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Monday, 31 October 2011

Average unemployment in Europe slightly higher. Unemployment rates in the Netherlands and Austria are positive exceptions. Spain and Greece face a grim future, with exploding unemployment.

On October 31, Eurostat, the statistical bureau of the European Union, presented the unemployment for the European Union for the month of September. Here are the most important parts of the press release from Eurostat:

The euro area (EA17) seasonally-adjusted unemployment rate was 10.2% in September 2011, compared with 10.1% in August. It was 10.1% in September 2010. The EU27 unemployment rate was 9.7% in September 2011, compared with 9.6% in August. It was 9.6% in September 2010.

Eurostat estimates that 23.264 million men and women in the EU27, of whom 16.198 million were in the euro area, were unemployed in September 2011. Compared with August 2011, the number of persons unemployed increased by 174 000 in the EU27 and by 188 000 in the euro area. Compared with September 2010, unemployment rose by 215 000 in the EU27 and by 329 000 in the euro area.

Compared with a year ago, the unemployment rate fell in fourteen Member States and increased in thirteen. The largest falls were observed in Estonia (17.9% to 12.8% between the second quarters of 2010 and 2011), Latvia (19.4% to 16.1% between the second quarters of 2010 and 2011) and Lithuania (18.2% to 15.5% between the second quarters of 2010 and 2011). The highest increases were registered in Greece (12.6% to 17.6% between July 2010 and July 2011), Spain (20.5% to 22.6%) and Cyprus (6.0% to 7.8%).

In September 2011, 5.308 million young persons (under-25s) were unemployed in the EU27, of whom 3.290 million were in the euro area. Compared with September 2010, youth unemployment increased by 41 000 in the EU27 and by 71 000 in the euro area. In September 2011, the youth unemployment rate was 21.4% in the EU27 and 21.2% in the euro area. In September 2010 it was 20.9% and 20.8% respectively. The lowest rates were observed in Austria (7.1%) and the Netherlands (8.0%), and the highest in Spain (48.0%) and Greece (43.5% in July). 

European unemployment rates (
Click to enlarge

The EU27 includes Belgium (BE), Bulgaria (BG), the Czech Republic (CZ), Denmark (DK), Germany (DE), Estonia (EE),Ireland (IE), Greece (EL), Spain (ES), France (FR), Italy (IT), Cyprus (CY), Latvia (LV), Lithuania (LT), Luxembourg (LU),Hungary (HU), Malta (MT), the Netherlands (NL), Austria (AT), Poland (PL), Portugal (PT), Romania (RO), Slovenia (SI),Slovakia (SK), Finland (FI), Sweden (SE) and the United Kingdom (UK).

In general you can say that the unemployment is not extremely high in the European Union. Only 9 of the 27 countries of the EU have an unemployment of more than 10%. These countries consist of the PIIGS (except for Italy) and the East-European countries Bulgaria, Slovakia, Estonia, Lithuania and Latvia. The unemployment of the last three, although still very high, has been dropping sharply YoY.

Much more worrisome is the situation of Greece (17.6%) and especially Spain (22.6%). Not only is the unemployment extremely high in these countries, but due to their financial problems , there is very little room for improvement in the coming months. Especially, as both countries are very dependent on tourism as a source of income. In the winter months, tourism drops to much lower levels than during the summer months and so will the employment in the tourism business.

And is the average youth unemployment already extremely high in the whole EU (21.4%), the youth unemployment in Spain (48.0%) and Greece (43.5%) is nothing less than a disaster. And, due to dropping tourism for the winter months and the lack of an economic spring for both countries, these rates will  rise rather than drop. Therefore these countries face a grim future in the coming years, unless something changes for the better very quickly.

To give you an impression of the current malaise in Spain, I want to show you the pertinent snips of two articles that appeared in Het Financieele Dagblad ( today:

In 2011Q3, the unemployment in the country rose to the highest level in 15 years. This was announced on Friday by INE, the Spanish bureau for Statistics in Madrid.

The unemployment rose to 21.5% of the labor force, compared to 20.9% in Q2. Almost 5 mln Spaniards are now unemployed. ‘These figures seem to predict a very negative scenario for the second half of this year’, according to analyst José Luis Martinez of Citibank in Madrid in a reaction. ’The bad situation on the labor market is a tell-tale signal in a Quarter in which tourism usually leads to extra jobs’.

The perspective for the labor market of Spain is not favorable for months to come. The economy is in a sturdy recession, caused by the considerable cutbacks that the Spanish government must carry through. The government in Madrid, just like the one in Rome, heard during last Wednesday’s European summit that additional cutbacks must be carried through, to prevent the financial markets from losing their confidence in Spain.

The Spanish economy didn’t grow in Q3 compared to Q2, while unemployment grew to 21.5%.

Year-on-year, the Spanish economy grew by 0.7%. This was announced by the Spanish central bank Banco de España. The government announced that the 2011 goal of 1.3% growth will probably not be realized. The disappointing figures are increasing the fears that Spain will sink into a recession.

