June 13th, 2012 Alex Jurshevski
(This title is attributable to Miguel de Cervantes Saavedra – “Don Quixote”)
Recovery Partners was interviewed last Friday and again this past Monday regarding developments in the European debt crisis. Unfortunately these interviews only allow a little time to get some sound bites in and not a whole lot of time for reasoned analysis. Therefore, this blog is aimed at adding some needed color and insight to the SUN TV and BNN interviews that underline the seriousness of the situation.
The simple reality is that not much has been done to solve any of Europe’s financial problems since they started over three years ago and, as a consequence, the available runway that European policymakers have left with which to craft workable solutions to the debt mess is getting very short. What is extremely concerning therefore, is that the latest events indicate that the Euro-strategy of incrementalism and trying to stretch out the process before hard decisions have to be made is being pursued by the Eurocrats and politicians there with even more vigor now.
After dithering for years about the rot in the Spanish banking sector and botching the recapitalization of several failed banks a few short weeks ago, the political authorities there finally and reluctantly agreed to accepting aid from the Eurozone this past weekend. In flippant style, Spanish Prime Minister Rajoy triumphantly declared that he had arranged a handy credit line and that the crisis was now over before jetting off to Poland to see the Spanish footballers tie the Azzurri 1-1 in Gdansk.
When have we heard this type of denial before?
There is in fact much to worry about in the wake of the news regarding the Spanish bank bailout not in the least because there are more questions than answers coming out of this series of announcements
As we mentioned in the TV interviews, these issues include:
- The fact that the EUR 100 MM amount mentioned, while much larger than the authorities may have admitted they were short in the past, is still likely far below the amounts that are really required. Certain estimates place the size of the hole at around EUR 400 Billion.
- The housing and real estate markets have been artificially propped up in Spain for years. Not only does this mean that it is now almost impossible to understand values without significant due diligence, this strongly suggests that there may be another downleg to the real estate bust there that would see even those lofty bailout requirements climb.
- This credit line as Rajoy so euphemistically termed the panic decision involving EUR 100 Billion (or more) piles more debt onto the very large debt load that Spain already has. Spanish central government funding requirements approach EUR 220 Billion for 2012 and almost EUR 170 Billion for 2013. Unfortunately, Spain is all but foreclosed from the traditional bond markets. Where will that funding and the not insubstantial funding for local governments not included in those requirements come from?
- But even before we consider the source of general Government funding requirements it is not even clear where this bank bailout money is going to come from or the specific terms of the deal. This table, drawn from a speech we recently delivered at an RBC Dexia client seminar, shows that for all intents and purposes that the EFSF mechanism is already tapped out. After accounting for dud guarantees and monies already earmarked, there is almost nothing left over. Note that the “Bank Recap” line in the table refers to the EUR 110 Billion that was only a few short months ago estimated by the ECB and IMF that the entire European Banking system needed. Now we find that Spain itself has gobbled up EUR 100 Billion. Also please note that the EFSF/ESM mechanism has been unable to fund itself and has been dowdgraded.
- What will the Greeks, Portuguese and Irish now think about the deals that they agreed to and will they now demand a look-back adjustment to the terms of those deals? Almost equally as important: What will now happen to the Italians who have mountains of debt to refinance and a government that, as admitted by Prime Minister Monti last week, is in its death throes and will likely have to call a snap election before its term expires next Spring? Italy is next in line to be punished by the markets and everyone knows it, yet there is no lifeline in place and moreover, none of the myriad zombie problems festering away elsewhere in Europe have been durably fixed.
- Similar to the Greek re-boot, this transaction calls into question the seniority of existing Spanish government debt obligations, potentially subordinating those to the creditor group that will make the handy credit line (ie BAILOUT) money available. This action has increased the risk of these obligations and has thus cast significant doubt over the ability of the Spaniards to raise any money at all from domestic and international bond markets.
Boiling all of this down, we come to the conclusion that we are seeing a tragedy play out in Spain that is very similar to the one still underway in Greece: The central Government has been foreclosed from raising money in the open market; there is an accelerating bank run in progress; to cope, a hastily conceived bailout patch is applied by the ECB, IMF and EU which results in the very significant probability that Spain will continue to be unable to meet its financing requirements in the normal course. This Financial Frankenstein thus threatens to run smack into the refinancing obligations that loom just ahead.
Given the magnitude of Spain’s funding requirements and the cross border exposures it has to the rest of Europe, this policy is thus far from being a handy credit line as described by Prime Minister Rajoy. It rather more completely resembles a financial time bomb with the detonator already having been set in motion.
Nothing in this is therefore any cause for renewed confidence.
We reiterate the point that we have been making for several years now: Nothing has been solved by the various policy patches that have been applied by the Fed and other Central Banks together with the politicians in Europe and North America. Since the onset of the Global Financial Crisis all that has been achieved are temporary delays and the imposition of growing and severe constraints on future policy flexibility, while at the same time the risk of unanticipated open-ended outcomes, second order effects and other nasty surprises (Black Swans) has been vastly increased because of the approach followed. There is now a non-trivial risk that this Black Swan phenomenon could overwhelm the ability of existing institutions to successfully and properly cope with the various problems unless decisive action “loss recognition, write-down and remediation” is taken soon.
The experience so far easily proves that anything short of swallowing that bitter pill simply won’t work.
May 22nd, 2012 Alex Jurshevski
There was a fantastic universal sense that whatever we were doing was right, that we were winning. . . .So now, less than five years later, you can go up on a steep hill in Las Vegas and look West, and with the right kind of eyes you can almost see the high-water mark, that place where the wave finally broke and rolled back. Hunter S. Thompson, Fear and Loathing in Las Vegas
The Great Bull Market is winding down much in the same fashion as when the World moved past Hunter Thompson’s Go-Go Sixties and slipped into the stagflationary dystopia of the 1970’s. No better bellwether of this phenomenon is given today than the transformation of Facebook (Nasdaq: FB) from IPO darling to abused foster child in the few short days since the shares made their debut. Today with the Nasdaq ending flattish, Facebook moved lower for the second day and its shares are now changing hands at more than 17% below IPO levels despite frantic efforts by the dealer group to hold the line on price.
With the shares trading north of 75 on a P/E basis and earnings proving hard to grow rapidly, the Facebook IPO was probably a major disconnect with financial reality much in the same way that other disconnects are playing out across the globe.
In fact this Facebook Flop could be the sign of a major top.
More evidence of a disconnect comes from Greece. For example 75% of the population want to keep the Euro; while 75% of the population want to abandon austerity – the condition precedent the previous government bound the country to precisely in order to stay in the Euro. In a similar vein, polls in the Hellenes are still showing that more than half of the population expect a civil war there in the near future.
So, it looks like we will likely be in for some shooting and looting before this is over.
In what has now been framed as a debate between the supporters of the Hair Shirt of Austerity , most notably Frau Merkel and her German countryfolk; against the Growth crowd, championed by Krugman, Obama, and many Euro countries, it is increasingly hard to maintain any confidence in the longevity of the EU in its current form; or for that matter the ability of politicians to chart a stable path to renewed prosperity.
In fact, the probable contagion impact of events that are flowing out of this policy impasse should be feared because Europe and the US will not achieve a way out of this quagmire through either growth OR austerity, unless and until a key pre-condition for restarting those regional economic engines is met.
This is quite simply that we must have a reckoning and write-down of bad debts. Until now this has been resisted at all costs by banking and investor interests, aided and abetted by the world’s largest central banks and the IMF. Surely, the experience of Japan’s two Lost Decades, as an object lesson of what happens when you avoid the reckoning and write-down, should be reason enough to swallow the bitter pill and get on with the task at hand. Nonetheless Europe’s policymakers dither while patching over problems in place of applying durable solutions. What in fact was the Greek Bailout other than a mechanism to buy some time for the creditors? What was the failed effort to get Iceland to swallow its IMF-led bailout, other than a thinly-veiled attempt to hang the costs of bad bond positions on Icelandic taxpayers instead of the offshore banks that had gotten themselves burned? Why is the US Government not addressing the bank solvency problem that it has been obscuring from public view, or its structural deficit problem? Are any of these policies in any way socially sustainable beyond the very short run?
The answer is No.
Not surprisingly therefore, it looks like no one has confidence any longer that that the current set of plans will stick. Some are now suggesting a Greek exit (Grexit) as a way out coupled with a firewall for the rest of Europe to contain the contagion. This is fantastical thinking. In the first instance, the time window for that type of a move has long since closed – as we had repeatedly advised early on in the crisis, the best strategy would have been for the Greeks to have defaulted and negotiated a soft exit from the Euro some two years ago. This did not happen in time and now the terms of the Greek Bailout and the much larger size of the Greek liability make a default a very risky prospect for the Greeks, and for Europe. In the second instance the concept of a firewall is simply not credible in the current context. The only true “firewall”, to the extent it is possible to implement such a thing is: adherence to sound risk management, non-invasive but effective regulation, and a neutral Hands-off government policy posture that sets the stage for stable economic growth, development and trade.
