The eurozone: why is there a March meltdown mindset?

British banks that we’re told are just fine just borrowed £22bn at a loss from the ECB. Hmm. Think ‘meltdown’.

Greece’s long-term foreign currency debt was downgraded to C from Ca late yesterday [Saturday] by Moody’s. The ratings agency said in a statement that investors who participate in the nation’s debt exchange will get about 70% less than the face value of their holdings. The deal constitutes “a distressed exchange, and hence a default,” the New York-based rating company said. Think ‘Merkel meltdown’.

Spanish Prime Minister Mariano Rajoy said his government, which came to power at the end of 2011, will prepare a 2012 budget that aims to reduce its deficit to 5.8% of gross domestic product, far in excess of the 4.4% target his predecessor, José Luis Rodríguez Zapatero, had committed to. Mr. Rajoy said a rapidly deteriorating economic situation and a large 2011 budget overrun made the wide deviation necessary.Think ‘major Merkel meltdown’.

“We have not exited the economic crisis but we are turning the page,” said Nicolas Sarkozy, France’s president. “The strategy we put in place is bearing fruit.” Think ‘major mixed metaphor meltdown’.

47 thoughts on “The eurozone: why is there a March meltdown mindset?

  1. How can you possibly say the British banks have borrowed from LTRO at a loss. This facility is an extraordinary free gift to the banks which use it. Even the most creditworthy institution in the world could not get three year money on anything like these terms.
    It is really strange to read things like this in a blog which tries to comment on markets.

  2. Do your own research. That way you will learn. Ask what the banks do with this money. Start with buying worthless bonds and then look at what return they get when they house it overnight in the ECB.

  3. It’s Sarko’s comment that made me wonder. Long held the thought that EZ will be the victor in the battle with the AngloUS markets they owe.
    The reason being the BRICs would rather that’s the way the cookie crumbles as the world rebalances this decade.
    Well that and the busted investment institutions….
    Build the firewall as best you can – ie get to be lifeblood for the EU banks pre nationalising. Once Greece defaults it’s a firestorm but even worse for the fictional CDS centres in UK and US.
    Is that the reward for the Greek tragedy Msr?

  4. “We have not exited the economic crisis but we are turning the page,” said Nicolas Sarkozy, France’s president. “The strategy we put in place is bearing fruit.”

    Sarkozy then sharpening up his Culinary skills on the books

  5. In the end no one wins. I don’t actually like Marxism but one quote he got right.
    “economics will always beat politics”
    He’s right, Europe can’t last because it’s sums don’t add up. Thing is the markets have been practising fantasy mathematics too. Everyone loses. The only question really is time frame.

  6. Here’s the deal, Greece is the lead elephant in the circus parade. The EU can be likened to the guy with the pooper scooper. The problem is that the poor guy with the scoop is having trouble keeping up with all the Greek shit and the pigs are getting ready to dump.

  7. David
    There are many strange things on this blog. I mean a loss based on what they would ordinarily do with the money. It all (plus some) went straight back into overnight at the ECB. That rate is lower than what it costs to borrow on LTRO.
    I would call that a loss.
    They could’ve lent it to other banks and made a bomb – but they didn’t. They preferred the safety of the ECB. That’s the point.
    Angels, pinhead etc etc.

  8. This has bothered me for some time. I can understand the banks taking euro the loans from the ECB in order to fund the commercial contracts they have that are written in euros ( saving currency transfer costs etc) but why do they take the money and then deposit it back with the central bank at a loss? Why take it in the first place if they don’t need it?

  9. Some rational, non-biased, enlightenment for the blinkered Europhiles who are constantly espousing, the euro must be saved at any cost, or it will be Armageddon, mantra.

    Having said that, when has the meaning of the words, rational, non-biased and enlightenment, had any bearing or reference to the actions of the myopic, self serving cretins, who have allowed this euro debacle to escalate to its current proportions.

  10. John, if UK banks who took LTRO money (Barclays, Lloyds, HSBC, RBS) are putting it straight back into the ECB on deposit, it looks like they’re running scared. Meaning that their liquidity problems are far worse than they and the govt are admitting to. That would also explain the rise in mortgage rates announced over the weekend.

    I believe many EZ banks are using LTRO money to buy quasi-worthless sovereign bonds to keep their govts afloat.

