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Here’s A Calendar For Fiscal Cliff-Mageddon
All of this noise out of Greece has taken attention away from the fastly approaching U.S. fiscal cliff: the end-of-year deadline that threatens to lop off an estimated 3 to 5 percentage points off of GDP growth in 2013.
Earlier today, Morgan Stanley’s Vincent Reinhart slashed his GDP growth forecasts for 2012 and 2013 blaming both deterioration in Europe and uncertainty tied to the fiscal cliff.
Reinhart’s note discusses the timetable regarding the fiscal cliff:
Unfortunately, there is no clear timetable for action. Congress will deal with the situation when it is good and ready to do so. And, the lessons from similar experiences in recent years suggests that such action will occur at the last minute.
But as an economist who’s getting paid to make forecasts and opinions, he shares with us the key dates that he’ll be watching. Here’s his assesment:
[T]here is a strong likelihood that there will be a lame duck session of Congress following the November election. Ideally, legislators will reach agreement on a plan which avoids the 2013 fiscal cliff and, at the same time, addresses the unsustainable longer-term course of US fiscal policy. However, given the elevated degree of gridlock in DC and the likelihood that some degree of gridlock will remain no matter what the election outcome (it is mathematically impossible for either party to achieve a filibuster proof majority in the Senate), this is an awful lot to expect during a post-election session of Congress that may last six weeks or so at most. A more likely scenario might involve a short-term extension of the major budget provisions or delayed action until debt ceiling constraints help to force a compromise agreement in early 2013. Of course, the longer the delay, the greater the likelihood that policy uncertainty will negatively impact the real economy.
Related articles
- Morgan Stanley Just Slashed Its US GDP Forecast And Warned Things Could Get A Lot Worse (businessinsider.com)
- CBO Warning: Recession Will Follow 2013 ‘Fiscal Cliff’ (theatlanticwire.com)
- Fiscal cliffs, multipliers, and the myth of central bank independence (economist.com)
European bank runs and failure of Credit-Anstalt in 1931
The events in Europe right now is essentially a slow-motion bank run (or “bank jog”) on various European banks in the periphery. Greece, for instance, have been losing deposits in their banks, while Spanish bank Bankia was rumoured to have massive among of deposits being withdrawn. And of course, in the days of modern banking with internet and other stuff, you don’t even need to see a massive queue outside a bank to know that there’s a bank run.
Disturbingly, what’s happening today in Europe reminds me of something happening more than 80 years ago, when bank failures triggered bank runs virtually in the whole of Europe, later bank holidays in hope to stop bank runs, capital control, and countries going off gold standard. Sure enough, by thinking about the event in 1931 by no means suggest that I think what happened then will surely happen in 2012. It is always, however, good to look at the history and see what we can learn from it.
We all knew that the Great Depression started in 1929. Perhaps lesser known is that one of the more dangerous legs of the slump during the the Great Depression did not start until 1931 when an Austrian Bank Credit Anstalt went bust.
At the time, it was the biggest bank of Austria. Its failure triggered a European banking crisis, with bank runs started first with Austrian banks, then with German banks.
In Liaquat Ahamed’s wonderful book Lords of Finance: The Bankers Who Broke the World, he wrote that while Austria was a small country with the GDP about one tenth of Germany’s, remarkably the failing on its biggest bank sent a massive shockwave to the whole of Europe, an ultimately to the world economy. While the big central bankers were trying to come up with rescue packages, without the experience of modern central banking, they came in too late, with too little money.
During the time of the Great Depression, it was the French which had the biggest gold reserve after the United States. At the time of Credit Anstalt’s failure, the French was apparently faring relatively well among European countries. And not surprisingly, politics was in play in their attempt to save themselves. France, although financially stronger among European great powers, they were not keen at all to save the Germans and Austrians (perhaps still quite keen to punish them for starting World War One). When the United States unilaterally forgo war debts from Europe for a year, which included German’s reparation, France was furious. Liaquat Ahamed quoted that the British Prime Minister at the time Ramsay MacDonald saying that “France has been playing its usual small minded and selfish fame over Hoover proposal…”, while the Bank of England Governor’s Montagu Norman said, according to Ahamed, that “Berlin was being ‘bled to death’ while the French and the Americans were busy arguing” (p. 413). And sure enough, when the German’s central bank Reichsbank asked Banque de France and the French government for help, that didn’t work. The French government offered some loan with conditions, which the Germans thought of that as “political blackmail”.
As the crisis worsened, Danatbank, at the time the second biggest bank in Germany, went bust some two months later after Credit Anstalt failed. On 13 July, it failed to open for business, triggering yet another wave of massive bank runs on every other German banks. With the banking crisis at its worst, a two-day bank holiday was imposed in German to prevent further drain in deposits. Later, banks in virtually the whole of Europe are closed.