The unemployment of 21.5% is the worst in fifteen years. Also the excess supply on the housing market remains a big problem in Spain. The country suffers from a surplus of 700,000 unsold houses.

Domestic demand got hit in Q3, according to the central bank, while exports and tourism showed positive developments.

Spain is one of the problem childs of the European debt crisis, with an expected debt of 67% of GDP at year-end and an interest of 5.6% on 10y sovereigns. As a consequence of the deficits, the social-democratic government implements an austerity program that leads to much protests among the population.

Spain is a beautiful and very sunny country, but these figures are far from sunny. And that is a real shame.

Only the most hardened perma-bull sees room for immediate positive change in Spain, but reality is that tourism will drop and unemployment will further rise in the coming months. Economic growth is anemic and the manufacturing and  services industry is anemic too. 

Especially the lacking outlook towards a more prosperous future for the young unemployed will cause that the young are probably sentenced to a life of relative poverty, unless they decide to temporarily move to Northern Europe (Scandinavian countries, The Netherlands, Austria and Germany). 

In these countries there is still a lot of manual and less qualified labor to be done in the greenhouses and in the manufacturing and services industry, for those who really want to work and don’t ask much for wages.

Unfortunately, the current, deteriorating economic situation leads to an upcoming of nationalism. It might even lead to acrimony towards foreigners in the Northern European countries, if the economic situation further deteriorates. Although this is not yet the case, it is a predictable consequence of an extremely bad economic situation. And that the economic situation will become extremely bad is something that I am not in doubt of.

Saturday, 29 October 2011

Latest figures on the Dutch economy: economic situation deteriorating. Manufacturer’s prices stable, but ready to make a tumble?

Yesterday, the Dutch Central Bureau for Statistics presented two new research results.

The economic situation for October and the manufacturers’ price development until September.

Here are the important data from both investigations.

Analysis October:

Overview economic situation ( to enlarge
 The economic situation at the end of October was worse than at the end of September. Indicators showed further deterioration across the board. The heart of the scatter in the Business Cycle Tracer is located in the recession stage. Eleven of the fifteen indicators are currently below the level of their long-term average.

In the course of October, new data have become available for all monthly indicators. The distribution of the indicators across the quadrants changed somewhat. Household consumption moved back from the yellow to the red quadrant.

The Tracer shows more serious downturns at the end of October relative to the end of September. Within the red quadrant, orders, producer confidence, consumer confidence and unemployment moved considerably downwards. In the orange quadrant, manufacturing output moved downwards and somewhat to the left. The Tracer also shows an improvement. In the red quadrant, the capital market interest rate moved upwards and to the right.

At the end of October, the heart of the scatter in the Tracer is located in the red quadrant (indicating recession). Eight of the fifteen indicators are in the red quadrant, three in the yellow, two in the green and two in the orange quadrant. The growth rate of indicators in the red quadrant is below their long-term average and slowing down. The growth rate of indicators in the yellow quadrant is also below their long-term average, but accelerating.

The growth rate of the indicators in the green quadrant is above their long-term average and accelerating. The growth rate of indicators located in the orange quadrant is also above their long-term average, but slowing down.

The above standing chart (courtesy of is actually quite hard to read. At least for me it was, initially. Shortly summarized. The upper right quadrant (increasing and above trend) is ‘good’, the lower left quadrant (decreasing and below trend) is ‘bad’.
Although Exports, Temp jobs and to a lesser degree Bankruptcies, Manufacturing, Jobs, Vacancies and Fixed capital formation look all right, there is a definite trend going on towards the lower left quadrant of the chart. 

Though the situation is not as bad yet as in January 2009, the trend is worsening. For a better illustration, please have a look at the site of the Dutch CBS (by clicking the link), where this chart can be seen as a running chart.

This chart definitely predicts bad news for the coming months and I would not be surprised if the economic downturn in 2012 will be worse and (much) longer lasting than in 2009. As I stated many times before: in The Netherlands we didn’t feel much pain yet of the biggest crisis since 1929. Now it might be that the pain is coming after all.

Selling prices in Dutch manufacturing industry were nearly 10% higher in September 2011 than in September 2010. The price increase is the same as in August.

Manufacturing prices rose across the board relative to September 2010. With 31%, prices of refined petroleum products increased most notably. The increase was slightly more substantial than in August. Manufacturers in the chemical industry (15%) and manufacturers of food products (9%) also charged much higher prices for their products than in September 2010. 

Compared to one month previously, prices rose by 0.6%. The price increase on the domestic market was less substantial than the price increase on the foreign market.

Factory gate prices
Manufacturing prices YoY (
Click to enlarge

If you look at the aforementioned chart, it seems like we are in a period of relative stabilizing that already lasts for more than a year. But sometimes it is good to look at data in its context. Luckily, the CBS offers this possibility by storing the raw data since 2000. And if you put that in a chart, you suddenly get a whole different picture (all data in the following chart, courtesy of CBS).

