Thread: Eurozone 'pigs' are leading us all to slaughter Portugal, Ir

Eurozone 'pigs' are leading us all to slaughter

The financial crisis is coming to a new, potentially more deadly phase, says Jeremy Warner.

By Jeremy Warner
Published: 7:17PM GMT 05 Feb 2010
Comments 57

Are we about to enter a third, and this time fatal, leg of the financial crisis? The problems of euroland which have so unsettled markets this week – and in particular those of Portugal, Ireland, Greece and Spain (the "pigs", as they have become known in financial circles) – are worrying enough in themselves.

But they are also a proxy for much wider concern about how national governments extract themselves from the fiscal and monetary mire they have created in fighting the downturn. It's proving messy, though, and they are running the risk of provoking an even worse crisis in the process.

Think of the three phases of the economic implosion like this. The first was a fairly conventional, if extreme, banking crisis where a cyclical overexpansion of credit and lending suddenly, and violently, corrects itself in a great outpouring of risk aversion.

In the second phase, governments and central banks attempt to counter the economic consequences of this crunch with unprecedented levels of fiscal and monetary support. Temporarily, at least, it seemed to work.

Until now, investors have been happy to finance the resulting deficits, in part because government bonds have seemed the only safe place to put your funds, but also because central banks have, in effect, been creating money to compensate for the paucity of private-sector credit. The mechanism varies from region to region, but much of this new money has found its way into deficit financing.

We are now entering the third, inevitable phase of the crisis where markets question the ability of even sovereign nations to repay their debts. Unnerved by this loss of fiscal and monetary credibility, governments and central banks are being forced, much sooner than they would have wished, to start withdrawing their support.

I say earlier than they would have wished because the recovery is not yet assured. Private demand and credit provision remain subdued. Policy-makers knew they would eventually have to abandon their fiscal and monetary support, but the timing of it may no longer be a matter of choice.

The first tremors around these so-called "exit strategies" occurred in Dubai a few months back when the emirate, fearing for its own solvency, shocked markets by announcing that it no longer stood behind the debts of its financially stretched state-owned enterprises. In this case, Dubai's fellow and richer emirate, Abu Dhabi, eventually came to the rescue.

It is much less clear that Greece, Spain, Portugal and Ireland can rely on similar support, either from richer members of the euro area or the European Central Bank.

For the "pigs", membership of the euro excludes the easy option, which is to devalue and turn on the printing presses according to local needs. Instead, monetary policy, and increasingly fiscal policy too, are dictated by Germany and France, the core euro nations.

Whether the fiscal consolidation demanded is politically feasible looks questionable. And even if these countries do succeed in making the necessary adjustments, they may face a classic deflationary debt spiral, where slashing the deficit causes the economy to shrink further which, in turn, increases the deficit.

Little surprise, then, that one of the big bets in markets right now is that these distressed members of the euro will be forced either into default, or rather like Britain with the ERM in the early 1990s, out of the single currency altogether. Serious knock-on consequences for creditor economies would follow.

Yet to true believers in the doomsday scenario, even an outcome as extreme as this would not be the end of the crisis. Fiscal ruin is not confined to the southern European nations. The hors d'oeuvre consumed, it would be on to the main course – the default of one or more of the big, triple-A rated sovereigns. Financial and economic chaos would follow quickly in its wake.

There's a world of worry out there, fed by self-interested speculators, which is proving hard to counter. Yet things rarely work out as predicted, and though nobody should be in any doubt about the scale of the economic adjustment still to be made in Western economies, more benign outcomes are still possible. Bigger, advanced economies with their own currencies are better placed to manage their exits than the "pigs".

However, right now, both Washington and London seem gripped by the sort of political paralysis that can indeed prove lethal. We should not assume that the sudden loss of market confidence that has afflicted Greece – essentially a developing market economy that should never have been in the euro in the first place – will be confined to the "pigs". The burgeoning size of public indebtedness the world over makes all economies vulnerable.

