side eventually...

Wed, 05/09/2012 - 18:20 | 2411528 bank guy in Brussels
bank guy in Brussels's picture

Agreed, this wasn't a bad piece at all ... and even mostly fit into some standard ZH themes quite well.

Indeed I have a few minor quibbles from my European perspective, but I think Brusca does deserve a break here.

The negative comments persisting to RB show the power of a first impression ... Brusca really bombed on ZH with those 'green shoots - and real estate is going back up!' themes ... LOL ... will take a while for the reaction to that to die down.

 

Wed, 05/09/2012 - 22:39 | 2412037 James
James's picture

Good evening Robert

Wed, 05/09/2012 - 20:04 | 2411725 Thunder_Downunder
Thunder_Downunder's picture

A titanic metaphor... a real game changer /sic. I wonder if that took him all week to come up with...

 

He states the obvious and presents it as insight. His analysis is definitely at the shallower end of the (gene) pool, compared to some contributors (BK for one). ZH sets a high bar.. most of the time.

 

 

Wed, 05/09/2012 - 18:02 | 2411482 The Alarmist
The Alarmist's picture

" ... Greece has done nothing wrong (yet)...."

If you don't count vastly over-promising and over-spending the public fisc for years .... but hey, nearly every western sovereign does that nowadays, so I guess you have a point.

I feel for the poor Germans, because despite their own government's overspending from time to time, the average German lives a somewhat austere life relative to their productivity and savings, and their reward is for the fruits of their discipline to be given to the rest of those in Europe who want a German standard of living without having done the years of toil and saving.

Wed, 05/09/2012 - 20:56 | 2411839 EuroSovietSerf
EuroSovietSerf's picture

They've done plenty wrong:

-haven't hanged the bankers yet

-haven't hanged the pro-Euro politicians yet

-haven't defaulted yet

-they keep listening to the international bankster crook cabal

Wed, 05/09/2012 - 18:03 | 2411479 jomama
jomama's picture

TL;DR

everytime i see one of this dude's articles on ZH, i feel like i'm in the twilight zone.

Wed, 05/09/2012 - 18:51 | 2411596 RobertBrusca
RobertBrusca's picture

I agree. I think you are.

 

You may stay there.

Thu, 05/10/2012 - 00:40 | 2412257 Cursive
Cursive's picture

@RobertBrusca

 

You never did respond to my question in your last ZH post about the May NFP as the whether you truly believed that unemployment rate was declining was more a function of a.) jobs were being created or b.) people dropping out of the labor force. 

Thu, 05/10/2012 - 07:45 | 2412593 RobertBrusca
RobertBrusca's picture

Since the unemployment rate peaked the labor force has expanded on balance. It shrinks some months, however. The household survey is erratic but since its unemployment rate measure has an erratic factor in the numerator and another one in the denominator as it turns out they cancel one another out and the resulting unemployment rate is quite stable and mostly smooth. So month to month if the U rate drops because the 'labor force contracted' that is not very telling. Employment, unemployment and the labor force measures all are volatile in the monthly report. Over broader periods they are less volatile and employment reading is more in line with nonfarm payrolls.    So do not be so concerned about the month-to-month fluctuation... For everybody that is up in arms over the last report recall that the household jobs measure created  847K jobs in Feb alone and the LF grew by 476K. That is a result of the warm weather and gives you an idea of the monthly volatility in the various series. This past month both the jobs created and the labor force shrank and in such a awy that unemployement fell. I'd bet that the U-rate fall sticks next month and both the LF and employment readings turn positive again. 

Thu, 05/10/2012 - 09:45 | 2412894 fuu
fuu's picture

<points and laughs>

Thu, 05/10/2012 - 07:47 | 2412597 GeneMarchbanks
GeneMarchbanks's picture

 flag as unintelligible (1)

 

Wed, 05/09/2012 - 23:11 | 2412106 jomama
jomama's picture

that was a real zinger, bobby.

Wed, 05/09/2012 - 20:49 | 2411827 WmMcK
WmMcK's picture

And he (Sterling?) will never turn the control of your television set back to you.

Sorry, but I think that's a reference to a different show (Outer Limits).

Wed, 05/09/2012 - 20:40 | 2411809 ihedgemyhedges
ihedgemyhedges's picture

See Bob, you can make a point in only TEN WORDS!!!!!  CONGRATS!!!

Let me redo your overly verbose analysis: Greek elections disruptive.  Merkel under tremendous pressure.  Euro future uncertain.

10 words.............................................

Wed, 05/09/2012 - 20:53 | 2411833 LowProfile
LowProfile's picture

His articles are posted here, he responds to comments here...

...BUT HE CLEARLY DOESN'T READ ANY OF THE OTHER THE ARTICLES.

Wake up.  Not much time left Bobby boy.

Wed, 05/09/2012 - 23:35 | 2412153 Element
Element's picture

The trick with an RB post is you don't read it, no point, you just mark it down to 'poor' out of 5, and scroll down thru the comments for a laugh.

 

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