Quote of the week
: “Had they fixed Greece properly in the first place, bondholders
would have concluded the EU could also fix Ireland ... whereas now
if Portugal comes under suspicion they’ll say : ‘Clearly, these
guys who couldn’t fix Greece or Ireland, can’t fix Portugal either,
and so on’ ” (Carl Weinberg, Chief Economist at Valhalla, NY-based
High Frequency Economics).
As German voters rebel
against more & more costly bailouts & ‘austerity fatigue’
becomes more widespread, there is more talk of a possible break-up of
the Euro zone, with its diehard proponents steadfastly denying the possibility
thereof to the point where Alex Weber, the President of the Bundesbank
recently assured a French audience that if the current 750BN Euro bailout
fund were depleted, the EU leaders would “top it up”. Nevertheless,
one should not rule out the possibility of the emergence of a smaller,
more homogeneous, but stronger, Eurozone that had sloughed off its low
performers. This would be easier than many people appreciate because
on every Euro note & coin in circulation there are marks that identify
which country it is from.
The Irish banking crisis
has played in the hand of the Euroskeptics who have long argued that
the EU was expanded too hastily & that a single currency could not
accommodate the needs of such a wide diversity of economies, and of
nationalists who see the cap-in-hand pilgrimages to Brussels for
highly conditional bailouts as validating their long-held fears that
economic union could at some point lead to political subjugation.
Bailing out Greece to
save the hide of the German, French & Italian banks didn’t
work. And bailing out the Irish banks to save that of these & other
European banks ain’t going to work either (German banks alone have
140 billion Euros at risk in Ireland). This validates the definition
of stupidity as “doing the same thing over & over again and expecting
different results”. Assuming Ireland gets its 85BN Euro loan (an estimated
30BN of which will go to further prop up its banks, bringing the total
cost thereof to 75BN Euros, i.e. one-third of Ireland’s GDP), the
interest thereon will wipe out the 15BN Euro savings the Irish government
is expected to come up with for the next four years. And the problem
now is that Greece’s fiscal mess is actually worsening.
The size of the EU/IMF
Bailout fund is 750BN Euros, Take away the 110 BN Euro for Greece &
another 85BN for Ireland, and 555BN Euros are left in the kitty. A
possible bailout for Portugal on the same scale as Ireland’s would
cost another 100BN Euros & leave 445BN Euros which would be wiped
out if Spain (the Eurozone’s fourth largest economy) needed help.
A bailout for the big elephant in the room, Italy, the Eurozone’s
third largest economy whose debt-to-GDP 120% ratio is the third-highest
in the EU, & only marginally lower than Greece’s, could raise
the tally to twice the original amount. While this may look like the
worst case scenario, it is unlikely to get that far since long before
the German electorate’s tolerance for bailouts will be exhausted.
In response to public
outrage about the use of body scan machines in US airports, the
TSA’s response
was that one type of machine used “had no known risk”), while the
other
GLEANINGS VERSION
II
No. 386 - November
25th, 2010
US ECONOMY GREW
SLIGHTLY FASTER LAST SUMMER (AP, Jeannine Aversa)
· The Commerce Department
on November 23rd published a revision of its Second Quarter
GDP estimate from 2.0% to 2.5%. It credited greater consumer spending
& greater overseas sales of US products. This was a major improvement
from the First Quarter’s dismal 1.7% rate. But to reduce the unemployment
rate, it must grow twice as fast.
While this continued
slow rate of growth was supposedly the reason for the Fed’s November
3rd launch of QE2, what matters is not the
rate of growth per se, but the rate of change thereof.
SPENDING, INCOMES
RISE AS LAYOFFS DROP (Msnbc. com)
· Americans earned
& spent more in October (consumer spending was up 0.4% , vs. 0.3%
in September, & incomes up 0.5%). The number of people applying
for unemployment, at 407,000 saar, was down 34,000 in the latest reporting
week, the lowest in over two years. And the Thomson-Reuters’ final
November’s Consumer Confidence Index was 71.6 vs. October’s
67.7, November’s preliminary reading of 69.3 & the consensus
forecast of 69.5.
