True, that's why I said either the governments will print money or simply default.
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Originally Posted by Prudent_Investor
India's total external debt was $305.9 billion at the end of March 2010-11.
India's current forex reserves stand at $312 billion.
So India still has foreign currency debt < forex reserve which is a safer situation.
India's external debt at the end of June 2011 was $317 billion.
The latest forex reserves figure is $304 billion.
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The Reserve Bank of India is reluctant to intervene, except to prevent volatility. Despite not targeting a level for the currency against the greenback, the foreign exchange reserves have plunged to $304 billion on November 25, a level not seen since March. In just about four weeks, it is down $16 billion.
Sarkozy and Merkel meet in Paris on Monday to unveil a proposal for closer political and economic ties between eurozone countries. While the leaders differ on some of the details, their co-operation has been so tight they have come to be known by a single name — "Merkozy."
Nice name !
Leaders across the continent converge to prevent a collapse of the euro and a financial panic from spreading.
Sarkozy and Merkel meet in Paris on Monday to unveil a proposal for closer political and economic ties between eurozone countries. While the leaders differ on some of the details, their co-operation has been so tight they have come to be known by a single name — "Merkozy."
Nice name !
Leaders across the continent converge to prevent a collapse of the euro and a financial panic from spreading.
Is it possible to check the collapse of euro?
In my opinion only two near-term solutions are possible:
1. Print Euros via the ECB.
2. Issue Euro Bonds so that member states can borrow at cheaper rate and pay-off existing debt.
Nothing else can work.
The second solution is fast approaching its "use-by" date. Germany is the only "strong" nation left to really back Euro Bonds. France is itself in danger of losing its credit rating.
In my opinion only two near-term solutions are possible:
1. Print Euros via the ECB.
2. Issue Euro Bonds so that member states can borrow at cheaper rate and pay-off existing debt.
Nothing else can work.
The second solution is fast approaching its "use-by" date. Germany is the only "strong" nation left to really back Euro Bonds. France is itself in danger of losing its credit rating.
Printing money is not just a short-term solution, but a long-term solution too.
Eurobonds may stabilize the financial markets in the medium-term, but I am not sure if Eurobonds will really work in the long-term.
The bonds will only spread the risk to other countries but the debt will remain as it is. Eurobonds will allow the PIIGS to borrow cheaply for some time, but without real growth their debts will keep piling.
German economy isn't big enough ($3.6 trillion) to support all debt of PIIGS (>$5 trillion).
Germany itself has a debt:GDP ratio of 80%. Right now, Germany's debt isn't a concern for investors because it has a huge trade surplus and a manageable budget deficit.
ECB may be unwilling to print money, but it may have no other option if conditions keep deteriorating.
Till now, ECB had been buying bonds of troubled Eurozone economies by draining an equal amount of liquidity from Eurozone's banking system. That is now getting difficult. A week back ECB failed to fully sterilize its bond program.
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While the ECB has failed to “sterilize” its bond program at least four times before, this is the first time it has happened since the central bank expanded the program to buy Italian and Spanish bonds in August. The ECB tries to drain the same amount from the banking system each week that its purchases have created to ensure they don’t swell the money supply and fuel inflation.
banks appear to be shying away from the ECB deposits more because they prefer to preserve their liquidity. If liquidity concerns are really the case, the ECB could face even more serious sterilization failures in the future as its attempts to stabilize peripheral bond markets continue.
"Standards & Poors" is expected to announce later on Monday that it may downgrade the credit ratings of all 17 euro zone countries, two EU officials said.
"Standards & Poors" is expected to announce later on Monday that it may downgrade the credit ratings of all 17 euro zone countries, two EU officials said.
Please comment on this.
The ratings don't matter now.
Irrespective of how many "A"s Eurozone's bonds get from the credit rating agencies, Eurozone has just a few days left to calm the financial markets.
Unless all the leaders completely agree to strictly impose fiscal discipline, Eurozone's bonds are headed for a collapse.
A new emerging dimension. This can worsen matters further.
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One of the central pillars of the Basel III framework is the notion of a risk-free asset class. That central pillar is disintegrating. Basel is quite clearly going to have to be revised."
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The Basel Committee may let banks use equities and more corporate debt, in addition to cash and sovereign bonds, to satisfy new short-term liquidity standards.
