European Sovereign Debt Crisis
There have been many forms of “debt slavery” throughout history, and almost everyone is chained to the oppressive financial, corporatist system now in one way or another. Although, this fact has not even remotely sunk in for millions of people who, unfortunately, have absolutely no clue how bad it can get. The real issue here, however, is not necessarily what people will have to do to survive the upcoming storms. Rather, it is what they will be forced to do to remain a functioning part of the system under threat of excessive monetary punishment, physical confinement or violence to them and/or those close to them. So, one must be financially/coercively attached to the system to be a “debt slave”.
If you are allowed to voluntarily downsize your living standards and retain some freedom of movement/action, then you are not really a slave. And that's not meant to demean the existential struggle of the chronically unemployed and/or homeless people living on the streets or in the subway, whose numbers are bound to increase and many of whom will die of sickness, cold and hunger, but it's hard to say that they are “attached” to our economic system of complicity and coerced participation. The most obvious way this slavish attachment forms is through personal debts/obligations.
That’s why it’s very important to pay off your mortgage(s), car loans, student loans, outstanding balances on past bills, etc., throw away your credit cards and generally avoid taking on debt at all costs. However, that is not a panacea for avoiding debt slavery by any means. One reason is that, as mentioned in Part I, creditors and third party debt collectors may literally conjure up debts for people who never agreed to take on those debts, by failing to account for payments, illegally jacking up interest rates, retro-actively inserting penalty clauses and other similar tactics. Or, they may simply doctor up brand new “contracts” that never existed.
The U.S. financial industry and government “regulators”, at both the federal and state level, have already taken the first steps towards such practices through the illegal transfer of mortgage titles in the MERS system and the “robosigning” of fraudulent loan documents by law firms employed by the major banks, which sought to “prove” ownership of such titles and therefore the right to foreclose. Once these illegal foreclosures came to the mainstream public’s attention, the federal government launched a sham investigation and effectively forced state attorney generals and prosecutors to go along with a tiny and symbolic settlement, which will primarily be funded by taxpayer money.
Jose Suarez explores this issue for the Huffington Post and brings up some key points:
However, the settlement will only help a small percentage of the millions of Americans who still are deeply underwater on their mortgages. Victims of fraudulent foreclosure robo-signings look to receive only about $2,000 in compensation.
That amount is paltry compared to the amount of pain, desperation, and despair of millions of Americans, and so many Floridians, dangling precariously at the unlikely mercy of banks and their improper, illegal foreclosure processes. $2,000 wouldn't even come close to covering moving expenses or the "first, last and security deposits" for folks forced to downsize from their own homes to rentals.
Another highly troubling aspect of the settlement is the potential spike in new foreclosures predicted by various real estate and financial industry analysts. The banks were delaying foreclosing on great numbers of homes until details of the settlement were finalized. They may not power up the illegal "robo-signing" machines again, but they are now clear to fire out the foreclose notices.
This is the buzz I hear from real estate professionals in South Florida these days. While it certainly has a big impact on their day-to-day business, a bigger question is: How will these trends affect the momentum of the overall economy? The tentative recovery has yet to reach a large portion of the individuals hit first and hardest by the recession; these residents, in particular, are still struggling mightily -- and yet another downturn could be exponentially catastrophic for many of these families.
The settlement frees the banks from any potential civil charges from the 49 states, though individuals can try to sue (in the chance you had the time and resources), and federal and state officials may wish to pursue criminal charges against the banks. But don't bet on the latter, unless you're interested in "wrist slaps." Snug relationships between so many politicians and big businesses, especially the banks, are telling.
This settlement essentially gives the banks free license to go on a rampage of financial harassment and foreclosure without any interference from state governments. That’s why it was noted in Part II that traditional protections found in contract law have been rendered completely worthless for the vast majority of people on this planet, including all but the wealthiest individuals in the West. These protections were rooted in decades of British common law that developed through judicial precedents during the so-called “Enlightenment” era. They offered the average white male citizen a way to protect himself from having to make payments or perform under a contract if it was generally secured in one of the following ways:
1) Duress (economic or physical) – i.e. You are put in a position, physically or monetarily, in which you have no other choice but to agree to the terms of a contract.
2) Fraud/misrepresentation – i.e. You agree to the terms of a contract based on a material misrepresentation or omission of facts.
3) Unconscionability – i.e. You are a disadvantaged party (very asymmetrical knowledge of the business) to a contract which contains extremely unfair terms on its face.
If a court established one of these situations to exist in any given case, then the complaining party had a right to void the contract. The problem for victimized debtors now is that the legal system only performs this protective function well when the economy is growing and wealthy private interests can claim an increasingly large share of the pie despite these common law hurdles-turned-artifacts. In an era of widespread economic contraction and deleveraging by consumers and businesses, the large private interests will instead seek to extract value through the seizing of assets (“foreclosure” implies a legitimate process) and the subjugation of distressed debtors.
Human labor, after all, is simply a form of energy that can be applied to various inputs and productive processes, including the harvesting of other energy sources and the development of infrastructure necessary for large-scale societies. Most middle to upper-middle class Americans have forgotten all about the labor expended and the lives lost by their not-so-distant ancestors in the course of such work. Yet, they may very well be forced into laying railway tracks and mining coal or constructing/repairing roads, highways, bridges and canals in the near future. College and graduate students steeped in debt who are expecting cushy office jobs that no longer exist will find out they have effectively been sold into slavery by their system of “education”.
At a time when the net energy returns afforded by the extraction of fossil fuels is quickly disappearing, the industrial corporate elites will once again rely on what can only be called “slave labor” to perpetuate a system of large-scale exploitation and wealth extraction. This time these pools of labor will not only be confined to minority groups or third world countries, and we will all find out just how little control we have over our own lives and our own bodies. When faced with the threat of arbitrary imprisonment and/or being stripped of all your earthly possessions, it will be very difficult to resist making a deal of debt servitude with the Devil.
Where can any of these people turn to for relief or protection? Can they seek help from their local police departments or court systems? Traditionally, those have been potential avenues for at least a modicum of justice. Soon, however, even these institutions will be well into the process of being privatized in the name of “fiscal responsibility” and “market efficiency”, which is really code for corporate control over all facets of the modern state. Wealthy corporate conglomerates will not only have seized the “power of the purse”, but also the state’s dispute resolution mechanisms and its monopoly to use coercion and violence in pursuit of vaguely-defined goals.
