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Austerity - Mais, Non. Spending - Nein. PSI - Tal Vez?
By Peter Tchir of TF Market Analytics
Austerity - Mais, non. Spending - Nein. PSI - Tal Vez?
Austerity hasn’t worked for countries. So far the austerity path has made situations worse, rather than better. Without stimulus, economies have seen their problems compound. So now virtually everyone is against the idea that austerity is helpful.
That takes us back to spending. Maybe it’s just me, but spending is what got us into this mess in the first place. If spending worked so well and was so easy we wouldn’t have a sovereign debt crisis in the first place. Virtually every country was spending, yet deficits grew and economies shrank. Why is there any faith that spending now will work? Are we so good at targeting specific things that will really, truly, work? Not a chance. Spending will ensure debt grows just as fast, make the problem even bigger in the end, but will make people slightly happier in the near term.
So if austerity doesn’t work, and spending hasn’t worked, what will?
PSI, or Default, or Restructuring.
Debts have grown so big, that the only way to bring them under control is to default on them in one form or another and wipe some out permanently. Doing it sooner than later is key.
Now is the time. Portugal 75% haircut. Ireland 50%. Spain 40% haircut (once they put all the Spanish guaranteed debt on balance sheet, they will need 40%). Italy 25%. Greece – just make EU and ECB eat the same dish they served to public sector. Only IMF money is sacrosanct. The ECB, EFSF, and EU can take losses like the rest of us. The EU talks about “firewalls”, well, put up or shut up. The ECB can print away the losses.
Using current data, here is the amount of debt at the sovereign level for each country (I think if they are going to do the restructuring, they should put on balance sheet a lot of the guaranteed debt, so they only have to do this once).
Portugal: €171 billion * 75% = €128 billion
Ireland: €122 billion * 50% = €61 billion
Spain: €712 billion * 40% = €285 billion
Italy: €1,631 billion * 25% = €408 billion
Total write-downs would be €882 billion.
A lot of banks have written down holdings in Portugal already and taken reserves on other countries. Greece shows that banks had done a semi decent job reserving against it. Let’s assume €100 billion of losses have been reserved against or already marked.
That leaves €772 billion of losses.
The ECB has about €175 billion of non Greek bonds on its SMP balance sheet (or a number close to that)? Assume an average loss of 40% on that (it is a mix of debt from the various countries). That is €70 billion accounted for. The ECB should just print that money. Call it a one-time exercise. With all the default/restructuring, inflation isn’t likely to be a concern.
So that leaves €702 billion still that needs to be taken out of the system.
Unicredit has an equity market cap of €23 billion. Intesa is about the same. Assgen (an insurance company, where the bond ticker is so much more fun than actual equity ticker) has a market cap of €19 billion. BBVA is €30 billion. DB is €35 billion.
The losses will be a massive hit to the banking and insurance industry. But to some extent, so what? The big “money center” banks will all survive it. The DB’s, SocGen’s, BNP’s, HSBC’s of the world will take some serious hits. US banks will take some hits. But they have plenty of equity capital to support it, and they made bad lending decisions.
The BBVA’s of the world will get hit extremely hard, but they should be able to survive it. I’m less sure about some of the Italian banks as they seem to have bigger concentrations, but in the end, there are a lot of banks.
So let the restructurings begin and figure out what to do with the banks after.
Many will survive without assistance.
Some banks may fail. If the ECB and EU and EFSF protect senior unsecured creditors from losses at the expense of equity and sub debt holders, then the risk of a banking death spiral goes away. How much needs to be protected and at what level is unclear. Some banks that were truly over exposed should see losses to bondholders too. Less losses for the public to bear and more losses for the bad decision makers to bear.
Provide “Warren Buffet” style equity capital to banks that want it or need it. Why shouldn’t the taxpayers make money like Warren does? Stop with the easy money for banks, make them pay the country like they would a private investor.
There has been ZERO evidence that bank share prices influence lending. It doesn’t seem to matter what we currently do to banks, they aren’t lending much. So let’s not worry about their share price. So long as they have access to money, they will or won’t lend regardless of whether their share prices are low.
Banks that are prepared and prudent will thrive in this environment.
Rather than making it hard to start new banks, the ECB and Fed should encourage new banks. There has to be 10’s of billions of Private Equity money that would start good mid-size banks. Heck, maybe we could get an i-Bank. But seriously, new money has been crowded out of the space by zombie banks and kick the can policies.
Take the hit. Figure out who excels, who fails, and for those in between, what is the cost of surviving. Open the markets to new equity capital and new participants.
Maybe this is too harsh and will never work, but it is a better path than pursuing the same policies that have failed year after year.
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Bombs work. They always do. Krugman is right. Seems like we are on for a Krugmanesque recovery.
One billion plus and more words probably wasted right here on this site.... and spoken long ago by Ze Greatest Hack Al Einstien....