Manufacturing prices (2000-2011): Click to enlarge

By looking at this data, you see how strong the manufacturing prices have risen, since the trough of March 2009, caused by the economic crisis and you also see that the current price level is substantially higher than at the peak before the start of this crisis.

Taking this into consideration, I would not be surprised if we would witness another steep decline of manufacturing prices very soon. The fact that the European and Chinese economies are stalling and the fact that the US is again spending its savings, could mean the start of a crazy ride in my opinion. 

Eventually this could lead to even lower prices than in March 2009.

Friday, 28 October 2011

There are no funds yet reserved for the larger EFSF rescue fund. Will China also here come to the rescue?

There are no funds yet reserved for the larger EFSF rescue fund. Will China also come here to the rescue?
It’s China day today. This most powerful member of the BRIC-countries is not only wanted as a lender of last resort for Swedish car brands in need, but also for the freshly expanded and leveraged EFSF emergency fund.
What I didn’t print in my yesterday post on the Euro rescue is that Europe is especially looking in Chinese direction for coughing up the necessary funds in the leveraged €1000 bln EFSF. The investments in sovereign or bank bonds sold by the EFSF, would be warranted by a 20% investment loss guarantee of the EU member states.
Suffice it to say that China is not jumping for joy to help its best customers, the European Union, with its ‘black hole’ EFSF investment fund. However, the country is probably willing to think about it, if Europe could help to ‘fill in a few minor details’.
And what are does details probably:
·    Growing influence of China in the IMF that is now dominated by Europeans (see the recent election of Christine Lagarde as chairman of the IMF).
·    Removal of trade barriers on the import of Chinese electronic equipment.
·    Removal of barriers for the purchase of European / American weapons systems
·    Removal of other possible EU barriers for the take-over plans of China in European countries.
·    Europe talking with a less loud voice about human rights in China and showing a more friendly face.
As these details probably need some heavy swallowing at both sides, China and Europe act like two people in love, both waiting who is going to make the first move.
And then you get funny stories in the news that Klaus Regling, the head of the EFSF emergency fund, is visiting China ‘to drink coffee’ with the leaders, but that there are no official negotiations going on.
Here are the pertinent snips of two articles in the Financieele Dagblad ( and Business News Radio (
China didn’t make any concrete commitments to invest in the European emergency fund. This is stated by the chairman of the EFSF this, German banker Klaus Regling.
Regling is visiting Beijing to persuade the Chinese government into an investment in the European emergency fund, that was renegotiated on the summit of the European leaders last Wednesday (October 26). Concrete commitments of China stay out. Regling states that he doesn’t expect an ‘exact result’ of his visit. He does expect, however, that China will continue purchasing bonds of the EFSF.
Regling denied that China can count on special conditions for the purchase of these bonds. Beijing would also not have asked for special concessions in exchange for its support for the Euro-zone.
China is looking for possibilities to reinvest its currency surplusses. The EFSF offers commercially interesting possibilities, according to Regling. China possesses the largest supply of foreign currencies in the world, to the amount of $3200 bln.
This article contains at least two blatant lies, that should award Regling with the Golden Pinocchio. Lie 1: China would not receive special conditions, while purchasing large amounts EFSF bonds. Lie 2: China would not have asked for special concessions. Sadly this award doesn’t exist yet:
Golden Pinocchio. Picture courtesy of
China is not investing money in the EU emergency fund yet and there are no formal negotiations going on. According to the Chinese, Europe is not solving the real problems with its current approach of the European debt crisis.
The People’s Daily, official newspaper of the Chinese Communist Party, stated in an editorial that the EU agreement on the approach of the debt crisis might stabilize the markets, but doesn’t solve the real problems.
Only when Europe reforms its institutions, it can regain the trust and aid of other countries.
There is not a single, unclear word in this Chinese statement. And of course, the Chinese are totally right here. But that doesn't mean that the Chinese are not negotiating with Europe.
Kees de Kort, the savvy macro-economic columnist of BNR, however, does think differently about Chinese intervention and stated today on his Dutch blog that China is often used as a carrot for the stock markets to get everybody happy.
A game that the powers-that-be learn to play better every day, is the manipulation of the optimistic stock investors (in his exact words ‘the people with the pink glasses and the rosy view’) at the financial markets.
They understand better every day which carrot needs to be hung down for the markets. Fixed part of this game is the word ‘China’. The word has been mentioned for at least ten times during the last few months and every time the ‘pink glasses’ were running the gauntlett. The story is totally useless, but the word is used over and over again.
I feel sorry for my English readers that they can’t enjoy the every day ‘acid attack’ of this very intelligent and outspoken columnist. And very often he is right. Maybe again this time.
Whatever the outcome of the EFSF negotiations with China will be; it will be tough negotiations and the price to be paid by Europe will be considerable. To be continued…

Yet again: New developments in the Saab soap. Will China come to the rescue anyway?