When a sizeable portion of the police force in any major city is trained, armed and managed by private security firms such as Erik Prince’s Blackwater (now known as… Academi), we may find it rather difficult to defend our homes, assets, friends and families from the wrath of our financial oppressors. They will be our creditors and debt collectors, as well as our judges, juries and executioners. One does not only become a debt slave by being underwater on private debts, though.
As we are clearly seeing in the Eurozone periphery, external public debts that are in the process of being redeemed through austerity and “structural reform” can be a force equally capable of enslavement. If you are any worker, taxpayer and/or retiree living in the shadows of the wealthiest members of society, then you are rapidly losing your freedom as I write these words. Your savings and disposable incomes are being run down to pay the salaries and bonuses of corporate executives and directors, while your democratic elections have taken an indefinite leave of absence and your government will be confronting your resistance with steel cages and the barrel of a gun.
At the same time, the Eurozone crisis perhaps offers us some signs of hope, albeit ones that are few and far between. First and foremost is the fact that the process of systemic credit collapse in our highly inter-connected environment can occur at a pace that is not necessarily capable of being out-paced by those who seek to take full advantage of it, or in ways that are completely unexpected by them. We see this revealed in the repeated inability of the IMF, EU and ECB (and their corporate masters) to come up with policies that will keep Greece in the monetary union and prevent contagion from spreading to other peripheral markets.
It is also true that extensive systems of slavery can only sustain themselves with a certain amount of complicity and passive acceptance within the population. When it is a clear majority of people in a given location, rather than a minority, who are being pushed into slavery, there will most certainly be forceful pockets of resistance and the slave masters will require the slaves’ help to squash these movements. Indeed, that is exactly what we saw in European countries occupied by Nazi Germany, and even then many of the resistance movements made significant headway towards unlocking their peoples’ chains.
The slave masters will especially require the unwavering support of civil servants tasked with carrying out orders of oppression from above. In Greece, we recently witnessed the country’s largest police union issue a statement of its intention to refuse to continue aiding the elites in the enslavement of the Greek people, and even threatened to issue symbolic arrest warrants for Troika officials stationed in the country. It is not hard to imagine similar occurrences in Portugal, Spain, Italy and even Ireland, as their policemen and women are squeezed of pensions and salaries, and forced to face the reality of their role as slaves to the system.
Closer to the “core”, there were also acts of defiance in Brussels, Belgium by firefighters who sprayed foam from their hoses onto central streets and government buildings. In a separate display, these protesting firefighters also hosed down the Prime Minister’s office and the police units protecting it. Perhaps we can expect these pockets of official resistance to grow larger over time and act as a barrier between the corporatist slave masters and the populations they seek to enslave. Which then begs the question - what will the military forces of Westerns countries do? Will they remain a cohesive, unified force that carries out orders as they have been for many years now, or will pockets of resistance materialize within their ranks as well?
It is a mistake to assume that the men and women in the U.S. military, for example, are guaranteed to bring slavery and death to their own people when they are commanded to. As USA Today reported, people who actively work for the military donate more to Ron Paul’s campaign more than any other candidate, and he is certainly not someone known for advocating imperialism and oppressive government authority. That reflects an attitude that is anything but closed-minded and uncritical of current policy trends. So, while the global population’s future of debt slavery is a very real and ongoing threat, there are also reasons to believe it may not sustain itself for very long.
Then again, the number of slaves is growing by the day and the time may come when many of us are forced to either fight for our freedom or learn to live with our chains. These are obviously very serious issues and very serious possibilities. It is no longer acceptable for anyone to pretend that the concept of systemic slavery in the developed, “civilized” world has been relegated to the history books. It took the upheaval of the Great Depression and the Second World War to truly rid the U.S. of its enslavement of African Americans only 60-70 years ago. What will it take for the indebted masses now? And is anyone really willing to find out?
It’s hard to miss the irony in the fact that perhaps the biggest stumbling block to the status quo financial elites in the Western world, who are attempting to kick the can a bit farther down the road, aside from the sheer impossibility of the underlying math, is democratic elections. 2012 may very well be the year where decades of political theater for the benefit of large corporations and financial consumers from sea to shining sea come back with a vengeance to bite the status quo politicians in the ass.
And let’s be clear, it is the run-up to elections and the accompanying theatrical drama that will prove to be the most difficult for the status quo, rather than the actual outcomes of these elections. There is little doubt that almost all of the politicians will end up singing the exact same tune once they are actually in office. The real problem for the perennial can-kickers is that they simply do not have enough time to wait around for the elections to finish and the winners to take office.
First and foremost, we have the elections in Greece to replace the unelected, technocratic government that was force-fed to its people late last year. Due to the increasingly large and vehement public opposition to bailouts for the banks and austerity for the poor, politicians in the "opposition" parties must be very careful not to align themselves too much with the Troika and it’s puppet PASOK party (of which former Prime Minister Georgios Papandreou was a member).
That’s why we see the leader of the New Democracy party, Antonin Samaras, who has his eyes fixated on the position of Prime Minister (I’m not really sure why anyone wants to be the leader of Greece anymore), continuously flounder and backtrack on what exactly he will agree to in the latest austerity package that all of the bailout money has been conditioned on. Last year, Samaras refused to sign any written commitment to the terms of the austerity package, which has since expanded, before finally giving in.
That was all just a prelude to the main show which is taking place now. Samaras has once again "pledged" in writing to implement the Troika’s austerity program, but is simultaneously saying that the program may have to be adjusted once he is in office, since it does not do enough to promote growth (no kidding!). Helena Smith reports on what she was told by a top adviser to Samaras for The Guardian:
"The letter has just gone. We have no problem expressing committment to a stabilisation progam. We are all for eliminating the deficit, controlling the debt and going on with the privatisation program things that right from the beginning we proposed.
It [the letter] makes very clear that we have full respect for the long-term objectives, targets and key policies of the programme.
We also said we should modify the plan to allow for prompt [economic] recovery. We don't want to make recovery a top priority but we insist that it becomes an additional priority, that it be be applied in tandem with other policies to allow the economy to breath. Is this such an irrational, stubborn view when the [rescue] plan to date clearly hasn't worked?"
