Tag Archives: ECB

The Tragedy Of The Euro, by Alasdair Macleod

The euro’s failure at inception wasn’t a certainty, but now it is. From Alasdair Macleod at goldmoney.com:

After two decades, the euro’s minders look set to drive the Eurozone into deep trouble. December was the last month of the ECB’s monthly purchases of government debt. A softening global economy will increase government deficits unexpectedly. The consequence will be a new cycle of sharply rising bond yields for the weakest Eurozone members, and systemically destabilising losses in the bond portfolios owned by Eurozone banks

The blame-game

It’s the twentieth anniversary of the euro’s existence, and far from being celebrated it is being blamed for many, if not all of the Eurozone’s ills.

However, the euro cannot be blamed for the monetary and policy failures of the ECB, national central banks and politicians. It is just a fiat currency, like all the others, only with a different provenance. All fiat currencies owe their function as a medium of exchange from the faith its users have in it. But unlike other currencies in their respective jurisdictions, the euro has become a talisman for monetary and economic failures in the European Union.

Recognise that, and we have a chance of understanding why the Eurozone has its troubles and why there are mounting risks of a new Eurozone systemic crisis. These troubles will not be resolved by replacing the euro with one of its founding components, or, indeed, a whole new fiat-money construct. It is here to stay, because it is not in the users’ interest to ditch it.

As is so often the case, the motivation for blaming the euro for some or all the Eurozone’s troubles is to shift responsibility from the real culprits, which are the institutions that created and manage it. This article briefly summarises the key points in the history of the euro project and notes how the mistakes of the past are being repeated without the safety-net of the ECB’s asset purchases.

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The Eurozone Is in a Danger Zone, by Alasdair Macleod

ECB liquidity has kept the European economy and European government bond markets afloat. What happens when the ECB tightens the spigot? From Alasdair Macleod at mises.org:

It is easy to conclude the EU, and the Eurozone in particular, is a financial and systemic time-bomb waiting to happen. Most commentary has focused on problems that are routinely patched over, such as Greece, Italy, or the impending rescue of Deutsche Bank. This is a mistake. The European Central Bank and the EU machine are adept in dealing with issues of this sort, mostly by brazening them out, while buying everything off. As Mario Draghi famously said, “whatever it takes.”

There is a precondition for this legerdemain to work. Money must continue to flow into the financial system faster than the demand for it expands, because the maintenance of asset values is the key. And the ECB has done just that, with negative deposit rates and its €2.5 trillion asset purchase program. But that program ends this month, making it the likely turning point, whereby it all starts to go wrong.

Most of the ECB’s money has been spent on government bonds for a secondary reason, and that is to ensure Eurozone governments remain in the euro system. Profligate politicians in the Mediterranean nations are soon disabused of their desires to return to their old currencies. Just imagine the interest rates the Italians would have to pay in lira on their €2.85 trillion of government debt, given a private sector GDP tax base of only €840 billion, just one third of that government debt.

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QE Created Dangerous Financial Dependence, Italy Hooked, Withdrawal Next, ECB Warns, by Don Quijones

Italy may want to think twice before it pisses of the EU. The ECB has been the only buyer of Italy’s debt, and Italy wants to issue €275 billion next year. From Don Quijones at wolfstreet.com:

“Who will purchase the €275 billion of government debt Italy is to issue in 2019?”

The ECB, through its army of official mouthpieces, has begun warning of the potentially calamitous consequences for Italian bonds when its QE program comes to an end, which is scheduled to happen at the end of this year.

During a speech in Vienna on Tuesday, Governing Council member Ewald Nowotny pointed out that Italy’s central bank, under the ECB’s guidance, is the biggest buyer of Italian government debt. The Bank of Italy, on behalf of the ECB, has bought up more than €360 billion of multiyear treasury bonds (BTPs) since the QE program was first launched in March 2015.

