Monday, May 28, 2012
Lloyd's of London is Preparing for the Collapse of the Euro
The realizations over the fate of Europe, Greece, and the Euro is becoming more dire. Lloyd's now has a contingency plan that includes the collapse of the Euro. Regardless of what happens Europe is in for an extended period of uncertainty concerning the fate of their monetary system. This will make the US dollar strong relative to the Euro, but remember nothing about our own fiscal crisis has been solved yet. Article is in italics. The portion in bold is my emphasis. From the BBC:
The insurance market Lloyd's of London is preparing contingency plans for the possibility of the euro collapsing, its chief executive has said.
With Greece facing new elections in June and anti-bailout feelings high, there are fears Athens may be forced to exit the eurozone.
In a Sunday Telegraph interview (highlight for a link to the original Telegraph article), Richard Ward said Lloyd's needs to "prepare for that eventuality".
He said that Lloyd's would settle claims using multiple currencies.
Mr Ward is one of the first bosses of a large UK business to admit he is planning for the end of the euro.
Lloyd's of London is a market in which syndicates meet brokers and agree to take on particular risks.Greece has implemented tough austerity measures in return for two multi-billion-euro bailouts, but five years of recession has seen the Greek people become increasingly opposed to pro-austerity politicians.
Many analysts think that Greece may abandon the austerity measures and be forced out of the euro if the leftist bloc Syriza, which came second in Greece's 6 May election, wins on 17 June.
This could potentially trigger a run on banks not only in Greece but in other eurozone nations.
"We've got multi-currency functionality and we would switch to multi-currency settlement if the Greeks abandoned the euro and started using the drachma again," Mr Ward told the newspaper.
"I don't think that if Greece exited the euro it would lead to the collapse of the eurozone, but what we need to do is prepare for that eventuality."
He added: "I'm quite worried about Europe."
In March, Lloyd's announced a loss of £516m for 2011, saying it was its worst year for catastrophe claims such as the earthquake and tsunami in Japan and the earthquake in New Zealand.Mr Ward's comments come as more and more politicians and business leaders talk of a Greek exit.
In an interview with the Guardian newspaper, the head of the International Monetary Fund urged Greeks to pay taxes.
Christine Lagarde also suggested it was payback time for Greece.
In addition to a Greek exit, investors are also worried about what would happen if other ailing economies like Spain and Italy followed suit.
On Friday, Spain's Bankia said it needed 19bn euros more from the government - the biggest bailout ever - as it and fellow regional banks struggle under a mountain of bad property debt.
Stocks have fallen over the past few weeks while on Friday the euro tumbled to under $1.25 for the first time since July 2010.
Thursday, May 24, 2012
Charles Dumas - The Economies in Europe and Their Affects on the MarketsTom Keene interviews Charles Dumas, the Chief Economist of Lombard Street Research. Mr. Dumas does not mince any words about his position on Greece and what Germany and the rest of Europe are going to do. As Mr. Dumas states, the situation in Europe is very serious and things will come to a head fairly soon.
From Bloomberg/Business Week:
Roubini Talks about the Financial Cliff, Recession, and the Stock Market
The following interview was published in USA Today. Dr. Roubini is was always interesting and many times controversial. This short interview gives some good detail on what is in reality a fairly serious economic situation in both Europe and the US.
The interview is in italics and bold is my emphasis. From USA Today:
Q: What about the U.S.
A: We have positive economic growth, but it's below trend — barely 2%. Job creation is still anemic. The recovery is still anemic because the painful process of de-leveraging has not even started in the public sector. And next year there will be some fiscal drag because of the fiscal cliff that's coming up.
Q: Explain what you mean by fiscal cliff.
A: Many things are expiring at year end. All the tax cuts on income, on dividends, on capital gains, on estates. There's an expiration of the payroll tax (cut). There is a reduction or expiration of transfer payments to state and local governments, to unemployment benefits. There is the expiration of infrastructure spending, and then there are the automatic cuts on discretionary spending, which came about because we failed to reach an agreement for reducing the budget deficit.The point is, all this is expiring at year end, and the hole will be $600 billion, or about 4% of GDP, and then we plunge into a nasty recession. Now, some items may be continued (if the Republicans and Democrats can agree to extend) but a realistic assessment is a fiscal drag. Even if the cliff is not a free fall because some items won't expire in an agreement, there will still be the beginnings of a fiscal drag, because you reduce disposable income by raising taxes, and (by) cutting transfer payments, you reduce aggregate demand by reducing government spending.
Q: What about Europe?
A: The European recession is getting worse. There's fiscal austerity that, in the short run, makes the recession worse. Second, the value of the euro is too strong for the countries on the periphery that have lost competitiveness. Third, you have a credit crunch because the periphery banks don't have enough capital, and they will be forced to cut credit. Fourth, you have the effects of high oil prices, and Europe depends 100% on oil imports. And now politics in Europe are an issue, as we saw from the Greek elections, French elections, the Italian elections and German elections, and the collapse of the government in the Netherlands.
Q: Wow. How long will this sustain?
A. You have on one side austerity fatigue, because these countries are finding that austerity makes the recession worse. The austerity fatigue is spreading to France and the Netherlands. On the other side, you have bailout fatigue in places like Germany or Finland or Austria. These Germans tell me, 'These Greeks have a big fat Greek wedding not for a weekend, but for the last 20 years. We give them one bailout, then a second bailout. We cut their foreign debt by 75% in the debt restructuring, and they still don't want to do any fiscal austerity and structural reforms.' So they say, 'Enough is enough, let's pull the plug.' "
Q: What will happen to Greece?
