Investors sent Europe’s politicians a painful message last week when Germany had a seriously disappointing government bond auction. It was unable to sell more than a third of the benchmark 10-year bonds it had sought to auction off on Nov. 23, and interest rates on 30-year German debt rose from 2.61 percent to 2.83 percent. The message? Germany is no longer a safe haven.
Since the global financial crisis of 2008, investors have focused on credit risk and rewarded Germany with low interest rates for its perceived frugality. But now markets will focus on currency risk. Inflation will accelerate and the euro may break up in a way that calls into question all euro-denominated obligations. This is the beginning of the end for the euro zone.
Here’s why. Until 2008, investors assumed that all euro- zone sovereign bonds, as well as bank debt, were risk-free and would never default. This made for a wonderfully profitable trade: European banks could buy government debt, finance it at less expensive rates through funding provided by the European Central Bank, and pocket the spread.
Then credit conditions tightened around the world and some flaws became evident. Greece had too much government borrowing; Ireland had experienced a debt fueled real-estate bubble; and even German banks had become highly leveraged. Investors naturally decided some credit-risk premium was needed, so yields started to rise.
Greece, Ireland, Portugal, Spain and now Italy have large amounts of short term debt that they can’t roll over at low cost. Leading European banks are in the same situation. None of these countries or banks can long bear the burden of their current debt levels at reasonable risk premiums.
Last Resort Technocrats
Many of Europe’s leading politicians, some International Monetary Fund officials, and the technocrats-of-last-resort -- Mario Monti in Italy and Lucas Papademos in Greece -- mistakenly believe that these risk premiums can be quickly reduced. They argue that if they cut budget deficits, carry out structural reforms and modestly recapitalize banks, their countries will soon grow and regain access to markets.
More realistically, none of these countries will be borrowing again soon in the capital markets. Ireland’s finance minister, Michael Noonan, is at odds with reality when he claims that Ireland should return to the markets in 2013. This is a country with 133 percent of gross national product in public debt and about 100 percent GNP in additional contingent liabilities to the banking system. (We use gross national product because gross domestic product is artificially raised by the offshore profits of non-Irish multinational corporations, most of which Ireland doesn’t tax.)
With such enormous debt burdens, even if the Irish or other troubled countries manage to convince the market that there is only a 5 percent to 10 percent annual risk of default, these countries will experience high real interest rates -- plus ensuing low investment and fragile banks -- for decades.
The French, along with U.S. and U.K. officials, are pleading with the European Central Bank to come to the rescue. Their hope is that the ECB can remove credit risk by promising to back all sovereign and bank credits in the euro zone. This is what politicians mean when they say “bring out the bazooka.”
When large amounts of any currency are printed in response to deep structural flaws, it’s hard to trust that money. A massive bond-purchase program by the ECB would reduce credit risk but increase the danger that the euro will decline in value against the dollar and other currencies. And if the ECB needs to continue buying more debt to finance deficits and prevent defaults -- because peripheral countries could stop making painful fiscal adjustments once the ECB starts buying bonds -- wages and prices would increase, as we saw in the U.S. in the 1970s. This is anathema to the Germans.
Inflation Risk
We would soon see German bonds sold off as investors protect themselves from long-term inflation, which erodes the value of such debt. People holding bonds with a high credit risk (such as Italy and Spain) would surely sell many of those to the ECB, or simply cash out when those bonds mature in case the central bank, at some point, stops buying.
An ECB “bazooka” wouldn’t restore competitiveness to Europe’s periphery, so even with this, Europe’s troubled nations would require many more years of tough austerity and budget reform to stabilize debt.
This would all just look like another unsustainable debt profile. Germany would be paying higher interest rates on its debt, while most banks and the periphery would be heavily financed by the ECB -- and both credit and currency risk premiums would remain. Markets would eventually turn against Europe with a vengeance, and with no more plausible solutions, the whole system would come tumbling down amid both inflation and debt restructuring.
Germany’s credit is impeccable, but the country is issuing debt in a currency that is flawed and could soon be worth much less than it is today. If Germany does block the “bazooka” and instead takes on more of the fiscal burden in Europe -- for example, through the obligations inherent in any kind of euro- bond issue -- this would reduce currency risk but undermine the country’s credit rating.
The path of the euro zone is becoming clear. As conditions in Europe worsen, there will be fewer euro-denominated assets that investors can safely buy. Bank runs and large-scale capital flight out of Europe are likely.
Devaluation can help growth but the associated inflation hurts many people and the debt restructurings, if not handled properly, could be immensely disruptive. Some nations will need to leave the euro zone. There is no painless solution.
Ultimately, an integrated currency area may remain in Europe, albeit with fewer countries and more fiscal centralization. The Germans will force the weaker countries out of the euro area or, more likely, Germany and some others will leave the euro to form their own currency. The euro zone could be expanded again later, but only after much deeper political, economic and fiscal integration.
Tragedy awaits. European politicians are likely to stall until markets force a chaotic end upon them. Let’s hope they are planning quietly to keep disorder from turning into chaos....
There was a time when US presidents showed real leadership in Europe – think of Ronald Reagan’s magnificent “tear down this wall” speech in Berlin in 1987 for example, standing up to the Soviet Empire in the defence of freedom. With Europe facing its biggest financial crisis since the 1930s, today might be another moment when a US president could stand with European allies while projecting American strength and leadership at a time of great fear and uncertainty.
