Category Archives: Economy and Meltdown

Cyprus, The Eurozone Breakup, & “The Dog in Charge of the Sausage Supply”


Wolf Richter   www.testosteronepit.com

Finland doesn’t get the white-hot attention Germany does, but it should because it could be the driving force behind a breakup of the Eurozone. And it fired another shot: it demanded collateral for its share of the billions of euros that Cyprus would receive from the bailout Troika.

Cyprus is the fifth of 17 Eurozone countries to ask for a bailout. It’s panic time. The first tranche, €1.8 billion, is needed by June 30 to prop up its second largest bank, Popular Bank. And suddenly, Bank of Cyprus, the largest bank, needs €500 million. That’s just the beginning. All its big banks have been eviscerated by Greek government bonds, Greek corporate debt, a real estate bubble that collapsed, and a title-deed scandal that they colluded in—whose outcrop is now gumming up their balance sheets [I warned about it in October…. Another Eurozone Country Bites the Dust].

Though the government denied any amounts had been discussed, Reuter’s “Eurozone sources” attached a number to it: €10 billion—for a country that acceded to the Eurozone in 2008, has a GDP of only €17.3 billion, and has the population of San Francisco (just above 800,000). It takes a lot of talent to do so much with so little.

In return, the bailout Troika will prescribe its bitter medicine: bank recapitalizations, structural reforms, privatizations, reductions in civil servants, and budget cuts. Communist President Demetris Christofias, who speaks fluent Russian, attended university in Moscow, and is an ally of Russian President Vladimir Putin, had already endeared himself to the bailout Troika—the European Commission, the ECB, and the IMF—by accusing them of being run like a “colonial force.”

Being so closely tied to Greece and having seen what happened there, Cypriots are worried about the fate that might befall them. But Finance Minister Vassos Shiarly had soothing words. It would be premature to speculate, he said on state radio, but the terms of the bailout “won’t be so painful as some may believe.”

Cyprus has been playing a guessing game. It would prefer a bilateral loan from either Russia or China. A veritable shuttle diplomacy has been taking place, with Cypriot officials flying to one or the other country and returning with promising smiles but little else. Last year, after it had been cut off from the capital markets, Cyprus received a €2.5 billion loan from Russia; and earlier this month, rumors were swirling around that it would receive another €5 billion. But so far, nothing. And the Chinese, who know how to negotiate, even with their communist friends, have shifted their attention to Malta on another project.

Russia and China have reason for wanting a stake in Cyprus: vast off-shore deposits of natural gas. The field off the southern coast might hold as much as 8 trillion cubic feet of gas. It’s likely that there are other fields around Cyprus. 15 major oil and gas companies and consortiums, including some from Russia and China, are bidding to do exploratory drilling, and they’re eager to build LNG export terminals and other massive infrastructure projects [read…. Manna for Bankrupt Cyprus].

But Russia and China could demand a heavy price in return for a loan—and that’s why Cyprus is even talking to the despised Troika. President Christofias, whose communist heart is closer to Russia and China, has perhaps already seen that price. So he’s fishing for a better deal. But by June 30, Cyprus must get the first €1.8 billion.

Ironically, the next day, Cyprus will rotate into the Presidency of the Council of the EU for a six-month term, as spelled out in the Lisbon Treaty. That’s democracy at the EU level: mechanized, predetermined by treaty, beyond vote. And the only directly elected institution of the EU, the European Parliament, shares the legislative functions with the Council (that Cyprus will preside) and the European Commission, but it’s emasculated because it cannot even propose bills.

This lack of democracy is the dark backdrop to the tohubohu about a fiscal union, a banking union, Eurobonds, and the idea of integrating the Eurozone more deeply, and all the other panaceas to be discussed at the EU summit: they hinge on transferring important aspects of sovereignty from democratic nations to unaccountable bureaucrats, appointed technocrats, or predetermined officials, all with an ever-increasing thirst for power. And the frustration is already high….

“An EU paradox! Now we have a situation where the dog will be in charge of the sausage supply,” said Kurt Lauk, President of the economic advisory board of the CDU, the party of German Chancellor Angela Merkel. “How can Cyprus engage in crisis management when it’s stuck deep in a crisis itself?” he asked. An eloquent paradigm for all Eurozone bailouts. He then demanded that all bailed-out countries be excluded from the presidency. An issue left up to voters, directly or indirectly, in democracies.  

During the two-day EU summit, all eyes will be breathlessly riveted on Chancellor Merkel—with one question on all lips: will she blink? Because nothing less than the future of the Eurozone and the euro is at stake. And by extension, the world economy. Only she can save it. And she’d have only 48 hours! Read…. The EU Summit To Save The Euro: It Already Collapsed.

With Total Viewers Sliding To 7 Year Lows, Is CNBC Fading Into Obscurity?


In the past 24 hours, some readers have been surprised to learn that as Jeff Reeves of InvestorPlace states, total Q2 CNBC viewership as calculated by Nielsen, has tumbled to to the lowest it has been since Q3 2005. This merely confirms that the trendline in our periodic observations of CNBC traffic was more than merely seasonal or VIX-related: it has been one long secular decline, peaking in the quarter of Lehman’s demise and down hill ever since.

