The Fundamental Flaw

Atlanta, GA 6/6/12 (StreetBeat) -- Look at yourself. C’mon, you’re better than this and you know it. Where do you think you’re headed? Because you had better figure out where it is that you want to go, and you had better do it soon. All I know is that you can’t keep going on the way you have up to now. It is time to get your house in order. I can’t do it for you, you have to help yourself, and I think you know how to do it. It won’t be easy and it won’t be quick, but you have to start moving in the right direction and you have to convince everyone else that you really mean what you say. You know you can count on me to help, but remember you’ll have to make me believe that you are ready to be helped. Carpe diem, you knuckleheads.

Just to be clear, the above paragraph is not the verbatim text of ECB boss Mario Draghi’s speech before the European Parliament last week. But it can be said that in a certain respect he did throw down the gauntlet and challenge the governmental leaders to make some tough decisions.

M. Draghi: “How is the euro going to be, to look like in a certain number of years from now? What is the Union vision that we, that you have a certain number of years from now? And I think the sooner this has been specified, the better it is.

“But Mr. Draghi said Thursday that the crisis now demanded solutions that could only come from political leaders—like creation of a Europe-wide deposit insurance program. Such a system, like deposit insurance in the United States, would reassure bank customers that their money was safe in any euro zone country, and that might prevent the sort of money flight that is now sapping Spain,” said The New York Times. “He also backed calls by European Commission leaders on Wednesday for a more unified banking system. But he has no authority to affect change, as only the lawmakers of the euro zone countries could together create such a deposit insurance system.”

As helpful as those steps would be, they are only remedies for the symptoms and not solutions to the root cause of the recurrent euro zone problems with debt and banking. And, by the way, it is probably true that the banking safety net would be a good thing to have in place if one or more countries exit the euro zone. But the unmentioned elephant in the room whenever there is a discussion about the European crisis is the absence of a common fiscal policy; it is a fundamental flaw of the common currency union. “That configuration that we had with us by and large for 10 years, which was basically considered sustainable, I should say, I should add, in a perhaps myopic way, is being shown now to be unsustainable unless further steps are being undertaken,” explained Draghi to the Eurocrats in Brussels. But the time has come to talk of the future, and in Draghi’s opinion it must be built on a sustainable foundation, not jury rigged with schemes that are destined for failure because the cause of the trouble goes unaddressed. I think that Draghi was imploring governments to show, in a credible way, convincing to the markets, that they are moving toward a fiscal union.

Although it is understood to be the crux of the matter, the lack of pan European fiscal rectitude has generally been side stepped rather than confronted. That’s because the there is not the common will to sacrifice a bit of one’s national sovereignty, especially when the parameters that would be laid out are not necessarily the ones that you would choose in the first place. In the years preceding the implementation of the euro the Bundesbank had few takers within the currency bloc for its disciplined style of economics. On the other hand Germany was not likely have enough voters agree to budgetary guidelines that fell short of the standard set by their central bank.

As it turned out the political desire to have a common currency trumped the economic calculation that it should be accompanied by a fiscal and or political union. “A special feature of European monetary union will, in fact, be that it will not have a complementary political union—at least in the foreseeable future,” said former Bundesbank economist Otmar Issing in March 1998, before the currency began to circulate. “The principle of ‘one country, one currency’ runs like a thread throughout monetary history. In EMU, this link is being broken for the first time and replaced by the principle of ‘one market, one money.’”

In an ECB paper published last September called The Stability and Growth Pact; Crisis and Reform, the authors addressed this situation. “The sovereign debt crisis in the euro area is a symptom of policy failures and deficiencies in –among other things—fiscal policy coordination. It reflects the as yet unresolved challenge of how to place public finances on a sufficiently sound footing in EMU.” They explain that as the currency member countries converged their economies in the years leading up to the euro’s introduction the debt and budget ratios were in good shape. “But almost as soon as the euro had been introduced, consolidation fatigue set in. Fiscal policies were broadly relaxed, especially during the mild downturn of the early 2000s, and the lower interest rates achieved thanks to EMU were used for increases in primary spending and tax cuts. The period prior to 2007 (i.e. before the crisis) saw a renewed improvement in fiscal balances, but this improvement was modest in cyclically adjusted terms. Strong growth and buoyant revenues owing to an unprecedented boom in real estate markets helped to disguise the expansionary expenditure policies of a number of countries. When the financial crisis hit, fiscal expansion and support for the financial sector meant the public finances deteriorated significantly in the euro area.” Despite all of the efforts, say the authors, skepticism prevails, ”The latest reforms continue to reflect Member States’ unwillingness to transfer the necessary degree of sovereignty over macro-fiscal objectives to the European level. While the latest reforms go in the right direction, it is far from clear whether they will be sufficient to ensure sound fiscal policies.”

