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November 25th, 2010

Quote of the week : “Had they fixed Greece properly in the first place, bondholders would have concluded the EU could also fix Ireland ... whereas now if Portugal comes under suspicion they’ll say : ‘Clearly, these guys who couldn’t fix Greece or Ireland, can’t fix Portugal either, and so on’ ” (Carl Weinberg, Chief Economist at Valhalla, NY-based High Frequency Economics). 

As German voters rebel against more & more costly bailouts & ‘austerity fatigue’ becomes more widespread, there is more talk of a possible break-up of the Euro zone, with its diehard proponents steadfastly denying the possibility thereof to the point where Alex Weber, the President of the Bundesbank recently assured a French audience that if the current 750BN Euro bailout fund were depleted, the EU leaders would “top it up”. Nevertheless, one should not rule out the possibility of the emergence of a smaller, more homogeneous, but stronger, Eurozone that had sloughed off its low performers. This would be easier than many people appreciate because on every Euro note & coin in circulation there are marks that identify which country it is from.  


The Irish banking crisis has played in the hand of the Euroskeptics who have long argued that the EU was expanded too hastily & that a single currency could not accommodate the needs of such a wide diversity of economies, and of nationalists who see the cap-in-hand pilgrimages to Brussels  for highly conditional bailouts as validating their long-held fears that economic union could at some point lead to political subjugation.   

Bailing out Greece to save the hide of the German, French & Italian banks didn’t  work. And bailing out the Irish banks to save that of these & other European banks ain’t going to work either (German banks alone have 140 billion Euros at risk in Ireland). This validates the definition of stupidity as “doing the same thing over & over again and expecting different results”. Assuming Ireland gets its 85BN Euro loan (an estimated 30BN of which will go to further prop up its banks, bringing the total cost thereof to 75BN Euros, i.e. one-third of Ireland’s GDP), the interest thereon will wipe out the 15BN Euro savings the Irish government is expected to come up with for the next four years. And the problem now is that Greece’s fiscal mess is actually worsening.  

The size of the EU/IMF Bailout fund is 750BN Euros, Take away the 110 BN Euro for Greece & another 85BN for Ireland, and 555BN Euros are left in the kitty. A  possible bailout for Portugal on the same scale as Ireland’s would cost another 100BN Euros & leave 445BN Euros which would be wiped out if Spain (the Eurozone’s fourth largest economy) needed help.  A bailout for the big elephant in the room, Italy, the Eurozone’s third largest economy whose debt-to-GDP 120% ratio is the third-highest in the EU, & only marginally lower than Greece’s, could raise the tally to twice the original amount. While this may look like the worst case scenario, it is unlikely to get that far since long before the German electorate’s  tolerance for bailouts will be exhausted. 

    In response to public outrage about the use of body scan machines in US airports, the

    TSA’s response was that one type of machine used “had no known risk”), while the other

    type used kind exposed people to less radiation than they would be exposed to during

    their flight. Neither one of these are what one might call ‘ringing endorsements’.   


No. 386 - November 25th, 2010 


    · The Commerce Department on November 23rd published a revision of its Second Quarter GDP estimate from 2.0% to 2.5%. It credited greater consumer spending & greater overseas sales of US products. This was a major improvement from the First Quarter’s dismal 1.7% rate. But to reduce the unemployment rate, it must grow twice as fast. 

While this continued slow rate of growth was supposedly the reason for the Fed’s November 3rd launch of QE2, what matters is not the rate of growth per se, but the rate of change thereof.  


    · Americans earned & spent more in October (consumer spending was up 0.4% , vs. 0.3% in September, & incomes up 0.5%). The number of people applying for unemployment, at 407,000 saar, was down 34,000 in the latest reporting week, the lowest in over two years. And the Thomson-Reuters’ final November’s Consumer Confidence Index was 71.6  vs. October’s 67.7, November’s preliminary reading of 69.3 & the  consensus forecast of 69.5.  

On a less positive note, manufacturing activity slowed.  

41 STATES SEE MOST JOB GAINS IN 5 MONTHS (AP, Christopher S. Rugaber) 

    · But the gains didn’t reduce the broad unemployment rate, although they fell in 19 states (incl. in California, Florida, Michigan & Nevada, the states with the highest rates - California alone added 39,000, the most in 4 ½ years but not enough to change its unemployment rate), remained the same in 17 & rose in 14. As Anthony Chan, JPMorgan’s Chief Econimist, put it, “The numbers suggest we’ve stabilized and have started to show real improvement ... But we’re a long way from crafting the ‘Mission Accomplished’ sign.” 

When the economy starts to improve, more people start looking for work, which affects the unemployment rate.   


