Aside from the face-saving act that Germany continues to perform when faced with the facts, it’s evident that they may end up suffering as badly as the worst of them here. The fact is that their industry is tooled up to sell to the fringe dullards not only making them complicit, but worse, dependant. They have the most integrated of the EU economies and will have to go with what serves the rest. As usual in this part of the world, local politics will make the ECB bond into a funny looking beast, but it will happen.

Ignore Soros. He’s talking various books.

Cheers

Nice to see you over here.

“This is not a Spain or EU issue. And it is precisely what you want to have happen – unless you think that euribor+30 on overvalued collateral was a viable business model. It is how banking should be done.”

Well I agree, but Spain (and Ireland) have specific issues here. They are being steadily throttled to death. Of course I agree about the unustainability of the old business model, we should never have gotten here in the first place, but we are here, and Spain needs some relief.

With rising costs on new mortgages those million on backlog of new houses will just never get sold.

Of course, you could take a bulldozer out and knock them all down again, that, I would agree, would be another solution.

But you still have to pay for the bulldozers, and clearing the rubble, and then write off all the debt the banks are holding. Spain did build way more than anyone else apart from Ireland, and at the new higher mortgage levels and lower housing costs this housing stock simply isn’t needed.

Plus we have the whole issue of what to do with that fraction of Spain’s workforce (a large one) that is now supernumery while a new business model is invented.

Which is why I’d be trying to get the mortage rate down a little to facilitate the transition.

But on the whole, I don’t disagree, we are into several years of balance sheet repair mode, and I doubt there is much way round this.

What I would like to do is try and hold the eurozone together while all this is going off.

Also, Europe’s problems certainly *seem* to be the worst right now (with the possible exception of Japan).

“Current eurozone yield spreads tell a different story. They continue to tighten as the yield on the bund actually rises – 20 bps (as much as 30 at one point) in the last two weeks. That might be construed to be convergence in advance of an ECB bond.”

This is interesting, and can be read in two ways. It could be that the risk level of German debt is rising (they do have one hell of a bailout on their hands, they just took a dircet hit from Eastern Europe, and they have the biggest aging on costs looming on their health and pensions systems, which will obviously now need another “reform”). This is why Merkel is being so fussy about stimulus programmes, since Germany (unlike France) simply can’t afford much more (nor can Japan, nor can Italy, people really shouldn’t have let their populations get so old so fast, they have been playing with fire here). So this is the view I would go for, German risk is itself rising. I have posted on this.

But, another view is possible. S&Ps suggested that if we had collective bonds, then the average yield would rise towards that of the weakest members (rather than the weaker being aided by the stronger). If this latter is what is happening, then we are cooked, I’m afraid, no doubt about it.

And this on the day that Soros warned that the UK may well have to go to the IMF for help, along with Hungary and Latvia.

Thank you. I understand. Still, it’s an interesting question to consider going forward.

Thanks,

Don

Banks virtually everywhere are seeing their lending spreads widening, and their profits from loan operations going through the roof. This is not a Spain or EU issue. And it is precisely what you want to have happen – unless you think that euribor+30 on overvalued collateral was a viable business model. It is how banking should be done.

Among the other considerations is that there is very little legitimate investment demand for money, so the stats are not merely a result of credit being unavailable. Clamouring for cash to pay off other debts and move the day of reckoning out the line does not really count. We are in a period in which people and businesses attempt to pay down debt and see very few investment opportunities that merit the risk of taking on debt in a non-inflationary environment cum recession.

Current eurozone yield spreads tell a different story. They continue to tighten as the yield on the bund actually rises – 20 bps (as much as 30 at one point) in the last two weeks. That might be construed to be convergence in advance of an ECB bond. Germany’s export economy cannot risk the development of impediments to trade in the ECM.

It’s like the mum who says “I wish I hadn’t gotten pregnant so young”, but she had, and that is that.

“only a Spanish problem or is it happening also elsewhere in Western Europe (and to which extent)?”

I don’t know, basically, since I don’t have the data. I would doubt it – in Ireland or Greece perhaps – since there aren’t the same quantities of bad assets piling up everywhere. Anyone reading this have any input to offer?

“If they, for political reasons, don’t opt for the latter choice, do you think that leaving the euro is better that staying in this situation?”

Well I think if they don’t, for political reasons, opt for this, then we are all, collectively commiting hari-kiri (or ritual suicide), as far as I can see. But then they are quite free to decide to do that.

Basically – look at the Almunia Syllogism post – my view is that any country voluntarily leaving the eurozone at this point (from the bottom, bankrupt, end) would be crazy, since it would get torn apart by the markets, since leaving would be an open admission that it couldn’t keep up the pace).

The only country that I could envisage leaving from the “top” end would be France (which is reasonably healthy under our new definition of “healthy”), but if the healthy country left, that would also be sending a strong signal to the markets that they could eat the rest for breakfast, and since France isn’t an island (not even the UK is that) then it needs an environment, so it isn’t very clear to me that even someone like France leaving would be a rational act.

So, if we can imagine that none of the ones about to go bankrupt are going to leave, we reach the much more to the point question as to whether countries can be allowed to go bankrupt inside the zone.

If the only reasonable answer is that we can’t have an “Argentina” in the zone, then this country either needs to be bailed out, or the zone needs to cease to exist.

Since bailouts without strings are absolutely useless, then we are pushed towards strong political union.

So the question is, who would “opt” to leave? I think no one. The risk is that the thing simply blows up. Remember the causal chain:

Financial crisis -> real economic crisis -> political crisis

(with feedback loops)

Well basically we are about to move on to the political crisis stage (we are already begining to see signs of this in the East) as people in one country after another get angry about a mixture of being unemployed, losing their home, and unemployment benefit running out.

So we may well then get a bout of “irrationalism”, and who knows how all that would end up. I have no crystal ball, I just hope someone does something before we get there.

But you can see where Spain is headed from the charts, the more time passes, the more mortgage and commercial loan defaults there are, the more the country risk level (sovereign spread) rises and the more the bank risk level rises, resulting in higher borrowing costs for the government, the banks and the individual household, regardless of interest rate policy at the ECB.

So either you clean out all those bad loans piling up, or this explodes. I obviously hope we will go down the former route.

If things do just blow up though, then there would simply be a huge crater left on Kaiserstrasse where the ECB building used to be, as no one individual country would be willing to take on the responsibilities left (think of all those bit of paper they are buing up).

Basically the whole is greater than the sum of the parts, and the total debt which has been generated by having the eurozone is much, much greater than what would have been created by individual states (all added up). So no one is going to be capable of taking it on.

So then we would have the counterparty risk element (remember Lehman Bros) and it would be look out Tokyo, look out New York time.

So basically, no one would benefit from either leaving the zone, or from the zone disintegrating, although many market participants and “groupie” cheerleaders look more like children playing with matches near a box of ready-primed dynamite to me, as I say somewhere “gee, its gone dark in here, let’s strike one of these……..boom”

@ Don,

I hope, in passing, I have answered your question. Basically, getting its own curerncy back wouldn’t help at this point, since all the debts would need to be repaid in another currency, or you default, and become a cross between Argentina, Cuba and Serbia.

Flat broke, and no one willing to lend you any money.