QEurope [angrybearblog]

I am generally skeptical about the importance of further QE in the USA, but I am definitely not skeptical about the effectiveness of the the leaked European Central Bank plan to purchase unlimited amounts of European Government debt.  The reason is that there are government bonds over here which terrify investors.  That means that the amount which private investors must hold should have a fairly large effect on the price (different European government bonds are not at all close substitutes).

The leaked plan is a compromise between the sane and the German (two of my best friends are German) .  Importantly the ECB will not place an upper limit on yields on bonds, that is promise to buy any amount if the price falls below some level.

The purchased bonds must be fairly short term bonds (the aim seems to be to make the intervention as ineffective as possible).  Jana Randow and Jeff Black  at Bloomberg report that up to three year bonds will be bought.  Again this is based on leaks.  Alarmingly Il Corriere della Sera reports both this claim and the dramatically contrasting claim (from a source identified only as “German speaking”) that the bonds will be of duration only up to 1 year.  That would be almost pointless.    I can’t get the corriere link (I read the article in the dead tree version and search ilcorriere is horrible).  The key passage is “Draghi ha citato l’esempio di titoli circolante sul mercato secondario con scadenze ‘fino a tre anni’ secondo alcune fonti, o ‘al di sotto di un anno’, secondo altre che parlano Tedesco.” that is “Draghi gave an example of bonds on the secondary market with maturity “up to three years” according to some source, or ‘less than one year” according to other sources who speak German.”

In comparison QE II consisted of purchases of 7 year notes and Twist of (sterilized) purchases of 30 year bonds.  My view is that QEII was totally pointless (didn’t even statisticall significantly affect the price of 7 year bonds) and Twist was at least better than QEII.  So 3 years is not long enough.  On the other hand, Spanish, Italian, Irish, Portoguese and especially Greek (PIIGS) bonds are not at all like US Treasuries.  They are not close substitutes for money at alllll (I personally will absolutely not exchange any of my money for any such bond with maturity over 3 months).

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Everything you need to know about the September 12 German court decision that could rock the entire world [Yahoo]

The eurozone is running out of bailout cash, and the German Constitutional Court now holds the fate of Europe in its hands.

The European Financial Stability Facility, the original euro area bailout fund established in the summer of 2010, is down to about €248 billion of lending capacity left after existing bailouts for Greece, Portugal, and Ireland are accounted for.

Spain and Italy – the next two countries expected to be in line for a bailout – could have combined financing needs as large as €703bn over the next two years, according to Citi estimates, dwarfing the existing capacity of the EFSF.

Those huge numbers underscore the need for the additional firepower of the European Stability Mechanism, the new bailout fund expected to replace the EFSF and make available hundreds of billions of euros in additional lending capacity to struggling member states.

However, the ESM has still yet to be ratified, which has many counting chickens before the eggs have hatched, so to speak.

The 16 judges that sit on the Federal Constitutional Court of Germany need to sign off on the fund’s constitutionality in order to make the fund operational – and the Court is widely expected to do just that when they deliver a ruling on ESM ratification on September 12.


President of the German Constitutional Court Andreas Vosskuhle (4th R) reads the verdict on the German government's European Stability Mechanism and the Euro Plus Pact in Karlsruhe June 19, 2012 file photo. REUTERS/Alex Domanski/Files


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Fate of the Euro [financialsense]

Europe’s long-term bailout measures for Spain and Greece depend on German ratification. After the German legislature gave final approval to the European Stability Mechanism (ESM) for establishing a European bailout fund, the German Federal Constitutional Court said it would rule whether the ESM compromises German sovereignty. The German high court will decide whether to impose a temporary injunction against the ESM on Sept. 12. How long will the injunction last? Supposedly, a final court decision could take several months.

The plaintiffs in the case argue that a $610 billion bailout plan effectively negates German budget sovereignty. Strictly speaking, such a measure is unlikely to be constitutional. German voters would be locked into a situation without remedy. Some portion of their money would go to other countries, at the discretion of the ESM. Germany would then be Europe’s cow, giving milk whenever needed. And a cow has no sovereignty.