In fact, the ECB is now virtually the only significant net buyer of Italian bonds left standing. This raises a key question, Nowotny said: With the ECB scheduled to exit the bond market in roughly six weeks time, “who will purchase the roughly €275 billion of government securities Italy is forecast to issue in 2019?”

With foreigners shedding a net €69 billion of Italian government bonds since May, when the right-wing League and anti-establishment 5-Star Movement took the reins of government, and Italian banks in no financial position to expand their already bloated holdings, it is indeed an important question (and one we’ve been asking for well over a year).

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Genocide of the Greek Nation, by Paul Craig Roberts

The Greek “rescue” was never about rescuing Greece, but rather rescuing Greece’s bank creditors. From Paul Craig Roberts at paulcraigroberts.org:

The political and media coverup of the genocide of the Greek Nation began yesterday (August 20) with European Union and other political statements announcing that the Greek Crisis is over. What they mean is that Greece is over, dead, and done with. It has been exploited to the limit, and the carcas has been thrown to the dogs.

350,000 Greeks, mainly the young and professionals, have fled dead Greece. The birth rate is far below the rate necessary to sustain the remaining population. The austerity imposed on the Greek people by the EU, the IMF, and the Greek government has resulted in the contraction of the Greek economy by 25%. The decline is the equivalent of America’s Great Depression, but in Greece the effects were worst. President Franklin D. Roosevelt softened the impact of massive unemployment with the Social Security Act other elements of a social safety net such as deposit insurance, and public works programs, whereas the Greek government following the orders from the IMF and EU worsened the impact of massive unemployment by stripping away the social safety net.

Traditionally, when a sovereign country, whether by corruption, mismanagement, bad luck, or unexpected events, found itself unable to repay its debts, the country’s creditors wrote down the debts to the level that the indebted country could service.

With Greece there was a game change. The European Central Bank, led by Jean-Claude Trichet, and the International Monetary Fund ruled that Greece had to pay the full amount of interest and principal on its government bonds held by German, Dutch, French, and Italian banks.

How was this to be achieved?

In two ways, both of which greatly worsened the crisis, leaving Greece today in a far worst position that it was in at the beginning of the crisis almost a decade ago.

At the beginning of the “crisis,” which would have easily been resolved by writing down part of the debt, the Greek debt was 129% of Greek Gross Domestic Product. Today Greek debt is 180% of GDP.

Why?

Greece was lent more money to pay interest to Greece’s creditors, so that they would not have to lose one cent. The additonal lending, called a “bailout” by the presstitute financial media, was not a bailout of Greece. It was a bailout of Greece’s creditors.

To continue reading: Genocide of the Greek Nation

Looks Like Italian Default is Back on the Menu, by Tom Luongo

Will southern European debt or emerging market debt kick off the next financial crisis? They’re both strong contenders, running neck-and-neck. From Tom Luongo at tomluongo.me:

Italian Deputy Prime Minister Matteo Salvini was right to call out the EU over the failure of the bridge in Genoa this week.  It was an act of cheap political grandstanding but one that ultimately rings very true.

It’s a perfect moment to shake people out of their complacency as to the real costs of giving up one’s financial sovereignty to someone else, in this case the Troika — European Commission, ECB and IMF.

Italy is slowly strangling to death thanks to the euro.  There is no other way to describe what is happening.  It’s populist coalition government understands the fundamental problems but, politically, is hamstrung to address them head on.

The political will simply isn’t there to make the break needed to put Italy truly back on the right path, i.e. leave the euro.  But, as the government is set to clash with Brussels over their proposed budget the issues with the euro may come into sharper focus.

Looking at the budget it is two or three steps in the right direction — lower, flat income tax rate, not raising the VAT — but also a step or two in the wrong direction — universal income.

Opening up Italy’s markets and lowering taxpayers’ burdens is the path to sustainable, organic growth, but that is not the purpose of IMF-style austerity.  It’s purpose is to do exactly what it is doing, strangling Italy to death and extracting the wealth and spirit out of the local population, c.f. Greece and before that Russia in the 1990’s.