Compounding debt will pound you.
Come-pounding Debt. Yikes!
ori
/and-weirder-still/
ori
/and-weirder-still/
Hunter S. Thompson: "When the going gets weird the weird turn pro."
Hunter S. Thompson: "It Never Got Weird Enough For Me"
Things have a way of catching up.......even to the pros.
Eat a bullet or move to France
http://today.msnbc.msn.com/id/7005168/ns/today-books/t/writer-hunter-s-thompson-commits-suicide/
.......neither option is a good one.
http://www.huffingtonpost.com/2012/01/05/jon-corzine-french-chateaux_n_1186773.html
Hmmmmh, interesting quotes. And trouble with living truly, is that after a point, no one understands you anymore. You've said it all, done it all, and then you put a bullet through your head.
Hemmingway comes to mind also, similar character too.
ori
"failure of imagination." ironic because Hemingway's greatest book was his last.
Yawn. This isn't complicated.
1) Eliminate all income taxes, only sales taxes and excise taxes allowed.
2) Slash government spending by 95%.
3) Eliminate central banks.
4) Let each nation's treasury print their own fiat currency, or issue specie currency, or a combination of both.
5) Default on all government debt.
That's it. So simple.
It's even simpler than that. How about we just spend more without creating more debt. There's no economic law that says you have to borrow your own currency from a private bank. Sovereign currency issuers don't ever have to be in debt, and banker scrip is not a national currency.
I think the BLS wrote this article. It said he was 67. Then later it said he was born in 1937.
This should happened 5 years ago!
Hell yeah.
"Maybe this is too harsh and will never work..."
It is NOT too harsh, and it WOULD work...BUT, will NEVER happen - 'status quo' woot.
There needs to be a redistribution of wealth from those who have failed to those who have not failed.
Buffett ... Goldman ... Bank of America ... I'm talking about you.
You have to have money to make money. The 1%'ers don't have money ... they have fiat.
Arkansaw - What these people/companies did is buy influence. They made Faustian bargains and the devil always gets his due. The center will not hold but the question of when may correlate to physical loss of life in world war. History rythmes.
Austerity works perfectly. It takes over populations and returns their wealth to the bankers. Until it doesn't work and the people take the bankers throw then into jails and redistribute their wealth. Same as it ever was. Same as it always has worked.
Trichet says that it is time for the central banks to eliminate the free markets and for the bankers to take over the world's finances forever. Famous last words. Here we go again.
Austerity works for the banksters.
Taxpayers usually don't make money from these "deals." Bankers do.
In the Netherlands, at least banks that received government aid and repaid it early had to pay a 50% fine on top of the repayment. ING and Aegon had to and did. Simple reason: significant control of asset-spending was handed over to the state until moment of full repayment.
For Aegon (you know it as owner of TransAmerica Corp) it was back2bonus time as soon as repayment was finished...
So let all states request warrants like Warrant B. did when refinancing his own corporate loves in love of the Administration...
Spending works because ink is cheap.
I prefer Jubilee. If it worked for the stupid ancients (no itoys) than why not us. Oh yeah, the banksters won't rule the planet. Well, we all must sacrifice.
Eat your peas!
why talk about capital injection in banks. Simply convert bank debt to equity. Should have been done with Lehman back then but it seems like this option is equivalent to pushing the nuke-em-all button
MADRID (AP) — Flag-waving Spanish workers livid over labor market reforms they see as flagrantly pro-business blocked traffic Thursday, formed boisterous picket lines outside wholesale markets and bus garages and kept some TV programming off the air.
http://news.yahoo.com/spaniards-wage-general-strike-over-labor-reforms-0...
It would be nice if it were that simple... take the hit and change your ways to become a sustainable society.
I added that second part about changing your ways as I've noticed nobody talks about that. I guess it's the third rail of diplomacy.
No one will take the hit until the PIIGS change their ways. They need to reform the way they govern themselves to stabilize their societies. If that is not done, we will be right back at this point in a couple of years time.
At present, we are talking about the big bad banks, pension funds, hedge funds taking the hit. In a few years time we will expect our kids and grandkids to suck it up and take the hit for the PIIGS.
... It ain't going to happen...
The end result is what is currently happening. The Troika will strip any decision-making away from the PIIGS, place them in an oversight management environment and govern the situation according to the Troika's political direction.
If the PIIGS don't like it, suck it up, clean up their domestic messes and get on with life. If they cannot stomach the political changes needed to bring their societies up to a sustainable situation, they will see their best and brightest leave for greener pastures.
Austerity takes time to begin to work. A long time. The fact is austerity is the only way to get out of this mess globally. But you need patience and you need to believe that eventually getting spending under control will bring sanity to the system along with fiscal responsibility. I believe it works just fine and in fact has always worked but politicians are afraid they will lose their jobs in the process as the people get restless.
