Merkozy Proposes Quick, New, Drastic "Stability Pact" to Fight the Euro Zone Sovereign Debt Crisis; Maastricht Treaty Trashed by Committee

German chancellor Angela Merkel and French President Nicolas Sarkozy proposed a "quick new stability pact" that allegedly will bypass the need for treaties. However, there is already disagreement over the role of the ECB.

Please consider Germany, France plan quick new Stability Pact

German Chancellor Angela Merkel and French President Nicolas Sarkozy are planning more drastic means - including a quick new Stability Pact - to fight the euro zone sovereign debt crisis, Welt am Sonntag reported on Sunday.

The report, which echoed a Reuters report on Friday from Brussels, quoted German government sources as saying that the crisis fighting plan could possibly be announced by Merkel and Sarkozy in the coming week.

The report said that because it would take too long to change existing European Union treaties, euro zone countries should avoid such delays be agreeing to a new Stability Pact among themselves - possibly implemented at the start of 2012.

Desperate Logic

Excuse me! There does not need to be treaty changes because a subset of the treaty signers can agree among themselves to trash it? Exactly what kind of desperate logic is that?

Among the countries in the Stability Pact there would be a treaty spelling out strict deficit rules and control rights for national budgets.

The European Central Bank should also emerge more as a crisis fighter in the euro zone. The ECB is independent and governments cannot tell it what to do. But the expectations on the ECB are clear, Welt am Sonntag wrote.

"Based upon these measures, there should be a majority within the ECB for a stronger intervention in capital markets," Welt am Sonntag said. It quotes a central banker as saying: "If the politicians can agree to a comprehensive step, the ECB will jump in and help."

ECB to Jump in and Help?!

Excuse Me! Since when will Germany agree to that? Since when will the ECB agree to that?

The European Commission, the EU executive arm, put forward proposals on Wednesday to grant it intrusive powers of approval of euro zone budgets before they are submitted to national parliaments, which, if approved, would effectively mean ceding some national sovereignty over budgets.

This could lead to joint debt issuance for the euro zone, where countries would be liable for each others' debts.

Germany strongly opposes the joint issuance idea fearing spendthrift countries would piggyback on its low borrowing costs - meaning no gain for the virtuous and no pain for the sinners.

Maastricht Treaty Trashed by Committee

I see Germany does not agree to that. Does the ECB?

What about other countries that might not like to see the Maastricht Treaty trashed because a handful of countries agree to do just that?

This is an incredibly slippery slope, and hopefully the German Supreme Court puts an end to the idea before it gets too much further along.

As a side note, Merkel has lost her mind.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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In Fiery Protest Against Fractional Reserve Lending, Disgruntled Ex-Employee of Chairman of Rural Bank of New Zealand Sets Car on Fire in Mall

The New Zealand Herald reports Fiery protest Against Fractional Reserve Lending 'Endangered Public'

A Bay of Plenty farmer who set a car alight in a protest in central Wellington this afternoon has been arrested and charged with arson.

The 40-year-old man set his car on fire in Wellinton's Cuba mall at about 1.30pm.

The man said in a video posted on Facebook that he was an ex-employee of the chairman of the Rural Bank of New Zealand.

"I've learnt a lot of stuff since then, and I've had enough. I'm gonna make this car disappear," he said.

He claimed that "fractional reserve lending is the root of all our problems" before walking to the boot of the car, which was filled with rubbish, with what appeared to be a lighter.

There were shrieks from by-standers as he was thrown backwards from the force of the explosion that followed.

He then threw flaming material back into the boot of the car before closing it.

He announced to shocked witnesses that the car was full of petrol and asked them not to put it out.

"I'm just waiting for police to turn up, I've made my statement."

Plum cafe owner David Fenwick said he heard a loud bang about 1.50pm and ran out of his cafe to see what was going on.

"Suddenly we heard an explosion, so I ran out the front and saw a red station wagon, and there was a fire behind it. I thought it was a street performance gone wrong."

Mr Fenwick ran inside to grab a fire extinguisher, and with a neighbour shop employee, put out the pile of burning rubbish.

"Unfortunately it took hold pretty fast....and the fuel tank exploded. And then it was just noxious smoke and a burning car in the mall on a lovely sunny day."

The fuel tank explosion took part of the body work off, and the car was now a charred wreck with blown-out windows, he said.

The man had spraypainted the message "what is fractional reserve banking...Google it" next to the car, he said.

The YouTube video does not show the explosion or the man's statement. This Facebook video does.

