Canada's Place in the Global Economy

[a_majoor]

The Greek situation is changing rapidly (apparently the referendum has now been caled off) but the situation is still quite tense; the unstable equilibrium is coming to an end:

http://pjmedia.com/richardfernandez/2011/11/01/nemesis/?print=1

Nemesis
Posted By Richard Fernandez On November 1, 2011 @ 12:05 pm In Uncategorized | Comments Disabled

Beware of Greeks returning gifts. This could be the moral of a new Eurozone crisis [1] caused by Prime Minister George Papandreou’s decision to call a referendum on the proposed bailout package for that country. The fear in Brussels is that the Greeks will reject the austerity measures that come with it, leading to a ‘disorderly’ default and bringing financial Armageddon in its wake.

The move also opened a rift within Greece’s ruling Socialist party, threatening the government’s survival after one lawmaker resigned from the party in disagreement with the referendum while a senior party member called for early elections.

The Greek government was holding an emergency cabinet meeting late Tuesday ahead of a parliamentary debate on a vote of confidence for the government that would start Wednesday and end with a vote Friday.

Papandreou announced late Monday a surprise referendum on Greece’s bailout program, in a high-stakes gamble aimed at quelling a public backlash against controversial austerity policies but at the risk of derailing plans aimed at solving the euro zone’s debt crisis.

His decision came just days after European leaders in Brussels agreed on a set of measures to reduce Greece’s debt burden and beef up the firepower of a rescue fund to make sure the continent is capable of supporting other troubled euro-zone nations. As part of the plan, the European leaders also agreed to reinforce their banks by requesting they add to their capital reserves.

Fears that the EU plan could unravel if rejected at a Greek referendum rattled financial markets, with stocks and the euro plunging, while 10-year Italian bond yields rose perilously close to their highest levels since the inception of the euro.

Meanwhile, Greece’s euro-zone partners were slow to respond, appearing unprepared and stunned by the developments.

Brussels is learning the hard way that it is easier to give away entitlements than it is to take them back. It is like unscrambling an egg. Angela Merkel, who recently remarked that Greece needed “permanent supervision” to make them behave contrary to their natures, may have anticipated how difficult it would be.

Investors are taking comfort where they may. The Globe and Mail [2] quotes an analyst who says that Papandreou wants his government to fall so that the opposition can take over and implement the very same policies they’ve criticized. Why, because they have no choice. So not to worry. Greece will swallow the austerity pill because there is no alternative. Others are not so sure because any government sufficiently competent to carry out the drastic reforms would never have gotten itself into a mess in the first place. The Globe and Mail notes the crisis is feeding itself. Austerity measures threaten to bring down whoever touches them. Only governments who are willing to spend or willing to lie about austerity and then spend have a chance in societies where the Free Lunch has become the great public god.

Of course, this “game” could turn out dreadfully if Greece either dissolves into chaos or the referendum defeats the country’s willingness to go along with the Euro deal. But if you’re optimistic, there’s a terrific upside: Greek politicians unite, order is restored and the debt deal goes forward without a referendum even being held.

Trouble is, Greece is only part of the problem here. As we’ve noted in this space before, Italian bond yields are rising – possibly to levels that are high enough to send the country’s finances over the edge. Meanwhile, the situation in Spain is looking messy again, with the country stuck in an apparent vicious cycle: Austerity measures are sapping economic growth, which must lead to more austerity measures.

To some extent the problems in Europe are in part problems of ideology. As Nigel Farage noted, the current president of the European Commission was a former Maoist revolutionary [3]. Greece is run by a socialist party. How could they have imagined that austerity would be easy? What Europe now needs is a good model for sustainable development. So far two models have proved popular. One in Eastern Europe and the other in Western Europe. Neither has worked particularly well.

[4]
Eastern European Model: "A lie told often enough becomes the truth."

[5]
Western European Model: "I'd gladly pay you Tuesday for a hamburger today."

Storming the Castle at Amazon Kindle for $3.99 [6]
No Way In at Amazon Kindle $3.99, print $9.99 [7]
Tip Jar or Subscribe for $5 [8]

Article printed from Belmont Club: http://pjmedia.com/richardfernandez

URL to article: http://pjmedia.com/richardfernandez/2011/11/01/nemesis/

URLs in this post:

[1] a new Eurozone crisis: http://online.wsj.com/article/BT-CO-20111101-714028.html
[2] Globe and Mail: http://www.theglobeandmail.com/globe-investor/markets/markets-blog/on-the-upside-maybe-the-greek-referendum-wont-be-necessary/article2221202/
[3] former Maoist revolutionary: http://en.wikipedia.org/wiki/Jos%C3%A9_Manuel_Barroso
[4] Image: http://pjmedia.com/richardfernandez/files/2011/11/leninstatue.jpg
[5] Image: http://pjmedia.com/richardfernandez/files/2011/11/wimpy1.jpg
[6] Storming the Castle at Amazon Kindle for $3.99: http://www.amazon.com/exec/obidos/ASIN/B005MH19XI/wwwfallbackbe-20
[7] No Way In at Amazon Kindle $3.99, print $9.99: http://www.amazon.com/exec/obidos/ASIN/1453892818/wwwfallbackbe-20
[8] Tip Jar or Subscribe for $5: http://wretchard.com/tipjar.html

 

[Edward Campbell]

I am obviously no technical expert on the matter, but I am scepitcal. It seems to me that if there were a legitimate $3.5 billion difference, these companies would be operating from the USA. Or paying a large team of lawyers and accountants a lot of money to find ways around this. Or bribing lobbying some politicians/bureaucrats to the tune of hundreds of millions of dollars to change these laws. That is just too much money to let it walk away.