So, looking at the situation today as the spat between Turkey and the U.S. escalates, it is obvious that Italy is in the crosshairs of any contagion effects into Europe’s banking system.

To continue reading: Looks Like Italian Default is Back on the Menu

The Gently Rotting Debt-Ridden EU, by Alasdair Macleod

The EU is essentially Marxist in its orientation, and tolerates dissent about like Joseph Stalin used to. From Alasdair Macleod at goldmoney.com

The EU as a political construction is in a state of terminal decay. We know this for one reason and one reason alone: its core principle is the state is superior to its people. A system of government can only work over the longer term if it recognises that it is the servant of the people, not its master. It matters not what electoral system is in place, so long as this principle is adhered to.

The EU executive in Brussels does not accept electoral primacy. It shares with Marxist communism a belief in statist primacy instead. The only difference between the two creeds is Marx planned to rule the world, while Brussels is on the way to ruling Europe.

The methods of satisfying their objectives differ. Marx advocated civil war on a global scale to destroy capitalism and the bourgeoisie, while Brussels has progressively taken on powers that marginalise national parliaments. Both creeds share a belief in an all-powerful executive. The comparison with Marxism does not flatter the EU, and suggests it has a limited life and that we may be on the verge of seeing the EU beginning to disintegrate. Despite economic evolution in the rest of the world, like Marxian communists Brussels is stuck with a failing economic and political creed.

It has no mechanism for compromise or adaptation. A rebellion from Greece was put down, the British voted for Brexit, which is proving impossible to negotiate, and now Italy thinks it can partially escape from this statist version of Hotel California. The Italians are making huge mistakes. The rebel parties forming a coalition government want to stay in the EU but are looking to exit from the euro. Putting aside the impossibility of change for a moment, they have it the wrong way around. If they are to achieve anything, they should be exiting the EU and staying in the euro. Let me explain, starting with the politics, before considering the economics.

To continue reading: The Gently Rotting Debt-Ridden EU

“The ECB Is Basically Giving The Finger To Italy”: Is Draghi Risking Everything To Teach Rome A Lesson, from Tyler Durden

One of the more consequential dramas on the world stage in what happens between Italy’s new government and the ECB and EU. It’s like Greece a few years ago, but Italy is much bigger and more important within the EU. From Tyler Durden at zerohedge.com:

Perhaps the most perplexing market-moving event of the past 48 hours, was the 1-2 punch of a Tuesday Bloomberg report that next Thursday’s ECB meeting is “live” in that policy makers anticipate (at long last) holding a discussion that could conclude with a public announcement on when they intend to cease asset purchases (QE), coupled with a slew of ECB members overnight coming out with unexpectedly hawkish comments.

Of these, the ECB’s otherwise dovish Peter Praet said inflation expectations are increasingly consistent with the ECB’s aim, and added that markets are expecting an end of QE at end of 2018, this is an observation and input that is up for discussion and that “it’s  clear that next week the Governing Council will have to make this assessment, the assessment on whether the progress so far has been sufficient to warrant a gradual unwinding of our net asset purchases.”

Other ECB hawks such Hanson, Weidmann and Knot doubled down on the central bank’s sudden QE-ending jawboning pivot, saying that the ECB could lift rates before mid-2019 due to “moderately” rising inflation, that market expectation of end of QE by end of 2018 is plausible, and that the ECB should wind down QE as soon as possible.

The market response was instant, and it not only pushed both German and Italian yields sharply higher…

… as well those of US Treasurys, but spiked the EUR while sending the USD lower, and unleashing today’s euphoric stock surge.

Now, it is hardly rocket surgery that without ECB support, Italian bonds are toast. After all, as we have shown and predicted since last December, without the only marginal buyer of Italian debt for the past 2 years – the ECB – Italian yields would soar, leading to a prompt default by the nation which would suddenly find itself drowning under untenable interest expense.

To continue reading: “The ECB Is Basically Giving The Finger To Italy”: Is Draghi Risking Everything To Teach Rome A Lesson