Warning: Harsh hanguage as the protester is blown backwards by the explosion he caused.

Please see "Fractional Reserve Lending is the Root of Our Problems"

I happen to agree with him. FRL is one of the root problems. However, he did not pick the best manner in which to protest, to say the least.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Latest Idiotic Plan: No Losses for Banks or Bondholders because "Losses Undermine Confidence"

In an attempt to improve confidence, yet another hare-brained scheme was launched by France to spare bondholders any losses.

Please consider Euro zone may drop bondholder losses from ESM bailout

Euro zone states may ditch plans to impose losses on private bondholders should countries need to restructure their debt under a new bailout fund due to launch in mid-2013, four EU officials told Reuters on Friday.

Commercial banks and insurance companies are still expected to take a hit on their holdings of Greek sovereign bonds as part of the second bailout package being finalized for Athens.

But clauses relating to PSI in the statutes of the European Stability Mechanism (ESM) - the permanent facility scheduled to start operating from July 2013 - could be withdrawn, with the majority of euro zone states now opposed to them.

The concern is that forcing the private sector bondholders to take losses if a country restructures its debt is undermining confidence in euro zone sovereign bonds. If those stipulations are removed, most countries in the euro zone argue, market sentiment might improve.

"France, Italy, Spain and all the peripherals" are in favor of removing the clauses, one EU official told Reuters. "Against it are Germany, Finland and the Netherlands." Austria is also opposed, another source said.

Germany and some other member states were hoping to bring the ESM, which will have a lending capacity of 500 billion euros, into force as early as July next year, but disagreement over its structure could delay that.

That's right folks, we are going to bail out the banks and no one has to take any losses (except taxpayers of course who will "share" 100% of the risk). Otherwise there will be a "loss of confidence" in the same banks that plowed into Greek, Spanish, Irish, and Portuguese debt because supposedly there would be no losses on sovereign debt.

Now they have taken a no-loss idea that has already blown sky high, and want to expand it to the next level: "no losses on bailouts".

This plan is so stupid only government bureaucrats could dream it up.

The only true way to restore confidence is to punish banks that make stupid lending decisions. Thus, 100% of the losses should go to the bondholders, not zero percent.

Addendum:

Reader Jim writes ...

A buddy of mine tells a story about being in the Army. Each time they asked their commanding officer why they had to do the latest unpleasant assignment, he would reply "It builds character." One day a lonely voice in the back said "Sir, we have enough character already."

In that spirit let me inform the politicians "I have enough confidence already."

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Do It Yourself Interactive Eurozone Bank Stress Test

Reuters has an interesting Interactive Eurozone Bank Stress Test

Adjust the Tier 1 Capital Ratio and Sliders for Haircuts and out pops an answer. This is what I came up with. It is hard to get the sliders to stop exactly on the spot you want.



A Political Problem?

Please consider Franco-Prussian flaw

The barriers to a proper recapitalisation of Europe’s banks look political, not economic. That’s the conclusion of Reuters Breakingviews’ latest bank stress test, which analyses what would happen if governments have to fill the entire capital hole required to restore confidence in Europe’s financial system.

The shortfall created by a tougher stress test is certainly large. Take the 90 banks that participated in the European Banking Authority’s now-discredited exam in July. If banks were forced to mark their sovereign debt to market and achieve a core Tier 1 capital ratio of at least 7 percent under a stressed scenario, they would need 93 billion euros. Raise the pass mark to 9 percent, and the hole is 260 billion euros.

That’s a giant leap from the gap of 2.5 billion euros identified by the EBA in July. However, when judged against the economies of the 21 countries whose banks sat the test, it’s still manageable. A 93 billion euro capital injection is equivalent to only 0.7 percent of the countries’ expected GDP for 2011. Even with a 9 percent pass mark, the bill is still just 2 percent of GDP.

Peripheral states would still suffer. At a 7 percent pass mark, Greek and Cypriot banks would need a combined 36 billion euros of extra capital. Footing the bill would push Greece’s 2011 debt-to-GDP ratio to 171 percent, from 157 percent. Cyprus’ post-recap debt would be 86 percent of GDP, 26 percentage points higher than before. But both those countries’ banking systems always needed help to cope with a Greek default.

The real question is whether Spain and Italy, which face a combined bill of 22 billion euros, need bailout money as well. However, financing the recap will only add 1 percent to their respective debt-to-GDP levels.

