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Well That Takes Care Of One Of The PIGS!


Parsad
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I am not sure how this changes much. The Italian people, like the Greeks, will fight austerity tooth and nail and the bureaucracy will continue to fudge the numbers (it's a cultural thing). Add in a recession and we get an ugly situation, especially for southern Europe.

 

Greece was the first victim (still barely alive). The piranhas (the hedgies) have moved on to the next victim, Italy. The real question is will they be happy with a bite or are they going to try and take down the whole fish. As the saying goes... you couldn't make this stuff up!

 

 

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I am not sure how this changes much. The Italian people, like the Greeks, will fight austerity tooth and nail and the bureaucracy will continue to fudge the numbers (it's a cultural thing). Add in a recession and we get an ugly situation, especially for southern Europe.

 

Greece was the first victim (still barely alive). The piranhas (the hedgies) have moved on to the next victim, Italy. The real question is will they be happy with a bite or are they going to try and take down the whole fish. As the saying goes... you couldn't make this stuff up!

 

 

 

I wasn't saying this changes anything for Italy.  It was just a play on words "PIIGS" and PIGS (in reference to Berlusconi). 

 

What I thought was pretty funny was when Sarkozy and Obama met for the first time at some G20 summit, Berlusconi went chasing after Obama like a star-struck fan and started yelling "Mr. Obama...Mr. Obama" as if he was going to ask for an autograph.  Good riddance to buffoon-like politicians!  Cheers!

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pippa malmgren had an interesting & presient piece re europe back in sept:

 

<<News to expect in the coming days and weeks:

•Greece defaults

•Germany protects German banks but other countries cannot do the same thus quickly provoking multiple sovereign defaults and or bank failures, all of which may easily lead to a payments crisis in the global banking system. Derivatives are particularly at risk in terms of operation and execution.

•The Euro falls in value especially against the US dollar

•The Germans announce they are re-introducing the Deutschmark. They have already ordered the new currency and asked that the printers hurry up.

•The Euro falls even more on any news that Germany is withdrawing from the Euro.

• Legal wrangling begins as to the legality of Germany’s decision. Resolution takes years.

•Germany insists that the Euro continues to exist even they do not use it any longer. They emphasize that European unification will continue and suggest new legal instruments to strengthen European Unification including new EU Treaties.

 

The markets are focused on the imminent default by Greece. But, this is not the most important issue now. The historic development the markets have not priced in as that Germany is preparing to exit the Euro. The markets are very likely to have to contend with the re-introduction of Deutsche Marks in the near future. This is bound to mean a collapse in the value of the Euro for those countries that will remain in it (devaluation for the rest of Europe). This step may seem unthinkable but, I believe that the German government is telling us in multiple ways that there is no other solution from their point of view....>>

 

you can read the rest at her blog here:

 

http://www.pippamalmgren.com/77.html

 

 

 

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I bet the problems continue until the ESM treaty is implemented. Then I predict the ESM is the fastest growing bureaucracy in history. It is a bureaucrats dream:

http://consilium.europa.eu/media/1216793/esm%20treaty%20en.pdf

Article 27 ESM enjoys Immunity from member nation state laws, oversight rules and regulations

Article 29 ESM enjoys secrecy forever and members and staff must keep it secret for life

Article 30 Immunity for board, executive and staff for all official acts.

Article 31 ESM and its employees are exempt from taxation. I like 31.6 which says there is no tax on dividends or interest its stocks or bonds based solely on where the interest or dividend is paid. So if I am a German and I pay tax because the interest or dividend is paid to Germany that means I pay no tax on the interest or dividend paid on ESM issued securities???

 

It looks like it is modeled on the ESF but it is more like the ESF on steroids as the ESF is controlled by Treasury and the ESF will be controlled by the alternates who are appointed, not elected. Eric deCarbonell has a good video and write up on the Exchange Stabilization Fund on Market Skeptics.

http://www.marketskeptics.com/2011/06/the-esf-and-its-history.html

 

As Eric points out when you create an entity which is secret and not subject to published audit or oversight you can predict that all sorts of wrongdoing will result. Democracy may not be perfect but from time to time the sunshine lets us clean out the vipers.

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It will be a big mistake to let Berlusconi resign. On a serious note; look at Italy's political history pre-Berlusconi.

On a facetious note; He is by far the most experienced crisis manager in Europe. Nobody has seen more busts than Berlusconi.

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The article in the link below provides some good examples as to why I am not optomistic that a solution will be found to the issues in Italy, Greece, Spain, Portugal and even France. Southern Europe culturally is VERY diferent from Northern Europe. For investors to assume that maintaining membership in the Euro is going to motivate these countries to 'change' a belief system that has evolved over hundereds of years is not realistic.

