Tag Archives: Euro

The Narrative Starts to Take: Greece is Out

Amid all the back and forth about Greece’s path back from fiscal oblivion, a frustrated narrative has begun to emerge in Athens – all of this is for naught because ultimately the EU and leaders in Brussels and Berlin never had any intention of keeping the beleaguered economy in the union. Sounding a bit hurt and a tiny bit paranoid at first, this take on the situation has gained steam as what appeared to be a finish line for promised cuts and assurances that Athens would indeed play ball, regardless of how painful it was or how little actual support they had from their citizens, kept changing. Frustration turned to outright allegations yesterday as the proposal was floated that any aid package would be held in limbo until after the country’s national elections were held. The response first came with charges that the troika was trying to use the package to manipulate the country’s elections to support the success of a new government that would ensure the further austerity they hoped for, but has now devolved into a discussion of whether the whole process is just a thinly veiled attempt to squeeze Greece out of the union completely.

“There are many in the eurozone who don’t want us any more,” Greek Finance Minister Evangelos Venizelos said during a meeting with President Karolos Papoulias, according to The Guardian. “We are constantly being given new terms and conditions.”

The discussion about Greek’s future has never been particularly pleasant, but recently, the atmosphere has grown toxic and days like yesterday hardly help the matter. With Greece facing down €14.5 billion ($19 billion) in debt set to mature within a month, its no wonder pressure has begun running especially high but if a solution is to be found – if all parties really want to find one – tempers need to calm and they need to do so fast.

Image: Economia

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Some Sun Through Europe’s Financial Clouds

Driving along an elevated stretch of the A-7 toll way that runs between Malaga and Algeciras in Spain’s southern Costa del Sol, one does not have to look hard to find evidence of the country’s financial burden. Built up and across the hillsides that rise sharply from the coastline, communities of summer and retirement homes sit empty, waiting for promised buyers who have long since lost their ability to keep up with payments. If complete, many properties lack the basic amenities promised by developers before the wave of bankruptcies left the coast’s real estate market gasping for air under the weight of oversupply and a sharp drop in demand brought on by the country and continent’s broader economic slowdown. Now left empty or occupied far below capacity, these properties have become not only a glaring reminder of the region’s rush to cash in on the explosion of profit and development of the early 2000s, but also a paralyzing force on the country’s banks, now weighed down by toxic assets and real estate prices that show little sign of rebounding in the near future. This latter pressure is made all the worse as Spanish banks’ books have become the focal point for both foreign investors and EU analysts wary of the country’s immediate fiscal stability and ability to withstand the stress of the coming year. According to a recent Wall Street Journal report, these empty properties could number as high as 1.5 million in a marketplace that is near stagnate. Still, combined with the countless other toxic assets crowding the books of La Caixa and Banco Santander could prove to be a boon for some investors.

Desperate to clear their books before stricter EU monitoring rules come into play or the force of anxiety about Southern Europe becomes too much to bare, banks across Europe are moving to unload assets at reduced rates, creating a buyer’s market for US and UK investors. “European financial institutions will unload up to $3 trillion in assets over the next 18 months,” according to a New York Times report released in the final week of 2011, adding that many will be let go at reduced costs either because they are seeking out ways to reduce their balance sheets or are under strict orders to do so by increasingly impatient EU regulators.

In addition to seeking a renewed level of confidence from foreign investors, the book clearing is also part of an effort to meet a “June deadline imposed by the European Banking Authority to raise more than 114 billion euros in fresh capital.” For many, the clock is ticking.

For local banks, the impact of off-loading their assets means more cash on hand and less dead weight to scare off investors and a restructured EU treaty that could mean far greater oversight in the coming months. For investors, the offerings mean a chance to snatch up properties and stakes in European firms at cut-rate prices, as long as there are willing to look past the risk of further fiscal collapse in the region. If recent activity is any indication, many are finding ways to look past the risk.

In November, according to the Times report,

“Wells Fargo bought the $3.3 billion in real estate loans, which are backed by commercial properties in the United States, that had been owned by the former Anglo Irish Bank. Wells has also bought $2.4 billion in loans and other assets from the private Bank of Ireland, which is trying to raise 10 billion euros ($13 billion) after a bailout by the European Union and the International Monetary Fund. Even with opposition from consumer advocates, Capital One Financial could soon win final approval from the Federal Reserve for its $9 billion acquisition of ING Direct in the United States, one of the year’s biggest banking deals. Based in the Netherlands, ING has been forced by European authorities to divest ING Direct, an online bank, after ING required a $14 billion bailout following the 2008 financial crisis.”