Meanwhile, in London, the government is considering measures to reduce budget deficits even as the banking crisis hit Britain, partly because of UK’s banks exposure to Germany and other countries in the continental Europe, and the Bank of England was losing gold reserve, forcing the Bank to raise interest rate when it should not. The military’s salary would be cut in hope to plug the budget gap, but the some sailors in the Royal Navy became (predictably) very angry and essentially went on strike, an event which is now known as the Invergordon Mutiny. Not a particularly huge event, but enough to send a shockwave to the City of London with stock market crashed and a sterling crisis. In about a week after the Mutiny, Britain was forced out of the gold standard.
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- European Banks Are Getting Pounded (mb50.wordpress.com)
- As First Greek CDS “Anstalt” Appears, A Question Emerges: Did Banks Not Square Off Margins? (zerohedge.com)
- Chinese Defaulting on Commodity Contracts (ritholtz.com)
- 18 Signs That The Banking Crisis In Europe Has Just Gone From Bad To Worse (raptureimminent.wordpress.com)
European Banks Are Getting Pounded
It’s selloff day in Europe again, with markets down across the board.
Damage in particular is centered around — no surprise here — European banks, especially the peripheral ones.
But here’s the whole EURO STOXX Bank Index (via Bloomberg), which is down 1.8%.
What The Worst-Case Scenario In Iran Would Mean For World Oil Prices
UBS commodities strategist Julius Walker has a note out on the prospects of an oil shock in Iran, what such a shock could look like, and the potential impact on commodity prices.
Walker sees four main possibilities, ranging from somewhat benign to extremely costly.
We summarize them quickly here.
- Scenario #1: EU sanctions get put into place starting July 1, resulting in 0.6 million of barrels per day coming off the market. In this case, Brent Crude would rise to about $130/barrel, though possibly less, since the embargo might make exemptions for some distressed buyers of Iranian oil, like Italy and Greece.
- Scenario #2: Full EU sanctions are put in place, plus there’s another 10% cut from other customers. In this case, we’d be talking about oil going to $138/barrel.
- Scenario #3: Iranian crude exports are halted entirely, perhaps as a result of an Israeli air strike. Then we’re talking about a loss of 2.5 million barrels per day of supply, and Brent Crude prices up around $205.
- Scenario #4: The complete shutdown of Iranian oil. This would require some kind of military action and wide internal upheaval. In this case, the world would lose 4 million barrels per day, and we’d see crude as high as $270 per barrel.
Read more: BI
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- The 10 Countries That Would Get Screwed In An Iranian Oil Shutdown (businessinsider.com)
- What Happens if Iran Does Close the Strait of Hormuz? $440 Oil? (247wallst.com)
- Iran stops oil sales to British, French companies (mb50.wordpress.com)
- SHIPPING CEO: Iran Could Send Oil To $440/Barrel (businessinsider.com)
- Four Scenarios For Engaging Iran At The Strait Of Hormuz (businessinsider.com)
Iran cuts oil exports to six EU countries
Iran has stopped crude supplies to Spain, Italy, France, Greece, Portugal and the Netherlands, reports Iran’s Press TV.
Tehran has fulfilled its threat to retaliate for the EU’s oil embargo, agreed by the bloc on January 26. The sanctions gave the EU members time till July to find new suppliers.
Officials within Iran immediately called to cork the black gold stream to Europe, targeting economies weakened by the ongoing financial crisis. On Wednesday, these calls became reality.
Related articles
- Iran could ban EU oil exports next week (mb50.wordpress.com)
- Iran ‘definitely’ closing Strait of Hormuz over EU oil embargo (mb50.wordpress.com)
- EU firms renew Iran oil deals to win sanction reprieve (mb50.wordpress.com)
- Sanction Show Signs Of Taking Toll On Iran | Fox News (foxnews.com)
- Iran Gave Syria $1 Billion To Aid Regime Against Sanctions, Documents Reveal | Fox News (foxnews.com)
- U.S. naval carrier group positioned closer to Iran (theextinctionprotocol.wordpress.com)
- Turkey Pledges to Stick with Iranian Oil (ibtimes.com)
This Is Europe’s Scariest Chart
Submitted by Tyler Durden on 01/30/2012
Surging Greek and Portuguese bond yields? Plunging Italian bank stocks? The projected GDP of the Eurozone? In the grand scheme of things, while certainly disturbing, none of these data points actually tell us much about the secular shift within European society, and certainly are nothing that couldn’t be fixed if the ECB were to gamble with hyperinflation and print an inordinate amount of fiat units diluting the capital base even further. No: the one chart that truly captures the latent fear behind the scenes in Europe is that showing youth unemployment in the continent’s troubled countries (and frankly everywhere else). Because the last thing Europe needs is a discontented, disenfranchised, and devoid of hope youth roving the streets with nothing to do, easily susceptible to extremist and xenophobic tendencies: after all, it must be “someone’s” fault that there are no job opportunities for anyone. Below we present the youth (16-24) unemployment in three select European countries (and the general Eurozone as a reference point).