Given Germany’s position within the European Union, what defense of German sovereignty can be made? Hasn’t German sovereignty already been compromised beyond the point of redemption? Besides, the Germans have marched for decades under a European banner, desperate to shed Hitler’s nationalist legacy. Germany must do good deeds now and forever. Germany must be Europe’s cow.

Without any doubt, Germany’s commitment to Europe has something of atonement about it – as well as economic optimism. But now the economic optimism is evaporating, and the generation that lived through the war is passing away, and some Germans would draw a line in the sand. “Perhaps we shouldn’t feel guilty any longer,” they say. “Perhaps Germany isn’t obliged to bail out other countries.” The question, however, is whether such Germans are to be found in the German Constitutional Court. The astute observer does not think so. The high court judges are good Europeans. They are not German nationalists. Furthermore, they do not want to be blamed for a general financial collapse.


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What Happened After Europe’s Last Three Currency “Unions” Collapsed [Zerohedge]

It may come as a surprise to some of our younger readers, that the Eurozone, and its associated currency, is merely the latest in a long series of failed attempts to create a European currency union and a common currency. Three of the most notable predecessors to the EUR include the Hapsburg Empire, the Soviet Union, and Yugoslavia. Obviously, these no longer exist. Just as obvious, all of these unions, having spent time, energy, money, and effort to change the culture and traditions of member countries and to perpetuate said unions, had no desire, just like Brussels nowadays, to see these unions implode. The question then is: what happened after these multi-nation currency unions fails. VOX kindly answers: “they all ended with disastrous hyperinflation.

Just in case anyone missed it, here it is again from VOX:

In the last century, Europe saw the collapse of three multi-nation currency zones, the Habsburg Empire, the Soviet Union, and Yugoslavia. They all ended in major disasters with hyperinflation. In the Habsburg Empire, Austria and Hungary faced hyperinflation. Yugoslavia experienced hyperinflation twice. In the former Soviet Union, ten out of 15 republics had hyperinflation (e.g. Pasvolsky 1928, Dornbusch 1992, Pleskovic and Sachs 1994, and Åslund 1995).

So… trying to pull infinite demand from the future to the present once the ability to fund said present deferred demand ends, has consequences? Oh yes, Virginia. It does indeed:

The output falls were horrendous and long lasting. The statistics are flimsy, but officially the average output fall in the former Soviet Union was 52%, and in the Baltics it amounted to 42% (Åslund 2007, 60). Five out of twelve post-Soviet countries – Ukraine, Moldova, Georgia, Kyrgyzstan, and Tajikistan – had not reached their 1990 GDP per capita levels in purchasing power parities by 2010. Similarly, out of seven Yugoslav successor states, at least Serbia and Montenegro, and probably Kosovo and Bosnia-Herzegovina, had not exceeded their 1990 GDP per capita levels in purchasing power parities two decades later (World Bank 2011). Arguably, Austria and Hungary did not recover from their hyperinflations in the early 1920s until the mid-1950s. Thus half the countries in a currency zone that broke up experienced hyperinflation and did not reach their prior GDP per capita in purchasing power parities until about a quarter of a century later.

What was the catalyst:

…systemic change, competitive monetary emission leading to hyperinflation, collapse of the payments system, exclusion from international finance, trade disruption, and wars.

It’s all good though: Europe has a beneficial donor with an endless sack of money – Germany – and 80 some million people who will never, ever consider voting out those politicians who jeopardize their standard of living (regardless how it was obtained, but hard work is a distinct possibility). Ever. Or maybe they will? Maybe they will realize, as they should have over a year ago, that each passing day that nothing changes, and the broken status quo persists, simply means the pain in the inevitable end will merely be that much greater? If recent elections are any indication, Europe should probably be very concerned. Of course, this being Europe, and the market being the market, the fact that there is reason to worry, will provide the market with reason not to worry. After all someone else will make everything better: the central planners made risk of failure illegal.