France and Germany have recently squabbled about whether the recapitalisation of their banks should be financed by the countries themselves, or by the European Financial Stability Facility. With self-help perfectly plausible, it suggests the real problem is justifying further bank rescues to voters.

The Problem is Political

I came up with a shortfall of 557 billion Euros. I suspect the answer is a lot more, say one trillion euros (not counting real estate loans, personal debt, and corporate debt writeoffs). However, there is absolutely no political will to allow that to happen, except via extend-and-pretend.

The problem is indeed political. The bondholders (that means banks), not taxpayers need to take those losses. Politicians (led by Nicolas Sarkozy) refuse to accept that.

Yet, the market will force it one way or another. The preferred way would be for banks to take a huge up front hit, right here, right now. The slow, painful way would be to stretch this mess out for decades like Japan did.

Politicians always want to avoid up-front pain. They will opt for slow-and-painful, no matter what the amount is. However, as I have said Eventually, Will Come a Time When ....

Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the "bail out" debt foisted on their country to be null and void. That person will be elected.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Not your grandfather’s Republican Party; President Obama and Mitt Romney are Nearly One and the Same!

Not your grandfather’s Republican Party

My lifelong friend and high-school classmate had an wonderful op-ed on iPolitics today. Please consider Not your grandfather’s Republican Party by David Wise.

One of the most negative things to have happened to the increasingly dysfunctional political system in the United States has been the transformation of the Republican Party over the last generation into the party of fiscal deficits. At one time, the bastion of balanced budgets and no free lunches, 70% of gross public debt through the last fiscal year was accumulated under the last three Republican presidents who ran deficits twenty out of twenty years averaging 3.9% of GDP.

Having inherited a budget surplus from Bill Clinton, George W. Bush presided over a doubling in federal debt, simultaneously cutting taxes while running two wars on credit. Railing against domestic spending, the same administration implemented a large new unfunded prescription drug benefit. Yet now, as the opposition party, Republicans pontificate about the dangerous levels of gross public debt (now at 101.1% of GDP) and last summer set about playing chicken with a possible default on our financial obligations. In now trumpeting national debt as a paramount evil, the Republicans approach the debate by taking tax increases and defense spending off the table – which is somewhat like resolving to set about losing weight by eschewing dieting and exercise.

Conservatives are right to raise issues about what they see as a tendency to throw money at domestic programs, yet refuse to apply the same logic to spending on the military. In a world with no existential threat such as we faced during the Cold War and in which 85% of global defense spending is by the US and its allies, the US defense budget is higher now on a constant dollar basis than it averaged during the Cold War. There is probably no part of the Federal government that is more poorly and wastefully managed than the US weapons acquisition programs where massive cost overruns are common.

The current situation is dangerous and unsustainable. This year the US government will collect taxes equal to 14.4 of Gross Domestic Product (GDP) – the lowest level since 1950 – yet spend 25.3% of GDP. Serious people know in their hearts what has to be done. ....

Here again is the link to the entire article: Not your grandfather’s Republican Party.

President Obama and Mitt Romney are Nearly One and the Same!

I do not know which candidate my friend backs, if any. It is easy enough to make a case that every candidate is flawed.

However, I am in 100% agreement with the central thesis of his article: "Serious people know in their hearts what has to be done."

To that idea, I have a few questions.

Do You Want More Bailouts? More War-Mongering? More Nation Building? More Federal Spending? More Status Quo?

Let me phrase the above in a single question: Do you want more of the same?

Polls suggest you don't. Your votes say you do. So which will it be?

If you want more of the same, then vote for President Obama. If you want more of the same you can also vote for Mitt Romney or Herman Cain.

Whether you voted Democratic or Republican in the last election, it did not matter. The non-super budget committee proves it as does Obama's carry-over of Bush's bank bailout policies.

The sad fact of the matter is a vote for Obama is a vote for Mitt Romney. Likewise, a vote for Mitt Romney is a vote for Obama.

Certainly a few details will change, and a small set of  "beneficiaries" will be different (for the one percent). However, for the average person, it simply will not matter. The average person will be ruined by the war-mongering, anti-free trade policies of all of the Republican candidates but one.

The latest Republican debate offers strong evidence of my statement.



Link if video does not play: Ron Paul Highlights in 11/22/11 Debate


Do You Want More of the Same?



As preposterous as it may have sounded at first glance, Obama and Romney are nearly One and the Same!

Neither will tackle the budget deficit. Both will keep military spending intact. Both support the "un-patriot" act.