It's not because the objectives are wrong. From the beginning we agreed with them. But there is a missing ingredient.
Even if it was perfectly implemented the numbers didn't add up. We are not saying that we are against austerity but we have to change the mix and allow for recovery.
We are feeling a little embarassed that again and again they want us to show our committment to the plan. When we say prioritize recovery we mean we want to discuss it with them, not do anything unilaterally. Even if they allowed us to do whatever we wanted to do we would still stick to the programme."
How about those statements for floundering and backtracking?? Now that Germany, Finland and the Netherlands are kicking around the idea of delaying Greece’s bailout money until after the elections, Samaras will have to put on an even bigger show about how he will protect the interests of Greek workers and pensioners against the abrasive Eurocrats, and perhaps even promise not to sign off on the current plan. Otherwise, everyone will just assume he is going to do exactly what the Troika requires of him once he gets in office, like the PASOK party he is running against, which is quite a safe assumption.
Secondly, there are elections in France and incumbent President Nicolas Sarkozy has been steadily dropping in the polls against Francois Hollande of the Socialist Party. As of early February 2012, Hollande is almost running at his all-time high of 60% against Sarkozy. If you thought Samaras was being a thorn in the side of the pan-European austerity hawks, then take a look at what Hollande has been saying. Steven Erlanger for the New York Times reports:
"The front-runner for the French presidency, the Socialist candidate François Hollande, criticized European policy on Greece on Monday, saying that mandatory austerity measures were too severe and would never produce the desired results because "everyone knows" that "there is no rebound in growth in Europe and in Greece."
Mr. Hollande’s remarks, one day after the Greek Parliament adopted austerity measures demanded by the European Union and the International Monetary Fund, while violent protests left many buildings in Athens in flames, offered a critical assessment of European and Greek leaders’ handling of the crisis. The Greek government, he said, would "have a short life," while the austerity plan forced on Greece amounted to a "purge."
The French presidential race is heating up with President Nicolas Sarkozy expected to make his candidacy for re-election official this week. Mr. Sarkozy is still running behind Mr. Hollande in the opinion polls for both the first round of voting on April 22 and in a runoff on May 6. In a luncheon interview with a group of foreign journalists here, Mr. Hollande was pleasant and expansive, but remained vague on the details of his programs."
Right, Politics 101 - keep all your plans and policies for office vague and uncertain, but stay sharply critical of the current administration. Yet, that’s exactly what the markets can’t continue to handle right now – vagueness and uncertainty about the future of fiscal and monetary policy. The French sovereign bond market has so far remained relatively quiet throughout the whole crisis, except for a brief spike upwards in the 10-year yield late last year. If all of Sarkozy’s repeated promises of implementing domestic austerity come into question, though, France's credit situation could change very fast, especially since it has already been downgraded from AAA by S&P and put on “negative outlook” by Moody’s.
We also have a Spanish regional election in Andalucía on March 25, which is a bit more trivial than those above, but it still has the potential to create some major disruption in the Spanish bond market over the next month. Spain has been one of the worst hit economies during the financial crisis, with its unemployment rate reaching 23% at the end of 2011, and it has so far failed to offer the Troika any "credible" austerity plan for reducing its budget deficit. Angela Benoit reports for Bloomberg:
"Spain’s month-old government may postpone deeper budget cuts until after a regional election in March, adding to the risk the nation misses its deficit goal for the second year.
The ruling People’s Party, led by Prime Minister Mariano Rajoy, will contest an election in the southern region of Andalusia to end 30 years of Socialist rule. Spain’s 10-year bond yields have risen 10 basis points to 5.5 percent since the PP government took over on Dec. 21, increasing the rate to 359 basis points more than German bunds of similar maturity.
"Rajoy doesn’t want to get burnt before the Andalusian election," Antonio Barroso, an analyst at Eurasia and a former Spanish government pollster, said in a telephone interview. "They’re so crucial for the PP that it won’t take any kind of measure that would undermine its ratings in the region."
Rajoy needs to slice the equivalent of 3.6 percent of gross domestic product off the budget deficit this year to meet a European Union target, just as the economy may be entering its second recession in two years. Postponing steps until after the March 25 election risks undermining confidence in Spain’s ability to meet its goal, which Fitch Ratings already has "doubts" the country will reach.
"Rajoy has yet to explain how he will reduce the deficit when the economy is shrinking," said Georg Grodzki, global head of credit research at London-based Legal & General Investment Management, which oversees about $515 billion. "I don’t think Spain can afford to wait for more than two months at the most."
There's obviously nothing Rajoy can do to achieve a "sustainable" budget deficit in Spain while the economy contracts, and implemented austerity will only make the latter worse, but he also can’t afford to not offer up any bogus policy promises. The regional election is now getting in the way of him doing so, though, because the Spanish people are simply against any Greek-style "structural reforms" (they are not senseless and can see what has happened over there). Rajoy realizes such opposition exists, and will therefore hold off on submitting a budget until after the election. It’s entirely unclear whether the credit markets will hold off on pounding Spanish bonds into the ground, though.
Last, but certainly not least, we have the 2012 Congressional and Presidential elections in the U.S. I have suggested before that the Obama Administration, in its consistent attempts to present a rosy economic story before November 2, may have effectively killed the capacity of the Fed to "print money" through QE3 asset purchases [Who Killed the Money Printer?]. That in and of itself would be a HUGE blow to the status quo elites who are banking on the Fed to step in with at least a trillion dollars or so in easing to keep the markets happy.
But the electioneering syndrome certainly doesn’t stop there. We also have the Republican Presidential front-runners and those up for re-election in the Senate who will harshly criticize and block any and all attempts of Obama to launch any significant stimulus measures or help bail out Europe through additional contributions to the IMF. Since the Republicans control the House of Representatives, these full frontal blocks will not be hard to carry out. For example, The Hill reports on the opposition to Obama’s latest mortgage refinancing plan.
"The White House has recently promised major steps to boost the housing market and help struggling homeowners, but bruising fights with Congress loom over major pieces of the plan.