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Euro Crisis Morphs into Generational Conflict [SpiegelOnline]

“Que se vayan todos,” or “Away with all of them,” became one of the slogans chanted by the tens of thousands of “Indignados” in Spain at protests last year. In addition to their eponymous outrage, many had one thing in common: Most were young and viewed themselves as victims of the crisis.


Elderly Greeks at a political rally: Are older people partly to blame for Europe's debt crisis?

They might have been more specific and instead chanted: “All the old people must go!” This phrase would apply because, in many ways, the euro crisis is also a conflict between generations — the flush baby boomers in their fifties and sixties are today living prosperously at the expense of young people.


Intergenerational equity — measured among other things by levels of direct and hidden debts and pension entitlements — is particularly low in Southern Europe. In a 2011 study of intergenerational equity in 31 countries by the Bertelsmann Foundation, Greece came in last place. Italy, Portugal and Spain didn’t do much better, landing in 28th, 24th and 22nd place respectively. Currently, the unequal distribution of income and opportunities is particularly distinct:


  • The employment market collapse has hit young Europeans much harder than older generations. In Greece and Spain more than half of those under age 25 are unemployed — twice the rate of older workers. Things are even worse in parts of southern Italy, where youth unemployment has risen above 50 percent.
  • One reason for this situation is unequal employment circumstances. Older Spaniards and Italians, for example, profit from worker protection laws preventing them from getting fired that are quite strong by international comparison. But almost half of young Italians and 60 percent of young Spaniards are on temporary employment contracts and can easily lose their jobs.
  • The burdens and risks of the euro bailouts are also mainly borne by young people. Ultimately, growing national debts and bailout funds worth billions will be financed through bonds that won’t be due for many years to come.


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Debt crisis: What could the ECB do to save the euro? [Telegraph]

The attention of world markets will be firmly fixed on the European Central Bank on Thursday, as it announces its monthly policy decision.

The declaration last week by President Mario Draghi that he will do “whatever it takes” to save the euro whipped markets into a frenzy. Investors took it as a signal that the ECB was poised to announce dramatic intervention to stem the eurozone crisis before policymakers take a summer break.

With expectations so high however, anything short of major action is likely to disappoint markets and trigger fresh panic. Here is a look at some of the possible options open to the Bank.

Banking licence

The ECB could grant a banking licence for the region’s permanent bailout fund, the European Stability Mechanism. This would allow the ESM to borrow from the central bank and take on a “lender of last resort” role for those sovereigns in difficulty but essentially solvent, like Spain and Italy. It would be a hugely significant move and likely have the most dramatic impact. Italy’s Prime Minister Mario Monti said yesterday such a move “will in due course occur”, but strong opposition from German policymakers makes it unlikely today.

Debt crisis: What could the ECB do to save the euro?


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How A Country Rationally Exits The Eurozone [Gonzalo Lira]

We are about to experience the Euro Exit Crisis.

Mish Shedlock and I have a private bet as to whether Italy or Spain will exit first—he says Italy, I say Spain. But either way, it’s gonna pretty much suck.

The whole point of exiting the eurozone is because a country no longer has the money to finance its continuing operations. Insofar as Spain, Greece and possibly Italy, that moment will arrive shortly—possibly within days in the case of Spain. So if a sovereign government reaches this moment, it will have no choice but to exit the EMU and revert to a local currency which the government can then devalue.

By doing this, the government simultaneously has all the cash it needs to continue operations, and also inflates away its debts. The private sector gets a shot of adrenaline insofar as foreign trade is concerned, because its goods and services become that much cheaper on the foreign markets. And the employment situation gets a boost, as those producers selling their cheap goods and services overseas begin to hire more workers to fulfill demand.

The downside is that the government gets shut out of foreign bond markets, its financial sector takes a huge hit, and prices for essential goods and services rise dramatically, hurting the poor, the lower middle-class, the elderly, and the unprepared.

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