While hardly a relief to a general public increasingly at odds with the actions of both their governments and banks, this fire-sale environment could at least provide some breathing room for economies facing a new year of little to no growth and even less confidence.

Image: Spain’s Costa del Sol, Christopher Coats

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All Eyes on Credit Agencies Reaction to New EU Path

With a new strategy laid out for the Eurozone, all eyes are now on how greater oversight among the member states that have signed on will be received by the markets and credit rating agencies. While today suggests some positive receptions from markets in Europe and further afield, ratings agencies may be a different story. Standard and Poor’s said they would hold off until after this week’s Eurozone  conference to announce anything about European ratings, adding an element of unease to France who have suffered under the threat of a downgrade for weeks now. However, as the agencies ponder the new plans how much of an impact it will really have on the region – as well as what the UK’s new found positioning will mean for London and Brussels – it is worth considering how much of an effect a downgrade will actually have given the agencies’ track record and current standing in Europe and beyond. Having come under attack recently for rather questionable or late findings about everything from mortgage-backed investments to Greece’s overall well-being, agencies are now finding themselves in a defensive position, forced to defend their ratings, their methodologies or even their purpose. Even worse, their findings, including recent downgrades of government bonds in Italy and Spain, have been greeted largely by yawns by the market.

This is in no way meant to suggest that agencies like S&P or Moody’s will cease to be relevant. The threat of six countries in the Eurozone losing their AAA rating come next week would undoubtedly be a blow to the region’s momentum towards staving off a collapse. But given their timing and new questions about methodology and track records, I will be curious to see how much of an impact a possible downgrade of European bonds will have come next week.

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EU Timing In Search of Logic

Given the response ostensibly domestic led austerity cuts have gotten in places like Athens, Rome and Madrid, the very idea of allowing Brussels the authority to initiate such efforts from afar is not something I could see being terribly well received. Its not that I did not see it coming eventually or even an inevitable goal of European economic integration but the timing of such a proposal, on the evening of Greece’s austerity vote, complete with crowds throwing stones at the Parliament building, could certainly have been better. According to the Guardian, the confidential paper lays out plans to centralize authority over austerity measures and goes so far as to suggest the stripping of power from countries that are on the receiving end of community fund.

For countries deemed to be insolvent and in receipt of eurozone and International Monetary Fund bailouts but failing to meet the terms, Van Rompuy raised the prospect of drastic action, suggesting: “The granting of exceptional powers to the [European] commission (or another body) to take enforceable measures in the country concerned so as to ensure the stability of the euro area.

Again, this was likely a goal of community architects from the very beginning but the logic of leaking this type of information at a time when heads of state already deemed to be illegitimate by large swaths of the population are trying to squeeze through deeply unpopular cuts, is beyond my understanding. In a situation so dominated by issues of confidence and wary sacrifice, why make it even harder for governments to try to push these things through by hinting at an obliteration of state sovereignty?

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Cost of Inaction – The ECB Edition

Taking aim at the inaction of the European Central Bank in this whole mess, The New Yorker’s James Surowiecki follows a similar line of reason to our earlier posts on the inaction of Merkel and the Southern economies, citing a clear and effective solution and an unwillingness to go there for fear of rewarding bad behavior:

The frustrating thing about all this is that there is a ready-made solution. If the European Central Bank were to commit publicly to backstopping Italian and Spanish debt, by buying as many of their bonds as needed, the worries about default would recede and interest rates would fall.

He continues with a swipe at the reasoning behind their choice of action – or inaction:
So the problem is not that the E.C.B. can’t act but that it won’t. The obstacles are ideological and, you might say, psychological…… Moral hazard is a reasonable concern, but the Germans have reaped enormous benefits from the euro—most notably, it made their exports cheaper for the rest of the continent—and they should be willing to bear some of the costs.
What I feel Surowiecki fails to mention is the pressure Merkel and Co. have put on the ECB to keep their coffers shut. Several times over the last few weeks, the ECB has broached the subject of extensive plans but have been curtailed by sharp responses out of Berlin and Paris. Their inaction seems less to do with their own ideological or psychological reasoning and more to do with falling in line with those at the helm. Still, the wave is coming whether they act or not; its up to them how prepared they will be.
Photo: AFP/Getty Images, via The Guardian
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Euro Panic – They Didn’t See It Coming?