The housing market is widely seen in Washington as still struggling in the wake of the subprime mortgage crisis, and weighing down what would be a more robust economic recovery.
In recent days, the White House has made a concerted effort to address the housing sector, rolling out new plans to help homeowners avoid foreclosure and boost the housing sector.
But while the administration can nibble around the edges and implement changes, it needs Congress and regulators to get on board with any major initiatives, and this presents significant challenges."
There are, of course, many other elections occurring around the world, but these are the "democratic" ones that could be the most disruptive to maintaining the status quo, hopium-filled market environment over upcoming months. And, as mentioned earlier, the political theater of these elections is by no means the only thing that could throw a spanner into the works. Here’s another obvious one – all of the non-existent capital that was promised to backstop the Euro periphery through the IMF, EFSF, private bondholder "haircuts", etc., doesn’t materialize! All in all, 2012 should be a very disturbing year for the extenders and the pretenders alike.
Jack Delano Hot Sugar January 1942 Guanica, Puerto Rico. "Burning a sugar cane field. This process destroys the leaves and makes the cane easier to harvest" Ilargi: No, I’m not talking about the fact that Germany and Holland want to take over as the de facto government in Greece, as Noah Barkin writes for Reuters (that they want to do it through Brussels is a mere technicality).
Ilargi: Nor do I mean the report from the Kiel Institute for the World Economy that Ambrose Evans-Pritchard cites for the Telegraph, and which implies a second bailout for Portugal is looming near:Investors fear mounting losses in Portugal as second rescue looms Portugal is fighting a losing battle to contain its public debt and may be forced to impose haircuts of up to 50pc on private creditors, according to a top German institute. A report for the Kiel Institute for the World Economy said Portugal would have to run a primary budget surplus of over 11pc of GDP a year to prevent debt dynamics spiralling out of control, even in a benign scenario of 2pc annual growth. "Portugal's debt is unsustainable. That is the only possible conclusion," said David Bencek, the co-author, warning that no country can achieve a primary budget surplus above 5pc for long. "We won't know what the trigger will be but once there is a decision on Greece people are going to start looking closely and realise that Portugal is the same position as Greece was a year ago." Yields on Portugal's five-year bonds surged on Thursday to a record 18.9pc, reflecting fears that the country will need a second rescue from the EU-ECB-IMF Troika. Three-year yields hit 21pc.
Ilargi: Or even the true meaning behind the steep drop in the Baltic Dry Index, on which Sebastian Walsh reports for Financial News:Chart of the Day: The Baltic Dry Index Statistics from the Office of National Statistics this morning showed that the UK went into reverse in the last quarter of 2011, when the economy shrank by 0.2% – but as the Baltic Dry Index shows, the global economy is looking even more worrying. The index – often used as a proxy for the health of the global economy as it reflects the prices charged for shipping commodities such as metals, coal or grain around the world – has fallen by 61% since October. The index was at 842 at yesterday’s close – down from its 12-month high of 2173 last October. Nick Bullman, managing partner at risk consultant Check Risks, said the index is a good way of looking at the risks to the global economy, "as it tends to be where they hit first".
Ilargi: The report I refer to in the title requires a little background info: In Holland, where I'll be for a few more days, there's a "rogue" right-wing party named PVV (Party for Freedom). It has no cabinet ministers, but the minority moderate right-wing government needs its support to stay in the saddle. The PVV, like other European right-wingers, is, among many other things, against much of what the European Union stands for. It's certainly against the Euro, and the bailouts with Dutch taxpayer money of countries like Greece and Portugal. A few months ago, the PVV announced they had commissioned a report from British financial consultancy firm Lombard Street Research on the economic consequences of staying in the Eurozone versus returning to the guilder. That report is about to be published "within days". It will prove to be highly explosive material. And the PVV will do all it possibly can to make sure it receives a lot of media attention. It may tear down the incumbent government, which is a heavy advocate of all things Europe, and which will have to quit once the PVV support dies, but for that party that's not the no. 1 concern. And if and when Holland has a large scale discussion on the report and the issues it raises, Germany won't be able to ignore it and stay behind. And then, neither will France. Max Julius of Citywire.uk did a piece on the report, without mentioning it directly, 10 days ago:Why Germans and Dutch will exit 'suicide pact' eurozone Germany and the Netherlands are likely to quit the eurozone rather than swallow an indefinite number of 'unrequited transfers' to the union’s crisis-stricken nations, according to Charles Dumas, chief economist at Lombard Street Research. Speaking at an event in central London, he said that before joining the single currency, German incomes had stayed level but their purchasing power had increased as the Deutschmark appreciated. With the weaker euro, the economist said, they have seen 'tremendous' wage restraint, leading to huge growth in German firms’ market share but ‘no serious growth of the economy’ and a squeeze on disposable incomes. Meanwhile, consumption rose elsewhere in the eurozone, he said. 'So what you’re actually dealing with here... is a German population which has had a rotten deal – and that’s why they’re all so angry' noted Dumas, who is also chairman of the macroeconomic forecasting consultancy. Branding the monetary union a 'suicide pact', he continued: 'So what this exercise in uniting Europe has achieved is to divide Europe.' Dumas [noted that] the 'Club Med' nations needed about 5% of gross domestic product in annual debt refinancing 'more or less indefinitely'. This would amount to €150 billion a year, of which Germany would have to stump up just over €60 billion, France a little under €50 billion and €15 billion from the Netherlands, he said. And this would be on top of the shortfall in consumer spending, in addition to the fact that wages and consumption may have to be held down in the future, Dumas warned.
Ilargi: This morning, Dutch daily Algemeen Dagblad cited Dumas as saying these numbers are "cautious estimates". They are valid only if Greece and Portugal would leave the Eurozone in 2012 - which Dumas expects will happen -. If they don't, the payments will be even higher. He predicts the costs of a return to the guilder will be much less than for instance the Dutch government's Central Planning Bureau claims, which warns of huge losses if Holland were to leave the Euro. Dumas: "It's just like in a religion: first they promise you heaven, and if that doesn't work out, they threaten you with hell."The economist dismissed the notion that the region would be able to turn itself around so as to make such support from its 'core' unnecessary. Citing the example of the persisting transfers from west to east Germany, he pointed out: 'The ones that need the money to flow in carry on needing the money to flow in, or just stay poor.' Dumas also warned that austerity was only worsening Greece’s budget deficit, and that it was 'difficult to imagine' the deeply indebted state receiving the four quarterly batches of financing it is due this year. ‘It’s almost impossible to imagine people continuing to stump up the money, because they simply have not actually gone into this thing with the intention of unrequited transfers to Greece ad infinitum,’ he said as the country resumed talks with its creditors over a planned debt swap. Calling the one-off damage of splitting up the eurozone 'seriously exaggerated', Dumas warned that as the crisis deepens, he believes 'Germany and the Netherlands will actually realise that they had better call it a day and jump out.'
