Europe’s politicians fiddle while the Euro burns
So much for the Euro rally.
After rallying against the U.S. dollar on February 16, today (February 18) the Euro is back to its old ways. As of noon in London the dollar had gained 0.4% against the Euro, sending that currency to its lowest level since May 2009.
Comments from German Chancellor Angela Merkel and other German politicians on the one side and Greek prime minister George Papandreou on the other reminded currency and bond traders that there is still no plan for how to end the Euro crisis set off by an out of control Greek budget.
Merkel poured oil on the fire by saying that Greece had falsified its budgetary and economic statistics for years. And that big investment banks such as Goldman Sachs and JPMorgan Chase had helped the country hide growing deficits.
Absolutely true. But certainly not helpful in ending the crisis.
For its part Papandreou’s Socialist party government is now pushing for a special parliamentary investigation into public finances and accounting under conservative New Party governments between 2004 and 2009.
The clear danger in both Germany and Greece is that politicians seem to be playing to their domestic audiences rather working to end the crisis. In Germany, where many still mourn the good old days of the Deutschmark before the European Monetary Union replaced that currency with the Euro, any move that smacks of a bailout for Greece is deeply, deeply unpopular. In Greece the government faces strong opposition from its political opponents and labor unions to the budget cuts it has already proposed. The European Union has already made it clear that it wants to see even deeper cuts.
Currency and bond traders are left, then, with a situation where no politician wants to spell out the detail of a plan that would actually end the crisis. And without those details no plan is even vaguely credible.
No surprise then that the dollar, still the safe haven currency in any crisis because dollar markets are so liquid (and hence easy to enter and exit without causing a big swing in prices), is up today against the currencies of 14 of 16 major U.S. trading partners. The Dollar Index, which tracks the dollar against the currencies of six major U.S. trading partners, was up 0.3% as of noon in London.
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I was a little surprised by this little photo “homage” over at CNBC.com to the world’s biggest debtor nations:
http://www.cnbc.com/id/30308959
Of the top 20, most were in Europe. #1 was was Ireland with over 1300% of external debt/GDP. Naturally, all the PIGS were there. The U.S. was #20, and the list also included Hong Kong and Australia.
Remember back at the peak of the bailouts in the U.S., we heard about “zombie banks”? Well, I’d call the euro a “zombie currency”. It’s dead, but it doesn’t know it yet.
Jim,
Greece is not too big to fail. Germany political stance, popular unwillingness to solidarity, and pride is suggesting a different scenario. Greece will exit the Euro with a New Dracma (or Drama) with a partial default. Greek society will not be able to suffer the other draconian solutions. it will be to be seen if this example will teach other European Countries the lesson. Sure the Euro and Greece pride will be tarnished for a while but it will give Europe politicians a leverage to do what needs to be done financially and politically. Beside a weak Euro will help in the meantime exporter Countries as well.
Something to keep in mind: The EU exports almost as much as the U.S. and China COMBINED (over $1.9 trillion for the EU, over $2 trillion for China and the U.S. combined):
http://en.wikipedia.org/wiki/List_of_countries_by_exports
The EU imports almost $1.7 trillion.
Let’s damage those two numbers substantially, and see what happens to world trade.
While I can agree that a weakened euro will allow more exporting activity from Europe, how much of that extra money will go towards paying higher rates on their sovereign debt?
Ed,
Is it time to buy gold?
mopama,
If I lived in Europe, I’d say absolutely! However, as the euro tanks, and the dollar strengthens temporarily, gold might not be the best play, although I do expect it will do well in the long-term.
Ed,
Then I will go ahead. I live in Italy for now!
Expel Greece from EU!
mopama,
You’re actually in a good position to play gold right now. If I knew of a way to take advantage of the gold/euro exchange rate in the U.S., I would.
YX,
It is not so easy, but reading into the Merkel wording, it could happen.
Ed,
I will definitely look into it. Thanks.
Considering how painfully PC the EU is, I cannot imagine them expelling Greece. They will hold hands, sing a song and send a stenly-worded note. At worst, they will put Greece on Double-Secet Probation.
Expelling Greece would show that there are flaws in the EU and I don’t see that huge bureacracy admitting it and giving Germany, UK or others a reason to bolt.