The ECB can still pull a rabbit out of their policy hat; Draghi did not deny that possibility. It’s also likely that a grand European summit might come up with another policy bandage that calms the market for some amount of time. But it seems that Draghi is warning that there is a limit to how many times the EMU can deal with the symptom and avoid the root cause. Time, as Draghi suggested, is running out.

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The Week Ahead; The Worst Case Scenario

Palm Beach, FL 5/22/12 (StreetBeat) -- As one can readily imagine, a man in my position is constantly on the move. You don’t get to be the assistant to the deputy administrator for monocotyledon classifications of the European Union’s Community Plant Variety Office (CPVO), regional sub-division in Brussels, without being a go getter. It can certainly be said that I fill my seven hour work day with action befitting my portfolio. That kind of exhausting schedule really builds an appetite, which I feel I can sate by justifiably tapping the CPVO expense account, but of course.

So I find myself once again settling into the familiar surroundings of Comme Chez Soi. You must know it, the Michelin three star joint just off the Avenue de Stalingrad. Sure its upper end, but I do the EU a great service and this is quid pro quo at the very least. Besides, as their wine list clearly states they carry “a fully detailed and well supplied heading of white and red wines for less than EU100.” Not that I care to drink that swill, but I could if need be. But then again do you really think the EU would want a key team member, such as myself, to lower his standards and possibly risk having that reduced vision creep into one’s mission; yeah, I know it’s ridiculous to even consider it, but it’s my nature to look at all sides of an issue.

Waiter: Good evening, once again, sir. Would you like to start with the usual?

Why not? The Royal Belgian caviar “Oscietra Gold” sounds great.

You work for the European Union, don’t you sir?

That’s who pays the bills.

Well, a couple of top ministers dined here just shortly before you arrived. They had a fascinating conversation about the situation with Greece and the chance that they could leave the currency union and go back to the drachma. Very interesting indeed; what do you think will happen?

Hmmm, actually I’m knee deep in trying to figure out how the EU can charge a fee to Eastern Europe for wind-blown pollination from Western European grasses. Tricky and important stuff like that leaves me no time to worry about how to pay for a holiday in Greece. What happens in Athens stays in Athens, right?

Not quite sir, not according to the ministers. They say that there was never before a thought given to the possibility that a country could leave the euro zone, that the only thing to worry about was how to accommodate the new arrivals. But since last autumn there has been a recognition, up to the most senior levels of European leadership, that Greece could exit the single currency union; might actually be asked to go, in a here’s your hat what’s your hurry sort of way. The ministers said that some contingency plans are being made, even by the ECB, to prepare for a Greece exit.

They seemed very worried about the Greek vote coming up in June; “never good to have the people decide their own country’s fate,” they said, it was like the blind leading the blind; you never know who they might elect, maybe even someone who will lead them out of the euro and back into the drachma.

Well good riddance, I say. I’ll take the Beef fillet with black truffles please.

The beef, certainly sir. But, in regards to Greece, the ministers were not too sure about the riddance being good if Greece were to leave. They kept referring to the “worst case scenario”. The vote in June, they say, may end up being the catalyst for Greece to exit the zone and because of that senior EU leadership has a conscious strategy to make it very clear to the Greek voters that if they decide to cut and run the consequences will be ominous; the country will be ostracized, their economy will be in ruins and they will lose an entire generation to emigration in search of work. They want to be sure the voters in Athens hear them loud and clear that leaving the euro zone would be a disaster for them.

Well, that could be my good man, but I am pretty sure the “worst case scenario” is that the banks in the rest of Europe, including the national central banks, such as the Bundesbank, will take a hit on any debts owed by Greece because, sir, who in their right mind would want to be paid in drachma?

