Tag Archives: euro

No debate please, we’re European

shhhOn the eve of Greece agreeing its first EU-IMF bailout in May 2010, the CEO of investment firm PIMCO, Mohamed El-Erian, expressed doubts about the package,  what it demanded of Greece and whether the Europeans would be able to manage the  process. “This is a daunting challenge,” he wrote in the Financial
Times
. “The numbers involved are large and getting larger; the  sociopolitical stakes are high and getting higher; and the official sector has  yet to prove itself effective at crisis management.”

El-Erian raised the  issue of private sector involvement, or PSI, almost two years before it happened  and warned the eurozone that it was walking into a potential disaster. “What started out as a public finance issue is quickly turning into a banking problem too; and, what started out as a Greek issue has become a full-blown crisis for  Europe,” he wrote.

This week, Bloomberg revealed that PIMCO has been selling the Dutch bonds it was holding. Until now a financial, AAA-rated safe-haven in the eurozone crisis, the Netherlands’ bond yields are edging upward, its coalition is under pressure and “austerity fatigue” is apparently setting in. El-Erian’s warning in May 2010 that the Greek debt crisis would “morph into something much broader” has been proved correct.

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Confidence or confidence trick in the eurozone?

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Illustration by Manos Symeonakis http://xpresspapier.blogspot.gr/

At a meeting of eurozone finance ministers in February, Greece’s Yannis Stournaras asked a fairly straightforward question: Could the troika explain what, if any, impact the International Monetary Fund’s miscalculation of fiscal multipliers had on the Greek adjustment program?

The question came in the wake of the IMF admitting a few weeks earlier that it had underestimated the recessionary impact that rapid fiscal adjustment would have in the current negative economic climate. The IMF assumed the fiscal multiplier of spending cuts and tax hikes was around 0.5 percent of gross domestic product – in other words, austerity measures equivalent to 1 percent of GDP would produce a 0.5 percent decline in economic activity. Its economists, however, discovered that the real fiscal multiplier was between 0.9 and 1.7 percent of GDP.

In Greece, critics of the bailout saw this as evidence that its austerity formula should be consigned to the rubbish bin. They put considerable pressure on the government to respond to the IMF’s revelation. Fearful of what implications an admission that the program had been built on unsound foundations might have on public opinion, the coalition played down the Fund’s findings.

Bearing this in mind, Stournaras put a rather tame question to Greece’s lenders after admitting to journalists that he could draw no reliable conclusions from the new analysis on the fiscal multipliers provided by the IMF’s chief economist Olivier Blanchard.

The response to Stournaras’s low-key request was a full-on blast from European Economics and Monetary Affairs Commissioner Olli Rehn. So forceful was the response, in fact, that one had to wonder whether the level of protest suggested that Greece might have a serious case.

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An April Fools economy

clown_390_0204The leaders of Greece’s coalition parties are due to meet on Wednesday, a day before the troika returns to Athens to resume its latest inspection of Greek public finances and check on the progress of structural reforms. Reports indicate that among the subjects which will dominate both Wednesday’s talks and subsequent meetings with officials from the European Commission, European Central Bank and International Monetary Fund are the collection of an emergency property tax and installments for unpaid debts to the state.

The talks will take place in the wake of Eurostat figures showing that Greece, for the first time since the crisis began, has the highest unemployment rate (26.4 percent) in the euro area. At the same time, Greece’s leading economic think-tank, IOBE, warned that the current rate of unemployment in this country is unsustainable and that 60 percent of jobless people had been without work for at least 12 months. Also this week, Markit’s PMI showed that manufacturing in Greece, which accounts for almost 15 percent of the economy, continued to fall in March as it has done since September 2009. Meanwhile, the Finance Ministry has reportedly revised this year’s recession figure to 5 percent of GDP from 4.5 percent.

To say that the talks between Greece and the troika will have a touch of the surreal about them given the mauling that the real economy is suffering is probably an understatement.