    · They came in at a 4.43MM annual rate whereas JPM had expected a rise to a 4.60MM rate. A huge overhang of unsold homes was cited as the main reason. This was the slowest rate  since July & came after two months of increases.  

7.25MM was the peak, in September 2005.   


    · The FDIC reported on November 23rd that the nation’s largest financial institutions are recovering from the financial crisis far faster than the smaller ones. This has far-reaching consequences for the industry &, more importantly for the economy, if only because the smaller ones will have more trouble raising new capital & will become takeover targets. 

Consolidation is not necessarily good news for locally-based small businesses. 


(AP, Julie Hirschfeld Adams) 

    · After a messy family feud among the Democrats, she will remain their House leader. But she diverges from the President, with possibly damaging consequences for the latter, in her opposition to him cutting deals with Republicans in order to get legislation passed. For the liberal Democrats believe that if he had done less compromising on principles close to their hearts in the past two years they would have done better in the mid-term elections, because they would have had a better jobs bill that would have created more real jobs. 

This is  ‘rewriting history”; for on paper at least, they had the votes for a better jobs bill.      


    · In October the annualized CPI jumped by 0.4% to a higher-than-expected 2.4%, its highest level in two years, led by an 8.8% hike in gasoline prices although the prices of most things were noticeably higher. Even core inflation was up 0.3% to an annualized 1.8%.   

The Bank of Canada continues to have a 2% target. 


    · Late November 23rd it passed, 65-33, a bill supported by Prime Minister Netanyahu, stipulating that in case peace deals were arrived at with Syria over Golan Heights and/or with the Palestinian leadership over the West Bank & Jerusalem, they would have to be approved by the Knesset & subsequently in a referendum. One Arab member of the Knesset called this proof that Israel had no interest in negotiating, that now  “only idiots”  would consider trying to negotiate with it, that international-, not Israeli-, law should apply, and that this was a reversal of the long established practice whereby the occupied decided their future, rather than having the occupiers do it for them. 

While it was reported that there had been no abstentions, 20-odd MKs incl. Labor Party leader cum  Defence Minister Ehud Barak, must not have been present for the vote. This may well be one more step towards the break-up of the current Netanyahu right wing coalition, and either new elections or its replacement with a more ‘dovish’ centrist Government of National Unity.



    · On November 23rd in St. Petersburg Premiers Wen Jiabao & Alexandre Putin announced that “ to protect their economies”, they would start using using their own currencies  in their bilateral trade. The next day, they announced 13 trade deals with a total value of US$8BN. 

Another, albeit small, bit of erosion of the role of the US dollar in the system. 


(BBC News, Subir Bhaumik)  

    · Two new army divisions will be deployed in the Northeastern state of Arunchal  Pradesh. 

Parts of the state have long been claimed by China. 


    · Their Third Quarter GDP growth was the least in three quarters. In Thailand’s case it was  6.7%, vs 9.2% in the Second Quarter, & in Malaysia 5.3%, down from 8.9%. 

While not necessarily good news, one should never read too much in one quarter’s numbers.    


(Reuters, Phil Stewart) 

    · North Korea’s recent disclosure, to a visiting US scientist earlier this month, of a hitherto unknown ultra-modern uranium enrichment facility raises questions about the quality of the US intelligence community’s surveillance  activities & about whether there might be more such facilities in the country that have escaped notice. What made this even more embarrassing is that it is located in plain sight in the Yongbyon nuclear complex that is supposedly under close, ongoing scrutiny by US spy satellites. 

So now everyone is speculating why North Korea chose this moment to reveal its existence.   


    · The November 21st announcement of a 85BN Euro  (US$113BN) bailout from the EU & IMF has failed to create a sense this is the end of two years of financial instability. The country in political upheaval. The government wants to pass a budget based on the four year package of brutal welfare cuts & tax hikes demanded as a condition of the bail-out  & faces an election in January it is all but certain to lose with the likely winners vowing to renege on the budget if it were passed & replace it with a more Irish taxpayer- cum economy-friendly one (prompting the EU to warn on November 23rd it could destroy the Euro by its political feuding, & its top financial official to say “Let’s adopt the budget” ... and ... move on” to avoid the Irish brush fire from turning into an EU-wide forest fire that could take the Euro down. But both government & opposition MPs fear losing their seats if they vote for the budget, & Prime Minister Brian Cowen asked the opposition parties to abstain from voting on the budget, so as to present a show of national unity & reduce the risk of a market panic & a run on the banks (which the opposition refused to do). The result has been Europe-wide concern that, if Ireland can’t, or won’t, meet the demands for drastic fiscal measures by December 7th, this may  may bring on a degree of investor panic that could lead to demands for bailouts of other Eurozone countries that would be beyond the capability of the EU & thereby bring down the Euro. And the fear of a major run on the Irish banks, whose depositors have been voting with their feet for some time & that have been shut out from the inter-bank lending market, forcing them to borrow 40BN Euros from the ECB,was not lessened when PIMCO’s Mohamed El-Erian told a TV interviewer “What you advise your sister in Ireland now is ... take your money out of an Irish bank and put it in another bank headquartered elsewhere ... That’s what happened in Argentina and in emerging countries. People worry about their savings”  

