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Friday, 15 July 2011

Europe, the USA and the stupendous game of chicken that is played with the financial markets.

It has been – to use an understatement - an interesting week on the financial markets:
·    Panic at the financial markets on Italy;
·    The downgrade to junk status of Irish sovereign debt;
·    The threats of Moody’s and S&P to downgrade the debt status of the US
These events were in itself enough to take the breath away of traders and investors all over the world.
But what is really shocking is the stupendous game of chicken that is played by the countries and leaders in the Euro-zone and by the president, republicans and democrats in the United States.
The sense of urgency that you would expect at the government leaders of Europe and the US at such moments, is totally invisible. Instead, I sense an attitude that could be described as:
·    “ I’m not giving in to external pressure…;
·     I’m not giving in to external pressure…;
·     I’m not giving in to external pressure…;
·     I’m giving in to external pressure…”
The most telling example was the farce around the European-summit-that-never-was on securing the Euro.
Planned by EU President Herman van Rompuy for this Friday July 14th, but scornfully refused by the leaders of Germany and The Netherlands. In the process, it became clear that Herman van Rompuy is nothing more than a marionette, that thought for a brief moment that it had true power.
Europe : the summit that never was
The Dutch newspaper De Volkskrant writes three tale-telling articles on this summit-that-never-was. I write here the pertinent snips of these three articles:
EU president Herman Van Rompuy is going ‘all in’, when he invites the leaders of the euro-zone countries today for a crisis summit on the euro. He gambles that the Prime-Ministers (with all eyes pointed at them) will achieve what their Finance Ministers couldn’t: to expel the euro crisis. When Van Rompuy fails, a free fall of the euro seems unavoidable.
Some member-states, like The Netherlands and Germany, are not in favor of such a summit-at-short-notice. In advance they want security on a successful ending of this summit. There is nothing more fatal for the euro than an image of pale-faced government leaders that split-up arguing and indecisively

But the time of muddling on is over, according to Van Rompy. Monday’s  massacre on the stock exchanges, the falling exchange rate of the euro, the near-default of Greece, the downgrade of Ireland by the rating agencies that are now targeting Italy: these are all events that are screaming for answers.

Van Rompuy is aiming at three breakthroughs. First, the leaders should agree on an emergency loan of €85 bln to Greece. Without agreement on this, the IMF closes mid-September the water tap of the first loan (€110 bln). Due to its lack of financial reserves, Athens will default immediately when that happens. This would put dynamite under the euro-zone.

A big obstacle here is the strong demand of The Netherlands, Germany, Finland and Austria that the banks, pension funds and insurance companies will do a substantial ‘burden sharing’ . According to the ECB and the peripheral countries, this is a suicide scenario.

The second breakthrough would concern the safety net for other euro-countries that encounter problems. The current structure of harsh conditions on emergency loans, doesn’t work in Greece and should be replaced by softer conditions (lower interest and longer maturity dates). Money from the emergency fund could also be used to buy sovereigns from weak Euro-countries. These proposals were categorically refused by The Hague and Berlin.

The third breakthrough would concern a series of measures to prevent the next crisis. France is very much opposed to these measures, as these would allow Brussels to carry through extra cutbacks, when French state debt or financial deficits would soar.

Van Rompuy ran the gauntlett. Will he succeed, he will be regarded as savior of the euro. However, if his bluff is called, then not only the euro has serious problems.

Angela Merkel: Euro-summit only after emergency plan for Greece

The  date for a new Euro-summit will only be chosen when there is an achievable emergency plan for Greece. This was stated by German Chancellor Angela Merkel during a visit to Nigeria

Merkel emphasized that Germany is striving for a quick solution of the Greek tragedy. ‘However, the condition for having a summit is that we should be able to decide on a finished new programme for Greece’, according to Merkel.

Rutte: Euro-summit only usefull, when ‘happy ending’ for Greece is certain

For The Netherlands, a summit of the government-leaders of the Euro-countries is useful, when there is certainty on a ‘happy ending’. This was stated by Prime-Minister of The Netherlands Mark Rutte.
‘We should not organize a summit, if you don’t know for certain that you come to the right conclusions. There is no need for hurrying, now Athens receives another €12 bln from the IMF and the EU. Greece can meet its obligations until mid-September. ‘The immediate threat for a Greek crisis is diverted’.

Bye bye, Herman van Rompuy. You were perhaps a very smart, but too uncharismatic leader in an impossible powerless position and now they burned you to the ground… Van Rompuy tried to save the day, but now it seems he can only save his career by resigning immediately.
These are examples of the recklessness and total lack of understanding of the financial markets that the current European leaders are emanating and that I already described in my article “Euro-zone acts like a punch-drunk boxer”.
If I were an investor on the financial markets, I would now be panicking.

USA: oh, what a feeling, we’re hitting our heads against the ceiling
Unfortunately, the situation in the US is not much better. The day of reaching the debt-ceiling (August 2nd) is coming near, but all parties involved (Democrats, Republicans and the White House) are playing a game of chicken, instead of trying to find a solution.The current (simplified) stance:
·    The President wants €4 trn in cutbacks on social security and medi-care, but wants also to raise taxes
·    The Republicans want €4 trn in cutbacks on social security and medi-care, but are totally against tax-raises for ‘the people that create jobs in the USA’
·    The Democrats are in favor of cutbacks, but are against too harsh cuts in social security and medi-care.
Elephant in the room is that the relationship between Republicans and Democrats is so totally messed-up that they truly hate eachothers guts. The presidency of Barack Obama seems like the ideal target to fight this ‘war’ upon, so both parties are looking who can hold its breath the longest.
In the meantime all deadlines for action are approaching and nobody yet wants to give in.
Moody’s and S&P’s smelt this American stalemate and threatened to put US credit under scrutiny and to lower the credit rating as soon as the debt ceiling was reached.
The latest episode is that all parties involved are invited to visit Camp David, as this protected environment, outside the waking eye of the camera’s, might bring a quick solution closer.
I don’t want to underestimate the legitimate objections that Congress might have against raising the debt-ceiling, but for a European’s eyes, the refusal to raise taxes for the higher incomes in order to help saving the economy sounds grotesque.
During the Bush-administration the wealthiest categories of American society received billions of dollars in tax-breaks and it sounds reasonable if they would pay something back.
And concerning the debt-ceiling: increasing it to resume the path of borrowing the US economy into growth (QE3), is an unsustainable path. And we can't expect the Chinese to keep footing the bill for the irresponsible 'spending our way out of crisis', that is currently going on. And even if the Chinese could and would do so, what is the price we pay for this?!
It will be two interesting weeks until August 2nd

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