Simon Johnson

Less Than Two Months Ahead Of The Greek D-Day, Rogoff Says "Europe Is Clearly Not Ready For A Greek Default"

It is less than two months until the Greek March 20 D-Day past which there is no more can-kicking? Check. Creditor negotiations which are going "so well" they may collapse at any given moment, have had their deadline extended indefinitely just because, and in which hedge funds now have every option to put the country into bankruptcy? Check. You would think Europe is prepared for this contingency right? Wrong. Per Ken Rogoff (who together with Simon Johnson are two former IMF chief economists who have become some of the biggest bears in the world - what is it about not being shackled to one's salary, that allows one to speak the truth), Europe is "clearly unprepared for a Greek default", less than two months from the day when it very well may finally occur. He adds: "there's going to be an endgame to this and it's not going to be pretty.... If you are just printing money and you are not making fundamental change you either lose money and you will have to recapitalize with the ECB or you will get inflation." And it gets worse: "it's not just Greece. You are going to see other restructurings before this is over." He ends with what we have been saying since mid-2011: "Once you set the precedent then say Portugal are going to say 'hey, look how much you gave Greece. How come we don't get the same?'." Unfortunately, the fact that Portuguese bondholders are far more protected than Greek ones will make an in kind restructuring virtually impossible. Which is something else for Europe to ponder as it prepares for the only key catalyst event between now and March 20 - the February 29 LTRO, which as Credit Suisse already suggested could be up to a ridiculous €10 trillion to firewall not only Greece and Portugal, but all the other PIIGS. Intuitively, this does make a lot of sense.

"Dreams Versus Reality" - Former IMF Chief Economist On Europe's Last Stand

Successive plans to restore confidence in the euro area have failed. Proposals currently on the table also seem likely to fail. The market cost of borrowing is at unsustainable levels for many banks and a significant number of governments that share the euro. In three short sentences, the Peterson Institute for International Economics' (PIIE) Simon Johnson introduces the clear and present danger that Europe has become in a comprehensive article on the deepening European crisis. The circular nature of the realization of sovereign credit risk realities and the subsequent effective insolvency of banks exacerbates a credit crunch and exaggerates problems in the real economy - most specifically in the periphery. Johnson outlines five measures that are needed to enable the euro area to survive but the big bazooka of up to EUR5tn just for the PIIGS is what the PIIE senior fellow fears as the ECB is pushed down a dangerous path. The coordination of 17 disaparate nations leaves the former IMF man greatly concerned as the unique nature of this crisis leaves "four economic, social, and political events as possible causes of systemic collapse with each at risk of occurring in the next weeks, months, or years and these risks will not disappear quickly." As European sovereign bonds are now deeply subordinated claims on recessionary economies, it is no surprise that Johnson ends by noting that Europe's economy remains in a dangerous state.

How The U.S. Will Become a 3rd World Country (Part 2)

The United States increasingly resembles a 3rd world country in terms of unemployment, lack of economic opportunity, falling wages, growing poverty and concentration of wealth, government debt, corporate influence over government and weakening rule of law. Federal Reserve monetary policies and federal government economic, regulatory and tax policies seem to favor the largest banks and corporations over the interests of small businesses or of the general population. The potential elimination of the middle class could reshape the socioeconomic strata of American society in the image of a 3rd world country. It seems only a matter of time before the devolution of the United States becomes more visible. As the U.S. economy continues to decline, public health, nutrition and education, as well as the country’s infrastructure, will visibly deteriorate. There is little evidence of political will or leadership for fundamental reforms. All other things being equal, the U.S. will become a post industrial neo-3rd-world country by 2032.

Frontrunning: November 21

  • China Fears Lasting Worldwide Recession (FT)
  • Grand deficit-cutting effort ends with whimper (Reuters)
  • Global Economic Outlook Grim, China Tells U.S. Trade (Reuters)
  • U.S. Billionaires Avoid Reporting Gains to IRS (Bloomberg)
  • Deutsche Bank Could Transfer Contagion (Simon Johnson)
  • Some BOJ Members Warned of Lehman Crisis-Type Shock (Reuters)
  • Spain's Rajoy Triumphs With Big Election Majority (Reuters)
  • Commission Proposes ‘Eurobonds’ (FT)
  • Greek PM Heads for Brussels to Try to Secure Cash (Reuters)

Guest Post: Facts Don’t Equal The Conclusion in Europe

Very simply, the facts of the current environment in Europe don’t equal the conclusion that a coordinated effort will restore confidence.  The fact of the matter is that European Sovereigns are massively indebted and European banks are massively under-capitalized.  The proposed solution of raising capital and issuing fresh debt to solve this issue is a joke.  If I walk away from a home I owe $200k on and its fair market value is $100k (a 50% haircut), does a loan to my bank for $100K from the institution overseeing it change the impairment?  No.  You’re shuffling the cards.  Instead of taking a $100k loss, they now have an asset worth $100k and a new liability of $100k.  The asset is still worth $100k. Even though their little maneuver technically gives them an asset of $100k and cash of $100k, my bank now has $100K less to lend against.  Thus, their leverage increases.  This analogy applies to European banks holding sovereign paper... and for that matter the countries themselves (ie Italy voting on whether Italy's debt should be purchased by the ECB/IMF/EFSF, etc).  At this point, any 'plans' are only slightly more creative than card shuffling tricks from a clown at an 8 year old's birthday party. 

Random Thoughts From David Rosenberg

Instead of tackling any specific and highly volatile high frequency macroeconomic data points today (which will most likely be diametrically inverted in the next update iteration), today David Rosenberg focuses on sundry items and flights of fancy that are worth noting, such as that "the S&P 500 has recorded 62 consecutive days in which it has swung by 1% or more in intraday trading. The Dow has also closed 1% higher or lower 38 times since the beginning of August (compared with just 25 in the first seven months of the year)." Additionally, Rosie shares some views on the Paradox of thrift, i.e., that "spending on appliances, jewellery, watches, air travel, recreation vehicles, cameras, gambling is actually lower today than in 2005", on credit unions whose customers don't want to borrow money, " "Too few of its 95,000 members, most of whom live or work in five counties in the San Francisco Bay Area, want to borrow money. And too many are making extra payments on mortgages and car loans — or paying off personal loans ... Provident's loan portfolio has shrunk by 25% since the end of 2008, including a 5% drop in the first nine months of this year" but most notably concludes with the observation that while the 2008 "Great Financial Crisis" was quite memorably, "I wonder whether we'll say 2008 wasn't the real crisis — it was a warm-up, but the real crisis was the sovereign debt crisis in Europe....It is clear that the situation in Greece has deteriorated markedly and that the scope for any further fiscal restraint without triggering some sort of revolution is small. The only way toward fiscal sustainability — to get the sovereign debt/GDP ratio down to 110% by 2020 — is for investors to grant the country a jubilee of sorts and accept a 60% write-down." Naturally, France will throw up over any proposal that sees a 60% haircut Greek haircut, not so much due to Greek losses per se, but due to imminent losses when Portugal, Ireland, Italy and lastly Spain (to which four countries France has exponentially more exposure) decide to do the same as Greece and start underreporting data, striking daily, and overall just shut down their economies.