European Union: On Stranger Tides

With the climate getting even bleaker and the Greece moving forward to an evident default, it becomes even more important, to assess the situation and see how it is going to change the world. The entire European Union stands on solid tectonic plates, where small ripples have started to appear. Recent outburst of Dexia is a mere upstart of what the entire banking system is going to unleash. The story is not from another world but looks so much similar, of how it began when the subprime mortgages refused to payback any returns back in 2008.

It is evident that the liquidity in Greece is going to dry up in November. An evident default has been predicted. What we are left with is how the exposure would spread into the other Eurozone economies. Even after the second round of bailouts through France and Germany the situations have not showed any form of improvement. Today the lenders are demanding a premium of nearly 22 percent on the Greek bonds of the same nature as those of Germanic origin. There is no way possible to pump in more capital into the system. The outcome of the lack of liquidity is what is very much visible at Dexia.

Dexia is Belgium- French based financial institution. Post a government bailout in 2008 due to the subprime crisis, Dexia came to be owned primarily by the French and the Belgium government. However the contagion in the European Union, over the banking crisis has forced Dexia to ask the government for help. The crisis and the fear over a total default in Greece, has forced people to pull out assets and driven the short term lending of the banks to the ground. The short term lending in Dexia was used to finance long term bonds to match both ends. However the evaporating liquidity has turned the tables.

Bailing out the bank was a good option; however currently there are a string of infected lenders, thus it seems quite evident that the decisions would have to be more unbiased. Dexia owns around 520 billion Euros in assets out of which 200 billion are supposed to turn out bad. The size of the bank is nearly twice the size of Greek economy no less. As the decision was taken to restructure the bank a number of implications could be drawn out of it judging by the mindset of the board. The lenders board has decided to tear up the entire bank and create a troubled section that would default. Its 200 billion of bad debt has been decided to put under an entity which they called a ‘bad bank’. These measures rhetorically speak of the confusion afloat.

The French and the Belgium based units rushed into claim their own working units. It may look like a relief to prevent contagion but the exposure of all entities is so much embedded into each other that at one point the bubble is going to burst. On the larger scale, the eyes are however, fixed on the decision made by the Sarkozy and Merkel duo to solve the ongoing problem. Merkel is no longer a favourite player in German politics. Due to the repetitive bailout sessions the Germans are getting indifferent over the issue that why are they overtaxed to bailout the Greek economy. The bailout may sound quite reasonable; however in reality it is very difficult to make a commoner digest the fact.

On the other hand the French economy not very sound still commands a lot of voice in the European Union. Both of the members have to decide how they are going to take the future of the crisis forward. European Union Financial Stability was a SPV created last year. The EUFS was supposed to derive its liquidity through the financed capital from the member countries. There is a clause that states that it could loan out cash to the tune of 440 billion Euros in case of crisis to AAA credited bonds. Though the Greek bonds may no longer be high on Moody’s opinion however en-cashing this facility may be a way to go. However the system still has several constraints.

Due to the constricted market the Germans are sceptical whether they would ever be able to redeem the bailout because after all they would be the chief financiers. The French on the contrary are quite forceful on the matter to use the money right now. A bailout seems a more favourable outcome that facing austerity measures for them. The English riots are a visual example of how bad the backbone crush of the West over which the Sun supposedly smiled.

The only king maker left in market is none other than the China itself. It has foreign reserves to the tune of trillions of dollars and everyone knows in secret it is buying up bonds. China today fashions the name of the key market player not because it wants it but rather because it needs it. The survival of the West and East is so much entwined into each other that a collapse might send every other economy to the dogs. The entire buyer seller chain depends whether the China would be able sell enough to the West when they get the money that it has used to loan out to them. Thus all eyes are on this player whether it would actually be able to make it or let it fall.

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Market Seizure.. Updated!!!

US versus China

When last we looked the United States was putting in unwanted pressure on the Chinese architecture and economy wise tightening their claws to curtail whatever money China was earning.

The reality of the truth well on the other side is that China holds such a huge population and pegging itself t the dollar at a constant value since 2008 it has not got many options to enjoy when price modulation is concerned. More or less whatever margin China gets on the goods that is sold is nothing but a meagre 2 percent. This means that in the United States if the bill is passed and the strong regulations are being applies on the Chinese economy then the exporters would be driven to the ground and the cushioning effect that the China had been downplaying since years would be devastated.

United States has a previous experience of such regulation when it has destroyed foreign economies to give boost to internal production. Something of this sort happened in 1990s around when goods that were imported from Japan were made very costly so that the simultaneous American goods can also become competitive.

As can be seen both the House Democrats and the Republicans are fixed on their point to pass the bill as according to them the curtailment of Chinese hands is an important agenda but time will tell what is bound to happen.

With the American economy completely broke and still waging war in Asia and the Middle East it becomes complicated to trust motives when things do tend to seem otherwise too and China vetoing whatever it can with the 54 African votes in the United Nation against any American imposed restrictions in Iran situation is pretty dim.

