Europe Crisis

Alchemist · #**121** 3rd December 2011, 11:51 AM

Quote:

Originally Posted by vinvest

Not all govts can print money to get out of debt!

True, that's why I said either the governments will print money or simply default.

Quote:

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.

Quote:

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.

Forex reserves plunge to 9-month low; may continue slide through June 2012 - The Economic Times

1. India has a current account deficit. India needs to maintain a capital account surplus to balance this current account deficit.

Worsening of the financial crisis in the west can significantly shrink or totally reverse India's capital account surplus.

2. Also, India has to rollover a lot of foreign debt in next few months.

Quote:

Based on residual maturity, short-term debt accounted for 43.3 per cent of the total external debt as at end-June 2011.

Reserve Bank of India

1. and 2. are two risks that RBI needs to keep in mind while managing its forex reserves.

India's forex position is much weaker than people think. That is the primary reason why RBI is reluctant to support the falling rupee.

prat40 · #**122** 5th December 2011, 02:52 PM

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?

sudhashbahu · #**123** 5th December 2011, 03:09 PM

Quote:

Originally Posted by prat40

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.

Alchemist · #**124** 5th December 2011, 08:11 PM

Quote:

Originally Posted by sudhashbahu

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.

Quote:

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.

ECB fails to offset bond purchases in sign of banking tensions | Investing | Financial Post

Quote:

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.

ECB Needs to Check Its Oil Leak Over Bond Purchase Sterilization - The Source - WSJ

prat40 · #**125** 6th December 2011, 10:03 AM

Hey guys! A new tragedy for Eurozone.

"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.

Alchemist · #**126** 6th December 2011, 06:18 PM

Quote:

Originally Posted by prat40

Hey guys! A new tragedy for Eurozone.

"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.

Prudent_Investor · #**127** 6th December 2011, 11:27 PM

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

prat40 · #**128** 8th December 2011, 01:06 PM

But if S&P Credit rating can shake US Economy then why can't Eurozone?

vinvest · #**129** 8th December 2011, 08:48 PM

Quote:

Originally Posted by prat40

But if S&P Credit rating can shake US Economy then why can't Eurozone?

How exactly did it shake the US Economy?

sudhashbahu · #**130** 9th December 2011, 11:28 AM

The way I see the crisis:

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.

chandubs · #**131** 9th December 2011, 04:52 PM

That was a very good explanation for people like me who knew very less on this Europe Crisis.

khangharoth · #**132** 11th December 2011, 12:57 PM

Although Europe is miles away from coming out from this crises but at least they seems to be on right track ! i.e austerity, cutting pensions etc.

So if they some how manage this spending cut and austerity phase then they can start afresh, not something US & UK have started.

sudhashbahu · #**133** 11th December 2011, 01:14 PM

I am confused by what the leaders have achieved.

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?

These are the question we need to evaluate.

Alchemist · #**134** 12th December 2011, 08:52 AM

Quote:

Originally Posted by khangharoth

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.

khangharoth · #**135** 13th December 2011, 08:25 AM

Quote:

Originally Posted by Alchemist

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 .

Alchemist · #**136** 15th December 2011, 08:30 AM

It seems Germany is totally against printing money to solve the Eurozone debt crisis.

Quote:

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."

German central banker: ECB must not print money - Yahoo! Finance

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.

Quote:

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.

Joint euro bonds unthinkable: Merkel

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%).

Quote:

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.

Italy Sells Debt at Record Yields as Monti Rushes Budget Plan - Businessweek

PrashantS · #**137** 15th December 2011, 07:38 PM

Quote:

Originally Posted by Alchemist

Time is quickly running out.

How soon do we face a crisis? And what about Nifty, is it definitely going to see the 4000 mark?

Alchemist · #**138** 15th December 2011, 10:06 PM

Quote:

Originally Posted by PrashantS

How soon do we face a crisis? And what about Nifty, is it definitely going to see the 4000 mark?

Eurozone is already in a crisis and from how I see it, it's going to end in a big disaster (in which levels won't matter).

In my opinion, the only solution to the crisis is printing Euros, but that is unacceptable to the Germans (so far).

I don't think any other solution can work in the long-term.

-------------------------------------------------

This data shows current account balances of various countries in the world.