On a less positive
note, manufacturing activity slowed.
41 STATES SEE MOST
JOB GAINS IN 5 MONTHS (AP, Christopher S. Rugaber)
· But the gains
didn’t reduce the broad unemployment rate, although they fell in 19
states (incl. in California, Florida, Michigan & Nevada, the states
with the highest rates - California alone added 39,000, the most in
4 ½ years but not enough to change its unemployment rate), remained
the same in 17 & rose in 14. As Anthony Chan, JPMorgan’s Chief
Econimist, put it, “The numbers suggest we’ve stabilized and have
started to show real improvement ... But we’re a long way from crafting
the ‘Mission Accomplished’ sign.”
When the economy starts
to improve, more people start looking for work, which affects the unemployment
rate.
EXISTING HOME SALES
FELL 2.2% IN OCTOBER (AP, Martin Crutsinger)
· They came in at
a 4.43MM annual rate whereas JPM had expected a rise to a 4.60MM rate.
A huge overhang of unsold homes was cited as the main reason. This was
the slowest rate since July & came after two months of increases.
7.25MM was the peak,
in September 2005.
BIG BANKS GROW
AS SMALLER RIVALS SUFFER (WSJ, Victoria McGrane)
· The FDIC reported
on November 23rd that the nation’s largest financial institutions
are recovering from the financial crisis far faster than the smaller
ones. This has far-reaching consequences for the industry &,
more importantly for the economy, if only because the smaller ones
will have more trouble raising new capital & will become takeover
targets.
Consolidation is not
necessarily good news for locally-based small businesses.
PELOSI’S NEW
MISSION : BLOCK OBAMA DEALS WITH GOP
(AP, Julie Hirschfeld
Adams)
· After a messy
family feud among the Democrats, she will remain their House leader.
But she diverges from the President, with possibly damaging consequences
for the latter, in her opposition to him cutting deals with Republicans
in order to get legislation passed. For the liberal Democrats believe
that if he had done less compromising on principles close to their
hearts in the past two years they would have done better in the
mid-term elections, because they would have had a better jobs bill that
would have created more real jobs.
This is
‘rewriting history”; for on paper at least, they had the votes for
a better jobs bill.
CANADA’S INFLATION
RATE JUMPS HALF-POINT (CP, Julian Beltrame)
· In October the
annualized CPI jumped by 0.4% to a higher-than-expected 2.4%, its highest
level in two years, led by an 8.8% hike in gasoline prices although
the prices of most things were noticeably higher. Even core inflation
was up 0.3% to an annualized 1.8%.
The Bank of Canada
continues to have a 2% target.
ISRAELI KNESSET
REFERENDUM BILL (Al-Jazeerah)
· Late November
23rd it passed, 65-33, a bill supported by Prime Minister
Netanyahu, stipulating that in case peace deals were arrived at with
Syria over Golan Heights and/or with the Palestinian leadership over
the West Bank & Jerusalem, they would have to be approved by the
Knesset & subsequently in a referendum. One Arab member of the Knesset
called this proof that Israel had no interest in negotiating, that now
“only idiots” would consider trying to negotiate with it,
that international-, not Israeli-, law should apply, and that this was
a reversal of the long established practice whereby the occupied decided
their future, rather than having the occupiers do it for them.
While it was reported
that there had been no abstentions, 20-odd MKs incl. Labor Party leader
cum Defence Minister Ehud Barak, must not have been present for
the vote. This may well be one more step towards the break-up of the
current Netanyahu right wing coalition, and either new elections or
its replacement with a more ‘dovish’ centrist Government of National
Unity.
CHINA, RUSSIA QUIT
DOLLAR (CD, Su Qiang)
· On November 23rd
in St. Petersburg Premiers Wen Jiabao & Alexandre Putin announced
that “ to protect their economies”, they would start using using
their own currencies in their bilateral trade. The next day, they
announced 13 trade deals with a total value of US$8BN.