At present, more, not less, European sovereigns are looking shaky, the EFSF/ESM bailout mechanism in Europe is unfunded and unworkable and the ECB is stretched. The recapitalization of Europe’s banks which last summer was being trumpeted to be completed by October 2011 has not progressed at all. In the US the situation is hardly different with many more insolvent banks being allowed to continue in business on the pretence that they are OK; the US economy is in Nowheresville, vast swathes of the personal sector suffering under some form of financial duress and the Fed is increasingly looking at a significant diminution in its menu of available policy options.
No one will be sheltered and no economy will properly recover until the rot and ruin of past excesses are carved away such that new shoots of durable economic activity can take root. This will not happen as long as there are zombie borrowers and zombie banks feeding off of the productive parts of the global economy at everyone else’s expense.
* Cognitive dissonance is a discomfort caused by holding conflicting cognitions (e.g. ideas, beliefs, values, emotional reactions) simultaneously. In a state of dissonance, people may feel surprise, dread, guilt, anger, or embarrassment. The theory of cognitive dissonance in social psychology proposes that people have a motivational drive to reduce dissonance by altering existing cognitions, adding new ones to create a consistent belief system, or alternatively by reducing the importance of any one of the dissonant elements.
April 19th, 2012 Alex Jurshevski
“There is a sucker born every minute” PT Barnum
Recent events in Toronto must be causing David Pecaut, to spin in his grave.
Over the past few months the legislative agenda at City Hall has imploded, throwing the political process into turmoil and imperiling the budgetary and planning imperatives. This ongoing political circus was temporarily upstaged by the Donald Trump circus, which moved into town briefly last week for the grand opening of the Trump Hotel and Condo Tower; a garish and undersold property development at the corner of Bay and Adelaide.
We then were treated to a story in Toronto’s tabloids about the owner of the Bunny Ranch bordello in Nevada declaring his intentions to expand his business into Canada. Sixty-five year old, Dennis Hof, together with his business partner and pneumatically-gifted paramour, Cami Parker (twenty-five), told the papers in part that his establishment aimed for Toronto, will allow patrons to dress up as Captain Kirk and play with Princess Leia. Perhaps. But to me the thought of someone more than ten years older than me calling a woman that is younger than my oldest daughter, his girlfriend leaves me more than a little weirded out. Isn’t the general rule for these type of age-difference relationships half your age plus seven years?
No matter, the trailer park theme moved into absolute top gear when the issue of allowing Casinos into the City was again raised by a number of City councillors. Coincidentally, one of the casino supporters was past brothel-booster Giorgio Mammoliti who said that Single mothers could hit the jackpot with a Toronto Casino. Appearing as a guest on Mayor Rob Ford’s Newstalk 1010 show, Mammoliti floated the idea that a casino in Toronto could create 10,000 jobs for residents. The idea appeared to get additional legs when opinion surveys of dubious provenance were trotted out to demonstrate that a small majority of Torontonians were in favor of the casino idea. Some councillors have even gone so far as to advocate extending tax breaks to Casino operators in order to attract them to Toronto.
The reasons why local politicians want to expand gambling as a form of industrial and jobs initiative is understandable on one level: Any new initiative which brings with it the allure of thousands of new jobs, expanded tax revenues and economic development can give the appearance of economic salvation. However, the degree to which this motivation is being exploited by gambling interests and their supporters and to where this could lead if the issue was left un-evaluated on its true merits is a serious matter that should concern all Canadians, and not only those residing in Toronto and environs.
Until recently, most research on the effects of gambling on local economies was conducted by special interests friendly to the gambling industry; or, in more brazen cases, by the very people and gaming companies in search of new places to exploit people through the legalized gambling mechanism. In fact, in 1999 the United States published a very comprehensive study of legalized betting in the United States. The Gambling Impact Study called for more research into what was then the largely unexplored area of the social and economic costs of legalized gambling.
Since then, a large body of evidence and data-based research has been established on the basis of years of experience with legalized gambling in the US, Canada and elsewhere which addresses in detail what the social costs and second order effects are, and why it is important not to just consider the jobs and spending parts of the equation in isolation.
For example, with the exception of the cluster services associated with gambling, casinos tend to put pressure on surrounding businesses. In Atlantic City and elsewhere, small business owners testified to the loss of their businesses when casinos came to town. As evidence of this impact, few businesses can be found more than a few blocks from the Atlantic City boardwalk. Many of the local businesses remaining are pawnshops, cash-for-gold stores and discount outlets. One witness noted that, in 1978 [the year the first casino opened], there were 311 taverns and restaurants in Atlantic City. Nineteen years later, only 66 remained, despite the promise that gaming would be good for the city’s own.
In another example, bankruptcies in Iowa increased at a rate significantly above the national average in the years following the introduction of casinos. Nine of the 12 Iowa counties with the highest bankruptcy rates in the state had gambling facilities in or directly adjacent to them. After gambling was legalized in South Dakota, gambling become one of the leading causes of business and personal bankruptcies.
Data from other US states is consistent with this general profile and the bankruptcy phenomenon also prevails in Canada, as these pictures of downtown Niagara Falls which were taken after the Casinos moved in, will attest.
According to the US National Research Council, As access to money becomes more limited, gamblers often resort to crime in order to pay debts, appease bookies, maintain appearances, and garner more money to gamble. In Maryland, a report by the Attorney General’s Office stated:[c]asinos would bring a substantial increase in crime to our State. There would be more violent crime, more juvenile crime, more drug- and alcohol-related crime, more domestic violence and child abuse, and more organized crime. Casinos would bring us exactly what we do not need: a lot more of all kinds of crime. Another study found that gambling behavior was significantly associated with multiple drug and alcohol use.
In a Canadian study casinos were positively associated with both rate of theft and robbery. And a recent RCMP investigation conducted in British Columbia found legalized and other forms of gambling intimately connected with gangs, the Mafia, money laundering, prostitution, drug addiction, robbery and extortion.
Obviously law enforcement costs escalate in these situations
Once gambling enters a community, it has been established that the community undergoes many changes one of which is that local government becomes a dependent partner in the business of gambling. Politicians end up being beholden to the gambling industry whether explicitly or implicitly. In recognition of the problem of corruption, in some US states, it is now illegal for officials to accept contributions from gambling interests.
Individuals with gambling problems constitute a very high percentage of the homeless population. The Atlantic City Rescue Mission reported to the Commission that 22 percent of its clients are homeless due to a gambling problem. A survey of homeless service providers in Chicago found that 33 percent considered gambling a contributing factor in the homelessness of people in their program. Other data also substantiate this link. In a survey of 1,100 clients at dozens of Rescue Missions across the United States, 18 percent cited gambling as a cause of their homelessness. Interviews with more than 7,000 homeless individuals in Las Vegas revealed that 20 percent reported a gambling problem.
But what about these high-paying Gambling jobs?
The reality is that there aren’t many high-paying jobs. After the initial fillip to the economy provided by the construction of the facilities, casinos are far more eager to place slot machines into the building rather than to hire and train thousands of dealers and other casino employees. This is because each slot machine can bring in $100,000 per year of revenue and doesn’t demand a sick day, benefits or overtime and needs only the occasional dusting for maintenance. Casino workers pay averages around $24-30,000, not high-paying by any stretch.
Moreover, recent Canadian research has shown that Ontario casino workers are at exceptionally high risk for developing gambling problems and the attendant side effects. Employees’ gambling behaviors were found to relate to various workplace influences and employment variables. Casino employees in Ontario interviewed in the study exhibited problem gambling rates over three times greater than those of the general Canadian population.
Gambling Addiction has been recognized as a clinical psychological disorder. Today, millions of families suffer from the effects of problem and pathological gambling. As with other addictive disorders, those who suffer from problem or pathological gambling engage in behavior that is destructive to themselves, their families, their work, and even their communities. This includes depression, drug and alcohol abuse, divorce, homelessness, and suicide, in addition to the individual economic problems discussed previously. While the impact of these problems on the future of our communities and the next generation is indeterminable, it is clearly much larger than zero.
If you are a single Mom, do you now still crave those jobs as Mammoliti suggests you should?
The Bottom line
Unfortunately, this is not where this sobering news ends. Research in the US indicates that for every dollar legalized gambling contributes in taxes, it usually costs the taxpayers at least three dollars. These costs to taxpayers are reflected in: (1) infrastructure costs, (2) relatively high regulatory costs, (3) expenses to the criminal justice system, and (4) large social-welfare costs. Another researcher, Professor Grinols, found that Casino gambling in the US causes up to $289 in social costs for every $46 of economic benefit. Put differently, Grinols said, “The costs of problem and pathological gambling are comparable to the value of the lost output of an additional recession in the economy every four years.”