I appreciate what a billion dollars means. I also understand that there are an almost infinite number of ways of counting money. So while I have no doubt that Canadian regulations result in increased difficulties for big business here, I think that a) it is wildly exaggerated in this article, and b) our performance in the recent financial slowdown has proven that these regulations are prudent and benefcial.

If we were treading on their toes to the tune of billions of dollars, they would be investing elsewhere. They're not investing their money in this market because of charity.

I'm not suggesting that Canada's standards are too low, in fact my worry is quite the reverse: it is that the US insurance business, the largest in the world, is overvalued by 10-15% and is filled with "too big to fail" institutions that are fraudulently incorrectly reporting their results.

 

[Edward Campbell]

Those who follow my ramblings will know that I, generally, favour Niall Ferguson's view of things. Here he is, on a range of topics, in an interview reproduced under the Fair Dealing provisions of the Copyright Act from the Globe and Mail:

http://www.theglobeandmail.com/news/arts/books/niall-ferguson-on-europe-and-the-collapse-of-the-west/article2226258/

Niall Ferguson on Europe and the collapse of the West

MICHAEL POSNER
From Saturday's Globe and Mail

Published Friday, Nov. 04, 2011

On the cover of historian Niall Ferguson's new book, Civilization: The West and the Rest, is a photograph of a gold-filigreed, antique French mantel clock lying on its side. Mr. Ferguson's implication is clear: Like France's 18th-century monarchy, societies don't fall decorously. They topple – not without warning, perhaps, but nevertheless with astonishing speed and often messy consequences. And that, as he told The Globe and Mail's Michael Posner, constitutes his book's Code Red alert: Unless Western civilization contends with the myriad risks it now faces, it, too, may collapse – and sooner than one might think.

How does the current euro-zone crisis apply to your schema?

This is something I predicted in an earlier book, The Cash Nexus – the degeneration of a monetary union with no fiscal component. But Europe is not necessarily at its best when it's integrated. Remember, the fragmented state structure was a big advantage 500 years ago, vis-à-vis unitary, imperial China. But it also speaks to my general point that things collapse, rather than decline gradually. Everybody thought the euro zone was fine until it wasn't fine.

Do you see Greece leaving the euro zone?

I think it's still a low-probability scenario, for Greece or anyone else, even in the event of default. The costs would be very high to all concerned. We ought to have known what monetary union would mean. We saw what happened with the integration of East Germany after 1989 – a few years of boom and then high unemployment. That's what Greece, Spain, Portugal and Ireland have been dealing with – the hangover that comes from stimulus. The euro was supposed to increase integration in Europe. It's actually done the opposite.

In your book, you take the West to task for a word I can barely pronounce, pusillanimity. What do you mean by it?

It's from the Latin, for weakness or vacillation of spirit. It's a nice word for cowardice or, in the vernacular, lack of balls. Pusillanimity of leadership is one of the big problems of our time. The institutional problems on both sides of the Atlantic can only be addressed with strong leadership, because they involve riding over the vested interests and privileges of powerful groups. We need to update the software, delete the viruses and reboot the machine, and that calls for massive political courage of the sort we don't see much of right now.

Confidence Men, Ron Suskind's recent book on the Obama administration, suggests that the President was sandbagged by his own advisers and prevented from implementing more dramatic financial reform.[/b]

Suskind is an outstanding journalist and it's clear he's been briefed by [former director of the National Economic Council] Larry Summers's enemies. But the room for manoeuvre was pretty darn limited. It's easy to engage in wishful thinking. Should the stimulus package have been bigger? A better question might be: Could things have been worse? It was only in the summer of '09 that we began to pull out of a tailspin that, until that moment, tracked very closely the declines of the Great Depression. So we do need to give credit where due. It turns out to be harder to create a sustained recovery when consumers are deleveraging, the housing market is in the tank and confidence is at a low ebb.

Indian novelist Pankaj Mishra, reviewing Civilization in the London Review of Books …

That wasn't a review. It's extremely selective, quite deliberately misrepresents my work, and strongly implies that I'm a racist, which I resent. I'm extremely angry about that piece. It was malicious and defamatory and I don't intend to take it sitting idly. I will respond with great force to that attempt at character assassination.

But how do you feel about being called a neo-imperialist?

I think if you read my work, you will see there has always been an ambivalence. In Colossus, for example, I argued that while there might be reasons for the U.S. to play a more consciously imperial role to deal with failed states and rogue regimes, there were three deficits: financial, manpower and attention. And I concluded that the American empire was dysfunctional and likely to screw up the undertaking, which it has – not enough resources, not enough boots on the ground, and the public losing interest. When I wrote [in 2003] that I was a fully paid-up member of the neo-imperialist club, that was irony. I was never a neo-conservative and I was skeptical the project would succeed.

How do you view the rise of Islamic power in North Africa and the Middle East?

I've been a skeptical voice on the so-called Arab Spring since the outset. If you take the institutional matrix of civilization in my book – secure private property rights, scientific literacy – they aren't well-established in places like Egypt. So the prospect of transition to a stable Western-style democracy strikes me as a low probability. More likely, political Islam will benefit and, while that may seem an improvement to people in Tunisia and Egypt, from the vantage point of regional stability, Islamist governments are likely to be far more confrontational toward Israel.

What's your reading of the Occupy Wall Street movement?