It looks that Merkel is the equivalent of Paulson. Germany is, perhaps, saying We will help (Europe and Euro) but someone (not systemic and poorly managed) has to go.
Run26.2,
Your “double secret probation” comment definitely qualifies as the funniest thing I’ve read today! (and sadly true too)
U.S Debt, China, Japan, Treasuries, and aging populations
(All things Jim has talked about in his articles)
http://blogs.reuters.com/great-debate/2010/02/18/at-least-u-s-has-japan-to-fall-back-on/
“The bad news for holders of U.S. debt, in case you missed it, is that China has sold so many Treasuries that it is no longer America’s leading lender.
The worse news is that there is a new creditor-in-chief, and it is Japan, an aging country with its own government debt bubble to contend with.
“
DJ,
After that, I’m tempted to start burying gold in my back yard!
EdMcGon—There is something wrong with the numbers for Ireland in that article. The rest of the 19 percenteges are correct, but either the percentage or total debt is off by 1000 for Ireland:
1. Ireland
External debt (as % of GDP): 1,352%
Gross external debt: $2.39 billion (2009 Q3)
2009 GDP (est): $177.3 billion
Do the math, 2.39/177.3 is 1.32% not 1,352% unless their debt is supposed to be 2.39 trillion, which I doubt.
OK, so Wikipedia confirms Ireland at around 2 TRILLION in external debt… Cha-ching! We have a winner (loser). This debt equates to an external per capita debt of around $400,000. How can there be that much debt per person, it doesn’t even make sense? The per capita US external debt (for reference) is around $40,000. Painful enough, but today I feel better living in the US!
dmartin,
According to this article, the World Bank figure for Ireland’s debt includes their financial sector, which apparently does most of it’s borrowing and financing outside of Ireland (hence it counts as external debt):
http://www.cnbc.com/id/33506526/
I saw that during my quest for sorting out external and public debt. It looks like public debt is the one to watch, not external.
dmartin,
While I agree with you, you do have to wonder why/how Ireland allowed their banking system to borrow that much money? That’s just insane.
The great thing about private debt though is that if the bank goes bankrupt, so does that percent of the external debt I would guess. Not nearly as bad as what your government owes. That puts a country in political and financial debt, while it seems relatively easy for a private company to fold and walk away. That said, $400k per person IS a scary amount of debt to be held by a few institutions. Hard to fathom.
Just when you think Europe can’t get any uglier:
http://www.reuters.com/article/idUSLDE61H1IZ20100218
Greek opposition parties calling for war reparations from Germany? WWII reparations? Brilliant! And that worked so well for Europe after WWI. Thanks to the economic havoc inflicted on Germany by the Treaty of Versailles, Hitler was able to rise to power. If there is anyone left in the European Union with half a brain, they will immediately denounce this idea as absurd.
Italy Is Top Threat to Euro, Columbia’s Mundell Says
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a_iQsQLYuvSA
Be ready for a short squeeze in the market.
mopama,
Actually, Italy is the one country of the PIGS which worries me least. With $369 billion in exports, they are the world’s 7th largest exporter. As the euro gets cheaper, Italy stands to benefit significantly. I also read somewhere that Italy’s financial sector should be able to refinance their debt with minimal outside assistance.
Mind you, they still need to show some fiscal austerity. But they could economically grow their way out of their problems better than other PIGS can.
Ed,
You are right they are big savers so they should be able to finance their huge debt… but still… a Nobel Prized is worried about Italy.
mopama,
They still haven’t resolved Greece yet. Frankly, I suspect that one will linger until they have two problem countries on their hands.
If I had to predict, I’d say EU will solve it by inflating the euro. And then we’ll be back in a few years talking about the same problems…
Ed,
what’s more insane- Ireland’s banks borrowing so much from outsiders…. or outsiders loaning Ireland’s banks so much money???
I understand Ireland had a housing bubble akin to California’s. I wonder if its mortgage debt is non-recourse to the banks, and what kind of security the banks’ lenders received.
If the loans are secured by MBS which are themselves packaged non-recourse mortgages, joke’s on the lenders to Ireland’s banks.
In my view the extent of the financial institution damage from the housing meltdown worldwide won’t be known until the banks are no longer propped up by the world’s governments and the alphabet soup of credit facilities of which they’ve taken enormous advantage.