List of sovereign states by current account balance - Wikipedia, the free encyclopedia

Germany is right at the top, whereas 4 of the 5 PIIGS are right at the bottom.

Quote:

2 Germany 188.400
167 Ireland –3.191
180 Greece –17.100
181 Portugal –19.030
189 Italy –61.980
190 Spain –66.740

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.

Quote:

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.

Why German Taxpayers Should Be Forced To Bail Out Italians And Greeks - Business Insider

Alchemist · #**139** 23rd December 2011, 10:14 AM

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.

Quote:

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.

Former Eastern Bloc Getting Rocked By Surging Swiss Franc

Quote:

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.

S&P Joins Moody's In Downgrading Hungary To Junk, Outlook Negative - Full Note | ZeroHedge

Also, most of the banking capital in the country is owned by foreigners.

Quote:

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.

Moody's Downgrades 5 Hungarian Banks On Deteriorating Assets - WSJ.com

Alchemist · #**140** 27th December 2011, 07:00 PM

Italian bond yields are again above 7%.

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.

Quote:

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.

Dollar Index Falls Before U.S. Consumer Confidence, Manufacturing Reports - Bloomberg

Alchemist · #**141** 29th December 2011, 05:08 PM

Italy managed to raised money today, but fell short of its maximum target.

2022 bonds were sold at an average yield of 6.98%.

Quote:

Italy auctioned 7.02 billion euros ($9 billion) of bonds, falling short of the target, as borrowing costs declined in its final debt sale of the year.

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The Treasury priced 2.5 billion euros of its 5 percent 2022 bond to yield 6.98 percent, compared with 7.56 percent on Nov. 29.

Italy Sells 7 Billion Euros of Bonds as Yields Fall - Bloomberg

PrashantS · #**142** 5th January 2012, 07:53 PM

What's the state of the crisis now?

We were expecting Nifty at around 4200. Is that fear gone or is it still there, and how do you think the market will move this month?

Alchemist · #**143** 6th January 2012, 09:45 AM

Quote:

Originally Posted by PrashantS

What's the state of the crisis now?

We were expecting Nifty at around 4200. Is that fear gone or is it still there, and how do you think the market will move this month?

The situation is same as earlier.

Italy's long-term borrowing cost is still at 7% and that of Spain at 5.5%.

January is results season and I have no idea where the markets will be at the end of this month.

Raghav · #**144** 12th January 2012, 06:22 PM

Something to cheer.

European shares hit 5-month high on Spanish auction - The Economic Times

Alchemist · #**145** 12th January 2012, 06:51 PM

Quote:

Originally Posted by Raghav

Something to cheer.

European shares hit 5-month high on Spanish auction - The Economic Times

Yes, definitely.

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.

Quote:

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.

Spain, Italy borrowing costs fall at debt auctions - Market Extra - MarketWatch

Alchemist · #**146** 15th January 2012, 07:44 PM

Italy's Friday auction was moderately successful. Even though the yields came down a bit, the bid-to-cover ratio was just 1.22.

S&P downgraded 9 Eurozone countries on Friday.

Also, the talks between Greece and its private-sector creditors broke down on Friday. The talks may resume this week.

Most of the western markets ended down slightly.

Alchemist · #**147** 25th January 2012, 06:48 PM

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.

Quote:

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.

Hedge funds prepare legal battle with Greece | Reuters

ethicaltrader · #**148** 25th January 2012, 09:22 PM

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.

Alchemist · #**149** 27th January 2012, 10:11 PM

Quote:

Originally Posted by ethicaltrader

'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.

Quote:

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.

Nouriel Roubini.

EconoMonitor : Nouriel Roubini's Global EconoMonitor » Italy

Alchemist · #**150** 1st February 2012, 10:23 PM

Some interesting charts on Krugman's blog:

Eurozone Problems - NYTimes.com

Alchemist · #**151** Yesterday, 02:35 PM

An interesting article on the ECB's LTRO program and its effect on the imbalances in the Eurozone banking system.

Sober Look: The new LTRO will boost TARGET2 imbalances - Bank of Italy example

For further explanation:

Baffled By The Recent Market Rally?

Sober Look: The TARGET2 imbalances reference guide

Risk is increasingly getting concentrated.

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.

PrashantS · #**152** Yesterday, 08:12 PM

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?