It's a variant of the populism you get after a major economic crisis – more of the 1870s variety than the 1930s, because it's not such a severe crisis. And it has two forms: the right-wing Tea Party and the left-wing OWS. The latter has one valid point: American society has become significantly more unequal than it was in the 1970s. But Wall Street isn't the sole cause. The reason income stagnated is not the wickedness of Wall Street. It's that globalization reduces massively the returns to unskilled labour. That's the big story OWS is not getting. And blaming it all on financial institutions misses the almost equal responsibility of political elites. The epicentre, the mortgage market, was rigged by interventions that horribly backfired. So the anger is legitimate, but it's been channelled simplistically into narrow demonization.

Are we necessarily doomed to collapse?

No, you can act or prevent it by identifying vulnerabilities and making the system more robust. Education reform, for example, is urgently needed in the West, particularly at the secondary level.

What risk is there that we might slip into the Chinese form, the illiberal form, of capitalism?

This is a siren song that I don't buy. It will become clear that the Chinese system has a fatal defect: It's not responsive to the needs of its people and is not competitive, because it's a one-party-system. Such systems tend to be corrupt and to misallocate resources. China does not have an easy way of moving toward the rule of law and secure property rights, which their new middle class will want. I feel more optimistic about India's future. But what we have to do is concentrate on what made the West the best – making our institutions work as they were supposed to. Then we are still in this race.

This interview has been condensed and edited.

Michael Posner is a Globe and Mail feature writer.

I think that both Michael Posner, in his question about the Chinese "illiberal form of capitalism" and Niall Ferguson, in his answer, mistake Chinese conservatism, of the Confucian variety, for illiberal tendencies. But, beyond that (and the review question - because I haven't read the review) I agree with most of what Ferguson says.

Amazon just delivered  Civilization: The West and the Rest yesterday so it will be a few days before I can comment on it.

 

[a_majoor]

China shows the EU the back of its hand (although given the Chinese economic bubble, this may be a prudent move for the Chinese)

http://www.telegraph.co.uk/finance/financialcrisis/8872380/Goldman-euro-could-split-apart.html

Goldman: euro could split apart

The chairman of Goldman Sachs Asset Management has said that the need for a German-led fiscal integration in the eurozone would make it increasingly unattractive for all the countries who joined to stay in the single currency.

Portugal, Ireland, Finland and Greece could pull out of the single currency rather than have to operate under a single eurozone treasury. Photo: Reuters
By Kamal Ahmed

9:00PM GMT 05 Nov 2011

Jim O’Neill, whose division manages more than $800bn (£500bn) of assets, said that countries as diverse as Portugal, Ireland, Finland and Greece could pull out of the single currency rather than have to operate under a single eurozone treasury.

Yesterday, Angela Merkel, the German chancellor, said the market turmoil could last for a decade and there was still “a chunk of work” to do.

“The Germans want more fiscal unity and much tougher central observation – with the idea of a finance ministry,”

Mr O’Neill said in an interview with The Sunday Telegraph. “That will emerge for those that want to stay in this damn thing, or can stay in.

“With that caveat, it is tough to see all countries that joined wanting to live with that –including the one that is so troubled here [Greece]. If you wind the clock back, it was pretty obvious that economically probably only Germany, France and Benelux of the original joiners were the ones that were ideal for a monetary union.

“For [them] it is not a bad idea – these countries have always had some kind of tight fixing of exchange rates and are very intertwined. For all the rest that originally joined – Spain, Italy, Portugal, Ireland, Finland – it is actually questionable.”

Mr O’Neill said that because Finland and Ireland were adjacent to non-eurozone countries – the UK and Sweden – they might prefer to quit the euro. He said the single currency might be stronger as a result.

Turning to the Brussels bail-out deal, he said that, although some steps had been taken in the right direction, it did not “solve the issue” and that the European Central Bank needed “eagerly” to buy bonds.

“The dilemma is how is this going to be implemented and is everyone fully signed up and, of course, we find in a few days that the key participant hasn’t signed up [Greece],” he said.

The ECB last night disclosed that it has discussed the possibility of ending the purchase of Italian bonds if it concludes Italy is not adopting promised reforms.

Also last night, the chairman of the supervisory board of China Investment Corporation, the country’s sovereign wealth fund, put further distance between China and the eurozone bail-out, saying that Europe’s bloated welfare state meant that people did not work hard enough.

“I think if you look at the troubles which happened in European countries, this is purely because of the accumulated troubles of their worn out welfare societies,” Jin Liqun said in an interview with Al Jazeera television. “I think the labour laws are outdated – the labour laws induce sloth, indolence rather than hard working. The incentive system is totally out of whack.”
Eurozone leaders had been hoping that China would use some of its trade surplus to back the bail-out fund.

 

[Good2Golf]

Well, I don't think the Chinese are too far off the mark.  :nod:  The only word they didn't use in their statement was "entitlement", but they got the (relative) laziness ("sloth") part right about many of the EU problem children.

:2c:

Regards
G2G

 

[Kirkhill]

Maybe ERC's "Red Dynasty" won't be so hard to live with after all.  >

 

[Kirkhill]

From the Globe and Mail - France has a new austerity budget.

This final paragraph stood out.....

“Our economic, financial and social sovereignty demand collective and prolonged efforts and also sacrifices,” Mr. Fillon said. “Our country must never be condemned to following a policy imposed by others.”