Reeves focuses on some specifics:

  • Squawk Box (6-9 a.m.) is supposed to prime traders before the bell. The show posted its lowest rated its time block since Q4 2006.
  • The Closing Bell (3-5 p.m.) is supposed to wrap up the day’s action. The slot posted its fifth-lowest rating in total viewers and second-lowest ratings in the key 25-54 demographic since 1997.
  • Fast Money (5-6 p.m.) is focused almost specifically on swing trading stocks. That time slot showed the lowest rating for the 25-54 demo since 1997 — and lowest in total viewers since Fast Money launched in 2006.

Yet none of the above compares to the Nielsen-sourced data Zero Hedge compiled showing CNBC viewerships since the beginning of 2004.

The chart speaks thousands of words about the shrinking viewer engagement with either CNBC the financial news station, or CNBC the financial news station.

What the clearly chart shows is that despite occasional risk flaring episodes, and a general preponderance of either ‘good news’ or ‘bad news’ regimes, the prevailing trendline is one of anti-Gartman proportions: from top left to bottom right.

Reeves attempts to give some explanations of his own explaining this troubling for Comcast trend:

It must be noted that it’s not their fault the market is miserable, and bad ratings don’t necessarily reflect bad shows. After all, we don’t blame builders like Pulte or Lennar for causing the housing crisis with poorly made homes.

It’s also worth noting that many cable networks are experiencing a viewership drain as many younger folks take their eyeballs to the Internet — and CNBC is hardly ignoring the move to online content. Its website gets some 8 million unique visitors every month, and a shrewd partnership with Yahoo! is teaming up the megasite Yahoo Finance with CNBC to tap into an even more massive chunk of the financial media audience.

But for whatever reason, investors are tuning out CNBC on their TV sets. That’s further proof that the market is jaded, that volume will remain low in the summer and that most investors are scared or nervous about what to do next.

Zero Hedge being Zero Hedge will add one more: perhaps CNBC’s viewers have gotten tired of getting just one side of the newsflow: the always rosy, and over the past 5 years, always wrong one.

Which also explains the growth of alternative financial media venues: those unconstrained in the type of data they can report on and analyze. More importantly: those unconstrained by what producers scream in their earpiece. In retrospect, they have much to be grateful to CNBC for- if for whatever reason the financial channel was not hemorrhaging eyeballs, there would be no new captive audience to, well, capture.

Finally, whatever the reason for the endless bleed in CNBC viewership one thing we can be sure of: the advertisers – that lifeblood of every media outlet – are certainly not happy.

Guest Post: How Much To Save The Euro?


Submitted by Geoffrey Wood

How Much To Save The Euro?

Germany keeps being told that it must pay up to save the euro. But how much can Germany pay? No-one seems to have thought about that, but there is already concern about the possible size of bill – German bond yields rose soon after news of the Spanish bail out, even before it was announced where the money was going to come from. (And it was of course a bail out for Spain, regardless of what Spain’s prime minister says. If I borrow money and then lend it to someone else I’ve still borrowed it.)

There is though a more basic question. How much does it make sense for Germany to pay? What sort of bill would it be reasonable to present to them? In fact the best approximation one can arrive at is a bill of zero.

Why zero? What about all these exports that have been produced because Germany has a currency whose value is determined not just by Germany but also by less productive, higher cost, economies?  That link has artificially depressed the prices of German exports. These net exports resulting from Germany’s Eurozone membership are actually the problem.

Germany has been exporting more goods and services than it has been importing. So non-German residents have been making net transfers of funds to Germany. If they can not earn these funds, and they did  not because if they had Germany would not have run a trade surplus, they must have borrowed them. A trade surplus being run by a country means, in other words, that it is a net lender to the rest of the world.

That is certainly not always bad. Often it is good for both borrower and lender. The classic, and one of the longest lasting and relative to national income one of the biggest examples of that is the lending by Britain to the United States that went on from just after 1870 to shortly before the First World War. That lending was beneficial to both sides. In the USA it was invested productively, developing and opening up the prairies. These were, and still are, among the most fertile agricultural land in the world. The investment helped to make the USA a major and very prosperous agricultural producer. And Britain meanwhile not only earned a higher return on capital than could be earned by investing at home (Britain was even then a mature developed economy) but saw a sustained fall in the cost of living as the cost of food fell due to the imports that started to flow from the USA.

Recent German investment has not all been like that. Some has been productive – motor car factories in Brazil, the Czech Republic, and Mexico, for example. But much of it has just been lending to enable governments and individuals to spend more than they have been earning. As is now clear, many of the recipients of these loans are unable to pay them back. So in contrast to the earlier British/US experience, where both sides gained, both sides have lost.

Another aspect of this appears if we think about what would have happened in Germany if net exports had been smaller. Workers and factories would not have simply sat around. More goods and services would have been produced for investment and for consumption inside Germany. By increased investment Germany would have become more productive, and because individuals in Germany could consume more they could have had a higher standard of living. These big exports have in effect been a subsidy from Germans to many of their trading partners.