A: The risk is that you'll have Greece exiting the eurozone with all the collateral damage. Also the risk is that many other countries will find it difficult to do austerity. There is a significant sociopolitical and policy uncertainty in Europe that affects the global markets. So, to me, the eurozone looks like a slow motion train wreck. Slow motion is not going to collapse overnight. But Greece is not going to be the only country that's going to restructure. Greece by next year might exit the eurozone. If one or two of the smaller countries restructure their debt and exit, like Portugal or Cyprus, the eurozone survives. But if the contagion spreads through Italy and Spain, the third- and fourth-largest economies, it could lead to a breakup of the eurozone three or four years down the road.
Q: So, how does all of this affect the U.S.?
A: First, there is huge exposure of U.S. companies to Europe because they have factories and businesses there. If Europe goes into recession, the profits of these multinationals are cut. About half of all the profits of U.S. S&P 500 firms are coming from their foreign operations, many of them in Europe. Second, whenever there is risk of disorderly financial conditions in Europe, there is not just a sharp correction of European stock markets, but also of U.S. markets. When Greece was first in trouble in the spring of 2010, you had a 20% correction in the European stock market, and a similar correction in the U.S., in Asia, in emerging markets. Same thing last year between August and October. So financial contagion becomes instantaneous because of sentiment, exposure of U.S. financial institutions to European ones, and because of these links between the U.S. businesses and their own activities in Europe. No country is an island.
Q: What are you expecting from the markets in the next year and how do you invest in the face of this?
A: We see it being flat for the rest of the year, like it was flat last year, given all these uncertainties and given there is a fiscal cliff and there is more gridlock. I don't expect the stock market to tank this year. But I don't see, from current levels, much upside. The emerging markets are a long-term story. Their growth rate in the long run is 6%, while in advanced economies (including the U.S.) is 2%, 2.5%. So if you are willing to invest for the long run, yes on emerging markets. But if you're thinking about what's going to happen in the next few months, no country is an island.
Saturday, May 19, 2012
Wednesday, May 16, 2012
The Real Issue of Greece Leaving the Euro - A Run on the Banks
Could anything else go wrong in Greece? There is austerity which drove the economy into a Depression, there is widespread civil unrest, fears that Greece will exit the Euro, and now a possible run on the banks. Can anything else go wrong? From Ambrose Evans-Pritchard at the UK Telegraph:
Economists warned that the Greek financial system could crumble within weeks or days unless the European Central Bank steps up support.
President Karolos Papoulias told party leaders that banks had lost €700m in withdrawals on Monday alone as citizens rush to pre-empt capital controls and a much-feared return to the Drachma.
He cited central bank warnings that "great fear" might soon escalate to panic. The leaked details lend credence to claims that capital flight by both savers and firms have reached €4bn a week since the triumph of anti-bailout parties on May 6.
Steen Jakobsen from Danske Bank said outflows are becoming unstoppable, not helped by open talk in EU circles of `technical’ plans for Greek withdrawal.
"This has a self-fulfilling prophecy built into it and I don’t think we can get to June. The fuse is burning and the only two options now are a controlled explosion where Germany steps in to ensure an orderly exit, or an uncontrolled explosion," he said.
The growing alarm comes as judge Panagiotis Pikrammenos was picked as Greece’s caretaker leader until the next vote on June 17. Polls show the Left-wing Syriza leader Alexis Tsipras emerging as clear victor.
Mr Tsipras has vowed to tear up the EU-IMF bail-out `Memorandum’, exhorting German Chancellor Angela Merkel to "stop playing poker with the lives of people". The Greek impasse has rattled markets, with the FTSE 100 down 0.6pc to 5,405 yesterday. Spanish lender Bankia fell 11pc in Madrid. Gold tumbled $17 to a ten-month low of $1,540 on dollar strength.
The crisis is replicating the pattern of fixed-exchange ruptures through history. Britain was forced off the Gold Standard in 1931 after pay-cut protests in the navy triggered capital flight.
Greek banks have lost 30pc of their deposits since late 2009. The total fell to €171bn in March. "The surprise is that there is still so much left. I can’t believe it will stay much longer," said Simon Ward from Henderson Global Investors.
The ECB is holding the line with an estimated €100bn of Emergency Liquidity Assistance (ELA) for lenders, channeled through Greece’s central bank. Supplicants must pawn their loan book in exchange. "The risk is that banks will run out of collateral since these are low quality assets with haircuts of 50pc or more. The ECB could relax the rules but they would have to take an active decision to do so," said Mr Ward.
JP Morgan said Greek banks have already exhausted their collateral. A refusal by the ECB to ease rules would amount to expulsion, forcing Greece "to issue its own money."
The ECB said it had stopped routine operations with certain Greek banks with depleted capital buffers, but underscored that they are still able to access the ELA scheme.
There is already a political storm in Germany over "junk collateral", as well as anger over the Bundesbank’s €645bn exposure to Club Med debtors through the ECB’s internal `Target2’ payments nexus. Mr Ward said it would be hard to justify to German taxpayers why the Bundesbank should lend more to "austerity-resistant Greeks" so that they can squirrel money abroad.
Julian Callow from Barclays Capital said the ECB risks grave contagion if it lets go of Greek banks. "We have reached the point where the ECB needs to come in with massive intervention and outright quantitative easing," he said.
Slow capital loss from Club Med is showing up in the ECB’s Target2 data. The central banks of Italy and Spain have built up liabilities of €279bn and €284bn, partly reflecting bank withdrawals. This is owed to Germany, Netherlands, Luxembourg, and Finland.
Italy’s banking lobby said foreign deposits at Italian banks were down 20pc in March. The good news is that the Libor-OIS spread -- the "stress gauge" for banks -- has not risen in this latest spasm of the crisis, suggesting that Club Med deposit flight remains modest for now. That could change fast if a Greek exit shatters the sanctity of monetary union.