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  • The Eurozone crisis

    Contagion fears drive up bond yields - The Irish Times - Tue, Nov 30, 2010

    Contagion fears drive up bond yields

    The euro zone's debt crisis deepened today as investors pushed the spreads on Spanish, Italian and Belgian bonds to euro lifetime highs and Portugal warned of "intolerable risks" facing its banks.

    European policymakers appeared at a loss to calm markets hell-bent on testing their determination to rescue countries like Portugal and Spain after approving Ireland's €85 billion bailout at the weekend.

    The borrowing costs of countries like Belgium and France also rose - and the euro hit a short-term low against the dollar - as investors looked beyond the so-called euro periphery and targeted core founding members of the union.

    A Reuters survey of 55 leading fund management houses showed US and UK investors had significantly cut back their exposure to euro zone bonds this month, piling into equities instead despite a weakening in global shares.

    "The crisis of confidence in Europe can't be resolved quickly," said Rick Meckler, president of investment firm LibertyView Capital Management in New York. "No single event can put things back in order."

    Markets are already discounting an eventual rescue of Portugal although the government in Lisbon denies, as Irish leaders initially did, that the country needs outside aid.

    While a Portuguese rescue would be manageable, assistance for its larger neighbour Spain would sorely test EU resources, raise deeper questions about the integrity of the 12-year old currency area, and possibly spread contagion beyond Europe.

    Italy, the euro zone's third largest economy, is now being referred to as "too big to fail" and "too big to bail".

    Citigroup chief economist Willem Buiter described the turbulence hitting the euro zone as an "opening act" and predicted that sovereign default fears could soon extend to Japan and the United States.
    "There is no such thing as an absolutely safe sovereign," he wrote in a research note.

    Tomasso Padoa-Schioppa, a former Italian finance minister and ECB member who is advising Greece's government, admitted that markets were "very nervous", describing worries about Spain and other large euro members as "excessive".

    The euro dipped below $1.30 and has now shed more than 7 per cent of its value against the dollar since early

    November. The yield spreads of 10-year Spanish, Italian and Belgian bonds over German benchmarks spiked to their highest levels since the birth of the euro in January 1999.

    "It's very worrying because Spain is almost too big to be bailed out ... whereas Italy is too big to be bailed out," said Everett Brown, European bond strategist at IDEAglobal.

    Jitters also hit European banking shares, which were led lower by French banks BNP Paribas, Societe Generale and Credit Agricole on market rumours Standard & Poor's might cut France's outlook - talk swiftly denied by the government in Paris.

    "There is no reason for concern, no risk," said Francois Baroin, budget minister and government spokesman.

    Deepening the sense of gloom, Portugal's central bank warned that its country's banks faced an "intolerable risk" if the government in Lisbon failed to consolidate public finances.

    Although the minority socialist government in Portugal approved an austerity budget for 2011 last week, it is struggling to meet its targets for deficit reduction, with the core state sector shortfall widening 1.8 per cent in the first 10 months of this year.

    The worry is that troubles in Portugal could spread quickly to Spain because of their close economic ties.

    Data released today underscored economic divergences within the euro zone, which pose an increasing challenge to the European Central Bank and its one-size-fits-all monetary policy.

    German unemployment fell in November for a 16th straight month while Italy's unemployment rate jumped to 8.6 per cent in October from 8.3 per cent the month before.

    Greek retail sales plunged 9.9 per cent year-on-year in September under the weight of crushing austerity measures agreed in exchange for its €110 billion bailout.

    In addition to Ireland's bailout, European leaders approved on Sunday the outlines of a long-term European Stability Mechanism (ESM), based on a Franco-German proposal, that will create a permanent bailout facility and make the private sector gradually share the burden of any future default.

    Although private bondholders will not be asked to share the cost of debt restructurings until after mid-2013 and then only on a case-by-case basis, the mechanism has raised fears of future defaults and the likelihood of so-called "haircuts" down the road.

    Eurointelligence, an online commentary service, said markets were growing increasingly concerned about the solvency of euro zone peripheral states after focusing mainly on their short-term liquidity problems in past weeks.

    "We at Eurointelligence consider a default of Greece, Ireland and Portugal a done deal," they wrote today.

    "The question is only now whether Spain can scrape through."
    Last edited by tantalus; 30 Nov 10,, 17:27.

  • #2
    Political ideology vs. reality...reality wins!

    A euro style socialist system is unsustainable. You can't cut workforce, pay out ever increasing pension, have longer life expectancy, and provide all other cradle to grave services at the same time. Something has to give.
    "Only Nixon can go to China." -- Old Vulcan proverb.