Barack Obama, however, is no Reagan, and he is himself adopting the same big government policies that are bringing some of Europe’s largest economies to their knees, racking up the biggest budget deficit since World War Two. He is also standing full square behind the spectacularly failing idea of a federal Europe, declaring just a fortnight ago that that “we stand behind the European project, we stand behind the euro”. As I noted in an earlier piece, Mr Obama would have been better suited as an EU bureaucrat than the leader of the free world:
President Obama himself is in many ways a quintessentially European-style official, who believes that government knows best when it comes to the economy, health care and key aspects of domestic policy. Had he been born in Brussels and not Hawaii, Obama would probably be sitting in the lavish Justus Luspsius building instead of the White House, challenging Herman Van Rompuy for the presidency of the European Union Council. And like the EU elites who rule with an air of impunity, he is increasingly out of touch with public opinion and wedded to big government solutions that have failed on both sides of the Atlantic.
Today’s US-EU summit in Washington is little more than a surreal posturing meeting of the clueless, drawing together a deeply unpopular president and the unelected leaders of an undemocratic fledgling superstate that is already in decline. If the dreams of Europe rest upon the likes of Barack Obama, Herman Van Rompuy, Jose Manuel Barroso, and Baroness Ashton, there can be very little hope.
Instead of clinging to a sinking European Project, the president of the United States should be urging greater freedom in Europe, and the kind of national sovereignty that hundreds of millions of Americans cherish and take for granted. He should also be calling on European governments to rein in spending, cut taxes, roll back their generous welfare states, support free trade, and adopt the kind of high growth policies that will create jobs, and attract investment. But unfortunately this is a president who remains an arch Eurofederalist, and a doctrinaire believer in the kind of big government policies that are wrecking Europe, and now threaten to do the same to the United States. He has become by any measure an embarrassing irrelevance to the tragedy unfolding across the Atlantic, one that will have major repercussions for the US economy for many years to come....
ZIOCONNED USA just as BROKE, if not more so....
President Barack Obama said Monday the United States stands ready to do its part to help Europe with its deepening debt crisis, even as the White House ruled out any financial contributions from U.S. taxpayers.
Meantime, a top European official offered his assurances to Obama and the American people that Europe's leaders fully understood the magnitude of the crisis. But European Commission President Jose Manuel Barroso warned that decisions on how to solve the economic woes could take time.
The annual meeting between U.S. and European Union officials came amid growing fears over the future of the euro. Experts say that without drastic action, the euro could be days away from collapsing, a scenario that could cause more financial damage to the already shaky American economy.
While Obama offered no specifics on how the U.S. may be willing to assist Europe, he said failing to resolve the continent's debt crisis could damage a U.S. economy saddled with slow growth and 9 percent unemployment.
"If Europe is contracting, or if Europe is having difficulties, then it's much more difficult for us to create good here jobs at home," Obama said at the conclusion of the day-long summit.
While Obama has offered support to his European peers, the U.S. believes the Europeans have the financial capacity to solve the debt crisis on their own.
But some U.S. allies, including Finland and the Netherlands, have called for the International Monetary Fund to be bolstered with more capital so that it could in turn help stem Europe's debt crisis from deepening and spreading.
The U.S. is the single-biggest stakeholder in the IMF. And earlier Monday, White House spokesman Jay Carney said the IMF has substantial resources already.
"We do not in any way believe that additional resources are required from the United States and from American taxpayers," Carney said.
European leaders are set to meet Dec. 9 to discuss next steps in tackling the financial crisis. New ideas were circulating Monday for how to finally cap the debt woes that began in Greece two years ago and have spread to other larger economies, most notably Italy.
One idea gaining momentum, was a radical proposal in which countries that use the common currency would cede control of a big chunk of their budgets to a central authority. Some say the proposal would be a big leap toward a United States of Europe, a move that could greatly enhance European stability, but at the cost, critics say, of national sovereignty and democratic accountability.
Another plan being aired in the face of fierce German resistance is for the eurozone's six triple A rated nations to pool their resources through a joint bond to prop up some of the single currency bloc's most indebted members. Germany, the EU's richest member, rejects the idea because it fears it would be tapped for the lion's share of the bailout
Back in Washington, Barroso said Europe's leaders are taking strong steps to solve what he called an unprecedented situation.
"We are absolutely serious about the magnitude of the challenges," he said. "You have to understand that sometimes some decisions take time."
Carney said that Obama, along with Treasury Secretary Timothy Geithner, would continue to stay in close contact with European leaders, including German Chancellor Angela Merkel and French President Nicolas Sarkozy. Vice President Joe Biden will travel to Greece later this week to meet with new Prime Minister Lucas Papademos, who took office earlier this month....
As we stand on the verge of world war, fomented by the British empire, we see two pathways laid out ahead. Some see, as German Chancellor Bismarck in the late 1880's, and Kaiser Wilhelm II after him, the makings of a trap laid for those nations of the planet which have been successful in developing. Now, nations such as Russia and China can see the writing on the wall, as potentially catastrophic provocations arise all around them. Uprisings in Syria, the confrontation with Iran, the missile shield in Eastern Europe, and the installation of a new military base in Australia near the South China Sea, are all pointed at the creation of a new global war, caused by the hyperinflationary collapse of the Transatlantic financial system, which, once incited anywhere, would lead quickly to thermonuclear warfare aimed at the destruction of the United States, Russia, and China, and the reduction of the world's population to about one billion. This is the tried and true method of operation of the British empire, whose model of destroying adversaries by launching continental wars can be seen in the creation of the Seven Years War, the manipulation of Europe and Japan during the 1890-1914 period resulting in World Wars I and II, followed by the sabotage of Roosevelt's post-war global development plans, causing instead the Cold War and the prevention of the long-awaiting US-Russian alliance from blooming, and the development of Eurasia to occur. The only way to stop this war-path of the British empire is to remove Obama from office immediately.....
Defense Authorization bill allows for military detentions of American citizens in the US.
1: Obama to EU: Take Decisive Action on Debt --
2: US will not help pay for Europe's debt woes --
3: Euro summit shows Obama's desperation --
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