Accordingly, several US state legislators have called for at least partially internalizing these external costs by taxing all legalized gambling activities at extremely punitive rates.
It is for all of the reasons enumerated above that Putin’s Russia outlawed gambling and casinos in 2009.
But aren’t Singapore and Nevada big success stories?
If there are all of these costs and negative externalities why is Singapore still a prosperous city-state with two mega-casinos located within its borders? Simple, this is because only foreigners can patronize casinos for free. Citizens and permanent residents must pay a $70 entrance fee or a $1400 annual pass to enter a casino. The hefty admission price, which is collected by the government, discourages impulse gambling, a Singapore official explained. To fill the casinos, promoters ferry in high-stakes gamblers, known as whales, from neighboring countries.
Nevada is also unique. Roughly 85 percent of Nevada’s gambling revenues come from out-of state tourists. Thus, Nevada receives the economic benefits of the dollars lost to gambling, while the attendant social and economic impacts of unaffordable gambling losses are inflicted on the families and communities in the states and countries from which those individuals come. Every gambling venue in Canada is far more reliant on spending by citizens in a far more concentrated geographic area and so would never be able to position itself to reap this kind of benefit unless it imposed Singapore-type disincentives on the local population (in which the case the known costs would still be inflicted on someone else, and more importantly the fundamental rationale gambling interests have for locating the Casinos in Canadian cities would evaporate)
A destination gambling mecca was never any part of David Pecaut’s vision for Toronto and it is hard to see how it is a part of any rational vision for the city or for Canada now or at any time in the future either. The promised benefits do not exist in the magnitudes advertised and are in any event significantly outweighed by the expected costs. Moreover, the predictable second-order effects of casino activity as described in the research are positively nightmarish.
Torontonians and all Canadians should not allow themselves to be buffaloed into a rash and unwise decision on this matter by the large-scale gambling interests and any venal, shallow-thinking facilitators that they might be connected with, and who are in positions of decision-making authority.
The facts are out there and it is time to consider them seriously.
Alex Jurshevski was intimately involved with the GBP 1500 MM acquisition of UK gaming company William Hill Bookmakers by Nomura International in 1997 and, far from being puritanical on the issue of wagering, is an avid poker, blackjack, bridge, backgammon and snooker player.
If anyone wants a full bibliography of the research material on which the forgoing article is based beyond the hyperlinks provided above, then please drop us a line.
March 11th, 2012 Alex Jurshevski
The recent discussions of the possible adoption of the Canadian Dollar by Iceland as a domestic unit of account and medium of exchange seem to have shot out of nowhere like a bolt from the blue. In fact, this opportunity was born of the financial crisis some four years ago and has been akin to a stew pot at the back of the stove quietly burbling away until good and ready. The writer has some knowledge of this as he had been discussing the adoption of loonie with a variety of Government officials more than two years ago. This was around about the same time that Iceland was in the midst of the Icesave referendum and being harangued by various international agencies into accepting bailout monies that it did not need, along with other financial measures that should not have and did not adopt.
Last week Canada’s Ambassador to Iceland cancelled a scheduled press conference where it was expected that he would lay out the benefits of a monetary concordat with Canada in detail. Why? Well, because the arrangement probably makes too much sense and would provide too many benefits both political and economic – to both Canada and Iceland. An assortment of vested interests, largely the same ones that were bludgeoning Iceland several years ago did not approve, and their lobbying against rationality appears to have gone into overdrive when it became readily apparent that this idea was getting some legs.
The history between Iceland and Canada stretches back well over a hundred years. Outbound emigration of Icelanders to Canada began in earnest following famines and the collapse of a set of flawed monetary arrangements within Denmark beginning in the 1870’s. Today there are sizable Icelandic communities in Canada. Gimli, Manitoba is in fact home to largest Icelandic community outside of Iceland. At the University of Manitoba students can learn the Icelandic language and literature. Each year the Icelandic Festival draws tens of thousands of people to Gimli including prominent politicians such as the Prime Minister of Iceland Johanna Sigurdsdottir.
This modern history of Iceland and Canada also includes a number of similarities: A keen devotion to democracy and fairness. Tolerance and respect for others. A respect for the rule of law. An affinity with nature and awareness of its frequent cruelties and the consequential need to prepare for bad times in good times and to prepare for changing weather and seasons. A sense of neighborliness accompanied by national pride, and a steely resolve to defend one’s interests. Emphasis on education and personal growth. A devotion to outdoor pursuits no matter what the temperature is.
In this latter regard it is little known, but the first Olympic Hockey Gold Medal ever was won by Canada in 1920 with a team from Manitoba named the Winnipeg Falcons. Most of the players were Icelandic Immigrants, some had even fought for Canada in the First World War before achieving sports immortality in the Olympic Games.
So the bonds run deep.
But why does this matter and why adopt a different currency?
This matters because Iceland knows that it must take some important steps to establish financial risk management firewalls that will protect against a repeat of the last debacle and to also pave the way for stable, predictable growth. Not in the least this is also because Iceland now has a substantial debt burden which must be responsibly managed. Iceland has never had a large debt burden and therefore this latter issue is very important.
In the case of Iceland the costs and benefits of an altered currency arrangement are clear. In the first instance the Canadian Dollar is tied to an economy that is much larger and more stable than Iceland’s yet its composition is broadly similar. Therefore the ability of Icelandic consumers, businesses and Governments to plan their activities would be greatly enhanced.
There is zero downside to this policy except that it would foreclose the possibility of adopting the Euro, an alternative that certain others have been touting. As we said two years ago to the Government: Why would you want to join a club where they beat you up at the door and rob you as the price of admission? Now we understand that today 60% or more of Icelanders agree with our earlier assessment. Moreover, the Eurozone is the grip of an intractable crisis that is being mis-managed and before it is over will make it seem like what happened in Iceland since 2008 like a walk in the park. In reaction to these policy failures, Europe is fast becoming more and more undemocratic, technocratic and desperate in its efforts to cling on to the last vestiges of a failed project.
For these and other reasons, an agency like the IMF, for example, should be in favor of the adoption by Iceland of the Canadian Dollar because it would help stabilize the Icelandic economy and provide a strong bulwark against the possible recurrence of any future financial crisis similar to the last one. And apart from this, there are many other benefits that adopting the Canadian Dollar would bring, including :
- lower borrowing costs for everyone in Iceland;
- a wider and deeper pool of investors for Icelandic bank, corporate and government debt;
- The availability of deep hedging markets that would make it easier for banks, governments and companies to manage balance sheet and income statement risks. This would likely make it possible to abandon the indexation of consumer financial contracts that caused so much pain and social division during the crisis.
- Access to the North American Free Trade area becomes a possibility;
- There would be no loss of sovereignty or resource rights as there would clearly be if Iceland opted to jump into the Eurozone.
- It would be a boost to trade flows;
- The financial efficiencies would improve productivity and competitiveness in Iceland;
- Closer cooperation on stewardship and management of Arctic and undersea resources would result in a bigger voice in international fora such as the Arctic Council;
- The Loonie would provide an almost impregnable defense against any attempts to run the currency against the Icelandic Central Bank and necessitate exchange controls;
- Access to an acknowledged first rate financial and regulatory system also becomes a possibility, and even if not adopted, the forgoing benefits would trigger a changed and hugely positive ratings picture for Iceland.
Iceland does not need anyone’s permission to adopt another currency, but it would be a boon if this were done in cooperation with Canada.
This article also appears under Alex Jurshevski’s byline in the Icelandic daily Pressan and can be viewed at this link
February 16th, 2012 Alex Jurshevski
Late yesterday the Moody’s Ratings agency announced that it was considering a downgrade of a number of Euro-zone, US and Canadian banks including Canada’s largest and arguably its most venerable banking institution, the Royal Bank of Canada (RBC). Readers might recall that Moody’s stripped the RBC of its Aaa rating in December 2010.
At the time this was not much of a surprise because the bank had been placed on negative credit watch earlier in that year largely due to an announcement by the RBC that it was seeking to generate a larger share of its total bottom line from Capital Markets businesses. The downgrade also occurred despite RBC having emerged from the Global Financial Crisis (GFC) relatively unscathed and in much better shape than most of its offshore competitors. Other agencies soon followed suit with their own downgrades for the bank.
The RBC is currently rated AA- by S&P and Aa1 by Moody’s. Fitch, and DBRS the other major agency and Canada’s domestic credit watchdog respectively, both peg the RBC credit quality at AA. Thus while the latest Moody’s announcement will bring their ratings assessment into line with their major competitor, it still remains above the credit assessment given by the two smaller agencies
The recent ratings action again pays reference to that fact that RBC’s announced business plans are running into strong headwinds, not in the least due to the furor over implementation of the Volcker rule, but also because the markets that it is seeking to exploit in the search for revenues are running into difficulties in the form of widening spreads, lower volumes, poor funding conditions and deteriorating investor appetite.