Some may be surprised to learn that while Portugal, and Greece, are quite bad, at 30.7% and 46.6% respectively, it is Spain where the youth unemployment pain is most acute: at 51.4%, more than half of the youth eligible for work does not have a job!
Because the real question is if there is no hope for tomorrow, what is the opportunity cost of doing something stupid and quite irrational today?
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The (ESM) will replace the (EFSF): EU leaders to agree on permanent bailout fund, balanced budget ???
By Jan Strupczewski and Luke Baker
BRUSSELS | Sun Jan 29, 2012 6:40pm EST
(Reuters) – EU leaders will sign off on a permanent rescue fund for the euro zone at a summit on Monday and are expected to agree on a balanced budget rule in national legislation, with unresolved problems in Greece casting a shadow on the discussions.
The summit – the 17th in two years as the EU battles to resolve its sovereign debt problems – is supposed to focus on creating jobs and growth, with leaders looking to shift the narrative away from politically unpopular budget austerity.
The summit is expected to announce that up to 20 billion euros ($26.4 billion) of unused funds from the EU’s 2007-2013 budget will be redirected toward job creation, especially among the young, and will commit to freeing up bank lending to small- and medium-sized companies.
But discussions over the permanent rescue fund, a new ‘fiscal treaty’ and Greece will dominate the talks.
Negotiations between the Greek government and private bondholders over the restructuring of 200 billion euros of Greek debt made progress over the weekend, but are not expected to conclude before the summit begins at 9:00 a.m. EST.
Until there is a deal between Greece and its private bondholders, EU leaders cannot move forward with a second, 130 billion euro rescue program for Athens, which they originally agreed to at a summit last October.
Instead, they will sign a treaty creating the European Stability Mechanism (ESM), a 500-billion-euro permanent bailout fund that is due to become operational in July, a year earlier than first planned. And they are likely to agree the terms of a ‘fiscal treaty’ tightening budget rules for those that sign up.
PERMANENT RESCUE FUND
The ESM will replace the European Financial Stability Facility (EFSF), a temporary fund that has been used to bail out Ireland and Portugal and will help in the second Greek package.
Leaders hope the ESM will boost defenses against the debt crisis, but many – including Italian premier Mario Monti, IMF chief Christine Lagarde and U.S. Treasury Secretary Timothy Geithner – say it will only do so if its resources are combined with what remains in the EFSF, creating a super-fund of 750 billion euros ($1 trillion).
The International Monetary Fund says an agreement to increase the size of the euro zone ‘firewall’ will convince others to contribute more resources to the IMF, boosting its crisis-fighting abilities and improving market sentiment.
But Germany is opposed to such a step.
Chancellor Angela Merkel has said she will not discuss the issue of the ESM/EFSF’s ceiling until leaders meet for their next summit in March. In the meantime, financial markets will continue to fret that there may not be sufficient rescue funds available to help the likes of Italy and Spain if they run into renewed debt funding problems.
“There are certainly signals that Germany is willing to consider it and it is rather geared toward March from the German side,” a senior euro zone official said.
The sticking point is German public opinion which is tired of bailing out the euro zone’s financially less prudent. Instead, Merkel wants to see the EU – except Britain, which has rejected any such move – sign up to the fiscal treaty, including a balanced budget rule written into constitutions. Once that is done, the discussion about a bigger rescue fund can take place.
After nearly three years of crisis, some economists believe the combination of tighter budget rules, a bigger bailout fund and a commitment to broader structural reforms to boost EU productivity could help the region weather the storm.
“The fiscal compact and the ESM will shape a better future,” said Carsten Brzeski, a euro zone economist at ING.
“Combined with ongoing austerity measures and structural reforms in peripheral countries, and, of course, with a lot of ECB action, the euro zone could master this stage of the crisis.”
Economists say the pivotal act in recent months was the European Central Bank‘s flooding of the banking sector with cheap three-year money, a measure it will repeat next month.
GREEK DEAL?
While EU leaders are managing to put together pieces of legislation and financial barriers that might help them stave off a repeat of the debt crisis, immediate concerns – especially over Greece and potentially Portugal – remain.
By far the most pressing worry is the seven-month-long negotiation over private sector involvement in the second Greek rescue package. A deal in the coming days may help restore investor confidence, although Greece will still struggle to reduce its debts to 120 percent of GDP by 2020 as planned.