Ilargi: Sure, the Dutch government, and certainly the EU and the banking system, have formidable PR machineries at their disposal. We’ll see a lot of numbers being floated that contradict Lombard's report. And we'll have to wait a few days to see exactly what numbers Dumas et al. come up with. But the people of Germany and Holland are already very nervous about the fact that they face austerity and budget cuts while billions of euros are transferred to southern Europe. Up until now, the fear of economic disaster predicted in unison by government leaders have kept them quiet. Now that a reputable economic research firm flatly contradicts these predictions, and states that, instead, it's staying within the Eurozone that will be the far more costly option, the people will grow increasingly restless. Charles Dumas again, from Algemeen Dagblad:"The Dutch people have lost thousands of euros in purchasing power per year since the currency was introduced."
Governments in Berlin and The Hague will have a lot of explaining to do. They have to do so against a backdrop of (near-)failing Greek debt swap talks, which will at the very least force them to admit that they have a lost tens of billions in taxpayer money to Club Med countries already. With a second Portugal bailout waiting in the wings. And lots of negative news on Italy and Spain. And more domestic budget cuts. They’ll realize that their governments have painted far too rosy pictures about the issues so far. And they’ll expect them to deliver more of the same. This is what we call a receding trust horizon. It's not the report alone, it's the entire combination of factors. The report will "merely" serve as the catalyst that blows up the powder keg. It may take a few months, but it will happen. The publicity hungry rogue PVV party that commissioned it, followed by anti-Eurozone voices elsewhere, will make sure of that.
Here's another interview with Nicole, conducted by Nicholas Bawtree for Italian magazine Terra Nuova, October 2011 in Florence, Italy.
Tyne & Wear Archives and Museums Just watch me June 9 1902 Fron album of prisoners brought before the North Shields Police Court in England between 1902 and 1916.
"Time has stopped before us The sky cannot ignore us No one can separate us For we are all that is left The echo bounces off me The shadow lost beside me There's no more need to pretend Cause now I can begin again." Smashing Pumpkins, The Beginning is the End is the Beginning
Ashvin: The latest revolution of the Euro Crisis Cycle has brought us back to talks of restructuring Greek sovereign debt through "Private Sector Involvement" (PSI), which are somehow taking place in a Universe where debt restructuring is not allowed to be confused with "debt default" or "bankruptcy". On Friday January 20, the IIF (representing some of Greece’s creditors) and the Greek government announced that they had finally reached an "agreement" on the basic structure of the restructuring (or the basic restructuring of the structure?). Here’s the live blog update from The Guardian on Friday, which really stood out to me:A framework of the deal -- the basic structure of the bond swap that the Greek finance minister Evangelos Venizelos wants to present at Monday's eurogroup meeting -- has been accepted by both sides, "put in place" and I understand committed to paper. But it would also seem that other aspects of the agreement - be them legal, technical or matters of substance -- remain unresolved and will be discussed at negotiations that resume at 7:30pm local time [6.30 GMT] and look set to continue over the weekend. If Greece's massive €360 bn debt load is to be made manageable much will depend "on the inter-related role of all the interests at stake" insiders say. Even if a decisive agreement is reached, the proposal will have to be put to technocrats -- given the complexity of the deal -- and they could very likely change it again. "The outline won't be the end of the beginning but the beginning of the end," said another source again requesting blanket anonymity because of the delicacy of the talks.
That’s how these anonymous blankets, with their linear mindsets and scripts, really think about the process and justify the charade to everyone else who looks on in anticipation. We have not reached the end of the beginning, but the beginning of the end! Or is it really the beginning of the end of the beginning? Let’s just go ahead and say that the end is the beginning, which is also the end. It’s a circle, a cycle, a never-ending series of revolving points; an optical and psychological illusion of mass proportions.
Of course, not more than two hours after the live update from above, I stumbled across another live update from The Guardian that, in combination with all the reports over the course of just one week, was starting to make the Escher Stairs look like a straight, non-stop, round trip flight from Athens to Brussels and then back to Athens… and then back to Brussels."At the risk of just adding to the confusion over what is or is not happening with the discussions between Greece and the private bondholders, CNBC is reporting no deal has been reached on the terms of a debt swap. Nor is there apparently a press conference planned for tonight. However that does not rule out the idea that a framework has been agreed, and further details will be hammered out over the weekend, as we reported earlier."
So now we should just be glad that we can’t "rule out" the possibility that a framework has been established to "hammer out" further details in upcoming days. What all of this really means is that there are way too many vested interests fighting over the pieces of the same wealth pie which is continuously dwindling in size, and it will take way too long for them to actually sign their names to an agreement that is suitable to all interested parties, as opposed to continuously cycling rumors of "progress" being made. But, alas, even the framework of a deal didn’t last past Saturday, as the parties involved kept making right turns until they came full circle to the point of "stalled talks". Here’s a report from Dow Jones on Saturday January 21, via ZeroHedge:
Greek Bondholder Talks Stalled, Agreement Unlikely By Monday Deadline Talks between Greece and its private sector creditors over a debt writedown plan appeared to stall Saturday as the banks' top negotiator left Athens amid signs of fresh disagreements over how much Greece would pay its bondholders in the future. Officials close to the talks said they may not conclude before a meeting Monday of euro-zone finance ministers where a second bailout which will keep Greece from defaulting is supposed to be discussed. Without a deal on the write-down of the debt held in private hands, the loan can't be released. Institute of International Finance chief Charles Dallara, who has been negotiating with Greek officials on the bond swap plan for the last two days, left Athens Saturday as hurdles remained over the interest rate the new bonds would pay private sector creditors. "Right now there are no talks. There will be consultations with the EU and the IMF to determine where we stand and then we'll see. It (negotiations) has again become complicated with the new demands over the coupon," said a person with direct knowledge of the talks.