Another, albeit small,
bit of erosion of the role of the US dollar in the system.
INDIA TO DEPLOY
36,000 EXTRA TROOPS ON CHINESE BORDER
(BBC News, Subir Bhaumik)
Parts of the state
have long been claimed by China.
THAI, MALAYSIAN
GROWTH SLOWS (Bloomberg)
· Their Third Quarter
GDP growth was the least in three quarters. In Thailand’s case it
was 6.7%, vs 9.2% in the Second Quarter, & in Malaysia 5.3%,
down from 8.9%.
While not necessarily
good news, one should never read too much in one quarter’s numbers.
NUCLEAR FACILITY
RAISES DOUBTS ABOUT US SURVEILLANCE
(Reuters, Phil Stewart)
· North Korea’s
recent disclosure, to a visiting US scientist earlier this month, of
a hitherto unknown ultra-modern uranium enrichment facility raises questions
about the quality of the US intelligence community’s surveillance
activities & about whether there might be more such facilities in
the country that have escaped notice. What made this even more embarrassing
is that it is located in plain sight in the Yongbyon nuclear complex
that is supposedly under close, ongoing scrutiny by US spy satellites.
So now everyone is
speculating why North Korea chose this moment to reveal its existence.
FEAR OF EUROPEAN
‘FOREST FIRE’ SPREADING (G&M, Doug Saunders)
· The November 21st
announcement of a 85BN Euro (US$113BN) bailout from the EU &
IMF has failed to create a sense this is the end of two years of financial
instability. The country in political upheaval. The government wants
to pass a budget based on the four year package of brutal welfare cuts
& tax hikes demanded as a condition of the bail-out &
faces an election in January it is all but certain to lose with the
likely winners vowing to renege on the budget if it were passed &
replace it with a more Irish taxpayer- cum economy-friendly one (prompting
the EU to warn on November 23rd it could destroy the Euro
by its political feuding, & its top financial official to say “Let’s
adopt the budget” ... and ... move on” to avoid the Irish brush
fire from turning into an EU-wide forest fire that could take the Euro
down. But both government & opposition MPs fear losing their seats
if they vote for the budget, & Prime Minister Brian Cowen asked
the opposition parties to abstain from voting on the budget, so as to
present a show of national unity & reduce the risk of a market panic
& a run on the banks (which the opposition refused to do). The result
has been Europe-wide concern that, if Ireland can’t, or won’t, meet
the demands for drastic fiscal measures by December 7th,
this may may bring on a degree of investor panic that could lead
to demands for bailouts of other Eurozone countries that would be beyond
the capability of the EU & thereby bring down the Euro. And the
fear of a major run on the Irish banks, whose depositors have been
voting with their feet for some time & that have been shut out from
the inter-bank lending market, forcing them to borrow 40BN Euros from
the ECB,was not lessened when PIMCO’s Mohamed El-Erian told a
TV interviewer “What you advise your sister in Ireland now is ...
take your money out of an Irish bank and put it in another bank headquartered
elsewhere ... That’s what happened in Argentina and in emerging countries.
People worry about their savings”
And to make matters
worse, the Irish who hitherto had displayed an attitude of
“We’ve seen worse & survived” rather than the public anger
seen in Greece, Portugal, Spain & Italy, and even France, have now
begun to get angry too, accusing those whom they perceived to have created
this mess & to have profited from doing so, of now seeking to be
bailed out at their expense.
GLOOM, ANGER SPREAD
AS EUROPEAN ECONOMIES TEETER (AP)
· Fears abound about
Europe’s seemingly unstoppable debt crisis. Striking workers shut
n adown much of Portugal. Ireland proposed its deepest budget cuts ever
including a lowering the minimum wage, and English & Italian students
have clashed with police over education cuts. And analysts are skeptical
about the future & concerned that the desperate efforts by governments,
the EU and IMF won’t be enough to prevent countries from defaulting
and/or banks going under.
