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Old 10-28-2011, 09:32 PM   #1
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Europe's rescue euphoria threatened as Portugal enters 'Grecian vortex'

http://www.telegraph.co.uk/finance/f...an-vortex.html

Europe's rescue euphoria threatened as Portugal enters 'Grecian vortex'

Monetary contraction in Portugal has intensified at an alarming pace and is mimicking the pattern seen in Greece before its economy spiralled out of control, raising concerns that the EU summit deal may soon washed over by fast-moving events.

Data released by the European Central Bank show that real M1 deposits in Portugal have fallen at an annualised rate of 21pc over the last six months, buckling violently in September.

Data released by the European Central Bank show that real M1 deposits in Portugal have fallen at an annualised rate of 21pc over the past six months, buckling violently in September.


"Portugal appears to have entered a Grecian vortex and monetary trends have deteriorated sharply in Spain, with a decline of 8.4pc," said Simon Ward, from Henderson Global Investors. Mr Ward said the ECB must cut interest rates "immediately" and launch a full-scale blitz of quantitative easing of up to 10pc of eurozone GDP.


The M1 data - cash and current accounts - is watched by experts as a leading indicator for the economy six months to a year ahead. It has been an accurate warning signal for each stage of the crisis since 2007.


A mix of fiscal austerity and monetary tightening by the ECB earlier this year appear to have tipped the Iberian region into a downward slide. "The trends are less awful in Ireland and Italy, suggesting that both are rescuable if the ECB acts aggressively," said Mr Ward.


A shrinking money supply is dangerous for countries with a high debt stock. Portugal’s public and private debt will reach 360pc of GDP by next year, far higher than in Greece.

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Premier Pedro Passos Coelho has been praised by EU leaders for sticking to austerity pledges under Portugal’s EU-IMF rescue, but the policy is pushing the country deeper into slump and playing havoc with debt dynamics.
The EU deal was not designed to deal with such a threat. The working assumption is that Greece alone is the essential problem, and that other troubles are under control or caused by jittery markets.

Officials hope that debt relief through private sector haircuts of 50pc will be enough for Greece claw its way back to viability, and that spillover effects can be contained by bank recapitalizations, raising core Tier 1 ratios to 9pc with €106bn of fresh capital.

A boost in the €440bn bail-out fund (EFSF) to €1 trillion or more - by opaque means - will supposedly create a "firewall" to rebuild market confidence and stop contagion to the rest of Club Med.

This rescue machinery may prove to be a Maginot Line if -- as many economists think -- the danger comes from within Portugal, Spain, and Italy. Like Greece, these countries have lost 30pc in labour competitiveness against Germany since the mid-1990s. That is the root of the EMU crisis. A toxic mix of fiscal tightening, higher debt costs, and now the threat of a eurozone recession risks tipping them over the edge.

The hairshirt summit ignored this dimension of the crisis. Italy was ordered to cut further, balancing its budget by 2013. The mantra was "rigorous surveillance" of budgets and "discipline". There will be laws to enforce "balanced budgets", and EU officials will have extra powers to vet economic policy.

This marks a step-change in the level of EU intrusion. Greece will be subject to a "monitoring capacity on the ground", implying a vice-regal EU presence calling the shots in Athens.

German Chancellor Angela Merkel said the goal is to create a "stability union", not a fiscal union. There will be no joint bond issuance, no shared budgets, no debt pooling, and fiscal transfers. The elevation of EU commissioner Olli Rehn to post of economic tsar does not change this.

Germany has dictated the agenda, vetoing calls to mobilize the ECB’s full firepower to halt the crisis. The Bundestag even ordered Mrs Merkel to insist on ECB withdrawal from existing bond purchases.


Jean-Luc Mélenchon, leader of the French leftist Front, said Europe is now marching to Germany’s drum and "headed for disaster", a view gaining ground across Europe’s Left.

Albert Edwards from Société Générale said the ECB will have to act, over a German veto if necessary. "The increasingly frenzied attempts of eurozone governments to persuade financial markets that they can draw a line under this crisis will ultimately fail."

"The impending threat of a euro break-up will force the ECB to begin printing money, very reluctantly joining the global QE party. The question is whether Germany will leave the eurozone in the face of such monetary debauchery," he said.

