Amid persistent rumors that yesterday the money markets were, in the words of economist Jeremy Cook, "a short shove away from complete collapse", all the world's central banks got together and decided to lower the cost of pushing US dollars across the globe.
Translation: billions of dollars more -albeit in short-term loans- were injected in what Alan Grayson yesterday depicted as "Russian Roulette" (he was talking about earlier Fed loans, same difference).
The stock markets of course are going through the ceiling; they love the smell of free money in the morning. The $16-$26 trillion the Fed has previously loaned may have largely been returned, but, says Grayson - and rightly so-, "what about next time?" After all, today's loans were poured into a financial system in which a whole set of first domino's are about to topple over.
The market reaction shows that there is indeed very cheap cash to be had. But also, and most of all, it shows that there are still a lot of people out there who've never figured out the difference between liquidity and solvency.
Eurozone PMI falls to 46.4 from 47.1 in October, contracting at the sharpest pace in 28 months. Not a single country came in above the 50 line that divides expansion vs. contraction, "highlighting the broadening-out of the downturn from the periphery to the core."
And that's going to bite, because all the banks and countries that were broke yesterday are just as broke today. Difference is, now it's going to bite you more, and the banks' investors less. Someone has to pay at the end of the day. Might as well be you; after all, you don't get to talk to the US Treasury Secretary for hot tips.
Wonder how much the ECB has put on the table. And what various parties in Europe think of that.
The calls for Europe to let the ECB jump in big and buy any scrap of paper the banks can come up with don't abate. Certainly not after even German Finance Minister Wolfgang Schäuble yesterday said the EFSF won't be leveraged enough, or in time, to save the hour, let alone the day. Word is it can't get bigger than €600 billion or so. Peanuts in comparison to the debts overhanging Europe.
And yes, it's absolutely true that Europe is handling the crisis completely wrong. But not at all for the reasons the financiers, politicians and other Neo-Keynesian groupies claim.
What Europe does wrong is not that it doesn't splurge additional humongous amounts of cash on member countries' debt. What it does wrong is that it isn't -very busily- restructuring that debt.
Yet. Because it is inevitable. That is where the difference between liquidity -give them billions in short term loans- and solvency -but they're bleeding broke!- becomes glaringly obvious.
How can you arrive at anything but wrong answers if nobody can even get the questions right?
So Schäuble, and a while bunch of others, downplayed the potential role of the EFSF in "solving" the crisis -which can't be solved without massive restructuring-. Also yesterday, a confidential EU/ECB report leaked to the Guardian stated that Italy is on the brink of insolvency. As in days away.
And Dutch PM Mark Rutte, when pushed on the "ECB big-time involvement" question while visiting Obama at the White House, told the President that it is, basically, not going to happen.
Another Dutchman, a former Finance Minister and the present Chairman of the International Accounting Standards Board (IASB), Hans Hoogervorst, told TV program "Andere Tijden" (Different Times) in a show to be aired December 11 that the Euro "has failed". "If we’d known beforehand what problems we now face, nobody with an ounce of common sense would have been willing to launch it."
Hoogervorst was also testifying yesterday before a parliamentary committee in The Hague, tasked with finding out why and how the financial crisis happened in Holland. There, he called the present situation "disastrous" and added that the problems 'may well have become uncontrollable'.
What else can they do, these folks that -exclusively- look for the right answer to the wrong question? As I've mentioned a few times before, their only option left, which happens to be also their -the Europeans- preferred option, is the IMF. Which unfortunately has no more than about $300-400 billion at hand (peanuts, I tell you!).
But the IMF can be refunded by its 186 members. One of which, the US, is required to pay 17.72% of all funding. While the Eurozone countries combined pay -only?!- around 30%. The idea is clear: get the whole world to pay, since if they don't, they too will suffer the consequences. And the Eurozone doesn't have the means to do it by itself. Go through the IMF and Europe saves two thirds of the cost.
Result: a Mexican stand-off. Nobody moves, nobody blinks. Nice predicament. You can just see Obama going to Congress to get permission for a scheme like that. Great way to seal victory in the 2012 election.
If you ask me, though, the main obstacle to the IMF faux solution is the same as with a lot of the intra-Europe ones. Time. Changing treaties, changing mandates, it may all be possible in theory, but the way the Eurozone is set up, it can -and will- take a long time to get any of these things done. Countries may constitutionally require referendums over them. Governments may fall, necessitating elections. Lots of things can happen that -substantially- stall the process.
There is simply no way left that we can be comfortable in thinking and believing the Eurozone will survive. Not even necessarily through December. There are too many dangers lurking in too many different places. Which is why in my next article I intend to launch the idea of "Cash for Christmas". Got to think it over a bit more.