Even so, this week's tremors should be seen as more of a warning than the beginning of a fatal endgame. The austerity of tighter fiscal and monetary conditions is coming to all of us. With or without the compliance of policy-makers, the markets will impose it. But it doesn't have to be a rout.

http://www.telegraph.co.uk/finance/comm ... ghter.html

Unhappy EU family meets to stifle the rising panic

By Vanessa Mock in Brussels
Saturday, 6 February 2010

Everyone at European Union headquarters is looking on in horrified fascination at the spectacle of eurozone countries tumbling to their knees one by one. But the decision-makers here in Brussels seem too caught up by this stomach-churning show to do anything to stop it.

Calls for action have grown louder this week and the air of panic is more palpable, although panic has not broken out entirely. There seems to be an unspoken agreement to try to keep a lid on things until Thursday, when the EU's 27 leaders gather in Brussels for a special summit dedicated to reviving the European economy.

Will they be able to hammer out joint measures to restore confidence? Few think so. "It will not be a happy family reunion," said one EU diplomat. "There are too many problems in this family. Many of its members are squabbling or not even talking to one another. That could make for a very difficult lunch."

As they sit around the banqueting table, some leaders will be painfully aware that their meeting should have taken place weeks ago, when first signs of deep trouble within the eurozone appeared. Some may cast critical glances towards Herman van Rompuy, the man appointed last year to steer the ship through just such storms. The EU's inaugural President took the initiative of calling the summit but has been almost inaudible since.

Some officials can barely contain their frustration. "It's not a question of panicking less, it's a question of panicking more! Where is the leadership? There is none," cried one official.

When the money markets collapsed 18 months ago, it was fortuitous that Nicolas Sarkozy was there to take matters in hand. His country held the rotating EU presidency and he wasted no time in banging everyone's heads together to deal with the meltdown.

So far, Mr van Rompuy has displayed none of that dynamism but he may yet come good. He has been flitting between European capitals for bilateral talks. His team says he is quietly hatching a plan. But he will have to be fast and resolute if he wants to dispel growing fears that Europe is dangerously adrift without a captain to steer her to safety.

http://www.independent.co.uk/news/world ... 90892.html

Debt Problems Chip Away at Fortress Europe

By LANDON THOMAS Jr.
Published: February 5, 2010

Government employees in Portugal gathered Friday in Lisbon to protest a wage freeze as the country struggles with its debt.

Dominique Strauss-Kahn, chief of the International Monetary Fund. The euro zone is wary of the I.M.F.'s aid, and conditions.

For months, the conventional wisdom in Europe was that the speculative aims of bond traders and hedge fund investors would remain largely focused on Greece, Europe’s chronic problem child.

But this week the cost of insuring the debt of not just Greece, but Portugal and Spain as well, rose to record levels — causing stock markets to tumble, the euro to fall, and borrowing costs in the most vulnerable countries to soar.

As a result, governments in the 16 countries that use the euro must now confront a new and disturbing reality: The deal they struck more than a decade ago to create a common currency area, hoping that a single central bank could manage to paper over the divergent economic and financial conditions of its members, is finally being challenged.

“This is the first big test for the European monetary system,â€

Strikes bring Greece to its knees

Public sector workers stage wave of walkouts after government unveils spending cuts to meet EU targets

By Anthee Carassava in Athens
Friday, 5 February 2010
REUTERS

The Greek government's emergency efforts to revive the country's ailing economy met with angry protests in Athens yesterday, as customs officials and tax collectors went on the first of an expected rash of rowdy strikes.

The two-day protest comes after the government enacted a brutal reform package in response to a disastrous economic picture in the eurozone's weakest economy. The absence of the customs workers was already making itself felt yesterday, as lines of trucks formed at the country's borders unable to bring imports into the country except perishable goods and pharmaceuticals. Fears arose that a fuel shortage would soon result.