Whether the EFSF alone is up to the job of containing the euro crisis may depend on how it is constructed. The apparent plan for "first loss" insurance on bonds concentrates risk, endangering the AAA rating of France and other creditor states that anchor the fund. "It is too complex and potentially dangerous," said RBS.

Japanese investors who bought the first EFSF bonds this year under entirely different assumptions are facing big losses as the instrument loses market credibility. They are angry that the fund has metamorphosed into a high-risk monoline insurer. The fund will in any case cover only new issues of debt. This instantly degrades old debt. There will be abritrage between insured and insured countries. Market forces are being profoundly distorted.

China may participate in a special purpose fund to buttress the EFSF, but only as a quid pro quo for industrial and trade concessions. French Green leader Daniel Cohn-Bendit said Europe was making a "dangerous mistake" by going cap in hand to Beijing.

RBS said market euphoria is unlikely to last long. The precedent of de facto default in Greece - which the EU authorities once promised to prevent - will cause investors to "reprice" the sovereign debt of all vulnerable states. "The summit solves one problem by creating another. We expect the market to deteriorate and see the ECB as the only backstop," said the bank.

Europe’s leaders are betting that a reduction of red tape and a radical shake-up of the labour markets will unleash growth in Greece, Portugal, Italy and Spain, a decade hence. In the meantime, the governments of these near helpless countries must soldier on with perma-slump, and riot gear, and pray for a miracle.
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Old 10-29-2011, 04:13 AM   #2
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riot gear, and pray for a miracle
Sounds promising if you make hockey pads for a living.
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Old 10-30-2011, 03:10 PM   #3
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SilverKing, thanks for opening up Europe's problems as a thread. I concur that Portugal is next, but I am not an expert. Europe is important, I get a lot of news on Europe from ZH, for which I am thankful.

While we have our problems over here, there is an extra burden over there: an opacity, a lack of transparency that is worse than here in the USA. All the languages they speak aggravates this as well as cultural differences. Different agendas too (France wants their banks saved, Germany does not want to pay for everything, Greece wants the others to make their problems go away, etc.).

In comparing the USA vs. Europe as a place to live and invest, there is no question (for me) that the USA is better. The "best" house in a bad neighborhood.

IMO, Europe will be the canary that will alert us to make the LAST ONE BIG step of our preparations (buying gold & silver, guns & ammo (you never know), any survival preparations, any plans to leave, and so on).
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Old 10-31-2011, 11:38 AM   #4
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Quote :
BERLIN: Europe's new strategy on resolving the debt crisis suffered a setback when Germany's highest court ordered a stay on the setting up of a special parliamentary fast-track committee to take speedy decisions on the allocation of funds from the euro-zone's emergency bailout facility.

The committee was constituted earlier this week and its inaugural session was scheduled for yesterday. However, that meeting was cancelled following the court order.

The Federal Constitutional Court in Karlsruhe issued an injunction against the 9-member parliamentary control committee on the the European Financial stability Facility (EFSF) and barred it from taking any decisions on the allocation of rescue funds until all doubts about its constitutionality are cleared.
...
More: http://articles.economictimes.indiat...vate-creditors

Quote :
Looks like the German high court has issued an injunction on the German Parlaiment's ability to deploy taxpayer money to fund the new EFSF funding agreement. Sourced from zerohedge quoting Spiegel Online:
Originally Posted by Spiegel :
Germany's Federal Constitutional Court on Friday expressed doubts about the legality of a new panel of lawmakers set up by the German parliament to reach quick decisions on the release of funds from the euro bailout mechanism, the European Financial Stability Facility (EFSF). The court issued a temporary injunction banning the nine-person committee in the Bundestag from taking any decisions on the deployment by EFSF of German taxpayer money.
http://truthingold.blogspot.com/2011...ken-to-eu.html
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Old 10-31-2011, 04:54 PM   #5
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Originally Posted by DoChenRollingBearing View Post:
IMO, Europe will be the canary that will alert us to make the LAST ONE BIG step of our preparations (buying gold & silver, guns & ammo (you never know), any survival preparations, any plans to leave, and so on).
THIS!

Prescient.

Totally agree.
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