At some point the tide will go back out. God only knows what will happen then. In my view most financial institutions remain simply too risky, and their balance sheets too opaque.
southof8,
I’m with you!
With only one exception (PSEC), I don’t invest in financial companies currently. The only reason I invested in PSEC is for their dividend (and I like their business model), although I don’t currently have any shares.
Ed,
I think is time to consider that Greece could be a Trojan horse to break Euro and Europe. It could be fantapolitik but to consider for a moment.
Chinese mines and misdemeanours
FsumF, Iron Ore, BHP and Andrew Forest (And the ASIC) not to Mention Chinese busniness practices…
http://www.lowyinterpreter.org/post/2010/02/18/Chinese-mines-and-misdemeanours.aspx
I don’t understand the point of the CNBC slideshow. Why does it matter where you own the money (if the currency is the same). It doesn’t really tell anything about the financial state of the countries. Public debt to GDP as in
http://en.wikipedia.org/wiki/List_of_countries_by_public_debt
makes much more sense. For example, why do Luxembourg and Monaco, countries with more millionaires than anywhere else in the world, have external debt to GDP ratios of 5000 % and 2000 % ? Maybe because it’s a lousy measure?
Sure, the measure does tell you useful things. The real problem is that 99 % of people have no idea of what it means and grossly misinterpret it.
Vuakko, an article by Reinhart and Rogoff called Growth in a Time of Debt that I’ve used a number of times recently argues that historically for an emerging market country who owns the debt matters because external debtors can cause a crisis of confidence–essentially a run on the coiuntry–that will exhaust reserves and crash the local financial system. That said I think a gross reading of external debt/GDP that doesn’t look at who holds the external debt or who borrowed doesn’t get you but part of the way to where you want to go. Need to look at some qualitative measure for how likely it is that the lenders will call their loans. The ECB, for example, could defuse the Greek crisis by finding a mechanism so that it could continue to take Greek sovereign debt as collateral even if the country went to junk status. Then Greek banks would remain able to fund themselves. And then there’s the possibility of a moratorium since so much Greek debt is held by banks inside the euro zone.There are lots of ways to finesse this but first politicians in Germany and elsewhere want to show voters that it is a real crisis in the system (the Paulson technique) and that they’ve put serious hurt on the Greeks.
True, confidence is important as the Greek situation shows us. But I’d think that it matters really only with government debt, not with debts of individuals that are also included in the external debt. If a government owns most of its debt to foreigners, it means that the country doesn’t have enough wealth to back its fiscal state. If a consumer decides to take a loan from an international big bank instead of a domestic bank (e.g. to get better terms/rates), then why would this reduce confidence towards the individual? (It might say something about the banks though.)
Therefore in my view a more interesting measure would be the net government debt owed to foreigners versus the GDP. That compares the money that foreigners want some guarantee on to the taxation basis of the government.
On the other hand, these debt ratios are really silly as long as you don’t calculate them in net terms (taking foreign reserves and such into account). For example the Wikipedia link says that Norway’s public debt to GDP is 52 %, but this is a gross measure. If you deduct the massive pile of money they have in their oil fund (take the net measure), you end up with something like negative 30 % or so!
So as long as the external debt measure doesn’t include the amount of debt foreign entities owe to domestic ones, it doesn’t really tell you much. E.g. people around the world probably owe a lot more to Luxembourg than the other way around.
(Whoa, that was long, sorry about that)
i live here in little oul ireland as regards the 400k
per person i hope thats not the number! But then again i can see where all the money is gone thousands of empty housing units hotels that we did not need vast tracts of land in the city areas that were bought for ridiculous sums of moneyThe banks gave out money like it was confetti the good old days ….not.
I am new to investing. I noticed that BRF is now on your drop list. Can you please tell me what that means? Thanks
valdier, BRF is now on the watch list drop list because I bought it for the Jubak’s Picks portfolio. When a stock I’m watching turns into a buy and I put it in a portfolio I take it off the watch list. I hope that answers your question.
pigeon, we had the same experience in Spain last summer. Lots and lots of partially finished houses and apartment buildings with no work going on that I could see. Quite a contrast to here in Manhatan where building is still going on like crazy.