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    • #3
      gunnut,

      A euro style socialist system is unsustainable. You can't cut workforce, pay out ever increasing pension, have longer life expectancy, and provide all other cradle to grave services at the same time. Something has to give.
      that's true, but it's not the reason why ireland and portugal are going under. ireland's going under because of very bad private banking decisions; portugal because of extremely high private sector debt.

      for greece, both high private sector debt AND public sector debt; of the latter, even more serious than the spending was the fact that estimates of greek tax evasion is estimated to be $20-30 billion -every year-. to give you an idea of the size of this, the total economic output of greece is some $330 billion, and the size of the bailout was $146 billion.
      There is a cult of ignorance in the United States, and there has always been. The strain of anti-intellectualism has been a constant thread winding its way through our political and cultural life, nurtured by the false notion that democracy means that "My ignorance is just as good as your knowledge."- Isaac Asimov

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      • #4
        It's like watching a cancer where the doctors have decided to treat the tumor rather than simply cut it out.
        In the realm of spirit, seek clarity; in the material world, seek utility.

        Leibniz

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        • #5
          Originally posted by astralis View Post
          gunnut,

          that's true, but it's not the reason why ireland and portugal are going under. ireland's going under because of very bad private banking decisions; portugal because of extremely high private sector debt.
          I don't know the details, but I bet it was caused by bad or wrong government regulations.

          Originally posted by astralis View Post
          for greece, both high private sector debt AND public sector debt; of the latter, even more serious than the spending was the fact that estimates of greek tax evasion is estimated to be $20-30 billion -every year-. to give you an idea of the size of this, the total economic output of greece is some $330 billion, and the size of the bailout was $146 billion.
          Again, why do these people evade taxes? Everyone agrees we should pay some taxes. The difference is "how much?" Taxing people too much and they'll find ways around it. Taxing too little and you can't fund essential government functions. Greece has a generous socialist lifestyle and needed money to pay for it. You can't escape the law of economics. They tax and tax and tax. People found ways around it. Yet another law of economics.


          There's a line item entry in CA income tax form. It asks how much stuff we have bought over the previous tax year from out of state which we did not pay a CA sales tax on. We are supposed to put in a number and then pay the sales tax. Guess how many Californians pay that?
          Last edited by gunnut; 30 Nov 10,, 23:18.
          "Only Nixon can go to China." -- Old Vulcan proverb.

          Comment


          • #6
            gunnut,

            I don't know the details, but I bet it was caused by bad or wrong government regulations.
            nah; it was caused by simple bubble- housing and banking. in fact, regulation had gotten more lax as the "celtic tiger" went into overload in the early 2000s. ireland is one of the freest economies in europe, with low corporate tax rates et al.

            free markets can and do fail without the government helping. :)

            Again, why do these people evade taxes? Everyone agrees we should pay some taxes. The difference is "how much?"
            actually, the richest were the most adept at evading taxes, which were actually very low for europe-- they're comparable if not lower than that of the US. yet tax evasion is incredibly more serious there.

            people primarily evade taxes when there's little enforcement and there's little threat of punishment even when caught, which was and remains to a high degree true in greece. in fact, your example demonstrates that very well.

            tax rate by itself is a secondary effect.

            so again, what you say is right, but it doesn't apply to the example here.
            There is a cult of ignorance in the United States, and there has always been. The strain of anti-intellectualism has been a constant thread winding its way through our political and cultural life, nurtured by the false notion that democracy means that "My ignorance is just as good as your knowledge."- Isaac Asimov

            Comment


            • #7
              Originally posted by gunnut View Post
              I don't know the details, but I bet it was caused by bad or wrong government regulations.
              No, not for the first time you've got it arseways. It was caused by a complete lack of government regulation, allowing and encouraging the bubble through standing aside and letting the banks borrow, fake-boom and speculate their way out of profitable enterprise. Free-Market capitalism at it's most natural, not that cult members like yourself will take any notice. I'm sure it's secretly the fault of unions, government, high taxes or some other expression that's not described Ireland for a long time.
              Although it is not true that all conservatives are stupid people, it is true that most stupid people are conservative.
              - John Stuart Mill.

              Comment


              • #8
                On the article itself, there's a lot of questions there. The euro isn't doomed, but it's unquestionably suffering from the complete lack of certainty we have about where the Eurozone economy will be at in 2-3 years, and the complete lack of honesty about how Portugal, Spain, and Italy are actually doing. Portugal may not need to default, it has a budgetary problem rather than a banking debt one, and if the irrational market hysteria stops may be able to sort itself out over the next few years. Spain is more risky, had a more Hiberianesque boom, and is larger, so there's a huge issue there. Italy's political stagnation has led to economic stagnation and a move away from productive industry that Italy once was a world leader in. A bailout there might actually make things worse by dampening the imperative need for reform. Bailouts are not the answer to structural problems, and in places like Ireland, those problems are insoluble without default. It's not neccisarily true of everywhere though, and while markets aren't helping, neither is the ECB with it's silence and unwillingness to say anything meaningful or assuring.

                Some countries may eventually have to leave the euro, if they can't control their debt, even with help from the ECB. That's the reality that has to be discussed. The euro as a failure or unsustainible though? That's a view mostly held by people who have slavishly and desperately wanted the euro to fail from day one, rather than some rational economic road to damascus conversion.
                Although it is not true that all conservatives are stupid people, it is true that most stupid people are conservative.
                - John Stuart Mill.

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