Well, no that was not the “worst case scenario” that seemed to have them terrified. They were not happy about the potential losses that would result from Greece leaving; both from Greek debts and from the fear of contagion rippling through to the debt of other countries such as Spain, Portugal or Ireland. But they figured that they could build a tall enough firewall to fence in the remainder of the zone and fence out most of the ripple effect from Greece. It wouldn’t be the best thing ever, but not the “worst case” either. It could even turn out that a disastrous outcome in Greece from their decision to leave the euro and print the drachma would focus their minds in the euro zone and result in a more comprehensive union; fiscal, political, etc that would satisfy everyone, even Germany, without going overboard with Berlin’s austerity hair shirt.

Espresso please. But first please tell me what this terrifying “worst case scenario” of which the ministers spoke?

Clearly there is one thing that has the EU ministers most afraid. The “worst case scenario” that could bring down the euro zone as we know it.

What? What is it?

The “worst case scenario” is that Greece stops using the euro, re-installs the drachma and that the country prospers, possibly in short order, as a result. The ministers were as white as ghosts when they talked about Greece improving its current account deficit with cheap exports and a reinvigoratedtheir tourist industry. Olive oil and other products leaving the country in massive amounts while discount seeking vacationers come in at a record pace. They shuddered as they discussed the possibility of China investing in the Greek infrastructure and revitalizing the Mediterranean ports as their own logistics center for exports to the rest of Europe.

And if all this were to occur, the ministers moaned, then what will be the reaction in Madrid, Dublin, or, don’t even say it, Rome? They envisioned mass protests by the otherwise unoccupied youth in those countries, possibly leading to, don’t say it, more votes that become referenda on using or leaving the euro. And they worried that one or more of these other exiteers could see the advantage of being an early mover and then no firewall would be big enough to cover the losses on the debt from these countries. The worst case is Greece succeeding on its own, not the reverse.

The ministers left without desert.

This cannot be good for the EU Plant Variety Office, check please.

Should I add it to the EU tab?

But of course.

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European Stocks Seen Little Changed

Naples, FL 3/15/2012 (StreetBeat) – European shares are seen opening flat to slightly lower on Thursday as investors fret over slowing Chinese growth and the risk of U.K.'s credit rating downgrade.

Asian shares are trading mixed on lingering concerns about downbeat Chinese growth outlook after Premier Wen Jiabao yesterday warned that the nation needs to embrace democracy and make urgent political reforms to cushion risks. India's benchmark Sensex is down 1.4 percent as the Reserve Bank of India left interest rates unchanged, citing high fiscal deficit and inflationary pressures because of the recent spike in crude oil prices.

Closer home, Fitch Ratings has downgraded the U.K.'s credit rating outlook to 'negative' from 'stable', indicating a slightly greater than 50 percent chance of a downgrade over a two-year horizon, given the economy's vulnerability to adverse economic shocks due to high indebtedness and weak economic outlook.

However, the country's long-term foreign and local currency Issuer Default Rating as well as country ceiling has been affirmed at 'AAA' to reflect the progress made in reducing the government's structural budget deficit and the credibility of the fiscal consolidation effort.

In corporate news, Swiss automation giant ABB has invested $10 million in electric vehicle charging specialist Ecotality Inc. to use its Blink operating platform for ABB's electric vehicle charging systems.

Bayer AG announced that the U.S. FDA has approved a new indication for oral contraceptive Natazia to treat heavy menstrual bleeding.

Italian car maker Fiat SpA said a transport strike in Italy has resulted in a loss of about 20,000 units in production and will reduce its market share in Italy by about 10 percent in March.

K+S AG, a German agricultural chemical and salt company, said Burkhard Lohr will take over as chief financial officer, effective June 1.

HeidelbergCement AG posted 5 percent higher net profit to 534 million euros in 2011 compared with the prior year's 511 million euros despite extraordinary charges of 138 million euros.

Feintool International Holding AG, a market leader in fineblanking technology, said that it has signed an agreement to acquire metal forming technology company Herzing+Schroth.

France-based biopharmaceutical company Flamel Technologies said it has agreed to acquire Missouri-based Éclat Pharmaceuticals that focuses on developing niche brands and generic products.