 

The money these countries owe is NOT going to be paid back. Doing nothing is not an option as the bond vigilantees appear to have had enough. Forcing austerity onto these countries is going to make things worse in the short run (resulting in social upheaval). The best case scenario I see is a return to the past where everyone pretends there are no issues; clearly this is not realistic. The worst case scenarion is a repeat of 2008. As John Mauldin likes to say we have no good choices.

 

It looks to me like we are now entering uncharted waters and a storm has started. The question is how bad the storm gets and what the boat looks like when it ends. Not an easy time to be a rational investor. I am back to 90% cash and 10% equities. I am focussed once again on keeping what I got.

 

http://www.theglobeandmail.com/report-on-business/international-news/global-exchange/financial-times/ill-judged-smirks-about-italy-miss-deeper-truth/article2231965/

 

"The nearer Silvio Berlusconi moves to the exit, the clearer it becomes that he is an expression of the problem rather than the problem itself. Commentators excitedly speculate on possible successors. But in truth it is too much to expect that any one politician possesses enough power, charisma or courage to ram through the change Italy needs, from the top down.

 

If the country is to be rescued we have to hope that using all the guile and intelligence they applied over the years to making sure nothing changes, networked Italians will begin to realize that the mechanisms they have used to keep the real world at bay are precisely those that have failed them. "

 

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One school of thought says that following what is going on in the bond market tends to be a much better forward indicator than the stock market. The bond market is currently freaking out about Europe; the stock market looks to be not too concerned at all. Interesting dicotomy.

 

http://www.bloomberg.com/news/2011-11-10/corporate-bond-risk-rises-in-europe-credit-default-swaps-show.html

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It looks to me like we are now entering uncharted waters and a storm has started. The question is how bad the storm gets and what the boat looks like when it ends. Not an easy time to be a rational investor. I am back to 90% cash and 10% equities. I am focussed once again on keeping what I got.

 

I'm with you (95% cash 5% equities).  This is certainly outside my circle of competence and the fluff we hear about replacing leaders does nothing to address the problem.  The hole is already in the side of the boat, there is no steering clear here.  The solutions thus far amount to little more than selecting which Captain will go down with the ship.  I expect nothing more from politicians! 

 

Leadership requires hard and unpopular choices be made for the long term good.  Politicians don't normally do that - less so now than in the past.  (Canadians can thank Paul Martin for some unpopular decisions that find us in our envious economic position as a country today.) We will all have the benefit of seeing how the sum total of decades of sidestepping amongst the PIIGS comes home to roost and should learn the lesson well and make our own hard choices today. 

 

Not to worry, things will get stupid cheap and then away we go - now it's just a waiting game.

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One school of thought says that following what is going on in the bond market tends to be a much better forward indicator than the stock market. The bond market is currently freaking out about Europe; the stock market looks to be not too concerned at all. Interesting dicotomy.

 

http://www.bloomberg.com/news/2011-11-10/corporate-bond-risk-rises-in-europe-credit-default-swaps-show.html

 

In mid 2007 we had this as well, TED was elevated, CDS were going up but equity market ignored all this and kept going up. This might be rear view mirror thinking but I cannot help thinking how close the parallel is between the two. Hopefully, we have an equally wonderful volatility this time.

 

Vinod

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One school of thought says that following what is going on in the bond market tends to be a much better forward indicator than the stock market. The bond market is currently freaking out about Europe; the stock market looks to be not too concerned at all. Interesting dicotomy.

 

http://www.bloomberg.com/news/2011-11-10/corporate-bond-risk-rises-in-europe-credit-default-swaps-show.html

 

In mid 2007 we had this as well, TED was elevated, CDS were going up but equity market ignored all this and kept going up. This might be rear view mirror thinking but I cannot help thinking how close the parallel is between the two. Hopefully, we have an equally wonderful volatility this time.

 

Vinod

 

This is exactly what I've been thinking, Vinod. Paulson et al were calling for a housing bubble well in advance of the market top in October 2007, Bear Stearns mortgage hedge funds blew up in July 2007, Watsa was shorting the market/buying treasurys - all the while, the market climbed to all time highs while investors ignored the burning house. My guess is that folks were saying that a housing market crash or an investment bank failure wouldn't affect their individual businesses....

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The disturbing thing to me is that no European leader is stepping up and stating that the Socialism is at the core of the destructive forces now engulfing the PIIGS.  Until there is open repudiation of this concept as public policy, the system in place cannot be fixed.

 

I think it's a bit more complicated than that. Culture plays a huge factor in it too. Finland, Sweden, Norway etc. are doing well and they're pretty socialist too.