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In a world where Nestle is seen as less risky than Portugal, it makes complete sense, but it is politically and economically very difficult.
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Only a quarter of 28 of Europe’s largest banks would comply today, leaving a shortfall of 500 billion euros ($670 billion). There aren’t enough assets in the world that are genuinely liquid and of high enough quality to allow all the banks to meet this ratio
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The debt crisis also is leading some regulators to question rules that allow European lenders to apply zero risk-weightings to government bonds issued in a bank’s home currency
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Regulators should distinguish between the sovereign debt of countries that have control over their own monetary policy and "subsidiary" sovereign bonds issued by countries in the euro zone
17 friends decided that they should construct a building and all stay together. Accordingly, a building was constructed with 17 apartments and they started leaving together.
They lived there for over a decade but neglected the maintenance. Some members did not even pay the maintenance costs. The building deteriorated to an extent that it was about to crumble. They got together to decide on how to fix it. However 15 of the members said they have no money and flatly expressed their inability to contribute in fixing things in anyway. Of the remaining two, once said he would take some responsibility but bulk of the costs needed to be paid by that one person who was capable of doing it. But this person was very resentful of having to pick the entire tab as everyone had enjoyed when the going was good.
I am sure Germany feels like that one person. I think a complete solution to the crisis is not possible. The German people and government will not want to pick the cost of the complete fix. They will try as hard as possible to fix it with minimum cost in a way that their losses are minimized.
After all, the one person could always decide that it is cheaper to buy a new house than to fix an entire crumbling building.
Last edited by sudhashbahu : 9th December 2011 at 10:47 AM.
Prevention is better than cure. But when the problems actually materialize, you need a cure; not prevention.
Controlling debt and deficit are preventive measures that can avoid the problem from getting bigger and avoiding future problems. But what about current problems? The PIIGS are in trouble and the only current "cure" in the deal is the Euro 500bn fund.
- Where will this Euro 500 bn come from?
- The fund will be set up by July next year (if at all). Meanwhile how do we deal with current problems?
- Is it enough to address the crisis on hand?
So if they some how manage this spending cut and austerity phase then they can start afresh, not something US & UK have started.
If austerity was an easy solution to the problems in the Eurozone, the politicians of PIIGS would have taken harsh austerity measures long back.
As sudhashbahu said, this is a preventive measure which may (or may not) prevent the problems from worsening, but it can't cure the high debt that these countries have already acquired.
Austerity cuts both ways.
Austerity is deflationary in nature.
Austerity in the Eurozone will not only bring down government spending, it will also shrink the economies of PIIGS and thus reduce tax revenues.
The measures taken by the Eurozone leaders may backfire and their economies may get trapped in a viscous cycle of falling government spending and falling tax revenues.
Also, the size of financial support offered by the IMF and EFSF is still inadequate compared to the aggregate debts of the PIIGS. A lot of debt has to be refinanced in 2012. If borrowing costs for these countries don't come down by next year, Eurozone will again face another crisis.
As sudhashbahu said, this is a preventive measure which may (or may not) prevent the problems from worsening, but it can't cure the high debt that these countries have already acquired.
My thinking is that Everyone knows that way out of this crises is by monetizing the debt ! - But this means punishing the savers and people who took uncontrolled risk gets away with little damage.
This also means that coming generation don't learn from the crises.
Merkel strategy seems to be :
a) Eventually we will have to print.
b) But before that get everyone in Euro Zone in-line with basics of economics - Can't spend more than what your earn.
c) Everyone know that just having a monetary union is not enough till they have some sort of Fiscal Union and Merkel has grabbed this opportunity to drive home this agenda !
Hence my take : If they manage this turbulent time of spending cut and austerity (without the member states getting fed up and deciding to leave) and then they will come out of the crises much more prepared than US or UK .
It seems Germany is totally against printing money to solve the Eurozone debt crisis.
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In the text of a speech in Berlin, Jens Weidmann said that "one idea must finally be put aside, that of getting the needed money from the printing press."
Eurobonds may offer a temporary respite, but Merkel has already ruled out any sort of joint euro bonds till the troubled economies correct their fiscal deficits.
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Merkel said the European Central Bank cannot be relied upon to resolve the crisis, since its statutory role is different to that of the Federal Reserve or the Bank of England. No "single stroke" will work and joint euro bonds are "unthinkable" without fiscal union, she said.