And yet the EU sought
to take advantage of the opportunity to bring, as a part of the Irish
budget cuts, Ireland’s exceedingly low corporate tax rates more
in line with those in the rest of the EU.
EU COMMISSION MUST
ALSO TAKE BLAME FOR IRELAND’S DEBT WOES
(The Independent,
Emmet Oliver)
· With the exception
of the Irish government, no entity has done more to pile mountains of
debt on the Irish tax payers than the European Commission (EC). For
since 2008 it encouraged, approved or, at the very least was consulted
on, the following capital injections & bank interventions . The
first recapitalization of the Anglo-Irish Bank (AIB). The nationalization
of the AIB, The first recapitalization of the Bank of Ireland. (BoI).
A capital injection for the AIB. The creation of the Eligible
Liabilities Guarantee (ELG) scheme. A second recapitalization of the
AIB. The restructuring of the BoI & the AIB. The creation of the
NAMA asset relief scheme. Capital support for the EBS Building Society
& Irish Nationwide. A prolonging of the ELG scheme. Approval of
the NAMA asset valuations. And the extension of the ELG scheme. All
in all, it did not reject a single banking intervention idea of the
Irish goverment; in fact it appears to have positively encouraged many
of them.
· It was obviously
wrong in its assumption that increasing the debt burden would not have
a calamitous market impact (& appears to have been more interested
in protecting the German & French banks’ 139BN & 50BN Euro
exposure than in doing what was right for Ireland).In the process,
Ireland’s souvereign balance sheet was wrecked, market confidence
evaporated & IMF/EU assistance became inevitable.
For over a decade
Ireland was a poster child for fiscal rectitude as it brought its debt-to-GDP
ratio down from 95% in 1995 to 25% in 2007, while now closing in on
100%, and on its way to 150%.
DUBLIN TO TAKE
MAJORITY BANK OF IRELAND STAKE (Market Watch)
· Right now it holds
36% of the bank’s shares which, it announced on November 23rd
it might take as high as 79%. This caused the price of its shares to
tumble 44% in two days & S$P to downgrade Irish government bonds
from AA- to A with the proviso that it would be lowered further if the
bailout “fails to staunch the wholesale funding outflows.”
Its shares are NYSE-listed
& right now are trading for US$1.50, down from US$100 in early 2007;
nevertheless institutional investors have doubled their holdings recently.
`
GREECE’S AUSTERITY
MEASURES DOOMED TO FAIL (BBCNews, Yanis Yaroufakis)
· The rationale
for austerity is two-fold. One is practical : to avoid bankruptcy the
profligate must tighten their belts & learn to live within their
means, the other moral : lenders demand painful austerity as a key step
back to responsible citizenship.
· In the Greek bailout
the EU & IMF wilfully confused the two. They demanded Greece swallow
austerity’s bitter medicine time & as the only way back to fiscal
health and to ensure the Greeks learnt the lesson the hard way.
But the medicin prescribed didn’t cure the disease & now threatens
to engulf the entire Euro zone. The savage austerity won’t arrest
the growth in Greece’s ballooning debt & will do nothing to inflict
righteous pain on the culprits.In fact, the very people responsible
for Greece’s indebtedness, who profited from doing so, are now preaching
austerity sermons & administering the bitter medicine to the innocents
who will suffer its ill effects. For the Greek bailout was not
intended to bailout Greece but rather to protect the interests of the
German, French & Greek banks.
Nevertheless, Greece’s
international lenders are saying Greece must make an
“extra effort”.
ENI SIGNS $17 BILLION
VENEZUELA OIL DEAL (BBC News)
· Working with state-owned
PDVSA it will develop a major oil fieldin the East Orinoco basin. It
will spend $8BN there &, with PDVSA as a 40% partner, will build
a refinery that will come on stream in 2016. ENI CEO Paolo Scaroni said
that “Within four, five years Venezuela is going to be the second
most important country for our company”.
This has to be a huge gamble that
Chavez is on the greasy slide.