And again Victor Müller, the Dutch CEO of Swedish Automobile N.V., the current holding company for Saab Automobile AB, has managed to pull a rabbit out of the hat.

Victor Müller’s company Swedish Automobile already briefly passed the review in my SMS from Ernst (17), because it withdrew from a proposed deal with Pang Da and Youngman to the amount of €245 mln in exchange for a 54% stake of the shares in Swedish Automobile and Saab AB.

But today Victor is back with a new deal, but with the same two Chinese companies. Here is the press release that was issued by Swedish Automobile this morning:

Zeewolde, The Netherlands, 28 October 2011 - Swedish Automobile N.V. (Swan)
announces that it entered into a memorandum of understanding with Pang Da and Youngman for the sale and purchase of 100% of the shares of Saab Automobile AB (Saab Automobile) and Saab Great Britain Ltd. (Saab GB) for a consideration of EUR 100 million.

Final agreement between the parties is subject to a definitive share purchase agreement between Swan, Pang Da and Youngman, which will contain certain conditions including the approval of the relevant authorities, Swan’s shareholders and certain other parties. The consideration of EUR 100 million will be paid in instalments.

An important consideration for Swan to enter into the transaction is the commitment of Pang Da and Youngman to provide long term funding to Saab Automobile. The administrator in Saab Automobile’s voluntary reorganisation, Mr. Guy Lofalk, has withdrawn his application to exit reorganisation . The MOU is valid until November 15 of this year, provided Saab Automobile stays in reorganisation .

When the news was published on BNR (Business News Radio), there were some cheers among the presenters. These people have probably quite short memory spans:

The funny thing about this press release is actually, that Pang Da and Youngman seemed to have lost some money on the way, as their wallet now suddenly contains €100 mln for 100% of the Saab stocks, instead of the €245 for 54% of the stock in Saab and Swedish automobile.

That this €100 mln deal is without the Dutch brand of luxury sports cars Spyker (another part of Swedish Automobile) could be interpreted by outsiders as that the value of the Spyker brand is estimated to €354 mln. That is grossly exaggerated. In reality, it probably means that Pang Da and Youngman came to their senses and estimated that €100 mln is probably more than enough for the eternal bleeder Saab.

People reading this should realize to other things:
·     Neither the Chinese, nor the Swedish government did approve of this deal. It is very doubtful if they will and if they will do so in time to save the Swedish automaker?!
·     This afternoon, a Swedish justice can decide that the current ‘suspension of payment’-situation is not legally admitted and then Saab could be finished immediately.

Summarized, you can state that Saab is still in very dire straits and that Victor Müller is currently operating like a cornered cat. That is: a cat with 9 lives, but still.
This can also be seen from the following press release that was also issued today, but that didn’t make it to the radio:

Zeewolde, The Netherlands, 28 October 2011 – Swedish Automobile N.V. (Swan)
announces that it issued a subscription notice for 3 million shares under the current EUR 150 million equity facility between Swan and GEM Global Yield Fund Limited.

The exact number of shares to be issued and the price thereof will depend on the pricing period which commences today.

In light of recent developments, North Street Capital, LP will not subscribe for 2.3 million shares in Swan and revoked its commitment to provide a loan of USD 60 million to Saab Automobile.

I can’t interpret this differently than that North Street Capital, LP woke up after having a bad dream about the chances of survival for Spyker and withdrew its offer. Cornered cat Victor Müller took another wild jump and opened a subscription for the issuances of 3 mln shares. Would you like to buy one? I don’t!

This article reflects only the opinion of the author and should not be handled like an investment advise.

Thursday, 27 October 2011

Companies have worries on the economy and their excess workforce… and start laying off personnel

One of the sad, but predictable results from the current recession is an increase in (mass) lay-offs among companies. In April I picked this up as a possible new trend:

It could be that these job cuts are the beginning of a more serious trend towards less employment. I wrote a number of columns mentioning the Part time Unemployment Benefit (PUB). This was a 50% government subsidy on salaries for companies to keep people employed that had too little work. In this way the companies could keep experienced personnel on the payroll until better days arrived.

What I had against this PUB is that companies that made use of it, missed the chance to become ‘lean and mean’ again. They gathered their personnel in the 2000’s:  while there was a situation of excess consumption in the USA and Europe, this also caused excess production. This excess consumption came to a sudden halt in the year 2008 in Europe and it is improbable that this excess consumption will return within a few years.  By keeping your personnel on an excess level, you run the risk of returning to red marks as soon as the economy chokes again.

Large consultancy firms, like Logica, Origin and Cap Gemini in The Netherlands, maintained a policy of lowering prices per hour for consultancy. These companies did this under pressure of the large banks and insurance companies. Contracts were bargained for large numbers of consultants and the discounts on the gross hourly rates were enormous. If you were not in on this, you were out!

The remaining rates were hardly sufficient to earn back fixed costs, but were still better than having 25% of the consultants without assignments. Although small consultancy firms sometimes had better deals, due to good personal relations of their consultants, also these firms had to give away 10-15% of their gross price.

