A Brief Guide To The Euro Crisis - News and Current Events | futures io social day trading
futures io futures trading


A Brief Guide To The Euro Crisis
Updated: Views / Replies:433 / 1
Created: by Quick Summary Attachments:0

Welcome to futures io.

(If you already have an account, login at the top of the page)

futures io is the largest futures trading community on the planet, with over 90,000 members. At futures io, our goal has always been and always will be to create a friendly, positive, forward-thinking community where members can openly share and discuss everything the world of trading has to offer. The community is one of the friendliest you will find on any subject, with members going out of their way to help others. Some of the primary differences between futures io and other trading sites revolve around the standards of our community. Those standards include a code of conduct for our members, as well as extremely high standards that govern which partners we do business with, and which products or services we recommend to our members.

At futures io, our focus is on quality education. No hype, gimmicks, or secret sauce. The truth is: trading is hard. To succeed, you need to surround yourself with the right support system, educational content, and trading mentors – all of which you can find on futures io, utilizing our social trading environment.

With futures io, you can find honest trading reviews on brokers, trading rooms, indicator packages, trading strategies, and much more. Our trading review process is highly moderated to ensure that only genuine users are allowed, so you don’t need to worry about fake reviews.

We are fundamentally different than most other trading sites:
  • We are here to help. Just let us know what you need.
  • We work extremely hard to keep things positive in our community.
  • We do not tolerate rude behavior, trolling, or vendors advertising in posts.
  • We firmly believe in and encourage sharing. The holy grail is within you, we can help you find it.
  • We expect our members to participate and become a part of the community. Help yourself by helping others.

You'll need to register in order to view the content of the threads and start contributing to our community.  It's free and simple.

-- Big Mike, Site Administrator

Reply
 
Thread Tools Search this Thread
 

A Brief Guide To The Euro Crisis

  #1 (permalink)
Quick Summary
A Brief Guide To The Euro Crisis

Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).

Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).




This article originally appeared in the Daily Capitalist.



There are several things that you need to know about the eurozone crisis and Wednesday's Summit agreement:
  1. It isn't over.
  2. The European Monetary Union's (EMU) "architecture" is a failure.
  3. They spent too much and can't possibly repay the debt.
  4. Banks will need to be bailed out.
  5. They will print money.
In order to understand the EU summit "breakthrough" we need to understand how the players in eurozone look at it. Last week a leaked confidential assessment of the problem that was prepared by the IMF was published by Linkiesta's Fabrizio Goria. The document revealed the IMF's private assessment of Greece and the requirements for a bailout. We were tipped off to the document by our friends atTrumanFactor.com. The complete document can be found here.

Here is a summary of how the IMF sees the problem:
  1. [T]he Greek economy is increasingly adjusting through recession and related wage-price channels, rather than through structural reform-driven increases in productivity. This is due to "administrative capacity limitations in the Greek government" which is a diplomatic way of saying that the Greek government can't pull off the reforms.
  2. In keeping with experience to date under the program, it is assumed that Greece will take longer to implement structural reforms, and that a longer timeframe is necessary for them to yield "macroeconomic dividends" (i.e., economic growth). They paint a dismal picture as Greece falls into a severe recession.
  3. Greece won't raise as much money as projected through privatization of public assets. Through 2020, total privatization proceeds would amount to €46 billion, instead of the €66 billion assumed.
  4. They assume that Greece will run fiscal surpluses starting in 2013 but note that it requires "sustained and unwavering commitment to fiscal prudence by the Greek authorities."
  5. They won't be able to return to private markets to finance their debt until after 2020. This will require "official financing" (i.e., a bailout from the solvent eurozone members) of €252 billion through 2020.
  6. They are very concerned that Greece will not meet these targets because their economy and government is not robust enough to withstand economic shocks (low growth, high interest rates), thus throwing off the entire projection on which the bailout is based. If this occurs, then Greece may not be able to go back to the markets to refinance its debt until 2027.
  7. In order for Greece to have "sustainable" debt levels, the following needs to happen:
    1. Generous official support (up to €440 billion under the worst case scenario), and
    2. At least a 50% haircut to their debt, which requires cooperation from its private bank creditors. This would get Greece down to a debt level of 120% of GDP by 2020. Under the worst case scenarios, they see the debt level rising to 208% of GDP.
  8. Another requirement is €30 billion of support for creditor banks to recapitalize.
As you can see, these policy conclusions are based on assumptions that someone in the IMF just made up (they understand this). Like all projections, especially ones going out more than a few years, they are fictions and are impossible to verify or have any confidence in. Yet ... if you look at these assumptions, this is what the Summit participants are basing their agreement on.

Here is what happened Wednesday at the Summit.

The whole deal revolves around the European Financial Stabilization Facility(EFSF). This is the entity that will issue bonds over-guaranteed by EMU members. The facility can issue up to €440 of bonds secured by €780 of EMU member sovereign guarantees (+65% over guarantee). These bonds will be issued in exchange for the Greek bonds (which are, in effect, in default). They will also be used to back the bonds of Spain, Italy, Portugal and perhaps others.

In order to get all member guarantors in line, the deal had to include bond creditors taking a 50% hit.

The private bank creditors were never really happy about this. It does several things to them (not the least is an earnings hit), but mainly it reduces their Tier 1 capital—any EMU sovereign bond may be counted as Tier 1 capital at face value no matter what the market value is. By taking a 50% haircut, they would need to boost their core capital.