Public sector workers are unhappy at what they see as excessive cuts announced this week, and claim they break the new socialist administration's campaign pledges. "We have already made sacrifices and will accept no more cuts," said Argyris Sakellaropoulos, the union leader of Greece's customs officials.

The industrial action will be followed by a 24-hour strike scheduled by civil servants next Wednesday, capped by another day of mass walkouts called by Greece's biggest trade union on 24 February.

The Prime Minister George Papandreou's planned reforms, announced earlier this week in a desperate attempt to slash the 12.7 per cent deficit to the EU limit of 3 per cent by 2012, have barely been better received in world markets. The Athens stock exchange dropped 1.5 per cent in afternoon trading yesterday, while markets on both sides of the Atlantic, concerned at Greece's debt struggles and similar problems in Portugal and Spain, followed suit.

Mr Papandreou's statement, nationally televised in an attempt to allay growing public concern, prescribed a host of belt-tightening measures, including a civil service pay freeze, higher retirement ages, and cuts in special stipends that make up a large part of civil servants' income. It was the Prime Minister's second appeal to the country in less than a week as part of a new drive to persuade people to accept the "painful" measures and accept that the country cannot afford strikes and blockades.

The measures were received with guarded optimism by the European Commission after pressure was put on the government to bring the deficit into line with the EU limit. But fears remain that the untested government of Mr Papandreou may have trouble implementing its reforms amid a wave of labour unrest.

Greece's recession-hit economy has already been hit by unrest from farmers, who last month blocked key highways, railways and border crossing, demanding more subsidies and higher prices.

The previous conservative government, replaced in October, faced a barrage of wildcat strikes after trying to tighten pension rules and raise taxes, and many hoped the new regime might be able to achieve the necessary savings.

Concern that Greece and other European nations may struggle to contain their deficits has pushed the euro down more than 7 per cent since November. A month later, Greece suffered a triple downgrade of its sovereign debt, setting off speculations of bankruptcy.

Socialists have begun accusing the ruling party of breaching campaign pledges ahead of its landslide victory last October. "The adoption of these measures raises suspicion that the government could carry out additional upsets ... when it had categorically denied it would do so," one leftist daily said.

EU and Greek officials have ruled out bailout assistance but the International Monetary Fund has said it was ready to help Greece.

http://www.independent.co.uk/news/world ... 89948.html

World bankers meet in Sydney as recovery fears intensify

George Lekakis and Fleur Leyden
From: Herald Sun
February 06, 2010 12:00AM

THE world's top central bankers began arriving in Australia for high-level talks as renewed fears about the strength of the global economic recovery gripped world share markets.

Representatives from 24 central banks and monetary authorities, including the US Federal Reserve and European Central Bank, landed in Sydney to meet tomorrow at an undisclosed location.

Organised by the Bank for International Settlements last year, the two-day talks are shrouded in secrecy with extensive security believed to have been invoked by law enforcement agencies.

Speculation that the chairman of the US Federal Reserve, Ben Bernanke, would make an appearance could not be confirmed last night.

The event will be dominated by Asian delegations and is expected to include governors of the People's Bank of China, the Bank of Japan and the Reserve Bank of India.

The arrival of the high-powered gathering coincided with a fresh meltdown on world share markets, sparked by renewed concerns about global growth and sovereign debt.

Fears that countries including Greece, Portugal, Spain and Dubai could default on debt repayments combined with disappointing US jobs data to spook investors.

Australia's ASX 200 slumped 2.4 per cent to its lowest close since November 5, echoing a sharp fall on Wall Street.

Asian share markets were also pummelled, with Japan's Nikkei 225 down almost 3 per cent and Hong Kong's Hang Seng off 3.3 per cent.

The damage was also being felt by European markets last night with London's FTSE 100 down 1 per cent in early trade.

Sovereign debt fears rippled through to the Australian dollar, which was hammered to a four-month low of US86.43 and was trading close to that level last night.