And here’s Paul Anastasi and Farry White from The Telegraph with a similar report, except with a slightly more optimistic spin, courtesy of official "spokespersons" from the IIF and Greek government.
Greek debt deal hits setback as talks suspended Charles Dallara, managing director of the Institute of International Finance (IIF), a lobby group representing private creditors who have lent €47bn (£39bn) to the Greek government, has so-far failed to reach agreement on the key interest rate of the new bonds Greece will issue. Athens was anxious to strike a deal ahead of a meeting of eurozone finance ministers on Monday, which could have set in motion the paperwork and approvals necessary to give Greece its next tranche of aid, worth about €130bn. This will prevent a disorderly debt default when €14.5bn of Greek bonds mature in March. However, Greek government officials said on Saturday that the crisis talks had now been postponed for a few days. A spokesman for the IIF said that Mr Dallara had travelled to Paris for a long-standing social arrangement and his departure was "in no way a reflection on the talks". The talks have made "substantial" progress, the spokesman said, noting that Mr Dallara was in phone contact with the Greek prime minister and could return to Athens at any point. International private creditors have already accepted a 50pc "haircut" or loss of their investments in Greek bonds, a move that would cut €100bn from Greece's €360bn debt pile. However, the sticking points appear to be the term to maturity of the new replacement bonds and the rate of interest, or coupon, that they will pay. "We are now expecting a solution in a few days," the Greek government official said. "Nobody expects a failure, as that could raise the spectre of a default. But it would have been convenient to have wrapped things up this weekend, because of the simultaneous presence in Athens of the Troika.
Not much commentary necessary, right? "Back to the drawing board" would imply that they had actually managed to upgrade from the drawing board to some more concrete stages of action, so that doesn’t work. The talks allegedly continue, but the questions of about what, between whom and to what end are all blowing in the wind. These PSI talks, and the Eurozone in general, are still stuck in the depths of an Escher diagram, where every ounce of "progress" is simply a function of some Eurocrat and mainstream media outlet declaring it to exist.
No one wants to accept the fact that, until the entire system is fundamentally transformed (through disorderly collapse or otherwise), this vicious crisis cycle will never end. The Greek PSI negotiations are a perfect example of the hamster wheel that is Europe. In theory, it is both necessary and just for private creditors (mainly banks) to take large haircuts on the net present value of their Greek bond holdings. But as long as the "restructuring" is treated as a means to avoid outright default/bankruptcy, stabilize the structurally imbalanced Eurozone and continue business as usual in the future, it will fail to produce any meaningful results. You simply can’t satisfy all of the vested parties in a fundamentally broken and collapsing system. After a prolonged period of running around in circles, someone is bound to crash into someone else. The revolutions of the Euro Crisis Wheel are bound to spark an actual revolution that forces the system to do that which is unspeakable - change. It is now starting to look like the disorderly Greek default in March (there is no "orderly" version), which was always inevitable but never until now capable of being marked on a calendar, will be the event that sets that particular ball rolling. Let’s face it – even after a credit market "rally", the Greek government is paying close to 400% for a year’s worth of money. The hold outs in the PSI right now are the hedge funds who have loaded up on Greek bonds and CDS insurance, as they figure it is better for them to try and get paid out in full on one or the other than agree to "voluntarily" participate in the swap deal and relinquish their rights as bondholders. Indeed, this literal leverage has given them a degree of negotiating leverage that was certainly under-estimated by the mainstream until now. If they do not take place in the debt swaps, then they can avoid taking a haircut on their bonds, and if they are "coerced" into a restructuring by retro-actively inserted "collective action clauses" (allows a majority of creditors to override the minority), then the CDS most likely get triggered. On top of that, ZeroHedge just produced a lengthy and complex report that describes, among many other things, the various other implications of a retro-active change of local law.
Subordination 101: A Walk Thru For Sovereign Bond Markets In A Post-Greek Default World Before we, like Reuters and like JP Morgan, accept that even the local-law debt can be crammed down, we point readers to a seminal paper by none other than Lee Buchheit, the same one who is currently advising Greece on its bankruptcy negotiations (to call a spade a spade), called How To Restructure Greek Debt from May 2010, in which he says the following: [Buchheit] 'No country in Greece’s position would lightly consider a change of local law as an easy method of dealing with a sovereign debt crisis. The following factors, among others, counsel extreme caution before embarking on such a remedy. • If done once, future investors will fear that it could be done again. The debtor country may therefore be compelled in future borrowings (in which international investor participation is sought) to specify a foreign law as the governing law of its debt instruments. • A dramatic change in local law by one country might allow a worm of doubt to slip into the heads of capital market investors in other similarly-situated countries, driving up borrowing costs around the board. • The official sector supporters of the debtor country will presumably balk at any action of this kind that could unleash the forces of contagion and instability upon other countries whose debt stocks also contain predominantly local law-governed instruments. • The more dramatic or confiscatory the effect of the change of law, the higher the likelihood that it would be subject to a successful legal challenge.
The report also describes how a stripping of the creditor protections offered by Greek bonds issued under U.K. law, which contain CACs and have been accumulated by these holdout hedge funds, will probably have even more severe implications for sovereign bond markets around the world. We should also remember that no one really knows what the knock-on effects of CDS triggers would be throughout the global financial system, since it is entirely unclear how many billions worth of derivatives have been written on Greek debt. It’s really the space between a huge, jagged rock and a very hard place for just about everyone involved, as it has always been. Besides the two direct parties involved (Greece and its creditors), we also have the European Commission, ECB and IMF, who obviously don't want the Greek government to compromise to the point where no meaningful debt reduction is made and they are simply writing checks (endorsed by Western taxpayers) to both the Greek government and its bondholders for nothing in return. English language Katimerini reports a bit on this angle:Dallara suddenly leaves Athens Talks between Athens and the steering committee of private creditors concerning the Private Sector Involvement plan (PSI+) will resume by telephone on Sunday as the committee’s head, Charles Dallara, left Greece unexpectedly on Saturday. According to reports on Skai radio the International Monetary Fund, the European Commission and the European Central Bank are not happy with the provisional agreement between the Greek government and its private creditors, as they believe it does not secure the sustainability of the Greek debt. As a result Dallara, who is also the head of the Institute of International Finance flew to Paris on Saturday to discuss developments with lenders and funds which hold the bulk of the privately-held Greek bonds worth 206 billion euros. Finance Minister Evangelos Venizelos told reporters on Saturday that negotiations would continue on Sunday by phone. Both the IIF and the government have leaked that there is progress in the talks but any agreement would require the approval of Brussels, Berlin and the IMF. Sources suggest that the Greek side proposed to private creditors a 3.5 percent interest rate for bonds maturing by 2014, 3.9 percent for those maturing by 2020 and 4.6 percent for those expiring after 2021. There will be a 10-year grace period and the new bonds will be under British law. Reuters cited an unnamed source saying that "things are complicated, we are getting closer on the numbers but there is still quite some work ahead. An agreement is unlikely before next week, if there is an agreement at all.