Siemens proposed to set up a major plant in the Dammam Industrial City of Saudi Arabia for manufacturing gas turbines, compressors and heat recovery steam generators as well as repair shops and service facilities for the Saudi market.

Telecom equipment maker Avaya Inc. said it has inked an agreement to acquire Israeli video conferencing company Radvision.

European shares largely finished to the upside on Wednesday, with upbeat comments by the Federal Reserve on the U.S. economy, a broadly positive stress-test result for U.S. banks and a successful auction of Italian bonds underpinning sentiment.

The euro Stoxx 50 index of eurozone bluechip stocks finished 0.7 percent higher while the Stoxx Europe 50 index, which includes some major U.K. companies, edged up 0.3 percent. Around Europe, the German DAX rose 1.2 percent, France's CAC 40 gained 0.4 percent and Switzerland's SMI added 0.7 percent, but the U.K.'s FTSE 100 dropped 0.2 percent.

On Wall Street, the major averages bounced back and forth across the unchanged line before eventually ending Wednesday's session little changed, as traders digested the results of bank stress tests and seemed reluctant to make significant moves ahead of some key economic data later in the week, including reports on weekly jobless claims, industrial production, and producer and consumer price inflation.

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Greek Debt Inspectors Complete Review

Tomahawk, WI 10/11/2011 (PennyPayDay) – Greece's international debt inspectors have completed their review of the government's reforms, and that if its conclusions are adopted by the eurozone and IMF, the country is likely to receive the next batch of its bailout loans in early November.

The inspectors from the International Monetary Fund, European Commission and European Central Bank, collectively known as the troika, said Tuesday that Greece's deficit targets for 2011 were "no longer within reach," but that additional measures announced were adequate for 2012. They said additional measures would be needed for 2013-2014.

The eurozone debt crisis has reached a systemic dimension that threatens banks and the wider economy, European Central Bank president Jean-Claude Trichet warned Tuesday, as Greece awaited approval of bailout loans it needs to avoid bankruptcy.

Trichet said "the crisis has reached a systemic dimension" and spoke out strongly in favor of boosting the continent's banks' health with new funds to weather the sovereign debt crisis.

Speaking as head of the eurozone's new risk-watchdog, the European Systemic Risk Board (ESRB), he told a European parliament Committee in Brussels that market fear about government debt has spread to capital markets around the world and is drying up bank funding.

"The banking sector in Europe needs recapitalization, that is part of our message," Trichet said.

Now "it is a matter of urgency" that governments move "decisively to tackle" the crisis, he added. "The high interconnectedness in the EU financial system has led to a rapidly rising risk of significant contagion."

Trichet's warning came as Jean-Claude Juncker, prime minister of Luxembourg and head of eurozone finance minister meetings, said Greece's bondholders would have to take sharp writedowns.

He was quoted late Monday by Austrian state broadcaster ORF as saying that eurozone countries are "talking about more" than a 50 to 60 percent haircut for Greece, though his spokesman later corrected his statement to say he meant more than 21 percent.

Experts and investors believe Greece's debt situation is untenable, even with more reforms and austerity measures, and will need to write off some of the money it owes bondholders.

Greece's second bailout, which was agreed in July but has yet to be finalized, proposed a 21 percent cut in bond repayments. Economists, however, say a 50 percent reduction would be necessary.

In the near-term, Greece depends on regular installments of bailout loans, but whether it gets the next euro8 billion ($10.9 billion) will depend on a review of its reforms by international debt inspectors to be wrapped up on Tuesday.

The International Monetary Fund, European Central Bank and European Commission are checking whether Greece has done enough to qualify for the next batch of its vital international bailout loans. Without them, the country will run out of money to pay pensions and salaries by mid-Novemeber and could be unable to repay bondholders in December.

As the debt inspectors concluded their talks, protests caused more disruption in the capital.

Workers at a key refinery went on strike, sending motorists who feared a fuel shortage to form huge lines at gas stations to fill up. A strike by municipal workers has left garbage piling up in in mounds on city streets for days. Protesters have also staged sit-ins of state buildings, including those of the water company.

Greece has been locked out of the international bond market for more than a year due to the high interest rates demanded for its bonds, but regularly issues short-term treasury bills.