To be fair, Romney is more likely to start a devastating trade war with China (in fact he has guaranteed it), while president Obama is more likely to waste money on social programs and big labor.

Some choice!

The simple fact of the matter is: it does not matter much if you vote for Mitt Romney or Barrack Obama. Both will destroy the country. Both support wars. Both will spend the country into the ground (but perhaps in different ways).

Regardless of who wins the Republican nomination, I will not vote for either of them. Nor will I vote for Perry, Gingrich, or Cain. I certainly will not vote for President Obama.

If you want change, and polls suggest you do, there is precisely one candidate who will give you the change this country desperately needs. That person is Ron Paul.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Ai đau, đau ai?

Trong một cuộc họp báo, khi bị hỏi tại sao ngành điện  kêu lỗ nặng, đến 10 ngàn tỉ chứ không ít, mà mức lương của ngành điện vẫn khá cao, Tổng giám đốc EVN (Tập đoàn Điện lực Việt Nam) lúng túng thừa nhận là “có phản ánh đó”, nhưng “đó có thể là lương, có thể là thu nhập”, còn lương để hạch toán vào giá thành điện thì chỉ 7,3 triệu/ tháng. “Đây là mức tương đối thấp, nếu ở nông thôn thì có thể được, còn ở thành thị thì không thể sống được. Là tổng giám đốc, tôi rất đau lòng khi lương của cán bộ tập đoàn chỉ có ngần đó”- Ông tổng EVN than thở.

Chưa có nơi nào  lương trung bình  7,3/ tháng triệu mà thủ trưởng than đau lòng như ông  tổng EVN. Đó là năm 2009 nhé, năm đó lạm phát mới chỉ một con số thôi nhé, với mức lương đó mà ông đã đau lòng rồi, hèn gì ông giấu không nói mức lương trung bình của EVN năm 2011, có lẽ ông sợ nói ra sẽ làm cả nước khóc òa.

          Khi ông tổng EVN đau lòng vì  với mức lương 7,3 triệu/ tháng người của EVN không thể sống nổi ở thành thị,  cả nước phải xấu hổ khi 73,4% người lao động  ở thành thị có mức lương dưới 3 triệu đồng/tháng và có11% dân thành thị sống ở mức 400-500 ngàn/tháng. Ông đau lòng bao nhiêu, hàng triệu người lao động có đồng lương chỉ bằng 1/10- 1/20 lương của EVN càng tủi hổ bấy nhiêu, bởi vì suốt đời họ chỉ mơ có được “đồng lương đau lòng” của EVN mà thôi.

          Không thấy ông tổng EVN kêu đau khi thất thoát điện năng lên tới 10, 25%. Theo nhà báo Trần Minh Quân: “Với tỉ lệ thất thoát này, EVN rất xứng đáng được trao danh hiệu “đệ nhất thất thoát” trong tất cả các loại hình kinh tế trên phạm vi toàn thế giới”. Cũng không thấy ông kêu đau khi ông Bộ Công Thương thông báo “con số nợ khủng của năm 2010 này sẽ được hạch toán vào giá điện. Tức là bất kể vì lý do gì, lỗ do yếu tố chủ quan hay khách quan, do cơ chế chính sách, do thiên tai hay nhân tai… thì dù thế nào đi nữa, người dân cũng phải gánh chịu”. Dân bị thiệt thòi ghê gớm làm vậy ông không kêu đau là tại vì sao nhỉ?

Còn nhớ năm 2008, một đằng EVN kêu lỗ rầm trời, trong khi đòi chính phủ trích thưởng 1002  tỉ . Dân tình chả hiểu sao làm ăn thua lỗ như thế lại còn đòi trích thưởng, bây giờ mới hiểu đấy là vì “ nỗi đau tiền lương” của EVN. Chỉ riêng đồng lương của  một số lãnh đạo EVN cũng đủ cho con dân nước Việt phải khóc òa. Việt namnet cho biết “ theo nguồn tin từ cơ quan chức năng thì có những cán bộ lãnh đạo của EVN có mức thu nhập hàng trăm triệu đồng/năm, thậm chí có người thu nhập lên đến con số trên 1 tỷ đồng/  năm.” Thất kinh.