Other Banks under review for possible downgrades include Citigroup, Bank of America, Goldman Sachs, JPMorgan Chase and Morgan Stanley; and Moody’s said it is extending its reviews on whether to lower ratings on Credit Suisse, Macquarie, Nomura, UBS, Barclays, BNP Paribas, Credit Agricole, Deutsche Bank, HSBC, Royal Bank of Scotland and Societe Generale. Moody’s also extended ongoing reviews for downgrades on 11 companies.
Pointing to regulatory, balance sheet and liquidity the agency said in a statement after markets closed last night: These difficulties, together with inherent vulnerabilities such as confidence-sensitivity, interconnectedness, and opacity of risk, have diminished the longer term profitability and growth prospects of these firms.
The Moody’s news came hard on the heels of credit downgrades for a number of Euro-zone countries including Italy, Portugal and Spain because of uncertainty over the weakening profile of economic activity in Europe and a growing credibility gap regarding the advisability of the polices being forced on debtor countries by the EU/ECB/IMF – Troika.
Do these Announcements now make the World Safer from Financial Calamity?
Nothing could be further from the Truth.
In our opinion here at Recovery Partners, this latest wheeze from the Ratings Agencies is comparable to the fevered activity of Balinese pool boys trying to rearrange deck chairs in the middle of a force-5 Typhoon.
While EU leaders have droned on for the last several years about their intentions of putting a â€œfirewallâ€ around the banks and nations most afflicted by the euro zone debt crisis, nothing of the sort has occurred. In fact, the recent Long Term Refinancing Operation (LTRO) in Europe and ongoing easements in collateral rules make a massive outbreak of contagion more likely rather than less likely because, systemic risk is increasingly becoming a function of the credit quality of the weakest banks, rather than the strongest banks. The ratings agencies’ recent focus on the stronger banks such as the RBC only serve to underscore the point that these announcements are largely a sideshow.
As we know, mark-to-market rules have either been overtly suppressed by regulators in Europe and North America or ignored.
In fact, given the unrelenting stresses in the interbank markets in Europe and elsewhere, we are wondering whether or not we are close to an explicit event of diktat similar to what was recently announced by the Chinese authorities. Not widely publicized, a particular example of how bad things are is given by China, the authorities there have recently commanded the banks to roll over maturing loans to local authorities in full knowledge that they are non-performing and cannot be, and will not be, paid back even under the rosiest of scenarios because they are backed by asset positions that are largely worthless and non-income producing. In the wake of the GFC, Chinese Banks lent the equivalent of 25% of Chinese GDP to local authorities. This is not a small problem.
Having the central government tell the Chinese banks to represent (to the regulator controlled by it no less!) that the loans are sound will not make them pay off nor reduce the eventual chop that the banks will have to take. This subterfuge only postpones the inevitable day of reckoning and contributes to further uncertainty.
A notch or two on RBC’s rating or on the ratings of similar banks is hardly an issue that anyone should lose sleep over in the current environment. There are much, much bigger demons out there.
January 31st, 2012 Alex Jurshevski
Financial Repression is being implemented by Monetary and Financial Authorities in many developed economies. The specific measures range from overt manipulation of traded markets, acquisition of toxic assets at off-market prices, an aversion to implementing needed restructuring of bankrupt entities, through to indirect forms of intervention such as we are witness to in Canada. The short term consequences of these types of policies include restraining economic growth, employment and productivity. Longer term consequences include inducing a greater predisposition towards inflationary policies by the monetary authorities, loss of competitiveness, moral hazard, below potential GDP growth and depressed rates of capital formation.
The Canadian Experience
In Canada so far our Central Authorities have refrained from overtly intervening in markets as noted above. That job has been left to the Crown Corporations. The Economic Action Plan announced in 2008 provided the Crowns with additional capital and a mandate to use that capital to support Small and Medium sized businesses in Canada (SMEs). Since then the Crowns have made no secret of their extended mandate.
Thus, one need not look far to find evidence of this “stealth bailout”. In Canada we have seen rapid increases in personal bankruptcies that mirror the weakness in the jobs picture and the cost-cutting efforts of many firms desperate to remain in business. Also, the number of personal bankruptcies has escalated rapidly, consistent with the scale of job losses in the early stages of the GFC. However, on the business side of the coin, the situation in Canada reflects the perverse nature of this stealth bailout. This is the fact that since the onset of the GFC the business bankruptcy statistics are not telling a tale of undue financial stress. In fact, the latest twenty four months of data show that the incidence of corporate failures in Canada has actually gone down! The data show that there were 38% fewer bankruptcies coast-to-coast in the year to October 2011 than 2007 just prior to the GFC.
The “Pig in the Python”
At the same time according to the chart, at the peak in 2010 there waa an almost foufold increase in Gross Impaired Loans (GIL) in Canada. In 2011 the GIL numbers were still almost three times higher than in 2007 and prior to the GFC. Yet, corporate bankruptcies have gone down! Moreover, if you speak to them most insolvency professionals report that business has been at it lowest ebb that they have seen over their entire careers! A number of Canadian restructuring firms have sharply cut back staff, gone out of business or have otherwise greatly curtailed their operations. Per the above-noted chart the chief cause is that the banks are not reprocessing their NPL assets in a manner consistent with past cycles and have instead been exercising extreme forbearance.
The bottom line is the fact that a large volume of restructuring that would have normally been expected to occur on the wake of the Global Financial Crisis (GFC) in 2008/2009 has simply not occurred.
The statistical records on corporate failures in Canada that have been maintained by the Superintendant of Bankruptcy extend back almost sixty years. The behavior of this time-series is akin to that of a step function. Historically there has always been a sharp increase in the incidence of corporate failure in the immediate aftermath of an economic slowdown or recession. This relationship has held up through numerous cycles up to, but not including the GFC. And, in looking at past cycles, the increase in the failure rates on a twelve month moving average basis was at times as high as 60% peak to trough.
The past decade has seen three distinct phases of restructuring activity in Canada. Between 2000-2003 in the wake of the Telecoms, Internet and Media bust, Canadian banks resorted to bulk sales to divest themselves of unwanted assets and distressed files. Two of the more motivated banks in this regard were CIBC and the TD. Then, between 2004-2007 the bulk of off-strategy and distressed filesÂ were pieced out by way of bilateral loan sales to leveraged loan funds that were relatively credit and price insensitive. Both of these periods saw significant levels of activity where banks were actively repositioning credit risk in their portfolios. Following that and since 2008, and up to the present, there has been very little activity despite a sharp run up in Gross Impaired Loans balances. There has been a corresponding lack of activity in business failures and active restructuring of loan files.
To examine the history further we have used three quantitative approaches to estimate a possible shortfall in the number of business failures that have occurred since the GFC:
The first test we ran tested the null hypothesis that the distribution of failures before the GFC had the same statistical properties as the distribution of failure events following the GFC. The results here show that it is not possible to reject the hypothesis that the distributions are different. This provides some statistical support for the contention that we are in a different behavioral phase with bankruptcies and corporate restructuring in Canada now relative to what went on before the GFC.
We then used two other methods to drag some more information out of the data set. The objective of both tests was to try and determine if the level of business failures that we have experienced in Canada since the GFC is “unusually low” and is so by how much. In summary this exercise suggests that there is at present a “restructuring deficit” of between some 6,000 and 13,000 businesses that could have been expected to have gone bust in the last three years but did not (This translates into between approximately one-half to one percent of all SME businesses in Canada). Translating those figures into potential monetary exposures Recovery Partners estimates that there are at least $20 to $30 billion of loan-related charge offs and or restructuring candidates that are bottled up on chartered bank balance sheets and elsewhere.
Zombie finance works only once. At the time this strategy was implemented the expectation was that the significant stimulus that was pumped into the economy would have resulted in a fairly rapid pace of recovery. In turn this would have refloated the businesses that were underwater allowing them to return to profitability and pay down their debt. This clearly has not happened. And, it is unlikely that the old zombies will be able to pull off another rescue financing particularly if the economy continues to grind along at a low rate of expansion or if it falters and maybe another downturn works its way into the mix.
A Rising Default Environment
A number of macro-economic factors affecting credit markets worldwide, including in Canada, suggest that all credit markets are entering a rising default rate environment. Both US and Canadian consumers are beginning to exhibit substantial signs of spending fatigue simultaneously with a significant, and accelerating, renewed softening of residential real estate markets in the US â€” the source of a substantial portion of consumer spending and employment growth in the last decade. Moreover the widening crisis in the Euro zone has already knocked EU growth for a loop as a recession is now expected there. The inevitable contagion will likely lead to confidence problems in North America as well threatening a more protracted slowdown here as well.