The second, even more disturbing trend was: Consultancy assignments that became shorter and shorter. The number of assignments that had a duration of less than a month was soaring, while a duration in ´good times´ is often at least three months, especially in times when consultants are scarce.

The aforementioned trend of (mass) lay-offs is now sustaining, according to the Dutch implementing body for social security laws for workers, like the Unemployment Benefit.

Het Financieele Dagblad ( writes upon this developing story (link in Dutch):

Companies are ahead of recession, lay-offs increase

Implementing body for social security laws for workers UWV sees the number of resignations remain at much higher than expected levels. At the end of this year, companies may have applied resignations for more than 35,000 workers. That is about 16% more than the amount forecasted at the beginning of 2011. The organization adjusted its forecast, after the expected decrease of the number of resignations in the summer months, stayed out.

The organization earlier assumed that the number of resignations this year would drop to pre-crisis levels. The news of the UWV fits in a recent trend. 

The CBS stated lately that the unemployment is soaring currently. A substantial number of large companies – a.o. CSM (sugar and bakery products), Aegon (Insurances), Rabobank, KPN (telco), TomTom (navigation) and Philips (light, medical equipment and household appliances) announced intending to reduce the number of workers.

It is remarkable that the companies are front-running the forecast of a deteriorating economy. Normally unemployment lags economic development by about one year.

According to Hans Stegeman of Rabobank, the last recession of two years ago is still working its way through the labor market, while at the same time a possible new recession is calculated in.

´The last recession forced the government to restore its own budget. This is causing cutbacks and as a consequenc, a dropping number of jobs´, according to Stegeman. ´At the same time companies notice that the revival of the economy is stalling and export growth is stagnating. Companies are preparing for difficult times by cutting costs´.

According to the UWV, pre-crisis levels for resignations were 2000 per month. At the peak of the credit crisis, this number soared to 5000 per month. This dropped to 3000 per month at the end of 2010.

Although it is not satisfying to be right in this matter and I feel sorry for the people that are laid off, this is in itself not a bad development.

The part-time unemployment benefit halted companies in the operation of becoming ´lean and mean´ again, by reducing their production capacity and by laying off excess workers.

These excess workers remaining in their jobs painted a false image of a healthy economy in The Netherlands in 2010 and the beginning of 2011. And now, with the first economic headwinds ahead, companies raise the white flag and lay-off the people they should already have laid off in 2009.

This seems like a cruel measure, but it is better to lay off a few workers, than to go down with the whole company.

As the number of available workers will drop sharply in the near future, due to the coming retirement of the Dutch baby-boomers, the chance that these excess workers might find a new job soon is considerable.

That is the funny thing about the Dutch economy currently: although it is still in a depression that will last for a number of years, the coming retirement of the baby-boom generation means that workers might become scarce anyway.
However, the chance that this will lead to a price /wage spiral is very slim, in my opinion.

Hooray, there is a €uro-deal: a diluted deal that solves nothing and costs money to “nobody”, until it does.