Unlike Greece, Ireland, Italy, Portugal...... France does the imposing.  France is never imposed upon.  Germany is of a similar mindset.  Both heirs of the Belgian Bastaards of Charlemagne.  And there you have Europe in a nutshell.

 

[Edward Campbell]

From the Globe and Mail - France has a new austerity budget.

This final paragraph stood out.....


Unlike Greece, Ireland, Italy, Portugal...... France does the imposing.  France is never imposed upon.  Germany is of a similar mindset.  Both heirs of the Belgian Bastaards of Charlemagne.  And there you have Europe in a nutshell.

Germany can afford to be of a "don't tread on me" mindset, France cannot. French public debt (measured as a % of GDP) is (slightly) higher than the UK's and the economy is growing more slowly than Germany's, the UK's, Italy's, the Netherlands' etc, etc for about a dozen other EU members states. It is past time the French took some of the UK's medicine but I suspect this is too little and too late.

 

[Edward Campbell]

And speaking of Italy, this report, reproduced under the Fair Dealing provisions of the Copyright Act from the Globe and Mail, says that the ever wise bond market has declared it to be bankrupt:

http://www.theglobeandmail.com/report-on-business/international-news/european/italian-bond-yields-jump-to-euro-era-high/article2228582/

Italian bond yields jump to euro-era high

BRIAN MILNER
From Tuesday's Globe and Mail

Published Monday, Nov. 07, 2011

Italy’s cost of borrowing money soared to its highest point since the euro zone was formed, signalling a growing conviction the sovereign debt crisis is about to get worse as the currency union’s third-largest economy creeps closer to a financial cliff.

The yield on 10-year Italian bonds hit 6.68 per cent - a 14-year high - on Monday before narrowing to 6.45 per cent, amid reports that embattled Prime Minister Silvio Berlusconi was about to resign. Greece, Ireland and Portugal each were forced to seek bailouts soon after their bond yields climbed past 7 per cent.

At current levels, Italy, one of the world’s most indebted industrial nations, faces added financing costs in the billions of euros to roll over maturing debt and obtain more capital to finance its deficit. And this is happening at a time when its stumbling economy means substantially lower revenue. With close to €1.6-trillion ($2.23-trillion) in bonds outstanding, Italy owes more than Spain, Ireland and Portugal combined.

“They’re essentially bankrupt at these prices,” said global debt expert Edward Harrison, general partner with Global Macro Advisors in Washington. “They can’t get the growth necessary to deal with yields of that magnitude.”

When the euro was launched a dozen years ago, Italy and other weaker members of the new monetary union suddenly gained access to loans at close to the low costs enjoyed by their more powerful partners. For Italy, that meant paying investors only a little more than 50 basis points, or a half a percentage point, more than Germany paid for its 10-year bonds. If that spread still held true today, Italy’s interest cost would be about 2.5 per cent.

But on Monday, the difference between 10-year Italian bonds and comparable German government debt reached 4.85 per cent. Italy’s particular challenge is that it has more than €300-billion worth of debt coming due next year, so the higher rate amounts to an extra cost of almost €15-billion in interest.

The higher costs will have to be covered by tougher austerity cuts and tax increases, part of broader fiscal reforms that have been promised but not delivered by Mr. Berlusconi. His weakened coalition government faces another crucial parliamentary vote on public finances Tuesday. But investors have already cast their vote.

Banks and asset managers have been selling off their Italian government debt in the expectation that conditions are going to darken. “They’re getting leery about holding these positions. When they’re starting to lose money significantly [on Italian bonds], it becomes very expensive to maintain these positions,” said John Braive, vice-chairman of CIBC Global Asset Management Inc.

Most of the Italian debt is held by European banks and other institutional investors. Italian banks, insurers and pension funds account for more than a third of the total.

So far, the European Central Bank’s efforts to stabilize yields of Italian and Spanish debt by buying bonds in the secondary market have failed. That, analysts say, is because the ECB is only committed to buying a finite amount of bonds and counts as merely another - albeit large - player in the market.

The key, they argue, is for the ECB to commit to unlimited bond purchases at a set price of, say, 200 basis points over German bonds. But this would mean printing more euros. Germany and a handful of other euro-zone governments strongly oppose such purchases out of fear they will cause inflation.

If the ECB were to intervene as “a credible lender of last resort,” set a target for spreads and defend it in the market, “the speculators would be crushed by the onslaught and the market would immediately move to that price,” Mr. Harrison said.

Such an intervention could happen soon, because Italy’s euro-zone partners realize that even a bolstered rescue fund is too small to bail out such a huge debtor. And it’s too late for austerity measures to work. The alternative could well be the implosion of the euro zone, with serious repercussions for the global economy.

“I would give it weeks before something happens,” Mr. Harrison said. “They’re obviously going to dither, because it’s a huge about-face in terms of policy.”

By way of comparison, the yield on Canadian 10 year bonds is 1.86%.

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions of the Copyright Act from the Globe and Mail, is a brief, timely and accurate explanation of the latest crisis:

http://www.theglobeandmail.com/news/opinions/cartoon/editorial-cartoons-november-2011/article2220178/

Anthony Jenkins
The Globe and Mail

 

[Edward Campbell]

Unlike Greece and Portugal and even Spain, Italy matters and the news is not good, in this article, reproduced under the Fair Dealing provisions of the Copyright Act from the Globe and Mail:

http://www.theglobeandmail.com/report-on-business/international-news/european/berlusconi-rally-short-lived/article2230271/

Berlusconi rally short lived

JEREMY GAUNT
London— Reuters

Published Wednesday, Nov. 09, 2011

Yields on Italian bonds shot to crisis levels above 7 percent on Wednesday and European stocks sank as a short-lived rally on Italian Prime Minister Silvio Berlusconi’s pledge to resign evaporated.