Therefore, for the banks, time is running short. Further cracks are appearing in the banking system and the economy and the authorities cannot stop them from spreading. In fact our views on the Stress Tests reflect the opinion that the problems in the banking system are far from having been properly resolved. In the US, in aggregate, banks remain significantly undercapitalized. Moreover, numerous US Banks that have earlier qualified for TARP funds now have more toxic (Level 3) assets on their books than before the financial crisis began. Other areas of concern include credit cards, commercial mortgages, and of course the fact that anecdotal and other evidence continues to reflect an anemic US economy whose consumers are tapped out and who have either fallen into unemployment or under-employment in vast numbers, where a substantial portion of the housing stock is under water, and whose Government is in a deepening fiscal hole.
In Canada, the situation may be even riper for a downturn in the credit cycle, especially in the export sector. The Canadian dollar has appreciated against the US dollar by more than 40% substantially eroding profit margins for Canadian exporters. For many of the banks as well, it is a case of “they do not know what they do not know”. Quite simply this means, that because of the distortions caused by zero interest rates, the lax forbearance practices and easements in lending covenants and loan servicing, many banks cannot today reliably identify all of the zombies and at-risk obligors in their portfolios. There is thus a substantial recognition lag built into the required solution to this problem.
Should the economy slow from here or enter a recession, institutions that hold large quantities of bad or deteriorating credits that have hitherto been slow in dealing with these exposures will find themselves competing against each other to unload or otherwise cope with these problems. Moreover, to existing exposures we have to add the new zombies that will have gone to ground because of continued weakness in overall activity.
This article is an abridgment of a longer research piece written by Alex Jurshevski, Managing Partner of Recovery Partners with research assistance from David R Fine, Director Credit Asset Management at Recovery Partners and appears in the January 2012 edition of Canadian Hedgewatch
December 12th, 2011 Alex Jurshevski
“It’s interesting to note that 20 years later we have realized we have succeeded in creating a more stable foundation for that economic and monetary union, and in so doing we’ve advanced political union and have attended to weaknesses that were included in the system.” Angela Merkel, 9th December 2011
The weekend headlines blared a mixture of adulation and success: Resurgent Germany, Shrewd Sarkozy, Britain Isolated. In fact Germany is far from resurgent, Sarkozy is more reacting to events rather than leading solutions, and Great Britain’s refusal to submit to fiscal control from Brussels is hardly a surprise given that she is not a member of the Monetary Union.
Had the agreement for fiscal union been reached prior to the launch of the Euro that would have been extremely favorable news; and the fiscal controls, had they been made to work would likely have muted the breadth and depth of the current Eurozone crisis. But alas, we are not living in 1991. It is 2011 and the promised reforms are just that: promised, they still are subject to debate and ratification by each member nation. And then there is the question of sanctions against members who violate the proposed fiscal rules. If the enforcement mechanisms are too stringent, no national government will ratify the fiscal proposals. If they are too lax, the agreement will be toothless and incapable of serving as a bulwark against some future crisis.
But the real story is that the proposed agreement does not address any of the urgent and important issues that the Eurozone is facing right now. These stresses threaten the continued existence of the common currency. Last week’s entire exercise, and the posturing before, during, and after therefore must be judged as a lost opportunity of significant dimensions
None of the structural problems relating to pensions and entitlements spending in a large number of countries has been adequately dealt with;
At last count, large European banks are undercapitalized to the tune of over EUR 120 Bn. Moody’s Investors Service downgraded the three largest banks in France on Friday and said there was a “very high” probability that the French government would be forced to step in to support them if conditions worsened.
Fifteen out of Seventeen EU countries were placed on negative Creditwatch last week by Standard and Poors.
Greece, Ireland, Italy, and Portugal and Ireland cannot fund themselves at economical levels. Spain is arguably close to the borderline as is Belgium. Over the next 12 months the aggregate funding requirements for these countries amount to EUR 1000 Bn.
The EFSF is broken and no credible mechanism yet exists to replace it. Announcement of the formation date of the ESM as being in 2012 in place of 2013 does not make money available sooner until the ESM is actually funded. No updated funding plans were announced in the wake of the recent dud China funding effort launched in spectacularly disastrous fashion by Klaus Regler, the EFSF honcho.
There is no relief for countries suffering with austerity. The solution, according to Merkel and Sarkozy appears to be More Austerity!!. As we have said in the past, the track record of these programs is not good, and that reflects cases where countries were able to devalue their currencies. In the present scenario no Soft Exit from the Euro for the PIIGS and other sufferers is being countenanced by the Euro Leaders. It is only a matter of time before large scale social unrest erupts in one of these places and/or the austerity programs are abandoned.
- The IMF is washing its hands of this mess. In fact, there may no longer be any legal or politically palatable way to re-engage the IMF after this episode. Similarly, the US is adopting a hands-off approach.
- One recurring theme of this crisis in Europe (and North America) was also played out yet again in that it was obvious that there is no political will to force banks that made all of the bad bets to pay for their oversights.
- The other recurring theme is that markets have again been asked to wait “another three months” for the next installment of this sorry saga.
Looking at the list above it becomes apparent that there are actually more and deeper problems on the boil now than in the late Fall when the crisis seemed to be close to a blow-off phase.
The Euro Leaders are likely taking comfort from the fact that there has been a muted to slightly positive market reaction to the announcements of last week. The reality is that what they are really admiring is the market reaction to the efforts of the Euro spin doctors hired to generate false headlines, and not developments that are substantive and likely to contribute to renewed and durable confidence in Eurozone economic management or the Euro itself.
Being suspicious of free markets, what the current Euro Leadership does not recognize is that markets do not necessarily follow a rational path in reacting to information and do not process it in a temporally consistent and predictable manner. Recovery Partners believes that although a measure of calm has returned, it will prove temporary. This is because the ongoing failure of the Euro politicians to implement appropriate measures with enough speed and force to counter market pressures that are threatening the Euro’s survival is risking evaporation of what remains of the opportunity to turn things around. This is the fourth kick at the can this year. Each time anyone has looked for substantive progress, they have been left wanting.
For now, the relative calm in the markets is therefore more a reflection of year end book flattening and position squaring behavior rather than a true reaction to last week’s efforts of the Euro people to fix the problems. In a sense, it appears that a Prozac Bubble has formed to shield the markets from bad news in what is supposed to be a happy time of year.
Unless something intervenes to prick this Prozac Bubble, we will have to wait until the New Year to fund out what Mr. Market really thinks about the latest Euro-wheeze. Whatever the timing, in our opinion the reaction won’t be pretty.
Happy and I’m smiling,
walk a mile to drink your water.
You know I’d love to love you,
and above you there’s no other.
We’ll go walking out
while others shout of war’s disaster.
Oh, we won’t give in,
let’s go living in the past.
Once I used to join in
every boy and girl was my friend.
Now there’s revolution, but they don’t know
what they’re fighting.
Let us close our eyes;
outside their lives go on much faster.
Oh, we won’t give in,
we’ll keep living in the past
Ian Anderson, Jethro Tull
December 4th, 2011 Alex Jurshevski
Was fÃllt, muÃŸ man nur noch stoÃŸen… Friedrich Nietzsche <PgDn for translation>
Dear Madam Chancellor,
This week will likely mark a critical turning point for Europe. The seriousness of the situation is underscored by the fact that this Euro-summit will also be attended by participants from the US Administration, the IMF and other third parties not normally seen at gatherings of the Eurozone political leadership.
You alone among the Euro leadership have consistently understood and have attempted to communicate that we should stop kidding ourselves that this crisis can be solved without a lot of pain.
By this point it should be clear that the tried and tested solutions for dealing with insolvency and default must be pursued. This means that Europe needs triage and restructuring, not additional can kicking and “monetary fakery” as some would suggest.
It also means that the incremental approach followed in the past 3 years has not only failed, it has become extremely counterproductive, and must be replaced by an action plan that features decisive and rapid action that will offer markets a clear roadmap to recovery.
For the negotiations that are upcoming the choice therefore is clear: you must either (1) lead Germany (and Europe) down a path of delusion and pain, submitting to the funny money Brussels elites who are calling for bond buying and money printing and inflicting significant cost and suffering on the peoples of Northern Europe (Germany and France being the key players) who have not over-borrowed or otherwise badly managed their economies, in order to bail out certain other nations who have done just that; all at the risk of huge expense yet with no guarantee of sustainable success; or (2), you must lay the groundwork for an orderly restructuring of the Monetary Union, which will see certain nations leave the Euro-zone (Greece, Ireland, Portugal, Spain; with Italy remaining within the EMU as a possible Associate Member, so that these exiting nations might catch their breath and recover. Accession plans for other nations would be put on indefinite hold.