That is not the end of the story, not the end of the bad news for Germany. What an economy produces can be roughly divided into two categories: goods that are traded internationally and goods that are not. These categories – tradable and non-tradable goods as they are termed – are not of course clear cut categories, but some goods are much more easily traded internationally than others. The depressed German exchange rate has shifted productive resources, labour in particular, from the non-traded to the tradable sector. These resources are more productive there only so long as the exchange rate stays at its current artificial level. When that changes, they will have to incur all the costs of moving back. And, of course, they have been employed producing goods for which in many cases Germany may never be paid.

This is actually the exact reverse of what is now facing Australia. Its exchange rate has been driven up by a mineral boom. Policy makers and voters there are now thinking about two issues. What is a reasonable distribution of the benefits of the strong currency? And what planning should there be to deal with the inevitable end of the boom?

In conclusion, then, it is clear that it is wrong to say that Germany has benefited because of the boost to its exports delivered by a depressed euro. There have been some benefits, for some of the associated overseas investment has been more productive than it would have been at home; but there have also been some costs. The net effect is immensely difficult to calculate, but there can be no doubt that claims that Germany has gained so Germany must pay are just wrong. Any attempt to put the burden of saving the euro on Germany has to be supported by other arguments. I have yet to see them.

Obama Better Prepared To Handle Alien Invasion, Poll Finds


The two presidential candidates may be neck and neck in most (un)popularity polls, and according to some metaphorical sources are even the same person just with different Wall Street backers, but when it comes to the critical topic of resisting an alien invasion, Obama is far better prepared, according to two thirds of the population.

From Politico:

Americans may be split on which presidential candidate can fix the economy, but President Barack Obama trounces Mitt Romney in one out-of-this-world scenario — an alien invasion. The majority of Americans, nearly 65 percent, say Obama is better suited than Romney to handle an alien invasion, according to a new National Geographic Channel poll, USA Today reports.

 

The survey, conducted to promote “Chasing UFOs,” a TV series premiering Friday, also found that almost eight in 10 people, 79 percent, believe the government has kept information about UFOs a secret from the public. In addition, 55 percent believe agents similar to those played by Will Smith and Tommy Lee Jones in the film “Men in Black” — their mission is to hide information about extraterrestrial beings — actually exist.

 

Meanwhile, more than a third of Americans, 36 percent, believe UFOs exist.

Now there is a discoonect here: as most readers know very well, Keynesian Plan Z for America is to fold like a lawn chair when ET starts shooting, and to have the planet literally leveled and all “windows broken”, with the resulting surge in GDP leading the world to a new Golden Age. Sadly for the high priest of Keynsianomics, Paul Krugman, this plan would require a president who is willing to immediately wave the white flag when faced with a UFO invasion.

If Obama indeed is capable of repelling an armada of little green men, then the world truly is doomed.

Then again, there really is no need to worry.

Chile Is Latest Country To Launch Renminbi Swaps And Settlement


The dollar exclusion list is becoming bigger and bigger with every passing day as China gets ready.

For simplicity’s sake here is the full list of “bilateral” arranagements in the past year as presented previously: “World’s Second (China) And Third Largest (Japan) Economies To Bypass Dollar, Engage In Direct Currency Trade“, “China, Russia Drop Dollar In Bilateral Trade“, “China And Iran To Bypass Dollar, Plan Oil Barter System“, “India and Japan sign new $15bn currency swap agreement“, “Iran, Russia Replace Dollar With Rial, Ruble in Trade, Fars Says“, “India Joins Asian Dollar Exclusion Zone, Will Transact With Iran In Rupees“, “The USD Trap Is Closing: Dollar Exclusion Zone Crosses The Pacific As Brazil Signs China Currency Swap.”

And now the latest: “China, Chile To Establish Strategic Partnership, Boost Trade… Launch Currency Swap and Settle In Renminbi

China and Chile agreed Tuesday to upgrade their bilateral ties to a strategic partnership, and double trade in three years.

 

Chinese Premier Wen Jiabao and Chilean President Sebastian Pinera announced Tuesday the establishment of China-Chile strategic partnership and the completion of negotiations on investment-related supplementary deals to a bilateral free trade agreement.

 

China would like to be actively engaged in Chile’s infrastructure construction and work with Chile to promote the development of transportation networks in Latin America, said Wen.

 

Meanwhile, Wen suggested that the two sides launch currency swaps and expand settlement in China’s renminbi.

Read more here.

So to summarize, the list of countries that China is transacting with directly (that we know of), and bypassing the USD entirely, is as follows:

  • Japan
  • Russia
  • Iran
  • India
  • Brazil
  • and now, Chile

In other words, it looks like the BRICs already have their “bilateral” arranagements all sorted out, and are now quietly moving into other suppliers of key resources with swap deals, all without any mention of the word “dollar.”

How soon until China re-dips its toe in Europe with a modest “bailout” nobody can refuse in exchange for a simple caveat: you get paid in renminbi?