  11. We are in a presidential election year which will go into hyperdrive (war)during this summer, my take is if the good people (think Sue Akers) are going to kick out the neocons who are the causers and drivers of the economic problems they have to make it happen during this springtime window. That means crashing completely the whole financial system and obliterating all of this toxic “funny money”.
    Its the only way because the neocons will not vote for debt forgiveness or anything other than “on their terms”, so therefore it has to be a March or April crash event.

    And isnt it spooky how the dow jones has just hovered around 13,000 points for over a month, just waiting for somebody to pull a lever and open the trap door beneath it.

  12. @ch-ch:
    “Long held the thought that EZ will be the victor in the battle with the AngloUS markets they owe.
    The reason being the BRICs would rather that’s the way the cookie crumbles as the world rebalances this decade.”

    I cannot speak for other BRICS but in the case of Brazil I have seen an almost anti-Americanism by their government for a long time which goes back several decades. Not surprising given that it’s a socialist run country. Given the choice between China and the US, Brazil will always prefer to do business with China. Consequently, China is Brazil’s largest trading partner. With its new-found oil and mineral wealth, I have often felt that Brazil is trying its best to create an alternative model of global trading which excludes the US/UK, and West generally, as much as possible. The EU gets some favourable treatment because it didn’t play a part in Brazil’s lost decades under military dictatorships. That is blamed on the US with its lapdog the UK.
    Nevertheless, I do not think the current Brazilian model of economics will survive. Like so many other socialist countries, big money is in bed with govt (corporate fascism) and the results are massive corruption and prices which are outrageously high, so the polarisation of wealth continues. Brazilian people have no idea how much they’re being ripped off by this unsavoury alliance and lack of effective price competition.

  13. There is no way around this anymore. We must go through it.

    I’m ready for a different world, i’ve had enough of this fake market, fiat money bollocks that is slowly choking the future to death. Kill it and lets start again, hopefully free of the current crop of “leaders” who frankly couldn’t peel a banana without supervision.

  14. Alternate possibilities:

    i) They don’t need the cash now but reckon they may do at some time over the next three years if the market becomes totally unhinged, and they cannot rely on the same deals being on offer then. It’s an insurance policy at a rate of 0.75%) and therefore probably cheaper than trying to buy a CDS.

    ii) They are reckoning on interest rates having to go up significantly at some time over the next three years. They have bought (money) cheap and when the market turns they will sell high.

  15. RV: I sense your frustration in your choice of words-I share your views, but in talking to friends here in Belgium, ‘they just don’t get it’ and regard any rational discussion not worth their attention. THE DREAM is real and as fixed as the stars in the firmament and displayed on the hated banner.

  16. I presume that all the appearance of action has been intended to see us through the winter. If the power fails in Spring or early Summer there will be months to reorganise before next winter. That may keep the death toll down. How many countries are part of “us” I’m not sure. Suggestions?

  17. Ironically when the SHTF I suspect the safest place for ones wealth – unless one is short the markets – will be in fiat money under the mattress.
    As far as gold is concerned I think the baby will go out with the bath water but such is my uncertainty I have my physical hedged.

  18. @Rui:
    Thanks for that, Rui. We’re now about six weeks further down the road from that article but nothing has changed. Nothing. If anything, the Euro apocalypse he describes is closer today than it was end December. I am horrified about his view of capital controls being introduced.

  19. Alternate possibility (iii)

    They will use it progressively to ‘roll-over’ maturing debt over the next few years rather than issue new bonds at a much higher rates of borrowing.

  20. Old Essex,

    The reason they need it is because they are insolvent and if they don’t get cash from somewhere, enough to technically cover the losses from CDOs,
    Euro sov junk bonds etc that everyone knows that they are hiding on their balance sheets (mark-to-fantasy style), then the sharks will surely start to circle. The banks aren’t lending to each other as they all fear each other will go bust and not repay any loan. So the ECB steps in to stop them all going Northern Rock.

    This is of course what will most likely happen in due course anyway, but you can’t blame em for not wanting to face the firing squad.

  21. One effective solution to this massive debt crises is for central banks to turn on the printers at full speed and flood all the banks and sovereigns with lots of money. Endless quantities of it.

    The downside of this is the hyperinflation it’ll cause. That will force the need for import controls, price controls, wage controls and capital controls plus a wider Welfare state to protect people impoverished by their hyperinflation.