A 7-per-cent yield is widely deemed as unsustainable and has previously led to bailouts and talk of default in smaller euro zone economies. The euro sank 1 per cent against both the dollar and yen.

Investors initially greeted the likely exit of Mr. Berlusconi as leader of the euro zone’s third-largest economy positively, but then began fretting about who his successor might be and how long political instability would last.

“There is no guarantee (Berlusconi’s) successor will be able to do a better job. Just keep your eyes on the Italian yield for now,” said Christian Jimenez, fund manager and president of Diamant Bleu Gestion.

Mr. Berlusconi said late on Tuesday that he would step down after parliament passes budget reforms. His often controversial presence at the top has been viewed by many in the markets as a block to fiscal reform.

Investors were also keeping an eye on Greece, which was struggling to create a consensus government under a new, yet-to-be-agreed prime minister.

World stocks as measured by MSCI were down a third of a per cent, while in Europe the FTSEurofirst 300 lost 1.3 per cent.

Earlier, in Japan, the Nikkei average closed up nearly 1.2 per cent on optimism about the Berlusconi departure.

Shares of camera maker Olympus , however, fell 20 per cent. On Tuesday, the scandal-hit firm said for the first time that contentious acquisitions helped it cover losses on securities investments dating back to the 1980s.

Mr. Berlusconi’s pledge to go did nothing to ease the pressure on his country’s debt.

“The mere fact that Italian 10-year bond yields have hit the all important 7-per-cent level shows that the crisis will not end simply with Berlusconi’s excruciatingly slow demise,” said Joshua Raymond, chief market strategist at City Index.

Yield’s on 10-year Italian bonds were slightly above 7 per cent as were two-year bonds.

In fact, the curve measuring the yield inverted for the first time in the euro era -- a clear signal of rising concern among investors that they may not get their money back.

Core German debt yields fell to less than 1.75 per cent on 10-year paper in a rush to relative safety.

The euro, beset by the region’s two-year debt crisis, fell around 1 per cent to $1.370 (U.S.) , down from $1.3773 late in New York and well off a 2-month high of $1.4248 hit on Oct. 27.

The bond market, one of those invisible hands and one which does not lie, has decided that Italy cannot continue on its current course - living beyond its means - for ten more years. No country can sustain a 7% yield on its long term debt; Greece and Portugal are already in de facto default; Spain will follow then Italy and then, the French banks will likely crash.

Goodbye Euro?

 

[Edward Campbell]

More, reproduced under the Fair Dealing provisions of the Copyright Act from the Globe and Mail on the real threat - France:

http://www.theglobeandmail.com/report-on-business/top-business-stories/europe-a-tinderbox-today-france-next-domino-to-fall/article2239236/

Europe a tinderbox today, France next ‘domino’ to fall

MICHAEL BABAD
Globe and Mail Update

Published Thursday, Nov. 17, 2011

Europe seethes

Europe is a tinderbox this morning, its financial crisis deepening and protests mounting.

In Italy, demonstrators clashed with police and the country's new prime minister, Mario Monti, prepared to unveil a fresh crisis plan. In Greece, where protests and strikes have been widespread, authorities have thousands of police officers on hand for another demonstration today.

Mr. Monti has taken a firm hold on the government, appointing a cabinet with no politicians. Today, all eyes are on his proposals for more bitter medicine.

"For the group, the honeymoon period will be short (or rather, non-existent), as the new cabinet will need to work quickly to restore investor confidence in the face of rising debt costs," said Carl Campus of BMO Nesbitt Burns. "Monti will lay out his policy platform today and then face a confidence vote in the Senate Thursday evening (followed by a separate confidence vote by the lower house on Friday)."

In the markets, borrowing costs hit punishing highs again in what is unquestioningly a frightening new chapter in the euro zone's two-year-old debt crisis.

"Italian benchmark yields are back in the bailout zone, above 7 per cent, despite the installation of a cabinet of technocrat experts in Rome, while Spanish yields are heading merrily towards the same abyss," said Chris Beauchamp of IG Index in London.

"Ten-year yields were at 6.69 per cent before a bond auction that saw them soar to 6.97 per cent, right on the cusp of rescue territory. Even more worrying was the continuing rise in French bond yields, and while these might be nowhere near the danger zone, it reminds everyone that the next euro zone domino after Italy and Spain is France."

As Brian Milner writes in today's Report on Business, leaders of the 17-member monetary union have simply been unable to get a grip on the debt crisis. Two prime ministers have fallen in the past two weeks - Italy's Silvio Berlusconi and Greece's George Papandreou - but wary investors continue to push bond yields higher nontheless.

There are options available - action from the European Central Bank, a pan-Europe bond and a pledge for a tight-knit fiscal union - but deep rifts among the region's politicians indicate these are not likely to happen any time soon.

Markets antsy

Against this backdrop, of course, stock investors are increasingly nervous today, following a warning from the Fitch ratings agency late yesterday of the threat to U.S. banks from the euro crisis.

While Tokyo's Nikkei eked out a gain of 0.2 per cent, Hong Kong's Hang Seng shed 0.8 per cent and European markets, in the eye of the storm, are antsy.