 

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The disturbing thing to me is that no European leader is stepping up and stating that the Socialism is at the core of the destructive forces now engulfing the PIIGS.  Until there is open repudiation of this concept as public policy, the system in place cannot be fixed.

 

What does socialism got to do with this? If every country in Europe had their own currency, the problem would have been very manageable, first by sharply curtailing much of the debt buildup and then by making both monetary and fiscal measures available to policy makers.

 

Vinod

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Hard to see why the solution is not Germany & France ultimately pulling out of Euroland, & effectively nationalizing their domestic banks. The big domestic industrials get protected, we get Breton Woods 2, & global banking broken into segregated pillars – capitalized according to the risk.

 

Assuming all Euroland does an Iceland, & declares an average 25% haircut ..... things could get very ugly.

 

SD       

 

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Hard to see why the solution is not Germany & France ultimately pulling out of Euroland, & effectively nationalizing their domestic banks. The big domestic industrials get protected, we get Breton Woods 2, & global banking broken into segregated pillars – capitalized according to the risk.

 

Assuming all Euroland does an Iceland, & declares an average 25% haircut ..... things could get very ugly.

 

SD     

 

That might be the best of the bad options but do not see that as a painless solution for Germany. Exports constitute 1/3 of German GDP and if it exits the Euro its currency is going to soar relative to many of the countries in Europe. That could be a pretty significant hit to its economy and this would be occurring at the same time as a major economic upheaval across the globe as a result of such a disruptive event.

 

Vinod

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The disturbing thing to me is that no European leader is stepping up and stating that the Socialism is at the core of the destructive forces now engulfing the PIIGS.  Until there is open repudiation of this concept as public policy, the system in place cannot be fixed.

 

Paul Krugman: Legends of the Fail

from Econo View by Mark Thoma

The moral of the story:

 

Legends of the Fail, by Paul Krugman, Commentary, NY Times: ...Not long ago, European leaders were insisting that Greece could and should stay on the euro while paying its debts in full. Now, with Italy falling off a cliff, it’s hard to see how the euro can survive at all.

But what’s the meaning of the eurodebacle? As always happens when disaster strikes, there’s a rush by ideologues to claim that the disaster vindicates their views. So it’s time to start debunking. ...

I’ve been hearing two claims, both false: that Europe’s woes reflect the failure of welfare states..., and that Europe’s crisis makes the case for immediate fiscal austerity in the United States.

The assertion that Europe’s crisis proves that the welfare state doesn’t work comes from many Republicans. ... The idea, presumably, is that the crisis countries are in trouble because they’re groaning under the burden of high government spending. But .. the nations now in crisis don’t have bigger welfare states than the nations doing well — if anything, the correlation runs the other way. Sweden, with its famously high benefits, is a star performer... Meanwhile, before the crisis ... spending on welfare-state programs ... was lower, as a percentage of national income, in all of the nations now in trouble than in Germany... Oh, and Canada ... has weathered the crisis better than we have.

The euro crisis, then, says nothing about the sustainability of the welfare state. But does it make the case for belt-tightening in a depressed economy?

You hear that claim all the time. America, we’re told, had better slash spending right away or we’ll end up like Greece or Italy. Again, however, the facts tell a different story.

First, if you look around the world you see that the big determining factor for interest rates isn’t the level of government debt but whether a government borrows in its own currency. ...

What has happened, it turns out, is that by going on the euro, Spain and Italy ... have to borrow in someone else’s currency, with all the loss of flexibility that implies. ... America, which borrows in dollars, doesn’t have that problem.

The other thing you need to know is that in the face of the current crisis, austerity has been a failure everywhere it has been tried...

The moral of the story, then, is to beware of ideologues who are trying to hijack the European crisis on behalf of their agendas. If we listen to those ideologues, all we’ll end up doing is making our own problems — which are different from Europe’s, but arguably just as severe — even worse.

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Not so sure on Germany.

 

It is virtually certain the banks would get nationalized following a Euro haircut, but it is also highly likely that Germany will not permit the degree of inflation that the rest of Euroland will probably use (Weimar experience). CHF or DM essentially become the regional trading currency, & they get to borrow at lower cost.

 

It also means that German industry sets up new plant in the lower cost Euroland (as occurred in the former East Germany)to reduce its costs. Germany remains the global power-house for decades to come, & can use the crises to offset it ageing demographic.

 

SD

 

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I think they will take the least painful treatment or path of least resistance---they will try to print more money + try to grow/inflate there way out of trouble first (then the haircut).

 

The German + french pulling out is interesting however. What were they thinking creating the euro?

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