    That lot would make it a socialist dreamland…I’m surprisd Gordon Brown isn’t volunteering to take over from Osborne!

  22. Well say what you will about his forecasting, but this is basically what Prechter has been saying for years – turn the stocks chart upside down and stick in 3-month T-bills.

    € is now a risk currency, so will likely collapse in tandem with other risk assets like stocks, which obviously means $ up up and away.

    Sure, gold will get hit as well, but not as much as stocks, which is why we could have all retired on the short SPX long gold pairs trade these last ten years.

  23. @rowland.

    My frustration is increasing every day, watching the people, the infrastructure and the culture of a country being destroyed by an unaccountable monolith run by crass politicians and unelected dictators who have no comprehension of what is really going on in the real world, most of the people making these decisions that are so detrimental to the lives of the millions of ordinary European citizens are career politicians and bureaucrats who have either been cosseted by the bureaucracy for so long they have forgotten what life is like outside the bubble they now live in or who have never in their entire lives lived or worked in the world the rest of us inhabit.

    Even when they visit the countries they are supposedly helping, they never see the problems they are causing, its private jets, chauffeur driven limousines, bodyguards and 5 star hotels, they are totally insulated from the trials and tribulations of the ordinary citizens and what’s more that’s the way they want to keep it.

    You make a very valid point regarding the attitude of the people in Belgium but what can anyone expect? The citizens of Belgium have lived the good life for many years on the back of the E.U. bureaucracy expenditure, which is around 50% of Belgium’s GDP at the last count, you can’t blame them for not wanting to change their status quo any more than you can blame the ordinary Greek citizens for wanting their status quo changed radically.

    Maybe if the massive expenditure of the E.U. bureaucracy in Belgium was transferred along with the all the Belgian E.U. non-jobs to Greece, it would go a long way to solving the Greek financial problems and when the Belgian people got a taste of surviving in an economy without the billions of euros the E.U. bureaucracy now provides, they would have an idea of what the ordinary Greek citizens are up against and I’m sure they would see the DREAM, for what it really is, an apparently never ending Orwellian nightmare.

  24. I believe that the iron lady comes in somewhere near the end to do the laundry, that’s right before the fat lady comes home to roost. I hope this helps John.

  25. Since the whole Euro system was so obviously whacko from the time of inception ~ 2001 (public), it really looks in retrospect as if it must have been designed to have these flaws. Must have been the price extracted for German unification (?). Some former Allied officers of the WWII generation who I spoke to about it at the time seemed deeply worried in their guts about the whole thing. These were very rational, highly educated, articulate individuals. But the thing that came through clearest to me was some deep sense of unseen danger, something they admitted they were not able to explicitly put into words when pressed.

  26. @MarkyMark:
    The UK banks who slurped at the trough didn’t ask for anything near €500 billion. Without looking it up I guess it was about €50 billion max.

  27. “Apocalypse”. “Crisis”, “collapse”, and “critical”.
    Buy gold, buy a bit of land, buy food.
    In this ‘neck of the woods’ (Buckinghamshire), everything is much as it was the week before, and as much as it was, six weeks before, except that Tesco is on an ‘up’ again in spite of John’s gallant efforts.
    I’ve watched ‘syncronized swimming’ and I’ve watched bbc documentries and I’ve even watched ‘paint dry’, but watching this euro ‘crisis’ hasn’t exactly got me sitting ‘on the edge of my seat’! Yawn!
    When is the s**t really going to hit the fan?

  28. BT
    I still believe there will be a moratorium on gold ownership before we’ve finished…like currency controls under Wilson.

  29. @BT,

    To be honest the point you make about nothing changing can be extrapolated back for any length of time you care to choose, pick any statements issued by the E.U. or the politicians involved in finding a solution to this total debacle that is the euro crisis, from any time period in the last 18 months, you can substitute one statement for the other on any time scale you care to mention,12 months ago for one written 6 months ago, for one written 3 months ago, for one written 1 month ago, the rhetoric is the same, only thing that has changed is the huge increases in the amounts of money required to bail out the euro, they are in the same situation as they were 18 months ago, i.e. up the creek, without a paddle but now they are even further up the creek and the boat they are depending upon has all the floating attributes of a brick.

  30. Yes, I agree, long the dollar via 3 month T Bills – difficult for non US residents to go direct but there are a couple of ETF’s, NYSE:BILL is one – and for the active aggressive trader/investor short everything else.

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