And to make matters worse, the Irish who hitherto had displayed an attitude of “We’ve seen worse & survived” rather than the public anger seen in Greece, Portugal, Spain & Italy, and even France, have now begun to get angry too, accusing those whom they perceived to have created this mess & to have profited from doing so, of now seeking to be bailed out at their expense.     


    · Fears abound about Europe’s seemingly unstoppable debt crisis. Striking workers shut n adown much of Portugal. Ireland proposed its deepest budget cuts ever including a lowering the minimum wage, and English & Italian students have clashed with police over education cuts. And analysts are skeptical about the future & concerned that the desperate efforts by governments, the EU and IMF won’t be enough to prevent countries from defaulting and/or banks going under. 

And yet the EU sought to take advantage of the opportunity to bring, as a part of the Irish budget cuts, Ireland’s exceedingly low corporate tax rates more in line with those in the rest of the EU.  


(The  Independent, Emmet Oliver) 

    · With the exception of the Irish government, no entity has done more to pile mountains of debt on the Irish tax payers than the European Commission (EC). For since 2008 it encouraged, approved or, at the very least was consulted on, the following capital injections & bank interventions . The first recapitalization of the Anglo-Irish Bank (AIB). The nationalization of the AIB, The first recapitalization of the Bank of Ireland. (BoI). A capital injection for the AIB. The creation of the  Eligible Liabilities Guarantee (ELG) scheme. A second recapitalization of the AIB. The restructuring of the BoI & the AIB. The creation of the NAMA asset relief scheme. Capital support for the EBS Building Society & Irish Nationwide. A prolonging of the ELG scheme. Approval of the NAMA asset valuations. And the extension of the ELG scheme. All in all, it did not reject a single banking intervention idea of the Irish goverment; in fact it appears to have positively encouraged many of them.

    · It was obviously wrong in its assumption that increasing the debt burden would not have a calamitous market impact (& appears to have been more interested in protecting the German & French banks’ 139BN & 50BN Euro exposure than in doing what was right for Ireland).In the process, Ireland’s souvereign balance sheet was wrecked, market confidence evaporated & IMF/EU assistance became inevitable. 

For over a decade Ireland was a poster child for fiscal rectitude as it brought its debt-to-GDP ratio down from 95% in 1995 to 25% in 2007, while now closing in on 100%, and on its way to 150%


    · Right now it holds 36% of the bank’s shares which, it announced on November 23rd it might take as high as 79%. This caused the price of its shares to tumble 44% in two days & S$P to downgrade Irish government bonds from AA- to A with the proviso that it would be lowered further if the bailout “fails to staunch the wholesale funding outflows.” 

Its shares are NYSE-listed & right now are trading for US$1.50, down from US$100 in early 2007;  nevertheless institutional investors have doubled their holdings recently. ` 


    · The rationale for austerity is two-fold. One is practical : to avoid bankruptcy the profligate must tighten their belts & learn to live within their means, the other moral : lenders demand painful austerity as a key step back to responsible citizenship.

    · In the Greek bailout the EU & IMF wilfully confused the two. They demanded Greece swallow austerity’s bitter medicine time & as the only way back to fiscal health and to ensure the Greeks learnt the  lesson the hard way. But the medicin prescribed didn’t cure the disease & now threatens to engulf the entire Euro zone. The savage austerity won’t arrest the growth in Greece’s ballooning debt & will do nothing to inflict righteous pain on the culprits.In fact, the very people responsible for Greece’s indebtedness, who profited from doing so, are now preaching austerity sermons & administering the bitter medicine to the innocents who will suffer its ill effects.  For the Greek bailout was not intended to bailout Greece but rather to protect the interests of the German, French & Greek banks.          

Nevertheless, Greece’s international lenders are saying Greece must make an “extra effort”.    


    · Working with state-owned PDVSA it will develop a major oil fieldin the East Orinoco basin. It will spend $8BN there &, with PDVSA as a 40% partner, will build a refinery that will come on stream in 2016. ENI CEO Paolo Scaroni said that “Within four, five years Venezuela is going to be the second most important country for our company”. 

This has to be a huge gamble that Chavez is on the greasy slide.

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