           Lạ nhất là EVN xây không biết bao nhiêu nhà máy thuỷ điện, phá không biết bao nhiêu cánh rừng, mà không biết đau; xả lũ làm trôi không biết bao nhiêu nhà cửa, giết chết không biết bao nhiêu trâu bò, gây ra không biết bao nhiêu đau khổ cho dân mà không biết đau; đổ ra cả núi tiền xây thủy điện làm nhiệt điện, tưởng rằng sẽ có đủ điện dùng, té ra vẫn “đi mua điện về bán”, thế mà không biết đau.

          Bây giờ mới hiểu ai đau, đau ai. Chưa đau đã kêu đau ấy là cái đau vị kỷ vụ lợi, dân đau mặc kệ dân chỉ biết mỗi mình đau ấy là cái đau vô đạo, ối ông tổng EVN ơi!

UK Banks Brace for Eurozone Break-Up; Eurogeddon and the Death of a Currency

There are several good articles in The Telegraph today. Let's take a close look at two of them.

The Death of a Currency

Jeremy Warner writes Death of a currency as eurogeddon approaches

The market is starting to bet on what was previously a minority view - a complete collapse, or break-up, of the euro. Up until the past few days, it has remained just about possible to go along with the idea that ultimately Germany would bow to pressure and do whatever might be required to save the single currency.

The prevailing view was that the German Chancellor didn't really mean what she was saying, or was only saying it to placate German voters. When finally she came to peer over the precipice, she would retreat from her hard line position and compromise. Self interest alone would force Germany to act.

But there comes a point in every crisis where the consensus suddenly shatters. That's what has just occurred, and with good reason. In recent days, it has become plain as a pike staff that the lady's not for turning.

All of a sudden, the pound is the European default asset of choice.

What we are witnessing is awesome stuff – the death throes of a currency. And not just any old currency either, but what when it was launched was confidently expected to take its place alongside the dollar as one of the world's major reserve currencies. That promise today looks to be in ruins.

Contingency planning is in progress throughout Europe. From the UK Treasury on Whitehall to the architectural monstrosity of the Bundesbank in Frankfurt, everyone is desperately trying to figure out precisely how bad the consequences might be.

What they are preparing for is the biggest mass default in history. There's no orderly way of doing this. European finance and trade is too far integrated to allow for an easy unwinding of contracts. It's going to be anarchy.

UK Banks Brace for Eurozone Break-Up

Garry White quotes Andrew Bailey, a top UK regulator who says "UK banks must brace themselves for euro break-up"

Andrew Bailey, deputy head of the Prudential Business Unit at the Financial Services Authority (FSA), noted that British banks are not heavily exposed to the eurozone, but said they must prepare for some countries to exit the single currency – or a complete break up.

"We cannot be, and are not, complacent on this front," Mr Bailey said. "As you would expect, as supervisors we are very keen to see the banks plan for any disorderly consequence of the euro area crisis.

"Good risk management means planning for unlikely but severe scenarios and this means that we must not ignore the prospect of a disorderly departure of some countries from the eurozone.

"I offer no view on whether it will happen, but it must be within the realm of contingency planning," he added. Failure to plan for the exit of a country from the euro would be "unsound risk management", Mr Bailey said.

Last week, Japanese bank Nomura said a euro break-up is a "very real risk" and advised bond holders to check whether they are likely to be repaid in other, reinstated European currencies if the euro crumbles.

Disorderly Death

Read that last paragraph above closely. The death of the Euro could be very disorderly.

It would be far better for Germany and other states against ECB printing to leave rather than suffer the consequences of a breakup fueled by Greece, Spain, and Portugal leaving.

If France wants to print (Sarkozy is committed to the Euro and to printing), then France can stay in. Will Sarkozy survive the next French election?

The next election may be moot. Things are unraveling far faster than I expected. The market is going to force some major action in days, not months.

"Plan C" Germany Exits the Euro

Several times recently I have linked to a discussion by Michael Pettis and Hans-Olaf Henkel (the former head of the Federation of German Industries), regarding "Plan C" a Eurozone breakup with Germany leaving instead of Greece, Spain, and Portugal leaving.

It is well worth another look. Please see Eurozone Breakup Logistics (Never Believe Anything Until It's Officially Denied) for a lengthy discussion.

Interestingly, Hans-Olaf Henkel was an early supporter of the euro but now says "I now consider my engagement to be the biggest professional mistake I ever made."

Steen Jakobsen is still sticking with his European "bank holiday" idea detailed in Perfect Storm the Most Likely Scenario; Is Europe Set to Declare a Chapter 11 in Early 2012?

If by some miracle the can is to be kicked farther down the road, it better happen soon. Promises to agree to agree will not work. Time is up.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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