In that case, Eurozone doesn't have many options left.
Time is quickly running out.
Yesterday, Italy raised money via 5-year bonds at record yield (6.47%).
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The Rome-based Treasury sold 3 billion euros of the bonds, the maximum for the sale, to yield 6.47 percent, the most since May 1997 and up from 6.29 percent at the last auction on Nov. 14.
By accepting the Euro, the PIIGS have committed an economic harakiri.
These nations are constantly losing Euros and Germany is constantly accumulating Euros.
Irrespective of how much wealth Germany sucks out from the PIIGS, the PIIGS can't lower their currencies and rebalance their trade accounts.
That's Eurozone biggest flaw - a flaw that cannot be corrected by any means.
Germany's trade relation with other Eurozone members works along the same lines as China's trade relation with the US.
By keeping its currency artificially low, Germany is slowly sucking out wealth for other Eurozone nations.
Germany's relation with the PIIGS is not mutualistic, but parasitic. The PIIGS gain little by being a part of the Eurozone.
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Germany continues to benefit massively from the Eurozone, as without it, it would be faced with swift loss of customers (all the countries around it), competitiveness problem (the Deutsche mark would likely surge in value) and removal of safe-haven banking flows. For this benefit, it's not at all ridiculous that the Germans -- through a combo of taxes and willingness to let the ECB print more money -- help bail out everyone else.
Hungary's debt has been downgraded to "junk" by Standard and Poor’s.
In spite of having its own currency, Hungary is facing a crisis that is similar to that faced by countries in the Eurozone.
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Eastern European homeowners had taken on Swiss franc mortgages before the financial crisis because interest rates in Switzerland were low and the currency was considered stable.
By the time the financial crisis began, two-thirds of mortgage loans in Hungary were denominated in Swiss francs.
Roughly 40% of commercial general government local-currency debt is held by nonresidents. The financial crisis in late 2008 revealed the rapidity with which local currency bonds held by nonresidents can be sold if investor confidence falters, resulting in increased pressure on the balance of payments. In our view, this makes Hungary unusually vulnerable to sudden shifts of capital flows.
Furthermore, an estimated 50% of total general government debt is denominated in foreign currency, which we think makes the debt burden highly sensitive to exchange rate fluctuations. Another potential area of risk is the large share of foreign-currency-denominated loans to the resident private sector, largely to unhedged Hungarian households. The high level of foreign-currency-linked liabilities constrains Hungary's monetary flexibility, in our view.
Also, most of the banking capital in the country is owned by foreigners.
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Foreign-owned banks, which represent more than 80% of the total capital in the banking system, face an increasing likelihood that their parent banks will limit operations in Hungary, which could affect the banks' capital positions and profitability as well as suppress lending growth, the firm said.
Italy has to auction bonds worth 20 billion Euros on Wednesday and Thursday.
Thursday's action will be the crucial one as it will be for longer tenure bonds.
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Italy is scheduled to sell 9 billion euros of 179-day bills and as much as 2.5 billion euros of zero-coupon 2013 securities tomorrow. It will auction debt due in 2014, 2018, 2021 and 2022 the following day.
Italy will also be auctioning 4.75 billion Euros worth of bonds tomorrow (primarily 3 year bonds).
If that auction is successful too, we may see another rally in stocks.
Today, Italy sold short-term bonds worth 12 billion Euros.
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Italy, which faces a bigger test on Friday, saw one-year borrowing costs fall sharply as it sold €8.5 billion of 12-month Treasury bills. The yield fell to 2.73% compared to 5.95% at a December auction.
The Treasury also sold €3.5 billion of flexible T-bills with a maturity of around five months at a yield of 1.64%, down from 3.25% at a six-month auction at the end of December.
Greece may seal a debt-restructuring deal with its private creditors in the next few days.
Even though it is not expected, but if Greece and its bondholders fail to reach an agreement, the consequences can be disastrous.
Some creditors have already started preparations to take Greece to the courts.
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They also contain precise clauses that could help hedge funds sue or eke out a settlement if they are forced into an unfavourable bond swap, because they are not being treated equally to other creditors like the European Central Bank.
The English law bonds include pari passu clauses, which mean creditors have to be treated on an equal footing and could give them leverage over the ECB, which owns around 45 billion euros worth of Greek bonds bought in the secondary market.