Late, late Wednesday night in direct talks with Merkel, Sarkozy, and the IMF's LaGarde, the chief negotiator for the Institute for International Finance, the bankers' lobbying entity, reached an agreement with the group. In exchange they got several assurances. One of them is that they would get €30 billion of "official funding" to help stabilize their Tier 1 capital. One estimate says they need €106 billion of additional capital (two-thirds of which is related to Greece, Spain and Italy). They will be required to have a 9% Tier 1 capital ratio by July, 2012. They also got assurances from their respective governments that they would not be allowed to fail. Remember that they have also financed other sovereigns on the brink. It was literally a game of chicken and they blinked when threatened with Greek default which could spread to other sovereigns whose debt they hold.

For the Greeks, they get a temporary reprieve and a total of €130 billion of additional funds (up from €109 billion). They are supposed to reduce debt to 120% of GDP by 2020 (per the IMF assessment) and carry out structural reforms. 120%!

Here is the problem: they all know that the €440 billion won't be enough. So the French are out raising money from non-EMU members with the hope they can increase the fund from €780 to €1 trillion. Thus their trip to China to beg Hu Jintao for money. The Chinese are experiencing a kind of schadenfreude over this whole thing, secretly enjoying their new power role in international finance as the Europeans go hat in hand to them for contributions for the EFSF. They have said they will contribute but they have also said they want their kilo of flesh: stop complaining about the Chinese currency exchange rates. Fair enough since they fear that it will be perceived as a bailout of the West and that won't be popular with Chinese citizens. They are entirely correct in that assessment.

The bottom line is that the Europeans are piling debt on top of debt except that the new bonds will be paid on demand with the sovereign guarantees of EFSF. This is not popular with German and French taxpayers since they will account for almost 50% (48.51%) of the Facility. Add in Italy's 18% and these three countries are on the hook for a potential €530 billion.

You can be assured that ultimately some part of this will be monetized by the ECB. Presently they have bought €169.5 billion euros in bonds so far, starting with Greece, Ireland and Portugal last year, then extending the coverage to Italy and Spain in August. This little detailwasn't mentioned in the Summit statement. Yesterday, Trichet's ECB successor, Italy's Mario Draghi said the ECB remains “determined to avoid a poor functioning of monetary and financial markets.” Which means they will print if needed.

I have little faith in Papandreou's socialist PASOK government's ability to adhere to the agreement. (See "Greece: The Problem With Socialism.") I feel it may be one, if not THE, stumbling block in this whole eurozone mess. Greece will be dragged down perhaps for a decade or more because I don't see them instituting the necessary free market reforms that will spur future growth. I also don't believe it will be easy to dismantle the elaborate social welfare system there without political unrest. I wonder if not only the Papandreou will last long, but if a democratic form of government in Greece will last long.

And Greece is not the only problem. Spain and Italy are large economies and face similar problems, just not quite the scale of Greece's. It all comes down to their ability to fund their excessive debt. Even France is being warned about its credit rating.

The EMU is built on a weak foundation. They allowed in countries that according to the Maastricht Treaty were not supposed to run deficits of more than 3% of GDP, yet they all did, even Germany. They allowed their members to spend and borrow without regard to economic reality and now the money has run out. At some point one wonders if Germany will be outvoted and they elect to bail out debt through inflation by printing money.

It's a mess and it's not over.



Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).


More on ZeroHedge...

Reply to share your thoughts on this current event.

 
  #2 (permalink)
Elite Member
Aurora, Il USA
 
Futures Experience: Advanced
Platform: TradeStation
Favorite Futures: futures
 
kbit's Avatar
 
Posts: 5,872 since Nov 2010
Thanks: 3,301 given, 3,332 received

Related: Gauging the Fallout of Another Rescue

Gauging the Fallout of Another Rescue

http://www.nytimes.com/2011/10/28/business/gauging-the-fallout-of-another-rescue.html?_r=3&ref=business

Reply With Quote

Reply



futures io > > > > A Brief Guide To The Euro Crisis

Thread Tools Search this Thread
Search this Thread:

Advanced Search



Upcoming Webinars and Events (4:30PM ET unless noted)

Jigsaw Trading: TBA

Elite only

FuturesTrader71: TBA

Elite only

NinjaTrader: TBA

Jan 18

RandBots: TBA

Jan 23

GFF Brokers & CME Group: Futures & Bitcoin

Elite only

Adam Grimes: TBA

Elite only

Ran Aroussi: TBA

Elite only
     

Similar Threads
Thread Thread Starter Forum Replies Last Post
'We Still Do Not Have a Euro Crisis': Economist Quick Summary News and Current Events 0 October 20th, 2011 06:10 AM
Latest Solution for Euro Crisis: Not What the Markets Wanted Quick Summary News and Current Events 0 August 16th, 2011 04:00 PM
Are Euro Bonds the Only Way To Resolve EU's Debt Crisis? Quick Summary News and Current Events 0 August 16th, 2011 11:50 AM
Does the Euro Zone's Crisis Have Its Own AIG? Quick Summary News and Current Events 0 June 23rd, 2011 08:10 AM
Bond issues stall as euro crisis bites Quick Summary News and Current Events 0 May 23rd, 2010 06:30 PM


All times are GMT -4. The time now is 08:26 AM.

Copyright © 2017 by futures io, s.a., Av Ricardo J. Alfaro, Century Tower, Panama, +507 833-9432, info@futures.io
All information is for educational use only and is not investment advice.
There is a substantial risk of loss in trading commodity futures, stocks, options and foreign exchange products. Past performance is not indicative of future results.
no new posts
Page generated 2017-12-15 in 0.07 seconds with 19 queries on phoenix via your IP 54.234.247.118