The situation however becomes even more gruesome with the sudden ascent of Chermany and not in the most positive way. Speaking of intentions some intentions have still not become clear as what the countries exactly want from the on going crisis that is pulling everyone into it.

This is the third time in a row when the fiscal tightening has forced the masses of the Greece on the streets while on the other side more sophisticated European nations are discussing how to do away with the need to sponsor a bailout for the bankrupt nations.

Germanic Intentions

Mr Schäuble, German finance minister addressed his critics by declaring Greece’s crisis had shown it was “obvious” that the 16-nation eurozone’s rules were “incomplete” and unable to deal with situations long thought “inconceivable”.

His argument comes after days of vigorous debate within Germany, and with other European Union partners, with some questioning the timing of the initiative and others the need for an alternative to the International Monetary Fund.

The Bundesbank, Germany’s national central bank, this week signalled its opposition to any proposal that might distract eurozone governments from the more immediate task of bringing Greece’s public finances under control.

Axel Weber, Bundesbank president, described as “not helpful” discussions about the “institutionalisation of emergency help”, which he said could prove “counterproductive” given that eurozone countries were currently helping Greece.

Greece even though being a paramount question need proper thought is saving it worth the cost for Germany.

If we go by the words of Mr Schäuble there can only be one thing that might come out clear and that would be that Germany is looking at options for a safe exit from Euro zone as far as the currency binding is considered while planning a bailout too.

The Boasters

Chermany as has the name been coined denoted the two of the world’s biggest exporters governing whatever the world eats. China and Germany are, of course, very different from each other. Yet, for all their differences, these countries share some characteristics: they are the largest exporters of manufactures, with China now ahead of Germany, they have massive surpluses of saving over investment; and they have huge trade surpluses.

Both also believe that their customers should keep buying, but stop irresponsible borrowing. Since their surpluses entail others’ deficits, this position is incoherent. Surplus countries have to finance those in deficit. If the stock of debt becomes too big, the debtors will default. If so, the vaunted “savings” of surplus countries will prove to have been illusory: vendor finance becomes, after the fact, open export subsidies.

China is already clawing the possibility of financing every spending of USA but considering the consumption of European Union is considered if Germany were to sponsor Greece bailout or for that matter any other bailout it would choose to leave the Union while doing that or force the weak nations to do so.

The situation is like Germany no longer wants to be associated with its weaker counterparts but seriously wants to help them. It is still playing with its cards till the time when the exact structure of European Union future would be decided for that would decide how the pegging of currencies would occur.

The time is like when financing counterparts is more like making them eat more and in doing so fuelling the market of the country itself. A kind of symbiotic foothold so that the eating and consuming cycle goes on, however this complicated cycle of Euro common currency is restraining countries as they are economically pegged to each other.

More to come.........

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Greece greased up !!!!

THE GREEK DEBACLE

The worst is not yet over. Just as the topsy-turvy market began to stabilize after the severe stroke of the Dubai fiasco nearly toppled it, the Greek debacle has once again pushed it into consternation.

Had it not been for the support of Abu Dhabi, Dubai would have possibly collapsed, now the search is on for the savior of the Greek economy. 

Corruption is widely regarded as one of the triggers of the Greek debt crisis threatening the euro common currency. Corruption is part of everyday life in Greece, and private households paid more than 780 million euros in bribes in 2009.

But the reality is more complex. A crisis began with the previous ­government in Athens cooking the books developed into three interlocking themes – the reluctance of the Greeks to swallow the nasty budgetary medicine prescribed for them, the medium-term outlook for the single currency and Europe's long-term role in a rapidly changing global economy.

Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules. At some point the so-called cross currency swaps will mature, and swell the country's already bloated deficit.

Had it been a country with a currency of its own, it could possibly have alleviated its present predicament by devaluation of its currency and hence would have created fluidity in the market and reined in inflation and national debt. But it can’t help it, being bound by the single currency Euro, over which it has no possible control.

The Country could do nothing but beg the other stronger (comparatively) countries like Germany and France to holds its hands while it is staggering on the precarious bridge to cross over from the land of recession to the new world of fiscal stability.

The IMF is also supposed to bail out the country with a humungous aid to help this debt ridden country.

The big market players are concerned with the present scenario of the commitment level of the Greek government.

The risk of another default or – the doomsday scenario – of Greece deciding to leave the single currency has spooked investors, who are demanding a high price for holding risky Greek debt. The gap between the interest rates on rock-solid Greek bonds has widened sharply.

The political equation of the country is also quite unbalanced with public raging over the price hike and tax cuts. Bedlam is reining over the country.

The Greek prime minister has been criticized for spending cuts in the public sector services and for raising the tax rates which is blurring the already faded vision of a better future.

The Socialist government increased sales, tobacco and alcohol taxes and cut public sector holiday allowances to save 4.8 billion Euros (6.5 billion dollars), equal to about two percent of gross domestic product (GDP).

Pensions in the public and private sector are also frozen.