London's FTSE 100, Germany's DAX and the Paris CAC 40 were down by just shy of 2 per cent by about 7:45 a.m. ET. Dow Jones industrial average (YM-FT11,810.00-35.00-0.30%) and S&P 500 (ES-FT1,225.50-5.50-0.45%) futures were bouncing back and forth.

"The FTSE 100 has started the day firmly on the back foot, and was pushed even lower by worrying bond auctions in Spain and France," said Mr. Beauchamp.

"Last night, the Dow Jones suffered substantial falls after ratings agency Fitch helpfully stated the patently obvious, noting that U.S. banks would suffer heavily if the euro zone debt crisis spread beyond its current limits. As a result the U.K. banking sector has sold off in sympathy with its Atlantic cousins, with the situation being exacerbated by the situation in Italian and Spanish yields."

While the Fitch report may have been stating the obvious in some ways, that doesn't mean it should be discounted. There are risks for America's banks depending on how this thing plays out and how much further the crisis spreads.

"A Fitch report out late yesterday arguing that 'further contagion poses a serious risk' to U.S. bank credit ratings is also making the rounds, especially as borrowing costs for countries such as Belgium and Austria have also risen lately," said Derek Holt and Karen Cordes Woods of Scotia Capital.

"And indeed, recent data released out of the [Bank for International Settlements] shows that Europe accounts for roughly 45 per cent of total U.S. foreign holdings, with France, Germany, Greece, Italy, Ireland, Portugal and Spain combined accounting for about 16 per cent."

When, not if, Southern Europe (Greece, Italy, Spain, Portugal) defaults - mainly in slow motion - it is French banks that will begin to collapse. French financial regulation is weak and French politics is irredeemably corrupt, most (all?) political factions being "in bed" with the banks.

My guess is that the Croatian, French, Greek, Italian, Portuguese, Serbian and Spanish governments will all fall and all will be replaced with populist movements - left or right wing, it doesn't matter - that will, fairly quickly morph into national-socialist regimes. I also suspect that Turkey, relieved at being rejected by the EU, will leave Europe, by leaving NATO, and challenge Iran and Egypt for the role of leader of the Muslims.

The result will be a global financial depression that will, I further suspect, drive Americans into a new fit of massive isolationism which will, in turn, drive Australia, Canada, New Zealand and Singapore closer and closer to China.

 

[Kirkhill]

Did you see these articles?

Daily Mail

Europe speaks German now! Controversial claim from Merkel ally that EU countries all follow Berlin's lead - and Britain should fall into line
‘Only going after their [Britain's] own benefit, and refusing to contribute, is not the message we’re letting the British get away with'
Tory MP: ‘British people will be horrified by what is going on in Europe'
Gap between French and German government bond yields reaches record levels – revealing fears about Paris’s exposure debt

By James Chapman

Last updated at 8:20 AM on 16th November 2011


Berlin declared last night that Europe is speaking German and Britain must be less selfish toward the EU. The UK has a duty to help the eurozone despite being outside the single currency, according to one of Angela Merkel’s closest allies.

Even more provocatively, Volker Kauder warned Britain could not block a financial tax that would cost the City billions.
He insisted it was wrong for London to defend its own interests, adding: ‘Only going after their own benefit, and refusing to contribute, is not the message we’re letting the British get away with.’ He said European nations were speaking German in that they were backing Chancellor Merkel’s diktats. The comments will cause fury among senior Conservatives, who say Germany’s refusal to prop up the euro threatens to drag the UK economy down as well.

‘British people will be horrified by what is going on in Europe,’ said Philip Hollobone, a Eurosceptic Tory MP. ‘Foreign policy going back to the time of Henry VIII has been to try to prevent conglomeration of power on the continent of Europe which would be against British national interests. ‘Here we are in the 21st century with a German attempt to create a single economic and political bloc. This is Britain’s golden chance to get out of the European quagmire and set ourselves free.’

No signs of abating: The economic turmoil in the eurozone continues to cause deep concern 

Meanwhile, the economic turmoil that has gripped Europe shows no sign of going away. The interest rate Italy has to pay to finance its vast debts topped 7 per cent again yesterday – despite a change that saw a technocratic government replace Silvio Berlusconi’s administration. Such payments are seen as unsustainable and have triggered bailouts in Ireland, Portugal and Greece.
Spain was unable to borrow the full £3billion it needed from the money markets yesterday and was charged 5 per cent interest for supposedly risk-free, 12-month loans.

The gap between French and German government bond yields reached record levels – revealing fears about Paris’s exposure to debts elsewhere.

But Mr Kauder, parliamentary leader of Mrs Merkel’s Christian Democratic Union party, insisted EU governments were backing Germany’s push for closer integration of their economies in response to the turmoil. He said there was now widespread support for strict limits on debt levels in eurozone economies, with sanctions applied to any that step out of line. ‘Now, all of a sudden, Europe is speaking German,’ declared Mr Kauder. ‘Not as a language, but in its acceptance of the instruments for which Angela Merkel has fought so hard.’ He said Britain must be less self-centred in its relationship with Europe. ‘The British are not members of the currency union but they are members of Europe and they also have a responsibility for the success of Europe,’ he told the annual congress of Mrs Merkel’s CDU in Leipzig.

On the proposed City financial transactions tax, he said: ‘The British don’t  want this and I understand, when 30 per cent of your gross domestic product comes from the financial market business in the City of London.’

The row flared as the pro-EU Deputy Prime Minister Nick Clegg attacked David Cameron’s suggestion that the crisis gave the UK an opportunity to take powers from Brussels. The Prime Minister used his annual foreign policy speech at the Lord Mayor of London’s banquet on Monday night to insist that the crisis in the eurozone provided an opportunity for the EU be refashioned as a looser union.