Do not listen to the Brussels elites that believe that the problems can be papered over in the same fashion that US policymakers believe that they have done in the US. These types of gambles have never worked and inevitably have led to worse problems. It is a tacit axiom of international relations that there is no altruism between nations and therefore no legal, moral or ethical principle exists that would suggest the profligate countries should continue to benefit from the largesse of their neighbors at whatever the cost and without sanction. Now is the time to restructure out the countries that are not suited to, or capable of, following the fiscal and monetary discipline required as per the agreements they acceded to when they entered the Eurozone. Contrary to the advice that you may be offered by others connected to this situation, the plans for fiscal union and the role of the ECB should be sorted out after the membership structure has been adjusted. Moreover, in order to exit the crisis there is absolutely no need to add to the powers of the ECB.
There are some who say that breaking up the Eurozone would be an expensive mistake that Europe cannot afford. We say it is a course of action that Europe cannot afford not to take. There are political as well as financial reasons for this.
Following reunification Germany had a period of adjustment which was expensive, painful and lengthy. Your recent elections have shown that the German people do not want to see these sacrifices and achievements squandered. In fact, most of your neighbors are fully supportive of your policies during the recent crisis period and are looking to Germany to supply continued reasoned and reliable stewardship of this situation.
This crisis and the crisis in the United States are evidence that the West is wounded and its way of life is at risk. That means repairing (not bailing out) the financial system and insolvent countries quickly as possible. Therefore any plan that promises to restore stability at a minimum of risk and cost should be greeted favorably by all Europeans, Americans and their allies. Already too much time and money has been squandered pursuing unworkable solutions aimed at preserving some kind of idealistic and now unattainable, status quo ante in the Euro area.
The US should be in favor of this for that very reason, and also because a festering crisis in Europe imposes strong headwinds on the fragile growth potential in the United States, restraining activity and complicating the job of economic management there. The same is true for the UK. And the same should be true of the Euro-zone countries now under financial pressure and having to deal with austerity programs without the ability to devalue the currency that they use. In the latter case it is extremely unlikely that the austerity programs will bear fruit before a time bomb of social upheaval and popular discontent explodes and drives these nations even further into chaos.
Caption: An anti-austerity protester holds a placard with the Greek flag and swastika reading "NO to the 4th Reich" after a student parade in Athens, on Friday, Oct. 28, 2011. The student march, in commemoration of the 71st anniversary of Greece's entry into World War II, went on without major incident, but in other cities officials were heckled and in Thessaloniki, Greece's second city, a military parade was canceled. They also wrote 1941-2011 The enemy is the same. Some shouted slogans Germany Out from the EU. (AP Photo/ Thanassis Stavrakis)
Europe is no stranger to currency crises. We saw enough of those throughout the 1970’s, 1980’s, and 1990’s. With the exception of the UK in the 1970’s the IMF has never before intervened in European affairs. This crisis is a European problem, and there is no strong rationale for IMF lending under the existing IMF articles. In fact the IMF does not even have sufficient resources to render any offer of assistance credible. Moreover some of the less wealthy members of the IMF would begin to register legitimate complaints about co-opting the IMF to bail out large wealthy nations. Europe has lots of money and no balance of payments problem. The Euro is a reserve currency. You and your country can do a lot to fix this problem, and using the Bundesbank, the German Treasury and the ECB, you can do everything that the IMF can do. We are sure that the very experienced people on 19th Street in DC understand the difference between a bad risk and a good one, know that they have scarce resources, and would welcome the chance to step aside.
Part of the costs will be the default of the Greeks, Irish, Portuguese and the Spanish and possibly the Italians, and needed bank recapitalizations in those economies and for banks in other Eurozone countries. The costs for the leavers can be estimated by looking at past crises. According to the IMF which has examined over 100 currency and banking crises, the data show that for countries that have experienced a banking and a currency crisis (the most severe combination of adverse events) that the average output loss is about 18.8 percent, and that the average time to full output recovery is around 2.6 years. The Eurozone problem countries have already experienced these types of losses in the three years since the crisis descended upon them, but there is no recovery in sight. On the present course there is also no end game, no guarantee that the bailouts will prove successful and no estimate of the final bill.
Your national treasure will be better spent on a program of triage and recovery accompanied by the needed reforms to the EMU beyond the exit of the wayward countries. This combination of measures will deliver finite costs within a reasonably finite timeframe and, we believe, will ultimately prove politically palatable to the peoples of Europe and their neighbors.
Who knows ….if you can pull this off, one day a re-energized, institutionally more robust and better managed Euro might supplant the USD as the Number One Reserve Currency for the world.
Best Regards and Good Luck,
Frau Merkel, sagen Sie einfach “Nein”!
If you see anything that is falling, give it an extra push for good measure Friedrich Nietzsche
Sehr geehrte Frau Bundeskanzlerin,
Diese Woche wird wahrscheinlich markieren einen wichtigen Wendepunkt fÃ¼r Europa. Der Ernst der Lage wird durch die Tatsache, dass diese Euro-Gipfel wird auch von Teilnehmern aus der US-Regierung, dem IWF und anderen Menschen in der Regel nicht bei Versammlungen der Eurozone politische FÃ¼hrung gesehen besucht werden unterstrichen.
Sie allein unter den Euro-FÃ¼hrung haben stets verstanden und haben versucht zu vermitteln, dass wir aufhÃ¶ren sollten, uns gegenuber zu sherzen, dass diese Krise ohne groÃŸe Schmerzen gelÃ¶st werden kann.
An diesem Punkt sollte klar sein, dass die bewÃ¤hrten LÃ¶sungen fÃ¼r den Umgang mit Insolvenz ausgeÃ¼bt werden mÃ¼ssen. Dies bedeutet, dass Europa muss Triage und Schuldenumstrukturierung folgen, und nicht zusÃ¤tzliche â€žCan kicking” und Monetary fakery wie manchen wÃ¼rden vorschlagen.
Es bedeutet auch, dass die “inkrementelle”-Ansatz das in den letzten 3 Jahren verfolgt wurde, hat nicht nur versÃ¤umt, es hat sich extrem kontraproduktiv vorgestellt und muss durch einen Aktionsplan, der entscheidende und rasches Handeln, das Angebot MÃrkte einen klaren Fahrplan, um Recovery-Funktionen ersetzt werden.
FÃ¼r die kommende Verhandlung ist est also klar: Sie mÃ¼ssen entweder (1) fÃ¼hren Deutschland (und Europa) auf einen Weg der TÃ¤uschung und des Schmerzes, die sich dem “funny money” BrÃ¼sseler Eliten, die fÃ¼r die Anleihe zu kaufen und Geld drucken anrufen und fÃ¼gt erhebliche Kosten und Leid Ã¼ber die VÃ¶lker des nÃ¶rdlichen Europa (Deutschland und Frankreich zu den wichtigsten Akteuren), die nicht Ã¼ber over-geliehen oder anderweitig schlecht ihre Volkswirtschaften gefÃ¼hrt, um aus der Patsche helfen bestimmte andere Nationen, die genau das getan haben, alle an das Risiko von groÃŸen Lasten noch mit keine Garantie fÃ¼r nachhaltigen Erfolg, oder (2), mÃ¼ssen Sie den Grundstein fÃ¼r eine geordnete Umstrukturierung der WÃ¤hrungsunion, die unter bestimmten LÃ¤ndern verlassen die Euro-Zone (Griechenland, Irland, Portugal, Spanien lag ; mit Italien noch in der EWU als mÃ¶gliche “Associate Member”), so dass diese spannende Nationen kÃ¶nnte zu Atem zu kommen und wieder wachsen konnen. Beitritt PlÃ¤ne fÃ¼r andere Nationen wÃ¼rden auf unbestimmte Zeit gehalten werden.
Mann kann nicht die heutigen Probleme mit Tapete verstecken. Diese Arten von GlÃ¼cksspielen haben noch nie gearbeitet und unweigerlich zu schlimmeren Problemen gefÃ¼hrt haben. Es ist eine stillschweigende Axiom der internationalen Beziehungen, dass es keine “Altruismus zwischen den Nationen” gibt und damit auch keine rechtlichen, moralischen oder ethischen Grundsatz gilt, dass wÃ¼rde vorschlagen, die verschwenderische LÃ¤nder sollten weiterhin von der GroÃŸzÃ¼gigkeit ihrer Nachbarn an, und ohne Sanktion. Jetzt ist die Zeit zur Umstrukturierung aus den LÃ¤ndern, die nicht geeignet sind, oder in der Lage, im Anschluss an die fiskal-und geldpolitische Disziplin gemÃ¤ÃŸ den Vereinbarungen sie, wenn sie in die Eurozone beigetreten erforderlich. Im Gegensatz zu den Rat, den Sie bereits vielleicht schon erhalten haben, sollten die PlÃ¤ne fÃ¼r das GeschÃ¤ftsjahr Union und die Rolle der EZB aussortiert werden, nachdem die EWU-Mitgliedschaft Struktur angepasst hat. DarÃ¼ber hinaus, um die Krise zu beenden gibt es absolut keine Notwendigkeit, die Befugnisse der EZB hinzuzufÃ¼gen.