I called this post Day X for a reason (other than it sounds great). You will understand why when reading the following, from this article by staff writers at Der Spiegel:
A Continent Stares into the Abyss
Dirk Meyer, a professor at the Helmut Schmidt University in Hamburg, [..] argues that the Germans should take the initiative and leave the euro zone as quickly as possible. He has even come up with a concrete time frame.
Under his scenario, it begins on a Monday, or "Day X." On the preceding weekend, the government will have issued the surprise order that banks remain closed on this Day X. The bank holiday is needed to incorporate all savings and checking accounts into the changeover.
On Tuesday, banks and savings banks begin to stamp their customers' banknotes with forgery-proof magnetic ink. Inspectors would monitor Germany's borders and international capital transactions to ensure that foreigners do not bring any money into Germany to have it stamped there.
As a result of the expected devaluation, euros that have been stamped in this manner would lose value. The government would have to provide aid to banks that have substantial receivables and assets abroad.
Time to Convert
After about two months, Germany would leave the euro zone and, through an amendment to its constitution, reintroduce its own currency, which could also be a new common currency with other former euro-zone members who had left the monetary union. A second bank holiday would be used to convert all accounts and bank balances to the new currency.
All individuals and companies residing in or headquartered in Germany would be entitled to convert their euros into the new currency. However, at least another year would pass before the new banknotes were printed and distributed. Until then, the stamped euro banknotes would serve as the valid currency. [..]
Meyer estimates the total economic costs of the operation would be between €250 billion and €340 billion, or 10 to 14 percent of Germany's gross domestic product -- a high price indeed. But, he argues, the damage would be even greater if Germany remained in the euro zone. Meyer believes that German taxpayers would face an additional annual burden of about €80 billion should a European "transfer union" come into existence.
Ilargi: This is merely one idea. There are many more floating around in Europe, guaranteed, as people scramble to grasp the enormity of what might happen, and soon. And whichever option prevails, we can still call the day it is implemented:
Day X
To put Dirk Meyer's numbers above into perspective, please allow me to quote from a September 6, 2011 report by UBS:
Euro break-up - the consequences
The economic cost (part 1)
The cost of a weak country leaving the Euro is significant. Consequences include sovereign default, corporate default, collapse of the banking system and collapse of international trade. There is little prospect of devaluation offering much assistance.
We estimate that a weak Euro country leaving the Euro would incur a cost of around €9,500 to €11,500 per person in the exiting country during the first year. That cost would then probably amount to €3,000 to €4,000 per person per year over subsequent years.
That equates to a range of 40% to 50% of GDP in the first year.
The economic cost (part 2)
Were a stronger country such as Germany to leave the Euro, the consequences would include corporate default, recapitalisation of the banking system and collapse of international trade.
If Germany were to leave, we believe the cost to be around €6,000 to €8,000 for every German adult and child in the first year, and a range of €3,500 to €4,500 per person per year thereafter. That is the equivalent of 20% to 25% of GDP in the first year.
In comparison, the cost of bailing out Greece, Ireland and Portugal entirely in the wake of the default of those countries would be a little over €1,000 per person, in a single hit.
The political cost
The economic cost is, in many ways, the least of the concerns investors should have about a break-up. Fragmentation of the Euro would incur political costs. Europe's "soft power" influence internationally would cease (as the concept of "Europe" as an integrated polity becomes meaningless).
It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war.
Ilargi: Losing between 25%-50% of GDP in just the first year. Yeah, that could make a body nervous.
You can bet your buttocks that Monti and Rutte and Papademos and Merkel and Sarkozy know about that UBS report too.
It keeps them up at night. Certainly Sarkozy.
He wants to join Germany if it would leave the euro, and take Holland, Finland and maybe Austria with it. And they won't want France to join that elite group.
To know why, just take one good hard look at this graph from the OECD:
If Greece leaves the Euro however, more weaklings will follow in their "Latin" group: Portugal, Ireland, and then Italy, Spain. Who will all want for France to be the strongest Latin partner. But France wants no piece of that!
This is what makes the European puzzle unsolvable: France. Germany will not accept responsibility for French debt, and without that France will be downgraded. And again. And again.
"What day is today, honey"?
"I think it's Day W, chéri".
"Oh, mais NOOOOOONNN!!!, that means tomorrow is Day X !!!!!!!!!!!!"
Where's my gun?
Where's the bébé?
Where's the cash?
Where's the ammo?
Where's the tuna?
Where’s the pickles?
Where’s the cheese?
What do you mean we ran out of wine?
Wait, where am I?
Why am I so short?
Why are you still here?
And why am I?
Did you invite all those people over for cake?
What's with all the pitchforks?"
http://theautomaticearth.blogspot.com/2011/11/november-30-2011-day-x.html |