All this has deeply underlined the error committed by the European countries by making Euro their single currency in haste without considering the possible ramifications. A new sense of direction is what this predicament demands of the European authorities.

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European Union in a FIX

Even as we remember much of what happened in Dubai as the entire stock market crashed and the world market was left lamenting on what has just happened many had speculated this was just the beginning and looks like it is turning out to be....

If the huge bailout of the entire American Economy was not enough, the later funding of the carcass of the Japanese Airlines which still hangs on the string between Delta or American Airlines for bailout support, what we have now next in line is the whole European Union on the verge of mass downturn and bankruptcy.

Well it has become public knowledge for the past few months even after defending their stance on the topic of financial stability that currently the entire European Union in facing a huge downturn and their economies stand on the rocks, and countries like Greece, Spain, Portugal, Ireland and most important of them Italy stands on being a blown up crashed economy.

European Union for the past two decades has been the symbol of financial wisdom and supremacy. With over 500 million citizens, the EU combined generates an estimated 30% share (US$ 18.4 trillion in 2008) of the nominal gross world product and about 22% (US$15.2 trillion in 2008) of the PPP gross world product.

The EU has developed a single market through a standardized system of laws which apply in all member states, ensuring the free movement of people, goods, services, and capital. It maintains common policies on trade, agriculture, fisheries and regional development. Sixteen member states have adopted a common currency, the euro, constituting the Eurozone and making it one of the strongest currencies in the world.

However with the current credit crunch many of the enlightened ones on the EU list are in the path of going bankrupt. Following the giant default in the Dubai when the Dubai world asked to further its payback of the load on about 60 billion dollars timeline by around six months the utter reality behind the situation is coming out.

The entire European regime has been built upon similar credit and much of the money that blew up the system also originated from the taxpayers in the European economies. Seeing this even in the European Union investors are getting worrying remark as the decline in the market is bringing out the hollowness in the system. The Standard & Poor’s has recently cut its credit outlook for Spain to “negative” from “stable,” fanning concerns that sovereign defaults will spread throughout the global economy.

The investors are fleeing away before a re-Dubai can happen. There is an increased fear among investors that the world could see a wave of global credit defaults and maybe it has started showing it ugly face of its beginning.

With the investor money dwindling and no further surging demand the credit system is bound to fall. The deficit with the government and most of the real estate companies stand over evaluated. However, Spain is just one of the region’s troubled economies. Europe’s most vulnerable countries have been nicknamed the “PIGS,” – Portugal, Ireland, Italy, Greece, and Spain. Fitch has even downgraded its outlook on Portugal’s sovereign-credit rating to “negative” from “stable,” as well, citing a deterioration of public finances.

The situation is like the productivity in the system in terms of real growth is zero so there are no way countries like Spain can innovate their way out. The bank cited figures from the International Monetary Fund (IMF) that indicate Spain’s housing sector it still 12% overvalued. At its peak, 20% of GDP was accounted for by the housing sector and construction.

The ratings agency in last year March cut Ireland’s triple-A sovereign debt rating by one notch and downgraded Portugal’s rating in January. Greece however has been an interesting case. It has failed to contain its deficit, which this year is expected to total 12.7% of gross domestic product (GDP). The country’s current account deficit rose to nearly 15% of GDP last year, but probably fell below 9% for 2009. Meanwhile, the European Commission (EC) projects Greece’s total government debt will exceed 112% of GDP. In downgrading the nation’s credit, Fitch said government debt was likely to rise to close to 130% of GDP before stabilizing, and that proposed pension reforms, spending cuts and broadening of the tax base would likely not be strong enough to reduce its debt burden.

If we look it from a different perspective that of the European Union the fiscal deficit of Greece which is the most in question due its thin line situation right now is around 250 billion USD which is not big for countries like France and Germany who still have a very sound financial situation but what complicates the problem is that they cannot bail out Greece.

Even if they bailout Greece how answerable they are going to the next country which is going to default. And leave aside Greece it is the grandmaster England too which is under the clouds. The private sector is slowly deserting these economies due to these negative sentiments are building up and the public sector is being overburdened.

Bailout is just not the answer to the situation. There has to be created a sustainable situation such that the countries are able to turn the wheel of financial system. Standing on their debt of huge amount is increasing the public outcry and the government is looking at the people for over taxation. However even if you overtax the public, on the daily items or other similar services how much more can you generate? Already the entire economy is bleeding and making it ever more vulnerable to a complete collapse can diffuse the setup.

The end is that the entire European Union is in a fix. They maintained solidarity in their triumphant days but with the debt burden what is to watch how they would fair on this front. The economies have maintained harmony till now but would throwing them out can be a question? It is a likely doubt as the situations may force an action. The negative sentiments are affecting the Euro as a whole and with no proposal of Greece bailout and their false belief of a Greece sustainability makes the future wary.

The public is in high discount and has constant complaints against the government but who is there to look after them. Who listens to common man these days......?It is the time of the demise of the commoners!!!!

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