The country raised euro1.3 billion ($1.8 billion) on Tuesday in the auction of 26-week treasury bills at an interest rate of 4.86 percent, marginally higher than the 4.8 percent yield in a similar sale on Sept. 6, the debt management agency said.

Demand was also slightly lower, with Tuesday's sale 2.73 times oversubscribed compared to 3.02 times in September. The country had initially been seeking to raise euro1 billion.

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Markets Down on Greece Fears

Nokomis, WI 10/4/2011 (PennyPayDay) – Stock index futures fell on Tuesday, a day after equities hit 13-month lows, on increased worries about a major banking crisis in Europe and expectations Greece would default soon.

* Wall Street has fallen for the past two sessions and the broad S&P 500 index was on the verge of entering bear market territory.

* The STOXX Europe 600 Banking Index (^SX7P - News) sank 4 percent on Tuesday while Franco-Belgian bank Dexia (Brussels:DEXI.BR - News) plummeted 17 percent to a record low because of its Greek exposure. European shares tumbled 2.6 percent. (^EU - News)

* U.S. banks were likely to remain in focus and continue to be pressured by the same issue. On Monday, Morgan Stanley (NYSE:MS - News) closed at its lowest since December 2008.

* European finance ministers were considering making banks take bigger losses on Greek debt and delayed a vital aid payment to Athens until mid-November, setting up a crunch point in the region's sovereign debt crisis.

* S&P 500 futures fell 6.4 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures sank 81 points, and Nasdaq 100 futures lost 11.5 points.

* The benchmark S&P is down 19.4 percent and near bear market territory, which would be a 20 percent decline from its recent high set on April 29.

* Later Tuesday, U.S. Federal Reserve Chairman Ben Bernanke will testify before the Joint Economic Committee in Washington on the economic outlook.

* Data on durable goods and factory orders, both for August, will also be released at 10 a.m. EDT.

* Fast food chain operator Yum! Brands Inc (NYSE:YUM - News) is on tap to report quarterly results.

* Apple Inc (NasdaqGS:AAPL - News) is expected to unveil a new version of its popular iPhone, hoping to fend off hard-charging rivals running Google Inc's (NasdaqGS:GOOG - News) Android system.

* The Dow and S&P dropped more than 2 percent on Monday, slumping to 13-month lows in heavy volume on fears Greece's debt woes could spark a full-blown banking crisis in Europe. The Nasdaq fell more than 3 percent.

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Update on Greece Not Good

Nokomis, WI 10/3/2011 (PennyPayDay) – Stocks were little changed on Monday as positive U.S. economic data helped to offset fears Greece may require increased euro zone financial assistance after news it will exceed its deficit targets.

Wall Street began the new quarter with choppy trading after falling on Friday to end its the weakest quarter since 2008. The decline was sparked in part by worries over the financial crisis in Europe and the threat of recession that could drag down economies around the world.

Greece's draft budget sent to parliament on Monday showed Athens would miss its deficit targets for both this year and next despite harsh new austerity measures.

The revelations brought the specter of a Greece default closer as euro zone finance ministers met to discuss the next steps toward resolving the currency area's sovereign debt crisis.

"This news isn't surprising, but if Greece continues to have problems that could really drag Europe into recession, and possibly the U.S. as well," said Randall Warren, chief investment officer of Warren Financial Service in Exton, Pennsylvania.

Stocks briefly rebounded after the Institute for Supply Management's September manufacturing index topped consensus forecasts and the government said August construction spending unexpectedly rose.

"The data supports the minority view that things are going to get better," Warren said. "You can't discount that view even as the market finds it hard to believe, and that's why things are so choppy today."

The Dow Jones industrial average was up 24.00 points, or 0.22 percent, at 10,937.38. The Standard & Poor's 500 Index was up 0.46 points, or 0.04 percent, at 1,131.88. The Nasdaq Composite Index was down 2.72 points, or 0.11 percent, at 2,412.68.

The S&P 500 index lost more than 14 percent in the third quarter and fell more than 7 percent in September alone.

Yahoo Inc rose 4.2 percent to $13.74 after the founder and chief executive of Chinese e-commerce company, Alibaba, expressed interest in buying the company and said he has talked with other potential buyers.

Eastman Kodak Co surged 93 percent to $1.50 after losing half its value on Friday. The photography company has hired a law firm specializing in bankruptcy but said it had no intention of filing for bankruptcy.