Italy's Prime Minister 'Monty' thinks that some framework is evolving which will result in solution to Europe Crisis. He thinks, reforms initiated by many debt ridden countries (including Italy) and more willingness on Germany's part to strengthen EFSF are creating background to long lasting solution.
'Monty', I must say is probably one of the most respected Politician when it comes to Economic wisdom, not only in Italy but in entire Europe. If he is hopeful, I would like to believe some ray of hope exists.
I am just back from a long break part of which was spent in Europe. It is a real pity that such outstandingly beautiful landscape is embroiled in such a mess. I hope we have a stable Europe much sooner than one expects.
'Monty', I must say is probably one of the most respected Politician when it comes to Economic wisdom, not only in Italy but in entire Europe. If he is hopeful, I would like to believe some ray of hope exists.
There are wise men on both sides of the debate.
It is entirely an individual's decision, which side he wants to believe.
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Even a debt restructuring would not resolve the problems of lack of growth and outright recession, lack of competitiveness and a large current account deficit. Resolving those requires a real depreciation that may well demand the eventual exit of Italy and other member states from the euro.
But exit can be postponed for a while. Restructuring, however, has to be implemented now. The alternative is much worse.
First the risk shifted from private borrowers to banks, then to governments and now it is moving to ECB.
From the third link:
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The concern around TARGET2 imbalances is that central banks owe a great deal of money to each other via the ECB and should a nation drop out of the Eurozone, these liabilities may not be met. The ECB may then have to take a large loss. A mechanism for a nation's exit from the euro area was never developed.
I thought this rally meant the Europe crisis was pretty much over. Today Nifty crashed 100 points. Are we going down again in the next two weeks or so?
Brent oil valued in euros set an all-time high on Thursday above 93 euros a barrel, beating 2008's pre-financial crisis high and adding fuel costs to euro zone debt troubles.
Greece has managed to close a bond swap deal with its private creditors.
Greece will soon gets its second bailout of 130 billion Euros.
There isn't enough clarity on whether this deal will trigger CDS payouts, but majority of the experts feel that the CDS would get triggered.
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Using the CACs is likely to trigger payouts on the credit default swap (CDS) insurance that some investors hold on the bonds. The International Swaps and Derivatives Association said it will meet on Friday at 1300 GMT to decide whether Greek credit default swaps will pay out.
"It almost now certainly going to trigger CDS. If this doesn't trigger it, nothing will," said Nick Stamenkovic, a bond strategist at RIA Capital markets in Edinburgh.
Venizelos played down the consequences. "This is not a concern for us because the net amount at stake globally if CDS are triggered is less than 5 billion (euros)," he told parliament. "This is a totally negligible sum for the Greek and the European economy."
The 10-year yield is still abnormally high and that means Greece still can't borrow from the open market.
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The holders of old Greek bonds received compensation valued at about 23 cents in the bond exchange: 15 cents in high-quality bonds from the euro-zone's bailout fund, and 31.5 cents in new Greek bonds that, because they trade at about a quarter of face value, are worth eight cents.
The 10-year yields have come down in the last few days, but still are at levels that are unsustainable in the long-term.
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Portuguese 10-year debt yields 13.71 percent, down from a euro-era record of 18.29 percent reached Jan. 31 though higher than its 2011 average of 10.17 percent.
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"I’m not forecasting a second default, but the markets certainly are," said Bill Gross, co-chief investment officer at Pacific Investment Management Co., which manages the world’s biggest bond fund.
Spain's problems are less severe compared to that of Greece, but Spain is too big to be saved and that's making the market nervous.
Spain's 10-year yields are now at 6%, just 100 basis points below the 7% mark, which for some reason (that I don't understand) is considered the sacrosanct level in the Eurozone.
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Spanish home prices continue to fall, corporate and personal bankruptcies are up, and Spain's economy is contracting.
Put simply: Greece is papas pequenas (small potatoes) when compared to Spain. If Spain's problems worsen and any of its big banks need a backstop or bailout, it is unclear where the money will come from. The bailout funds in Europe currently aren't big enough to handle it and many I speak with aren't optimistic the money could be easily raised.
I really dont understand what the investors are waiting for? Why they are still buying Spainish bonds?
From where the money would come? Even if they would some money from ECB/IMF etc, it's not going to solve anything. Eventually these countries would default.
So what's the hypothetical scenario where things can work out properly?
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