For argument’s sake, though, let’s say the Troika, the Greek government and the holdout creditors manage to come back full circle (via telephone conference) to "progress" being made and a deal "nearly within reach" in the next night or two, and then put an actual deal to paper. What will that mean for the Euro Crisis Cycle? Simple – it will continue rolling on in a broader and more devastating fashion. First of all, Greek debt will still not be sustainable in any meaningful sense of that word, as this comprehensive report from Barclays makes clear (via ZeroHedge).Greek Debt Likely Unsustainable Even With Haircuts, Barclays Complete Q&A On PSI 6) Does the PSI in its current form make the Greek debt sustainable? The October Troika debt sustainability report highlights that the current PSI with nearly universal participation gets debt/GDP close to 120% by 2020. First, this number is still on the high side to conclude that Greek debt is sustainable. Second, the underlying macroeconomic assumptions by the October Troika report in terms of GDP growth and primary balance post-2015 are still optimistic (c.3.8% average nominal growth and average 4% primary balance). If these macroeconomic assumptions are reduced to a more realistic 2.5-3%, then the debt sustainability picture would look much worse. As seen in Figure 1, a 50% national haircut with 50% participation does not get Greece close to 120% debt/GDP by 2020, as envisaged even with the relatively optimistic macro economic assumptions of the Troika. Only if 100% participation is achieved would close to a 120% debt/GDP target be reached. For this reason, the Troika does not want to sacrifice universal participation and is determined to do whatever is necessary to maintain it. When worse macroeconomic assumptions are used, the notional haircut needed for a reasonably sustainable debt path is about 80%. Therefore, if Greece and the Troika go ahead with October summit broad parameters for the PSI, even with 100% participation Greek debt is not likely to be sustainable in the absence of substantial fiscal and structural adjustment by Greece in the years ahead.
That's right - even if 100% of private creditors participated in the proposed debt swap arrangement for a 80% haircut to notional value (not going to happen!), Greece's debt would still remain at entirely unsustainable levels for many years to come (and that's assuming a 100-120% debt/GDP ratio is the threshold for sustainability). Secondly, the Greek situation is obviously only one piece of a much larger puzzle in Europe. Peter Tchir remarks on those other debt-swamped Eurozone countries who sure would love to have some "voluntary debt swaps" of their own.Greek PSI Here We Come? Be Careful What You Wish For "So it looks like we should get an announcement sometime today about the proposed Greek PSI deal. Yes, proposed, not finalized. Asides from the obvious fact that there will be limited or no documentation for the deal, we still have no clue who has agreed to what. As far as I can tell, no one has given the IIF negotiators any binding power. Obviously some of the institutions that the IIF negotiators are associated would have trouble not approving the "deal", but how many bonds do they really represent? I think this will be a relatively small portion of bondholders and then the real game begins. The carrot and stick that the EU and ECB can use with other holders and the desire to maximize profits (or minimize losses) on the other side. So far, this news seems to be acting inversely to the "downgrades" price action, as early front-running is meeting sell the news. If the terms of the deal being leaked are true, it will be extremely interesting to see what other countries do. Not only will Greece receive a 50% notional reduction (except from the ECB and other "public" holders), but they will get very long dated money at very low rates. Who wouldn't want that? Why should Spain be going through semi-legitimate auctions when Greece can get longer dated money at lower rates? Why should Portugal or Hungary bother with painful steps to reduce debt when the alternative is spend more, reduce debt via restructuring, and get lower rates on that reduced debt?"
There is absolutely no way that European private banks can afford to take another 50-100% haircut on the bonds of Portugal or Ireland on top of Greece, let alone Spain or Italy. Any attempts towards such an outcome would be even less "voluntary" than the Greek swaps, and that’s really saying something. And who would even want to buy the bonds of these countries after the most coercive restructuring in history just took place? This time it was a few hedge funds that have brought us to the brink of potentially catastrophic debt deflation, next time (if there is one) it will be a much broader force of resistance.
The economic, financial and political divides within Europe will simply deepen to the point where the internal hemorrhaging overwhelms any and all top-down "solutions". So IF this Greek PSI deal is finalized soon, the IMF bailout money is disbursed and Greece gets through the next few months, the focus will simply shift back to those equally troubled and much bigger debt issuers across Europe (and perhaps the world). We’ll be right back at the end of the beginning or the beginning of the end, depending on which way the crisis propaganda decides to spin on any given day.