Pharmaceutical Product Development Inc climbed 26 percent to $32.41 after it agreed to be acquired by Carlyle Group and Hellman & Friedman for $3.9 billion in cash.

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Little Changed as Greece Plans Emerge

Shawshank, VA 9/27/2011 (PennyPayDay) – The euro traded lower against the dollar and the yen on Monday, in volatile trading, as doubts over officials reaching an agreement on a resolution for the debt crisis bubbled to the surface.

European officials are considering a plan to make sure that Greek default will not spread into the rest of the euro zone’s banking system.

Newspaper reports suggest that officials are mulling a plan that would allow Greece to default, recapitalise banks and increase the European Financial Stability Facility fund way beyond its current €440bn capacity.

However disappointment remained following unfruitful International Monetary Fund and G20 weekend meetings. The euro was at $1.3486, down around 0.1% on Monday. The single currency was also down 0.3% against the yen at 103.02 yen.

The dollar too was lower against the yen, down 0.3% at 76.38 yen. The dollar index, which measures the US dollar against a basket of six other currencies, fell 0.3% at 78.284.

The dollar also lost ground to the pound on Monday however sterling remains susceptible to selling against the dollar on concern that the Bank of England could unleash more monetary easing to bolster sluggish growth.

The greenback has risen by around 6% against the pound over the last month on fears over further QE in the UK, the eurozone debt crisis and the weak US economic outlook.

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Greece Sharpens Austerity Measures

Oxford, MS 9/22/2011 (PennyPayDay) – Greece adopted yet more austerity measures on Wednesday to secure a bailout installment crucial to avoid running out of money next month, as the IMF warned that Europe's sovereign debt crisis risks tearing a giant hole in banks' capital.

The Greek cabinet agreed to cut high pensions by 20 percent, put 30,000 civil servants in a "labor reserve" on a road to redundancy, lower the income threshold for paying tax and extend a real estate tax, a government spokesman said.

"The measures taken today allow us to comply with the bailout plan through 2014," the spokesman, Ilias Mossialos, said.

The new package is designed to ensure Greece gets an 8 billion euro rescue loan vital to pay state salaries and bills in October. Senior European Union and International Monetary Fund officials are to arrive in Athens early next week to review progress, Mossialos said.

Greece is on the front line of the euro zone debt crisis that has engulfed Ireland and Portugal and now threatens Italy, Spain and some of Europe's biggest banks, risking plunging the West back into recession.

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Euro Steadies As Officials Discuss Greek Solution

Wausau, WI 9/14/2011 (PennyPayDay) – The euro was stable Wednesday morning in New York, supported by tentative hopes that Europe will act decisively to manage their sovereign debt crisis.

European leaders are scrambling to avoid the contagion that may be brought on by a Greek default that appears more inevitable with every passing day. Greece's Prime Minister will hold a conference call with his counterparts from Germany and France this afternoon.

Europe has the capacity to confront its sovereign debt crisis and will not allow its largest to fail, U.S Treasury secretary Timothy Geithner said Wednesday.

Europe won't allow a Lehman Brothers event to happen, Geithner told CNBC's Jim Cramer ahead of his meeting with European Union finance ministers in Poland.

With China reportedly in talks to backstop Italian debt, markets are expressing very cautious optimism that a wider crisis can be averted.

The European Commission will soon present options for the introduction of Eurobonds, Commission President Jose Manuel Barroso said Wednesday.

However, he cautioned that this will not bring an immediate solution for all the problems faced by the region. Moody's Investors Service Inc. Wednesday announced a one-notch downgrade of the long-term ratings of French banking giants Credit Agricole SA and Société Générale SA.

Still, the euro was steady near $1.37 versus the dollar, more than 2 cents from a 7-month low of $1.3493 set earlier this week.

There was little movement versus the yen near Y105, although the Japanese currency edged toward its record highs versus the dollar.

U.S. retail sales were unchanged in August, according to government figures released Wednesday, disappointing economists, who had generally expected a slight advance.

In addition, July's growth, which had represented the strongest performance since March, was revised lower. The U.S. Commerce Department revealed that August sales figures came in at $389.5 billion, virtually unchanged from the June figure.

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