“If there is a deal, the heads of state and government can endorse it, welcome it and say that now it is up to Greece to agree to and deliver on reforms to get the second financing package,” the euro zone official said.
Negotiators believe they have until mid-February to strike a deal. Failure to do so by then would likely force Greece to miss a 14.5 billion euro repayment on its debt due in mid-March.
Even if Athens can strike a deal with private bondholders to accept a 50 percent writedown on the nominal value of their bonds, it may still not be enough to close Greece’s funding gap.
The IMF has suggested it may be necessary for public sector holders of Greek bonds – including the ECB and national central banks in the euro zone – to write off some of their holdings in order to close the gap.
Such a move would not necessarily involve the ECB or national central banks incurring losses, they would just be expected to forego any profit on the bonds they have bought.
But German ECB board member Joerg Asmussen told Reuters there was no possibility of the ECB taking part in the private-sector restructuring of Greece’s debt.
(Reporting By Jan Strupczewski, editing by Mike Peacock)
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- Germany opposes combining ESM, EFSF: reports (marketwatch.com)
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EU states agree gradual ban on Iran oil, sanctions on
(Reuters) – European Union governments agreed on Monday to an immediate ban on all new contracts to import, buy or transport Iranian crude oil, a move to put pressure on Tehran‘s disputed nuclear program by shutting off its main source of foreign income.
However, to protect Europe’s economy as it battles to overcome a debilitating debt crisis, the governments agreed to phase in the embargo, giving countries with existing contracts with Iran until July 1, 2012 to end those deals.
At a meeting of foreign ministers in Brussels, EU governments also agreed to freeze the assets of Iran’s central bank and to ban all trade in gold and other precious metals with the bank and other public bodies, EU officials said.
Western powers hope the far stricter sanctions net, which brings the EU more closely into line with U.S. policy, will force Iran to scale back or halt its nuclear work, which Europe and the United States believe is aimed at developing weapons. Iran says it is enriching uranium solely for peaceful purposes.
EU foreign policy chief Catherine Ashton said she wanted financial sanctions to persuade Tehran to return to negotiations with the West, which she represents in talks with Iran.
“I want the pressure of these sanctions to result in negotiations,” she told reporters before the ministers met.
“I want to see Iran come back to the table and either pick up all the ideas that we left on the table … last year … or to come forward with its own ideas,” she said.
Tehran says its nuclear program is necessary to meet its rising energy needs, but the United Nations’ International Atomic Energy Agency said last year it had evidence that suggested Iran had worked on designing a nuclear weapon.
EU sanctions follow fresh financial measures signed into law by U.S. President Barack Obama on New Year’s Eve and mainly targeting the oil sector, which accounts for some 90 percent of Iranian exports to the EU. The European Union is Iran’s largest oil customer after China.
MEASURED STEPS
Economic considerations weighed heavily on EU preparations for the embargo in recent weeks because of the heavy dependence of some EU states on Iranian crude. Greece, which is at the heart of the debt crisis, is almost entirely dependent on Iranian oil. It must now seek alternative sources.
Diplomats will return to the issue of oil sanctions before May, officials said, to assess whether the measures are effective and whether EU states are succeeding in finding sufficient alternative resources.
Saudi Arabia, Kuwait and other oil-rich states in the Gulf are expected to increase their output of crude oil to offset the loss of access to Iranian exports.
“There will be a review of the embargo before May,” one EU official said. The review could potentially affect the date when the full ban takes effect, diplomats said.
Greece, which depends on financial help from the EU and the International Monetary Fund to stay afloat, gets nearly a quarter of its oil from Iran, thanks to favorable financing terms from Tehran.
“The financial situation of Greece at the moment is not the brightest one, and rightly they are asking us to help them find a solution,” a senior EU official told reporters on Friday.
With a significant part of EU purchases of Iranian oil covered by long-term contracts, the grace period will be an important factor in the effectiveness of the EU measures.
The unprecedented effort to take Iran’s 2.6 million barrels of oil per day of exports off international markets has kept global prices high, pushed down Iran’s rial currency and caused a surge in the cost of basic goods for Iranians.
(Additional reporting by Adrian Croft in London and Sebastian Moffett in Brussels; Editing by Luke Baker and)
Related articles
- EU firms renew Iran oil deals to win sanction reprieve (mb50.wordpress.com)
- EU governments consider delay on any Iran oil ban – Reuters (reuters.com)
- Iran warns Arabs not to fill oil supply gap (thehimalayantimes.com)
- EU Officials Try to Agree on Iran Oil Embargo – Fox News (foxnews.com)
Continents of the World
Mb50's "Liquid Mud" Rant 