The ignorant listener to the European government leaders could have the feeling that a deal of heroic proportions has been taken away from the gates of hell.
Prime-ministers, chancellors and presidents are boasting on their achievements and, considering my article D-day (€-day) in Europe on Greece, the deal seems indeed almost more than you could have bargained for.
First, an increase of the EFSF to €1000+ bln is not to be sneezed at. And the large banks’ ‘voluntary’ reduction of the Greek debt by €100 bln to a level of 120% of Greek GDP seems like a big step forwards.
In combination with the demand that European banks need a 9% buffer for their risk-bearing liabilities, it seems at first glance that the financial markets could have a sigh of relief.
The financial markets in Europe seem to applaud this deal by opening substantially higher, but will these feelings of relief last?
As always, the devil is in the details. The FT reports on these details in a thorough article by Peter Spiegel, Stanley Pignal and Alex Barker. Here are the pertinent snips, accompanied by my comments.
European leaders reached a deal with Greek debtholders on Thursday morning that would see private investors take a 50% cut in the face value of their bonds, a deep haircut that officials believe will reduce Greek debt levels to 120% of gross domestic product by the end of the decade.
The agreement, struck after nearly 11 hours of talks at a summit of eurozone leaders, includes a new €130bn bail-out of Greece by the European Union and the International Monetary Fund.
They [European leaders-EL] agreed to increase the firepower of their €440bn bail-out fund by providing “risk insurance” to new bonds issued by struggling eurozone countries – a scheme designed for potential use in Italy – but they did not specify the amount of losses that would be covered by the insurance.
Both Ms Merkel and Nicolas Sarkozy, the French president, said it would increase the size of the fund “four or five times”, but a final number could not be calculated because it was unclear how much money was left in the fund. Most analysts estimate about €250bn will remain after the second Greek bail-out, putting the fund’s new firepower at more than €1,000bn.
Although the details of the deal as outlined by both European leaders and the Institute of International Finance remained vague, officials said that €30bn of the €130bn in the government bail-out money would go to so-called “sweeteners” for a future bond-swap, which would be completed by January.
Some €35bn in such “credit enhancements” were included in the original July deal with the IIF, an association of global financial institutions. In that deal, the money was used to back new triple-A bonds that would be traded in for debtholders’ current bonds.
Whether the new programme would be organised in a similar fashion remained unclear. Such factors as the interest rates and maturities for new bonds are critical to determining how valuable the swap will be for private investors.
Some elements of the package appeared to be based on optimistic assumptions. Under the terms of the deal, Greece agreed to put €15bn it aims to raise from a vast privatisation programme back into the European Financial Stability Facility, the eurozone’s €440bn rescue fund. International monitors have already acknowledged that Greece will struggle to raise the €50bn in privatisation cash it promised earlier this year, but the €15bn is supposed come on top of previous commitments.
Although I printed only parts of it, the whole article is a must-read for anybody that is interested in the Euro-zone.
What can be said about the deal as outlined in this article?
Although the 50% haircut for the banks is officially voluntary, you could ask how much is truly ‘voluntary’ of it? And on the other hands: will all banks take part of it? Or will this be a reason for further delay?
Also it seems that the banks received their guarantee on the future sovereigns that are to be swapped against their current greek sovereign bonds (see the red and bold text). The €30 bln in so-called ‘sweeteners’ seem like a premium for the banks on stepping into the Greek (and possibly future Italian / Spanish) bond swap.
This swap will presumably take place according to the scheme printed in my article of yesterday (see the aforementioned link):
This is the reason that today the banks are screaming for additional guarantees, while being confronted with the EU´s proposal to receive ´voluntarily´ €0.15 in cash and €0.35 in new sovereigns for every €1 of old Greek sovereigns they possess.
This guarantee will almost certainly turn into a future transfer of taxpayer money into the banks, privatizing their profits and socializing the banks' losses on these bonds. It is always easier to grab money from faceless taxpayers than from banks that have gathered a powerful lobby for their interests. 
My main objection against the current solution is that a remaining Greek debt of 120% of GDP, in combination with harsh austerity measures on the already anemic Greek economy is not a winning recipe for restoring economic firepower in the country. It seems that Greece will remain in an economic coma and as long as this takes, the financial markets will be extra aware of the other struggling Euro-zone countries (Italy, Spain, Portugal and Ireland). In this way it seems more like delaying the problems than solving these. The €130 bln won’t help to end the Greek misery.
Then about the increase of the EFSF bail-out fund to €1000 bln; the current plan is that the fund won’t contain any more real money supplied by the EU-countries, but will make usage of leveraged funds, backed by guarantees from the EU-countries. This seems like a cheap solution for the EU-countries, but:
·    When the going gets really tough in Italy or Spain, this €1000 bln, although a staggering amount of money, is nowhere near to ‘enough’ for solving the problems there.
·    We had our share of bad experiences with leveraged funds in the recent past; these won’t cost you much money, until losses start to mount and suddenly they do. This leveraged fund won’t be any different, I’m afraid.
European leaders, and not in the least PM Mark Rutte of The Netherlands, always try to sell these rescue plans as 'free lunches' that won’t cost the Dutch/European taxpayer a cent. When will the lying and cheating finally stop on this subject? There is no such thing as a free lunch and there is no guarantee that won’t cost you money eventually.
Then there is the recapitalization of the European banks to meet the 9% capital demand. Bloomberg stated a figure of €106 bln, of which only €8.8 bln for the French banks. The Dutch banks would not even have to raise new capital for this.
Hey, am I the only person that doesn't believe one bit of this calculation? No, I'm not. Read Mish's very interesting article: Good News for Bears: Torture by Rumor Ends.

And last, but not least, how on earth is Greece going to collect this €15 bln in extra EFSF money, when it even can’t raise the €50 bln in privatization money?? It is like building in the next Greek crisis, in order to solve the current crisis.
So unfortunately, my final conclusion is that this €uro-deal is a diluted deal that solves nothing and costs money to “nobody”, until it does.  

Banks most assuredly need more than 106 billion in recapitalization efforts. The idea that French banks only need to raise 8.8 billion is preposterous.

Wednesday, 26 October 2011

D-day (€-day) in Europe on Greece: Why does Europe seem to make such a mess of the process to save the Euro?

It is very easy to get commiserated, bantered or even angered by the European political process around the Euro. I vented my spleen many times over the past 9 months since the creation of this blog and I will continue to do so in the coming months.

But this time, on D-day (or is it €-day?), I want to take a different stance and try to explain why the political process goes the way it goes, by looking at the most important protagonists of it.