National Photo Co. Bond Vault 1914 "Treasury Department, Office of Comptroller of Currency -- bond vault. Contains bonds to the value of $900 million securing government deposits and postal savings fund"
I’m not a technical analyst or a fundamental analyst or any other type of equity market analyst. What I am is just a guy who likes to think he can spot completely nonsensical propaganda when he reads or hears it. You know, the type of non-stop propaganda that attempts to manage perceptions/expectations and convince "investors" that, while things are obviously very bad in the real economy, everything is still just hunky dory in the wonderful world of equities. Case In Point Some mainstream market analysts chimed in after the serial S&P ratings downgrades of nine Eurozone countries, and specifically the one-notch downgrade of France from AAA to AA+ (ratings outlook still negative), to say that the market had already "priced them in" and therefore they are really no big deal. S&P had put all of these countries on negative watch back in December before the latest and unsurprisingly innocuous EU Summit, so the downgrades were no surprise. Here are just two examples of a very pervasive and perverse logic, presented by The Telegraph:S&P cuts ratings of nine eurozone countries: reaction Fabrice Seiman, head of Lutetia Capital, said: "S&P is absolutely right. France is paying the price of 30 years of irresponsibility in public finances. French politicians on the right and on the left fell short of the job by not taking measures to reduce spending." I think this is already priced in. There should not be any sizable reaction, but there could be a technical reaction on the Franco-German spread. It should be limited to the long-term and if there is a reduction in spending." Bill O'Grady, chief market strategist at Confluence Investment Management, said: "If France had been downgraded more than one level it would have precipitated a crisis. This is not good but it was anticipated, baked in. For oil it is probably a neutral event. If it raises concerns about a worsening economic environment it would be bearish."
Ashvin: That logic does sound appealing on the surface and many others like to parrot it, but the first question to pop into my mind was this – how can the market "price in" very significant developments in Euro sovereign credit markets by steadily increasing in valuation since they became aware those developments would occur?? Since the S&P put a bunch of EZ countries on negative watch on December 5, 2011 and the EU Summit on December 9, the S&P500 has risen almost 6%.
That’s a boat load of downgrades the market appears to have priced in over the last month while very little "positive" news has come out of Europe. Now I’m confident that the initial reaction to my question above would be, "that’s a really simple and stupid question to ask!". Fortunately, there are several great analysts out there who have reached similar conclusions about these equity markets, which have allegedly "priced in" everything under the Sun, and have provided us with slightly more nuanced arguments than my own. The U.S. Dollar (and Treasuries) has been increasing in value alongside U.S. equities, so the pundits should find it very difficult to explain the upwards "pricing in" market action of the last month by saying it is a nominal increase of shares priced in dollars. What we have is a very significant divergence between the dollar index and equities, as Charles Hugh Smith outlines in his piece, A Useful Fiction: Everybody Loves a Melt-Up Stock Market, and one that must close in the near future. The following charts of the dollar index ($DXY) and 5-year Treasuries are from M3 Financial Analysis:
The truth is that the very notion of the market "pricing in" events as the investor collective becomes aware of them is flawed. In the comprehensive TAE classic of 2010, Fractal Adaptive Cycles in Natural and Human Systems, Nicole Foss delves into Robert Prechter's theory of "Socionomics" (among other things) and how it can explain market valuations as a function of endogenous factors, such as the collective mood of investors, rather than exogenous events relayed by "the news".Bob Prechter's socionomics model combines Elliott's observed fractal patterns with an understanding of human herding behaviour, comprising a comprehensive challenge to prevailing notions such as the Efficient Market Hypothesis by reversing causation and recognizing the role of emotional/irrational behaviour as the prime market driver. While the real economy demonstrates negative feedback loops, finance is thoroughly grounded in positive feedback.
Ashvin: Mish Shedlock also touched on this concept in a post earlier this week. He illustrated that, at best, the market should be viewed as a contrarian indicator for future economic trends due to its function as a gauge of extreme sentiments, and, at worst, it shouldn't be viewed as an indicator of anything at all.Cherry Picking Timeframes on Alleged Leading Indicators; Big Change In LEI on January 26 "The stock market is not a leading indicator of the economy. Rather, the stock market is a coincident indicator of sentiment towards equities. ... Far from being a leading indicator, on an absolute basis the S&P has a perfect track record of peaking right before or just as a recession starts. This is just as one might expect from a gauge of equity sentiment which tends to peak right before a downturn in the economy (with everyone extrapolating good times forever into the future). ... On a percentage change basis, the S&P 500 is not leading, not lagging, and not coincident. Instead it is completely useless mush."
Ashvin: It's not just the "fringe bloggers" drawing these conclusions about the market, but also such "reputable" financial institutions as UBS. Granted, the well-intentioned bankers over there also point out that the French downgrade, among others, was expected and shouldn't affect near-term credit spreads too much. Instead, they choose to focus on the effects it will have on the state of realpolitik in Europe’s core, and how that is certainly not something which is "priced in" at all. Indeed, only market shills and fools can even pretend to separate the two (finance and politics).
Ashvin: So if the equity markets are "pricing in" anything, it's the pure hope that all of these downgrades of countries, banks and corporations will continue to be glossed over by bond markets, that political/economic imbalances in Europe haven't been exacerbated, that the Greek government and its creditors aren't helplessly struggling to reach a "voluntary" debt reduction deal before a technical default in March becomes inevitable, that China/India aren't facing "hard landings" and that the U.S./U.K. economies will not be dragged down by their own housing markets, corporate [lack of] earnings, unemployment trends or any of the above. Some people will tell you that the only thing the markets need to keep their manic phase intact is the inevitable QE money printing that the Fed will officially announce, which has conveniently been "just around the corner" for almost a year now. Despite those consistent predictions of QE3, I made clear that I didn’t expect the Fed to relent in 2011, and many of the same financial and political reasons underlying that expectation still stand. The primary reasons being the conundrum reflected by the fact that the S&P is still hovering around 1300 (and oil around $100/bbl), which makes the marginal benefits of QE very slim, and the politically volatile situation in the run-up to November’s elections. On the other hand, the financial threats from the Euro crisis and a strong dollar (weak euro) have clearly intensified over the last few months, and the ECB is even more constricted from printing than it has ever been (at least for anything other than sub 3-year sovereign paper through its indirect LTRO, which still doesn’t reflect net cash entering EZ bond markets). Perhaps these developments will finally convince the Fed to "pull the trigger" on QE3, but then many questions still remain – how many trillions are needed to boost "risk appetite" for more than a few weeks and what happens when those trillions are perceived as "not enough"? Like I said at the beginning, I'm not any sort of market analyst, but there do seem to be a whole slew of developments starting to weigh on collective investor sentiment right now, which will only get heavier in the upcoming weeks and months. No one can tell you that any of these negative and ongoing developments herald an imminent market crash or how exactly they will impact shares. What I can say with confidence, though, is that none of them are insignificant bumps in the road. They certainly did not "remove any uncertainty" from the markets and they have in no meaningful way been "priced in" by these markets either.