Daily Mail

French and Germans clash over European Central Bank intervention as borrowing costs threaten triple-A rated economies

France and Germany, Europe's two central powers, clashed today over whether the European Central Bank should intervene to halt the eurozone's accelerating debt crisis - as modest bond purchases failed to stop the rout.

Facing rising borrowing costs as its AAA credit rating comes under threat, France appeared to plead for stronger ECB action

Bond market contagion is spreading across Europe. Italian 10-year bond yields have risen above 7 per cent, unaffordable in the long term.

Yields on bonds issued by France, the Netherlands and Austria - which along with Germany form the core of the euro zone - have also climbed.

'The ECB's role is to ensure the stability of the euro, but also the financial stability of Europe. We trust that the ECB will take the necessary measures to ensure financial stability in Europe,' government spokeswoman Valerie Pecresse said after a cabinet meeting in Paris. 

Pecresse said Paris believed the risk premium investors charge to hold French debt rather than safe haven 10-year German Bunds 'is not justified'

....

And

Daily Telegraph

Latin showdown with Germany over ECB
Germany is facing a moment of strategic truth. The sacred union with France that has held together through thick and thin for half a century is in growing danger as contagion spreads North, engulfing the French bond market.

By Ambrose Evans-Pritchard, International business editor

9:29PM GMT 16 Nov 2011

For EU veterans, the drama has has echoes of 1993 when the Bundesbank ditched orthodoxy to rescue France, after first cutting Britain and Italy adrift in the Exchange Rate Mechanism. But this time the stakes are much higher.

On that occasion, Chancellor Helmut Kohl pulled rank, more of less ordering his bankers to obey. "We must always bow three times before the Tricoleur", as he famously put it.

On Wednesday, France began to deploy its political leverage in earnest, leading an open revolt against Germany over the fire-fighting role of the European Central Bank.


The country's budget minister Valérie Pécresse said the central bank had a greater duty to Europe's citizens than mere adherence to its low inflation mandate. "The ECB's role is to ensure the stability of the euro, but also the financial stability of Europe. We trust that the ECB will take the necessary measures," she said. Finance minister François Baroin made near identical comments to Les Echos. ....

I do think that the Eurozone will change (contract - possibly all the way back to Germany).  I do think that the EU will change (ideally disappear - unlikely given the litter of bureaucrats that are scattered over the continent and have survived every emperor and church known to man).  I do think that there will be an unholy mess to accomodate and that that will take some time.

I don't think (or perhaps hope is a better word) that we will see as dire an outcome as you posit (although it is not an impossible outcome).

But on the bright side of things:

Investors are running for safety which is driving yields down on UK, US and Swiss bonds (the Swiss are being paid 0.3% to take foreign investments). 

Japan, despite its tidal wave clean up and massive debt (two to three times Italy) is showing signs of growth.

In the middle east Turkey and Israel seem to be making common cause against Assad (the Kurds may get their homeland yet).  The reformed Arab League (reformed by revolution) is also openly anti-Assad and is requesting that the British and French intervene in a non-military military fashion (nudge, nudge, wink, wink).

Personally I think the time of crisis is upon us.  It is January 1942.  It is going to get a whole lot messier on the financial markets but I don't think it will las for more than another couple of years.  Once markets can see their way through to the new rules, whatever they may be, they have a history of accomodating fairly rapidly.

The best thing that can happen is that the public and the politicians learn the limits of the politicians' real powers.  And that education is progressing fairly quickly.......unfortunately Democracy is getting a blackeye in the process and that is a real worry.

 

[Kirkhill]

But on the subject of the alternative (technocracy vs democracy):

A sterling example of the capabilities of your average technocrat (Courtesy of Michael Burleigh at the Daily Telegraph)

As a young man, the utopian socialist Claude Henri de Rouvroy, comte de Saint-Simon (1760-1825) insisted that his valet wake him each morning with the exhortation: “Remember, monsieur le comte, that you have great things to do.”

.......

...Saint-Simon, in the pitiful penury of his last years. He eventually shot himself repeatedly, and survived, asking his doctor: “Explain this… my dear Salandière, a man with seven bullets in his head can live and think.” Sympathetic French bankers maintained his grave in Père Lachaise and the Soviet Union put up a memorial to him....

 

[Brad Sallows]

I am surprised the socialists are not actively fanning the flames.  Surely the collapse of financial institutions under the weight of default will serve as an excuse to socialize most of the holdings of the citizens (covering the losses) and to take the banks firmly under national control to prevent a recurrence; surely the impoverishment of the citizens would solidify their dependence on the state.

 

[Kirkhill]

Perhaps it is just that even socialists recognize that capitalists are necessary, even if only to supply the hanging rope. Apparently they can't even make rope themselves.

 

[a_majoor]

I am surprised the socialists are not actively fanning the flames.  Surely the collapse of financial institutions under the weight of default will serve as an excuse to socialize most of the holdings of the citizens (covering the losses) and to take the banks firmly under national control to prevent a recurrence; surely the impoverishment of the citizens would solidify their dependence on the state.

This probably is/was the plan ("socializing" the IRA accounts of US citizens would net about $2 trillion dollars, for example), but much of the wealth isn't in the form of seizable assets (what are you going to do with unsellable houses?) and there is no more money to pay the dependents, so the ability to "execute" the plan no longer exists....