This might help to understand the current processes and might shed a different light on the ‘communio opinis’ that the EU is screwing up currently.
And who are the protagonists of this Greek-European drama?
  • The large, internationally operating banks from outside the PIIGS with massive exposure to these countries 
  • Banks inside the PIIGS-countries themselves. 
  • Chancellor Angela Merkel of Germany 
  • President Nicolas Sarkozy of France 
  • PM Giorgos Papandreou jr. of Greece 
  • PM Silvio Berlusconi of Italy 
  • PM José Luis Rodríguez Zapatero of Spain 
  • PM David Cameron of the United Kingdom 
  • PM Mark Rutte of The Netherlands 
  • The smaller Eurozone-countries like Portugal, Ireland, Finland etc. 
  • Mario Draghi and Jean-Claude Trichet of the ECB 
  • The European Commission. 
  • The international (financial) media 
  • The Financial markets
The first thing that strikes me is that – of the mentioned political leaders – NOBODY is operating from a position of strength. All of the leaders here are more or less under fire at their home front, and operate like cornered cats, in order to secure their reelection. This situation makes that national priorities currently even more prevail over international priorities.

This is in itself already a case for a political and economic European Union, for the same reason which makes such an union currently virtually impossible: loss of sovereignty. That is seemingly bad for the individual countries, but much better for the EU as a whole

Large, internationally operating banks outside the PIIGS
The large, internationally operating banks outside the PIIGS-zone all play for keeps. Banks like CA, BNP Paribas en SocGen of France, Commerzbank and Deutsche Bank from Germany, The ING and Rabobank from The Netherlands and RBS and Barclays from the UK would all be in immediate solvability and liquidity trouble, when Greece and (especially) Italy would default.
All these banks have heavily invested in the PIIGS; not only through sovereign bonds, but also through loans to companies, banks and governments in the PIIGS-countries. I recall here the same schedule that I also used in my article Dutch Banks are solid as a rock.

Amounts in €mln.Source:

And please remember that this is only the exposure of the Dutch banks. The intertwinedness of capital in the EU and especially the PIIGS is enormous.
The ´voluntary´ write-off of 50% of the value of Greek sovereigns that was proposed by the European Commission today, is enough to cause a serious headache in many executive suites. However, an uncontrolled default of Greece and/or (even worse) Italy or Spain would lead to an immediate vaporizing of equity capital in more than a handful of banks all over Europe.
This is the reason that today the banks are screaming for additional guarantees, while being confronted with the EU´s proposal to receive ´voluntarily´ €0.15 in cash and €0.35 in new sovereigns for every €1 of old Greek sovereigns they possess.

Banks inside the PIIGS-countries themselves.
The banks in the PIIGS-countries are in an even worse situation. These are mostly filled to the brim with sovereign bonds and loans to their own government. A government default would immediately vaporize the equity capital of most of these banks.

Angela Merkel
This 6-year CDU Bundeskanzler of Germany, that has the bad luck of lacking the charisma of her predecessors Gerhard Schröder and Helmut Kohl, lost some important elections in her country lately. She is under increasing pressure of her own party and the German people to be ´tough on the Greeks and tough on debt´.

On top of that she is tied by hand and feet, due to a recent verdict of the Constitutional Court in Karlsruhe that demands that all decisions on European debt are acknowledged by the ´Bundestag´ in advance. Today she got the blessing of the German parliament for an increase of the EFSF, but her leeway is more limited than a flea´s condo.
That is the reason that she doesn´t acknowledge of QE1 (Quantitative Easing) by the ECB and claims it should stop immediately with massively purchasing sovereigns of the PIIGS.

Nicolas Sarkozy
Although the French president does have charisma (and Carla Bruni(!)), it seems to have worked out in French politics. The French people are sick and tired of their president, which makes a reelection very, very uncertain.
The worst thing that could happen to Sarkozy are defaults of large, French banks like the three mentioned before or a downgrade of the French credit rating, making French life more expensive. Add the lagging French industry and economy and you have an explosive mix. This is the reason that France thinks that the whole of the EU should add to the recapitalization of the French banks and that Sarkozy is strongly in favor of QE1 by the ECB.

Giorgos Papandreou
The Greek PM is dealing with the worst riots since Greece became a democracy. The people don´t trust their (corrupted) leaders and are totally fed up with the European austerity measures. The EU, IMF and ECB on their behalf demand much more Greek austerity. Papandreou is stuck between a ´rock and a hard place´ and is now cutting his economy into smithereens with all the austerity measures. A 5% slump of the Greek economy was the result of his recent cutbacks.

If I would be in Papandreou´s shoes, I would probably ´call it a day´ and let Greece default. He might do so too at short notice.

Silvio Berlusconi
Where a ´vote of no confidence´ usually means the end for a politician, Berlusconi survived more than 40. He is a cat with 90 lives and a Phoenix that rises from the flames every time.