I used to find myself amused at the small stores around Barcelona and Malaga that used to list prices in Euros and then the now defunct peseta below, imagining the older residents of the neighborhood deciding that adopting a new currency after so many years of another was just too much effort. After all, this was years after the introduction of a European currency, meant to unite the 17 member states that had signed on to the experiment under a single economic policy. Were they really waiting for a return of the peseta or could they just not muster the enthusiasm for this great European project? Over the past few weeks, I’ve started to see some wisdom in the actions of these smaller shops as the reality of a broken or drastically altered Euro becomes more of a reality that anyone involved ever hoped it would be. Banks in the UK are running war games to see how hard they would be hit if the Euro collapsed – not if, but how much of a dent it would leave. Heads of state are having little luck calming voices of calamity from even within their own parties. Euro-skeptics are now being hailed as prophets who saw the ill of the continent’s ways as Euro Romantics, as Paul Krugman has coined them, rushed headlong into certain economic disaster.

Google ‘The end of the euro’ and you’ll be greeted by a lengthy list of the phrase as decisive statements and pondering aside. The coverage runs from the sadly hopeful to the methodically analytical. The news, they all agree, is not good. Meanwhile, even the best efforts of political leaders from Berlin to Madrid have done little to rebuild any sort of confidence in the currency and really the economic stability of the entire community. Despite new leadership, decisive shifts of power and pledges of pushing through difficult cuts have done little to bolster investor confidence, leaving countries struggling beneath spiking interest rates and a currency that seems to slip against the US dollar with each passing day. Yes, it remains steady considering the storm moving across the continent but losing ten cents against the dollar since January is nothing to dismiss. And finally, Chancellor Merkel crushed any remaining hopes of the ECB stepping in to offer what analysts warn was a last chance effort to stave off the currency’s collapse. To put it simply, this has been a tremendously bad couple of weeks for the dream of a European economic community. To be honest though, I am not sure I see the need for panic when it comes to the trials and travails of the Euro and the economies of member states.

Yes, I see plenty of reason to worry about the inaction on the part of particular heads of state – a week in, interest rates hitting record highs and 23% unemployment and Spain’s new prime minster can not muster the strength to name a finance minister? Sure, their inability or unwillingness to take difficult steps that might doom immediate election chances for the sake of the entire community but as far as the immediate issues facing them, wasn’t it supposed to be like this? This difficult? The idea was to bring together 17 very different economies under singular policies and a single currency and they could not see potential potholes along the road ahead? Its hardly a novel finding that Athens has different spending habits than Berlin, is it? There were always going to be obstacles to full integration and the thought that certain parties would bail out of the ship at the first sign of a wave seems a bit of an overreaction. To be clear – this is a hell of a challenge ahead but one I am naïve enough to think that the early proponents of a continental currency would have seen coming.

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How Much of This Could Have Been Predicted?

I would like to think those at the helm of the move towards adopting a European-wide economy would have had the foresight to see the difficulty of getting everyone on the same page, making the current set of challenges something they knew would eventually arrive. Though, the more I watch it all come together, or fall apart, the more I think they didn’t. The 2008 downturn certainly exacerbated things but distance between these economies and obstacles to getting them closer is hardly a new issue.
This morning is providing a new set of worries for those hoping the new government in Italy would set things right in an orderly fashion. Talks with members of party leadership and Monti went late into the evening and still have failed to produce a solid announcement about how the new cabinet will be made up. Is it an issue of pushing for more power or an effort to wash their hands of it all altogether? After all, who wants a majority in the government charged with cleaning up this mess?

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Italy Hit Highs at 7.1 for 10-year Bonds, Spain Follows at 6.34

Is there any way to regain some confidence around here? Political shifts in leadership aside, it does not appear to be doing much to calm the markets or investor worries that the Eurozone is in some serious, long term trouble. Not even pledges from what will undoubtedly be the next head of the Spanish government can allow for a boost the country’s ailing economy. Really though, I am sure this has as much to do with wider worries as it does with the inability or unwillingness for Rajoy and the Partido Popular to offer up concrete solutions or even a basic plan in the months since it became clear that the PSOE would drown with an anchor like Zapatero tied to their feet. Winning only because someone else is losing is not a recipe for long term recovery.


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