Es gibt einige, die AuflÃ¶sung der Eurozone wÃ¤re ein teurer Fehler, dass Europa es Sich nicht leisten kann, werden sagen. Wir sagen, es ist ein Vorgehen, dass Europa Sich nicht leisten kann, nicht zu nehmen. Es gibt politische als auch finanzielle GrÃ¼nde.
Nach der Wiedervereinigung hatte Deutschland eine Phase der Anpassung, die teuer, schmerzhaft und langwierig war. Ihre kÃ¼rzlichen Wahlen haben gezeigt, dass das deutsche Volk will nicht diese Opfer und Leistungen verschwendet zu sehen. In der Tat sind die meisten Ihrer Nachbarn voll und ganz hinter Ihrer Politik wÃ¤hrend der Krise Zeitraum und sind in Deutschland auf eine weitere vernÃ¼nftige und zuverlÃ¤ssige Verwaltung von dieser Situation zu liefern.
Diese Krise und die Krise in den Vereinigten Staaten sind der Beweis, dass der Westen verwundet ist und seine Art zu leben ist in Gefahr. Das bedeutet, dass die Reparatur (nicht Bailout) des Finanzsystems und insolventen LÃndern so schnell wie mÃ¶glichpassieren soll. Daher ist jede Plan, um die StabilitÃ¤t bei einem Minimum an Risiko und die Kosten wieder Versprechungen positiv von allen EuropÃ¤ern, Amerikanern und ihren VerbÃ¼ndeten begrÃ¼ÃŸt. Schon zu viel Zeit und Geld verschwendet worden verfolgt undurchfÃ¼hrbar LÃ¶sungen zur Erhaltung einer Art idealistischen und nun unerreichbar, “status quo ante” in der Euro-Zone ab.
Die USA sollten sich fÃ¼r diese gerade aus diesem Grund, und auch, weil eine schwÃ¤rende Krise in Europa auferlegt starken Gegenwind auf der fragile Wachstumspotenzial in der USA, einstweilige AktivitÃ¤t und erschweren die Arbeit des Ã¶konomischen Managements gibt. Das gleiche gilt fÃ¼r das UK. Und das gleiche sollte auch fÃ¼r die LÃ¤nder der Eurozone nun unter finanziellem Druck und mit mit Sparprogramme ohne die FÃ¤higkeit, die WÃ¤hrung abzuwerten, die sie verwenden viel. Im letzteren Fall ist es Ã¤uÃŸerst unwahrscheinlich, dass die Sparprogramme wird Obst vor einer Zeitbombe des sozialen Umbruchs und der Unzufriedenheit in der BevÃ¶lkerung explodiert tragen und treibt diese Nationen noch weiter ins Chaos.
Europa ist kein Fremder in WÃ¤hrungskrisen. Wir sahen genug von diesen ganzen 1970er Jahre, 1980er und den 1990er. Mit Ausnahme von ber UK in den 1970er Jahren hat der IWF noch nie zuvor in europÃ¤ischen Angelegenheiten eingegriffen. Diese Krise ist ein europÃ¤isches Problem, und es gibt keine starken GrÃ¼nde fÃ¼r IWF-Kredite im Rahmen der bestehenden IWF-Artikel. In der Tat der IWF nicht einmal Ã¼ber ausreichende Mittel verfÃ¼gen, um ein Angebot der UnterstÃ¼tzung glaubhaft zu machen. DarÃ¼ber hinaus einige der weniger wohlhabenden Mitglieder des IWF beginnen wÃ¼rde, um legitime Beschwerden Ã¼ber die Kooptierung des IWF zur Rettung von groÃŸen wohlhabenden Nationen registrieren. Europa hat viel Geld und keine Zahlungsbilanz Problem. Der Euro ist eine ReservewÃ¤hrung. Sie und Ihr Land kÃ¶nnen eine Menge tun, um dieses Problem zu beheben, und mit der Bundesbank, die deutsche Finanzminister und der EZB, kÃ¶nnen Sie alles tun, dass der IWF tun kÃ¶nnen. Wir sind sicher, dass die sehr erfahrene Leute an der 19th Street in DC der Unterschied zwischen einem schlechten Risiko und ein gutes VerstÃ¤ndnis, wissen, dass sie knappe Ressourcen haben, und wÃ¼rde die Chance, beiseite zu treten willkommen.
Ein Teil der Kosten ist dass die Griechen, der irischen, portugiesischen und spanischen und mÃ¶glicherweise die Italiener, Bankrott sind und auch benÃ¶tigt Rekapitalisierungen der Banken in den Volkswirtschaften und fÃ¼r die Banken in anderen LÃ¤ndern der Eurozone. Die Kosten fÃ¼r die Abiturienten kÃ¶nnen, indem Sie auf vergangene Krisen geschÃ¤tzt werden. Nach dem IWF, die Ã¼ber 100 WÃ¤hrungs-und Bankenkrisen untersucht hat, zeigen die Daten, die fÃ¼r die LÃ¤nder, dass eine Bank-und eine WÃhrungskrise (die schlimmste Kombination von unerwÃ¼nschten Ereignissen), die mittlere Ausgangsleistung Verlust Ã¼ber 18,8 Prozent erlebt haben, und dass die durchschnittliche Zeit bis zur vollen Leistung Erholung um 2,6 Jahre. Die Eurozone Problem LÃ¤nder haben bereits diese Art von Verlusten in den drei Jahren seit der Krise auf sie herab erlebt, aber es gibt keine Erholung in Sicht. Auf dem gegenwÃ¤rtigen Kurs gibt es auch kein Ende Spiel, keine Garantie, dass die Rettungsaktionen als erfolgreich erweisen werden und keine SchÃ¤tzung der Endabrechnung.
Ihr nationaler Schatz wird besser auf ein Programm der Triage-und Recovery durch die notwendigen Reformen des EMU begleitet Ã¼ber den Ausgang des eigensinnigen LÃ¤ndern ausgegeben werden. Diese Kombination von MaÃŸnahmen werden endlich die Kosten in einem angemessenen Zeitrahmen zu liefern und endlich, wie wir glauben, sich letztlich als politisch schmackhaft zu den VÃ¶lkern Europas und ihre Nachbarn.
Wer weiÃŸ…. wenn Sie dies zu erreichen, einen Tag mit eine neuer Energie, institutionell robuster und besser verwaltet Euro kÃ¶nnte der USD als Nummer eins der Reserve WÃ¤hrung fÃ¼r die Welt zu verdrÃ¤ngen.
Mit freundlichen GlÃ¼ckwunschen,
November 24th, 2011 Alex Jurshevski
In our last blog installment we asked, given the present unsettled state of the world the real issue for clear-thinking people is: “What comes next after these Occupiers fade into the sunset?”
Well, here in Toronto the OWS has been dispersed, the “Library Yurt” in St. James’ Park has been dismantled and its “defenders” bundled off; and who better to provide some insight into that question than The Right Honourable Tony Blair, the former Prime Minister of Great Britain from 1997 to 2007 and since then the Official Envoy to the Middle East for the Quartet?
Recovery Partners attended a dinner last week where Mr Blair was the keynote speaker. A key message that he delivered was that the world is shifting very fast, and it is more interdependent and interconnected than ever before. Following that theme, he said that today’s politicians must quickly get used to the fact that they have to make “Big Decisions” and they must the right ones and make them quickly or risk losing control of the situation the West confronts today. This message ran through his entire address.
As for the situation in Europe Mr. Blair strongly advised that leaders there must recognize that the Eurozone is shifting from the Politics of the Grand Design to the Politics of the Grand Plan. It is the Grand Plan that has eluded decision-makers there. Unfortunately for Europe, however, Mr. Blair emphasized that, in this regard, the Eurozone and its leaders cannot afford to rely on a strategy that makes incremental changes that lead to incremental gains. This requires that the current Eurozone leadership realize that the crisis there is not a situation to be “managed: Today’s leaders have to take Big Decisions at an Existential and Fundamental level (which in itself is an act that risks or provokes a collapse of the system unless the right decisions and plans are implemented). The key realization here is that the single currency crisis has exposed a need for reform, it has not created that need.
Mr. Blair went on to say that the true operative timeframe now for the Euro rescue must be measured in weeks not months if the Eurozone is to be saved. This means that everyone in Brussels and in the Euorzone countries needs to get behind the Euro. In the longer term decisions need to be taken about a European Fiscal Union and Fiscal Reform. There are clear flaws in the Monetary Union Project, but for now a crisis management solution must be implemented quickly.
Everything is preferable to a breakup as the consequences are serious for both creditors and debtors therefore people on all sides of the negotiating table should be motivated to find a decision. Based on the foregoing there is simply is no middle course according to Mr. Blair.