"This does feel like '08 and '07 all over again whereby we had these sorts of little fires pop up and they are supposedly contained but in reality they are not quite contained," said H3 Global Advisers chief executive Andrew Kaleel.

"Dubai should have been an isolated incident and now we are seeing issues with Greece, Portugal and Spain."

But it wasn't all bad news with the RBA upping its Australian growth forecasts and flagging more interest rate rises this year.

The central bank estimates the economy grew 2 per cent in 2009, and will expand by 3.25 per cent in 2010, and by 3.5 per cent in 2011.

The outlook for global growth is likely to be a key theme of the high-level central bank talks.

The gathering also comes at an important time for the BIS as it initiates an overhaul of the global banking system, which will include new capital rules applying to banks and more stringent standards regulating executive pay.

A key part of the two-day talkfest will be a special meeting of Asian central bankers chaired by the governor of the Central Bank of Malaysia, Zeti Akhtar Aziz.

Influential BIS general manager Jaime Caruana is also expected to take a prominent role in the talks.

Federal Treasurer Wayne Swan will address the central bank officials at a dinner on Monday night.

http://www.heraldsun.com.au/business/wo ... 5827280461

Secret summit of top bankers

By George Lekakis and Fleur Leyden
From: Herald Sun
February 06, 2010 12:00AM
28 comments

video at the link

THE world's top central bankers began arriving in Australia yesterday as renewed fears about the strength of the global economic recovery gripped world share markets.

Representatives from 24 central banks and monetary authorities including the US Federal Reserve and European Central Bank landed in Sydney to meet tomorrow at a secret location, the Herald Sun reports.

Organised by the Bank for International Settlements last year, the two-day talks are shrouded in secrecy with high-level security believed to have been invoked by law enforcement agencies.

Speculation that the chairman of the US Federal Reserve, Dr Ben Bernanke, would make an appearance could not be confirmed last night.

The event will be dominated by Asian delegations and is expected to include governors of the Peoples Bank of China, the Bank of Japan and the Reserve Bank of India.

The arrival of the high-powered gathering coincided with a fresh meltdown on world sharemarkets, sparked by renewed concerns about global growth and sovereign debt.

Fears countries including Greece, Portugal, Spain and Dubai could default on debt repayments combined with disappointing US jobs data to spook investors.

Australia's ASX 200 slumped 2.4 per cent, to a its lowest close since November 5, echoing a sharp fall on Wall Street.

Asian share markets were also pummelled, with Japan's Nikkei 225 down almost 3 per cent and Hong Kong's Hang Seng slumping 3.3 per cent.

The damage was also being felt by European markets last night with London's FTSE 100 down sagging 1 per cent in early trade.

Sovereign debt fears rippled through to the Australian dollar which was hammered to a four-month low of US86.43 and was trading at US86.77 cents last night.

"This does feel like '08 and '07 all over again whereby we had these sort of little fires pop up and they are supposedly contained but in reality they are not quite contained,'' said H3 Global Advisors chief executive Andrew Kaleel.

"Dubai should have been an isolated incident and now we are seeing issues with Greece, Portugal and Spain.''

It wasn't all bad news with the RBA yesterday upping its Australian growth forecasts and flagging more interest rate rises this year.

The central bank estimates the economy grew 2 per cent in 2009, and will expand by 3.25 per cent in 2010, and by 3.5 per cent in 2011.

The outlook for global growth is likely to be a key theme of the high level central bank talks.

The gathering also comes at an important time for the BIS as it initiates an overhaul of the global banking system which will include new capital rules applying to banks and more stringent standards regulating executive pay.

A key part of the two-day talkfest will be a special meeting of Asian central bankers chaired by the governor of the Central Bank of Malaysia, Dr Zeti Akhtar Aziz.

Influential BIS general manager Jaime Caruana is also expected to take a prominent role in the talks.

Federal Treasurer Wayne Swan will address the central bank officials at a dinner on Monday night.

http://www.news.com.au/business/secret- ... 5827289543