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Cyprus: The eurozone’s omnishambles moment

Petros Karadjias/AP

Petros Karadjias/AP

At the beginning of last week, Cypriot politicians insisted they would not choose a “suicidal” option for their country. By the end of the week, they picked one that would inflict mortal wounds instead.

Nicosia’s handling of its unprecedented predicament has been cataclysmic. But the approach adopted by the European Union and International Monetary Fund to Cyprus’s problems has also been disastrous. The eurozone has been building up to an omnishambles moment throughout the debt crisis and it finally struck in a small island state in the Eastern Mediterranean.

The agreement arrived at in Brussels early Monday, following hours of talks involving Cypriot officials, eurozone finance ministers and EU and IMF chiefs, is being billed as the least worst option after all sides took successive wrong turns on the way. That may be the case but it will be little consolation to thousands of Cypriots who have lost a big chunk of their deposits and face uncertain times ahead.

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Cyprus: It’s not about the numbers

Cyprus Financial CrisisThe Eurogroup agreed on Monday night to allow Cyprus to change the make up of its controversial deposit tax. Instead of imposing a levy of 6.75 percent on savings under 100,000 and 9.9 percent on those above 100,000 – as agreed in Brussels in the early hours of Saturday – Nicosia can play around with the numbers, just as long as it raises the arranged amount of 5.8 billion euros.

Cyprus’s new but already beleaguered President Nicos Anastasiades is proposing that bank customers with deposits under 20,000 euros should not be taxed at all, while keeping the levy the same for the remaining depositors. Cypriot MPs have already shown a reluctance to approve the tax, mindful of the impact on depositors but also the long-term damage it could do to the island’s banking system and economy.

However, what’s happened over the past few days and what’s likely to happen in the days and weeks to come has little to do with numbers. It is much more about perceptions. Even if a financial meltdown is averted in Cyprus this week, the decision to tax depositors there in order to reduce the eurozone and International Monetary Fund contribution to the island’s bailout has sown the seeds for a future eruption.

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After Cyprus, eurozone risks transmission failure and running out of road

?????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????The Eurogroup’s decision on Friday to impose a one-off tax on depositors in Cyprus may mark a turning point in the euro crisis. Only, the single currency’s decision makers might soon realize that in taking this particular turn, they also ran out of road.

Under pressure from several members of the eurozone – Germany in particular, if reports are accurate – the new Nicosia government agreed that deposits above 100,000 euros would be taxed 9.9 percent and those under 100,000 at a rate of 6.75 percent.

This is an unprecedented decision for a eurozone country. It is also one whose potential consequences reach much further than an island in the eastern Mediterranean. It threatens to cause the transmission system between the economic and financial sectors on one side and the political and social on the other to seize up. Without this, the euro cannot be propelled forward. It cannot function.

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EU banking union a product of the euro crisis but also its solution?

bankia-protestThere is a dirty little secret at the heart of the euro crisis and it concerns Europe’s banks. Many politicians and much of the media have focused their attention on the role sovereigns – particularly in southern Europe – had in triggering uncertainty and economic instability in the single currency area but the part banks played in laying depth charges at the euro’s foundations has been largely absent from public debate.

Yet, most places you look, eurozone banks have left their mark through a mixture of risky practices, undercapitalization, and over-exposure to government bonds and the US subprime market. Ireland is the most obvious case, where taxpayers have been asked to stump up about 70 billion euros to bail out reckless and troubled lenders. Spain has just asked for a 40-billion-euro bailout for its banks, which fuelled an unsustainable property boom through cheap credit in the previous years. The most prominent example of the short-termism and entangled interest that led to this imprudent lending was Bankia, formed by the merger of seven savings banks, or cajas, in 2010.

Bankia has so far absorbed 19 billion euros of taxpayers’ money, shed 50 billion euros of assets as part of a restructuring and cut 6,000 jobs. French-Belgian bank Dexia found itself in a similar situation. France and Belgium have so far spent about 15 billion euros rescuing the lender and provided up to 85 billion euros in state guarantees after it was caught short by its reliance on short-term financing in 2008 and then to Greek debt in 2011.

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