But the old fox feels that he is at the end of his lifecycle, as he had too many scandals and too much political trouble. Especially since today Italian papers spread the rumour that he would resign in exchange for a raise of the pension age in Italy. This rumour was later debunked by the Lega Nord of Umberto Bossi, his partner in crime. In the meantime there is an agreement on the Italian pension age, but little people know the content of this agreement.
Europe doesn´t trust Berlusconi at all, since most of his promises on the Italian economy were worthless. The Italians are probably sick and tired of his corruption, his connections to the mafia, his monopolistic grip on the media landscape and his bunga-bunga parties. They are also sick and tired of the economy that is now stalling for almost ten years, due to the excess loans costs in Italy.

Berlusconi will do his job to save the Italian banks (that store the cash of his media empire) and to get as much money from the EU, IMF and ECB as necessary.

José Luis Rodríguez Zapatero
The Spanish PM is PM under resignation, which makes his leeway very limited. He also won’t run for PM in the next elections. The Spanish unemployment situation is truly desperate, the economy anemic and the Spanish real estate market a mess. Although the Spanish government cannot be blamed for having senseless politics, the budget deficit of 9% is much too large for the ailing economy to bear.

Zapatero will fight for keeps: i.e. for saving the Spanish economy by getting necessary aid from the EU and the Euro-zone. But he probably won’t have the energy that a candidate running for reelection has.

David Cameron
David Cameron is a Euro-hater (that was a tough one) and – as a true Briton – feels literally more on an island than connected with Europe.

He regrets every day that the UK is part of the EU and regrets even more that he has to defend this decision on a daily basis to his own, even more Euro-phobic, Conservative Party.

Cameron will do everything possible to get out of the group of countries that has to pay for saving the Euro, but thanks to ´his´ banks Barclays and RBS, he is in the Euro-misery up to his ears.
Talking about ´operating from a position of strenght´: as PM of the first British coalition cabinet in ages, he has virtually none. That explains his tough stance on (about) anything European, which annoys ´Merkozy´.

Mark Rutte
The PM of the first Dutch minority cabinet in ages has to deal with the extremely populistic, Euro-phobic Party for Freedom (PVV;his silent supporting partner for his cabinet) at one hand and on the other hand the Euro-loving opposition. He has to battle for every decision on Europe and gets always some important parties alienated by his decisions.

The PVV doesn´t want one more cent for Greece, while the opposition wants to save the Euro at all costs.
With this in mind, Rutte does remarkably well from a political point of view, but doesn´t have a coherent message for the EU. This is the reason that he currently focuses on the EU Commissioner for the Budget: the perfect decoy for being utterly clueless on what to do with the Greek situation.

His henchman Jan-Kees de Jager (Finance) is busy ´being tough on debt´ and is further known for his misplaced oral outbursts on the Euro and the Euro-zone.

The smaller Euro-zone countries
Since the Slovakian ´nyet´ to the EFSF and Finland (True Finns), everybody is aware that small countries have a voice too in Europe. Sadly enough it is not the same voice, but a mixture of Euro-friendliness (Luxemburg, Belgium and Portugal), angriness on Greece (Slovakia and other small, poor, new Euro-zone countries) and Euro-phobia (Finland). This sounds like a cacophony, but a cacaphony with the right to veto for every soloist.

Mario Draghi and Jean-Claude Trichet
Trichet runs the risk of leaving the ECB, while the organization is in a state of despair. He is forced to take decisions (Euro QE1) that he doesn´t want to take, as his main task is fighting the inflation. He hopes he can leave the organization through the front-door, but fears the back-door.

Draghi, the new president, is already suspicious as being 1. An Italian in an ECB that is dominated by people from the PIIGS-countries and 2. A former Goldman Sachs employee.
He never can do it right: for nobody. If he is too strict on the monetary policy, the French and Italians will blame him. If he is too loose, the Germans and Dutch will hate him for weakening the Euro.

European Commission
The EC (i.e. José Manuel Barroso and Herman van Rompuy) looks at the current situation with definite tooth grinding, while the EU situation is running quickly out of hand.

They want a political union and want an economic union, but know that this is virtually impossible now. This turns them into toothless tigers that have no power, compared to Merkozy.

The Financial Media
If there is one group that benefits from the current situation, it would be the financial media. These are having their finest hour with Minyanville, Bloomberg, Financial Times, WSJ and even the Dutch Financieele Dagblad being the ´talk of the town´every day.

Not to falsely accuse somebody, but you better believe that even the smallest spark within the Euro-zone will be promoted to a forest fire in the current media climate.

Even the author of this blog couldn´t even dream of having so much to write about in his first year of blogging.

The Financial Markets
It is the task of the companies and people on the financial markets to make money from every situation. That is what they do. Although the people involved are sometimes involuntary whistleblowers, it is not their main task.

Financial Markets are (falsely) accused of deliberately spreading rumours, abused as being scavengers or on the other hand seen as the party that mucked out the stable. All of this and at the same time none of this is true. 
They just want to make money.

Is it any wonder that tonight´s ´Mother of all Euro meetings´ can´t and won´t yield a substantial result?!

No it isn´t! The situation is that just too many parties with too many different problems and purposes are involved. That´s sad, but true.