In fact Peter is a good example in saying that austerity has not worked. Well for how long has i been implemented? Now Compare it to how long we have to implement overspending.
Everybody wants to "solve" the "problem".
Unfortunately, to those in power, there is no problem. Through the judicious use of fiat currency and the creation of law in all types of governments, they have managed to transfer most of the wealth on the planet. They have eliminated ot absorbed competition and gained control of markets.
Through the education and media, they have convinced the worker class that they are obliged to pay taxes and the debt accumulated over more than a hundred years.
This debt can only be paid with more borrowed money, creating the perfect perpetual debt machine.
With the use of fear and homages to patriotism and nationalism, we now have huge standing armies, deadly missiles that can be launched and landed all over the planet and we do it with pride, honoring the live and dead as they "sacrifice" for the "greater good of us all".
They have re-written history and made heroes out of traitors, traitors out of heroes. They have defined good and evil in terms that guarantee their position and futures.
They are now using sophisticated methods of eugenics, through the the food supply, water supply, pharmaceuticals, warfare, toxic environmentals and others to reduce a burgeoning population that exceeds their future needs. As resource disparities continue to hamper further production, the decision has been made to eliminate certain areas of demand.
We have become a well structured corporate production facility, managed with an eye to minimize costs and maximize profits. The costs are simple: maintenance on workers and energy. Wonder why food is becoming industrialized and quality is disappearing? They are now making hamburger from stem cells in Germany. GMO salmon. Pink Slime. We are being fed industrial wastes.
Taxes, living expenses, rents continue to take ever increasing percentages of income and currency inflation steals even more. It's the company store on steroids.
The planet has run out of places to hide. Everywhere needs an identity, a commitment to a government. You can no longer escape to liberty and the creation of an island in the new wasteland is difficult, if not impossible. Each year is worse than the one before it.
Solutions? Take they out or suffer the consequences. It has come to this.
You can cut all the public sector debt you want, does not mean we will get growth. Most people are so in debt it does not matter. ANd there are no jobs. So what if Spain, Portugal, Ireland, etc cut their debts. How is that going to bring growth back.
We have hit a wall, we need a new technolgy that will create hundreds of millions of jobs wordwide. What the technolgy will be, who knows. Plus you have demographics working agianst us as well as the rise in the population, we have hit the saturation point.
It sounds like you have rolled up your sleeves and have gotten to work. Let us know how that turns out. I'm hoping you have an altruistic bent in your innovative activities. Somebody has to carry the load.
"spending" never declines so talking about the subject as if it has meaning is ridiculous. Spending PRIORITIES matters...and this is where Krugman et al fall flat on their face. "Speak softly and carry a big stick" said Teddy Roosevelt. We talk smack but back it up with nada. How about some white ships instead? I would argue insinuation of power is far more powerful than actual power being used. Since the USA prefers "full frontal" the true power of sound finance is still lost. The rhetoric of course for such..."true power" is totally lacking. "Gated communities in Florida" are the "enemy of the gates?" Give me a break. Grow up America.
I'd like for Pete (deleverage) Tchir to debate Bruce (stimulus) Krastings someday.
they are not entirely mutually exclusive, imo, schmuck
pT is correct in terms of systemic medicine and healing; i developed the same argument earlier, around the LTR0, about the time time tyler was ringing the "margin calls from the ECB" bell at every meal: in order to make this "time-buying" not aggravate the problem, the dead wood needs to start coming out of EU banking; there is that daisy-chain of interests on balance sheets, however...
the deficit is the 'stimulus'? unfortunately, it has become toxic, too
after we see what the BRICS come up with, currency-wize, and whether israel/(US) takes out iranian oil facilities over it, maybe the EU can get to work on this banking bullshitsky
I don't think austerity can ever work with fiat money. Certainly not when you have had fiat money savings debasement for this long and it is still ongoing.
I've always characterized the current debt situation as a cancer. There are two ways you can deal with it. You can go through chemotherapy (austerity) which will be painful but gives you a chance to live through it. The other option is to continue doing what you are doing (spending) in which case you will not have any near term effects but you guarantee death in the future.
Of course, the governments around the world have chosen the "smoke yourself to health" plan.
"I've always characterized the current debt situation as a cancer. There are two ways you can deal with it. You can go through chemotherapy (austerity) which will be painful but gives you a chance to live through it. The other option is to continue doing what you are doing (spending) in which case you will not have any near term effects but you guarantee death in the future.
Of course, the governments around the world have chosen the "smoke yourself to health" plan."
You overlooked The Bernanke Plan. If surgery is too harsh and chemotherapy takes too long, touch up the Xrays, apply makeup, and inject pain killing drugs. The patient will be good as new, and you will get your picture on Atlantic magazine calling you a hero.
This is a great plan. If you are working for the cancer.
Meanwhile the cancer is metastasizing around the world. So don't worry. As long as you are one of the big shots, when it kills one host just jump to the next.