Similarly, the US Economy requires dramatic decisions that the Leadership there has avoided. Mr. Blair enumerated several huge challenges facing the US including debt levels, deficits, needed reform of the tax code, and an urgent need to rebalance the economy in favour of a more equitable division of National Income. He was unequivocal in saying that needed decisions have been deferred and have been piling up for years and these imperatives can now no longer be ignored.
As noted above Mr. Blair has spent a good deal of time since leaving office preoccupied with events and developments on the Middle East. His main message here, following from above, was that the Arab Spring, the Israeli Palestinian conflict, and Islam’s relationship to the West are all not only interconnected, they are key agenda items.
While it has become obvious that a variety of regime shifts have been going on in the Middle East, it is less obvious to note that most lack stability. In many countries modernization has outstripped to ability of the economy and population to keep up. Here, the main difference between Eastern Europe and the Fall of the Berlin Wall and what is going on in the Middle East today, is that with the Fall of Communism there was: (1) Unity among the Eastern Bloc population on what they wanted to get rid of; and, (2) unity among those peoples on their desire to adopt a Western Way of life, its aspirations and values.
Mr. Blair explained that in this regard, today in the Arab world there is no cohesion around what the population would like to structure in place of deposed regimes and dictators. Therefore it would be a huge mistake for the West to assume that people there just want to move towards a stable democracy. The simple model of modernization conveniently ignores the deep influences or tribalism and religion in many of these countries.
Therefore it is not obvious what the outcome in many of these countries will actually be. That means that unless we take strong positive action to get people into the right frame of mind that there will be problems with the transition.
Many of the regimes outside the West are quite strong and resistant to “Arab Spring” type events. They afford a measure of political stability. The folks who are a serious threat to these regimes or the status quo in those countries are usually either co-opted or neutralized
To underscore this point Mr. Blair said that many prominent people in these countries are extremely nervous about making ANY move, let alone the RIGHT move….and that this is happening throughout the region. Therefore he emphasized that we in the West we have to stay engaged with these populations. Specifically he stated that we have to assist with change, help these societies cope with modernization and at the same time, challenge them. The West needs to demonstrate that democracy is not only about a constitution and right to vote, it is also about: (1) an attitude to life, (2) freedom of expression, (3) freedom of religion, (4) freedom to work and transact in open, transparent and fairly-regulated markets, and (5) the requirement to live with tolerance and diversity.
The World no longer revolves solely around the US and Europe regarding strategies and political imperatives based around territorial interests. In fact the West must understand that the main message it must represent going forward is a Way of Life: Freedom, Democracy, Justice, and Tolerance being but some of the watchwords. Through leadership and vision we should impress upon the emerging and newly middle income economies to come to the conclusion that they would do far better to emulate the West rather than if they did something else.
Mr Blair’s remarks were warmly received and appreciated. Clearly in command of the subject matter and charismatic, he could probably have gone on for several hours. From our persepctive his address was as much an observation on the current state of affairs as it a warning to all of us that unless a more constructive approach to our problems is pursued by politicians both in Europe, North America and elsehwhere, that the consequences could be extremely undesireable.
This week financial markets in Europe remained on a knife edge and the US political class again showed that it continues to behave in a manner that is completely unresponsive to market discipline. The indicatiors on the threat board continue to flash yellow and red.
I am reminded of a luncheon I attended in Tokyo shortly after the fall of the Berlin Wall, when the then Russian Foreign Minister, Andrey Kozyrev, was asked by a member of the press how things would turn out in Russia. His response was that “No one is in full control, any one of hundred outcomes are possible and most of them are ones that people really won’t like.” As events have shown since then, it appears that the world and Russia herself has largely lucked out.
We may not be so fortunate this time.
November 23rd, 2011 Alex Jurshevski
“Now if I tell you that you suffer from delusions; You pay your analyst to reach the same conclusions; You live your life like a canary in a coalmine; You get so dizzy even walking in a straight line”
Sting and The Police
Monday’s news of the failure of the debt ceiling negotiations in the US ahould not have come as a surprise to anyone who has followed this issue. Disheartening, sad, and ultimately dangerous to our economic well-being and Global Stability, yes, but unexpected, no. Recovery Partners was interviewed on that very topic yesterday and the full interview is avialable here in part 1 and part 2 or you can watch an abridged version on our site.
On Monday Zerohedge posted a note on Austria, entitled “35 Seconds Of TV Air Time Explaining Why Austria’s AAA Rating Is Doomed“. Most of the discussion focused on the massive Central and Eastern European credit exposure. According to them, massive bank credit losses and a sovereign downgrade is a sure bet as well as the fact that contagion has spread to several Central and Eastern European economies.
Elsewhere on the Continent, the Sovereign obligations of Eurozone countries were getting smoked as spreads against German bonds blew out across the board. Looking ahead at the heavy borrowing calendars for many of these countries the picture does not look good.
In related news, European stock markets dropped Tuesday after an expensive bond auction for Spain and as data showed that the U.S. economy grew at a slower pace in the third quarter than initially estimated.
Also today, IMF Managing Director Christine Lagarde said in an e-mailed statement to accompany a press release annoucing the creation of a new IMF fast-track liquidity facility. This is another step toward creating an effective global financial safety net to deal with increased global interconnectedness. It is no surprise as these announcements came as Europe’s crisis threatens to spread to Spain and France. The real “non-announcement” here is that this is happening because the Euro-people have yet to implement the Bailout plans agreed to weeks ago in part because the EFSF has become non-functional and incapable of producing needed funding for cash-starved Euro-governments. This despite the recent publicly announced intentions to ramp up the EFSF to between EUR 1 and 2 Trn. How ironic it is that just over a year ago on the establishment of the EFSF, that Olli Rehn, EU commissioner, boasted that the EFSF would “never need to be used”. Now it is obvious that, apart from some half-completed bailouts, it has proven to be of extremely limited effectiveness and can no longer function.
And earlier this morning it was reported by the FT that the Chinese Banking Regulator (the CBRC) announced that the Chinese Property slump exceeded the test limits of the Chinese bank stress tests. In April, the CBRC told banks to test their loan books against a 50 per cent fall in prices, and also a 30 per cent fall in transaction volumes. In October, however, property transactions fell 39 per cent year on year in China’s 15 biggest cities, according to government data. The weaknesses in the Chinese scenarios echo earlier problems with stress testing in the EU, where regulators underestimated the potential impact of a sovereign debt crisis.
Joining the party, the Fed announced new stress tests for the top 19 US banks to take place between now and January and having the results announced by March 2012. There are six large banks that are going to attract particular focus according to the Fed press release and accompanying statements.
Watch this space.
Early Warning Systems and all That
During my time in New Zealand I remember seeing lorry loads and trainloads of sheep, cattle and pigs being packed off to the slaughter houses and knacker’s yards. Over the time I was in that beautiful country, I observed the behaviours of these animals as the transport vehicles rumbled past and this left me with the indelible impression that these creatures somehow knew that something ominous was afoot….even though they could not read, write or understand a sentence of English, much less the road map.
This brings to mind the OWS movement which appears to have swept the globe as a phenomemenon that defies definition. The OWS movement seems a jumble of contradictions: it professes respect for the enviroment but its activities have destroyed parkland and befouled inner cities with garbage and human waste; it professes respect and fellowship for citizens of the countries in which it staging its protests, yet its activities have significantly interfered with the commercial interests of small businesses and their employees, threatened passersby with violence and has otherwise commanded the attention of our law enforcement authorities to the deriment of others who might actually have benefited more from their attention at a particular time; and yet all along it professes to be able to see the future and is therefore justified in attempting to change that fate for everyone’s benefit. Moreover, in conversation, not one of the OWS protesters has been able to articulate a coherent vision, objective or group mission that all OWS protesters can agree with.
The ultimate irony of the OWS movement however lies not in the paucity of substance, it lies in the fact that what little substance its demands and prescriptions contain, all seem to feature demands for exactly the wrong thing. This is quite simply that the common thread among OWS protesters is that they are screaming for : more Government, more state control, more handouts, and generally speaking, for the Government or some other central authority to solve their problems. This is precisely the wrong prescription delivered at a time when the reality is that the cause of many of our challenges today is that the modern Welfare State has run out of rope, our political structures have not responded well to recent challenges and, combined with the demographic picture, that there is simply is no more wealth to be spread around. The choices Western society confronts today all revolve having to make do with less. That is the Bottom Line that the OWS is ignorant of at a fundamental level.
This movement in its present state will therefore likely fade away shortly and none too soon. Although the OWS folks sense that something is wrong in the world, they, like the animals on the way to the slaughterhouse, cannot articulate what it is they sense and fear, and, because of that and other inherent limitations, they are in no way equipped to devise strategies or action plans to avoid whatever fate awaits them, nor by the same token, to be able profess that they can render such advice to anyone else.
Given the present unsettled state of the world the real issue for clear-thinking people is: “What comes next after these occupiers fade into the sunset?”
For more on that, please dial in to Part II of our Canaries Blog series in 24 hours.