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Economic shock waves from Spain to Italy again

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 financial crisis 2012


We note once again (yes, we did tell you so already-several times) that Italy and Spain are clamoring for loans from the ECB (European Central Bank). Perhaps we have erroneously allowed the world press to misuse "contagion" in reference to the current spreading European economic disease. We dug through our archives and came up with a phrase that was popular in the early 60's with reference to Southeast Asia. The domino theory. Older readers may recall that dominoes did indeed fall, ridicule of that prediction notwithstanding.

We opine that these repeated ministerial and chancellor level meetings are more theatre for the restless masses (who seem to expect the people who created the problem to fix it) than actual substance. Spain, Italy, Portugal, Greece all have their own diseases, and they did not catch it from one another. To pretend that a truck load of depreciated Euros can somehow make the recession bugger-man run away is becoming more and more preposterous. What, we ask, will another round of meetings produce? What had the ministers not thought of in the last round that is now new and better? We also call the readers' attention to mention of how "common resources" should be transferred from "richer countries" to "poorer countries". We thought that had already been done. We wonder just whose resources are on the transfer list?

The Germans are (finally) getting cold feet, and now the whole house is shaking in that cold, cold breeze. Germans ought to have learned something from the collapse of the Wiemar republic. But perhaps they have forgotten.

We suggest that this news ought to making US banks nervous because some of them hold European promissory notes. Haircut anyone?

From  Ekathimerini: The Italian prime minister finds himself between three fires: the Greek crisis and the tardy effort to manage it undermined confidence in the euro and allowed the trouble to spread to Spain and to cast doubts on the Italian economy; the parties that support his government of technocrats are afraid of the political cost of reform (especially in the labor sector); Germany, mainly, insists on harsh austerity, which Monti sees leading to deeper recession. (What we in Greece can add to this is that austerity leads not only to an economic impasse but to a political one as well). Today Europe is trying to find a way to promote growth. The same issue will determine whether the American voters in November will grant Obama a second term or whether they will elect Mitt Romney instead. That is why Obama is afraid of a Greek collapse: no one can predict the fallout, when the water is up to our chins, no one wants even the slightest waves. In Venice, no one had any answers as to what would happen if the party that would be elected in the elections might annul Greece's bailout agreement with the country's creditors and so open the way to leaving the euro. The talks focused on the need for further unification of Europe, and not on the fear of dismemberment.

From Telegraph: “These are systemic problems in the eurozone which require a systemic answer and we need to see measures from the eurozone that help bring borrowing costs down, that help ensure that there are common resources transferred from richer countries to poorer countries, that the whole eurozone stands behind the banks of the eurozone.”

He added: “The eurozone is inching towards solutions. Basically, we do need to see the richer countries, like Germany like Holland, spend some of their resource in propping up the weaker countries of the eurozone.


The EU crisis has not really improved since 2010- who sees a real solution in the present course?

From Der Spiegel (2010) : Greece isn't the only problem facing the euro zone this spring. Public debt has skyrocketed across the Continent as a result of the financial crisis. Plunging tax revenues combined with expensive economic stimulus programs have severely stretched budgets.

In addition to Greece, Portugal is also facing serious difficulties. Spain, too, is under close observation. Of particular concern is the fact that, since the introduction of the euro, both countries have become less and less competitive. Instead of introducing necessary reforms, low euro-zone interest rates in recent years led them to rely heavily on borrowing.

From Bloomberg: “The scrutiny of Italy is high and certainly will not dissipate after the deal with Spain,” Nicola Marinelli, who oversees $153 million at Glendevon King Asset Management in London, said in an interview. “This bailout does not mean that Italy will be under attack, but it means that investors will pay attention to every bit of information before deciding to buy or to sell Italian bonds.”

Italy has 2 trillion euros of debt, more as a share of its economy than any developed nation other than Greece and Japan. The Treasury has to sell more than 35 billion euros of bonds and bills per month -- more than the annual output of each of the three smallest euro members, Cyprus, Estonia and Malta.

From Palm Beach Post: Troubled banks across Europe are having trouble borrowing money normally from other banks so they can continue making loans and doing business. Other banks are reluctant to lend to them for fear they may not repay the money. Some banks have fallen back on the ECB's credit window as a last resort.

The ECB says its governing council has decided to reduce credit-rating thresholds and widen eligibility for asset-backed securities and mortgage-backed securities. Those are investments made from batches of auto loans, consumer credit, loans to companies and commercial and residential mortgages.

From US News and World Report: Crucially, some banks took the cheap money and started buying higher-yielding government bonds with it. That raised bond prices and lowered bond interest rates, which move in opposite direction from the price. The lower interest yields meant lower borrowing costs for struggling Spain and Italy.

That relief has proved short-lived, however, as those two countries are now seeing borrowing costs rise again.

The bank has resisted calls to do a third round of loans. In part that is because banks have plenty of cash, yet are not finding the demand for loans from businesses. This is due to a weak economy that gives business owners little reason to think they should borrow to expand their businesses.

From Business Week: But at the same time, the U.S. and the West as a whole no longer enjoy the economic dominance they once did. Just in the two decades from 1990 to 2010, the U.S. and EU’s combined share of global gross domestic product fell from 52 percent to 42 percent, according to Arvind Subramanian’s book Eclipse. The U.S. and EU share of world trade fell from 31 percent to 20 percent over the first decade of the 21st century alone. And, of course, both regions are significant net importers of capital. In 1950, the U.S. alone accounted for about one-third of net exports of global capital. Today, the U.S. borrows heavily from China, and Europe is borrowing increasing amounts from the IMF.


Last modified on Tuesday, 26 June 2012 04:46

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