 

[Edward Campbell]

I am surprised the socialists are not actively fanning the flames.  Surely the collapse of financial institutions under the weight of default will serve as an excuse to socialize most of the holdings of the citizens (covering the losses) and to take the banks firmly under national control to prevent a recurrence; surely the impoverishment of the citizens would solidify their dependence on the state.

Even the socialists can see the populists gathering strength and it is only 80 years since the last batch of populists 'captured' one of the world's great nations and sent the socialists, amongst others, to the ovens.

 

[a_majoor]

Capital contols reimposed by Brussels?

http://brucekrasting.blogspot.com/2011/11/on-capital-flight-and-forced.html

On Capital Flight and Forced Repatriation

There are some folks in America who will wake up this morning and read that Jefferies has been sued for its role in a bond deal with MF Global and they will vote with their feet (Zero hedge Link). They will close their accounts with JEF and move to a safer address. That’s an example of capital flight.

There are people all over the globe who have looked at the rapid un-gluing of the financial system and have bought gold as a safe haven. That’s another example of capital flight.

Every time that something stupid crosses the tape from one of the EU deep thinkers the US bond market catches a bid. Yet another example of capital flight.

I could go on for a bit with this. There are dozens of examples. All around the globe one can find evidence that money is moving around with the sole purpose of finding someplace “safe”.

Capital flight is a perfectly logical consequence in today’s world. Barely a day passes where we are not reminded that nothing is safe any more. Not our currencies, not our equities, not our bonds and certainly not our banks/brokers.

In Greece there are many example where capital flight is undermining stability. The most obvious is the capital flight from the Greek banks that has taken place over the past few years. This flow of money is also perfectly logical. There are many risks of leaving money in a Greek bank:

-The Bank could default. The principal in the account is at risk. The guarantee (up to E100k) is from the government. What's that worth? If the banks were going under so would the solvency of the government.

-The government could default. The chaos that would follow would result in a freeze of all bank balances.

-The government could announce one morning that it was re-establishing the Drachma. This would mean that any Euros in a Greek bank would be automatically converted into Drachmas at the old official rate. The value of those Drachma would be worth half (or less) as a result of the immediate devaluation that would occur.

Put yourself in the mind of a Greek who had some savings in a local bank. What would you do? You would do whatever you could to get your money to high ground. It would be perfectly reasonable for you to do that. And that is exactly what the Greeks have done. They’ve moved billions of Euros to Swiss banks in an effort to preserve their wealth. In the process they have crippled the Greek banks and have added to the downward spiral in Greece and the rest of the EU.

There was (IMHO) a very significant development on this front last week. A move is being made in Brussels to “force” the Swiss government/banks to transfer all of the assets of Greek citizens back to the Greek banks. For a Greek this means that your money is hostage. It has been functionally expropriated. It will be transferred into a banking system that is fraught with risk. Some portion of the money that goes back to Greece will certainly be lost.

I have talked with some who I know in Athens. They are out of their minds with this development. Some thoughts/quotes:

    - BRUSSELS—The European Commission is helping Greece negotiate an agreement with Switzerland to repatriate as much as $81 billion believed to be hidden in Swiss bank accounts, a high level European Union executive body official said Nov. 17.


$81 billion?? That’s massive. This is not the shopkeeper or pensioner. This is big bucks and that means the Greek shippers. It is a fact that the Greek government doesn’t tax the foreign earnings of the shippers. Call that a mistake, but that is the law. As a result, the shippers have held huge bucks in Switzerland. It’s not dirty money. Right or wrong, there was no legal tax on this.

    The European Commission is working with Switzerland and Greece stop what it believes is an ongoing exodus of money from Greek bank accounts into Swiss and other offshore banking centers, the EU official said.


The only way to stop capital flight is to address the underlying causes of the flight. That can’t happen in Greece for years. The alternative is to trap the money, force it to go where it is at most risk. The owner of the money will have no choice. Any rights they might have to preserve their assets will be abrogated.

I’m amazed at this development. The Swiss government/banks are obligated to cooperate with EU tax authorities when there is evidence of tax fraud. But that is not what this is about. The people in Brussels and Bern know that. The fact is that the Greek tax system is so screwed up that there simply are no taxes levied on certain types of income/capital (the shippers). No doubt, some of the Greek cash that is in Switzerland is there because of tax avoidance. But the vast majority is simply safe haven money.

The word “Repatriation” sounds nice enough but really it means “Theft and expropriation”. There will be nothing voluntary about this. There will be little (if any) due process.

If this happens (the folks in Brussels are pushing hard) a very dangerous precedent will have been set. Flight capital will have been made illegal. Where might this go?

-It will go to Spain very quickly. After that it will go to Italy where there are truly huge fortunes outside the country. I see a development like that as being a lights out event.


-It will come to the USA. EU residents have tons of assets here.


-Money that is subject to forced repatriation back to countries with weak banks and bankrupt governments will seek the last remaining safe haven, gold. If governments go so far as to repatriate money, they would also not hesitate to make gold ownership illegal. That too would be a lights out event.

We have a situation developing where the technocrats in Brussels are trying to institute capital controls. They have put a gun to the Swiss government to achieve their objectives. They will likely succeed. The fear of broader capital controls and more repatriation will spread like wildfire. The fact is, capital flight is a very reasonable response in our current environment. Capital controls that either stop or reverse it will undermine confidence and create a panic. Those officials in Brussels have no idea what they are unleashing.

 

[57Chevy]

I see global debt as a balloon with many nations poised on the stretch marks.

Thought I'd throw that in there.