Category Archives: Economy and Meltdown

The ECB-Driven Toxic Debt Loop At The Heart Of Europe's Misery


Just as we will not tire of pointing out the unintended consequence of the Fed’s central-planning efforts, so it is time, courtesy of the IMF’s latest missive, to point out the vicious circle that the ECB has created and encouraged in Europe. The unintended consequence of the ECB’s intervention – as both perpetual backstop and lender of last resort – has created an ever-increasing fragmentation between the core and the periphery (exactly the supposed ‘issue’ Draghi is attempting to fix with his OMT). The toxic-debt-loop as capital leaves the periphery for the core, pressuring peripheral bond yields/spreads, and forcing private sector borrowing to be replaced by public-sector not only clouds the true picture for real-money investors or depositors (risk-based pricing has been destroyed) but encourages front-running fast-money flows which do nothing but provide short-term cover for banks/sovereigns to delay the inevitable (and potential market-clearing) deleveraging/restructuring that is required. Because the fundamental issue is one of solvency – not liquidity – the ECB’s continued artifice of plugging liquidity shortfalls does nothing but lessen the confidence in the system and reduce any faith in price levels as without addressing the real insolvency, trust will never return.

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Guest Post: The Unstimulus


If your predictions are wildly out-of-whack with reality, you need to change your approach. Jared Bernstein and Christy Romer Administration predictions have been an unmitigated disaster. Not only did the real figures not match up to the advertised ones, but they are also much worse than the baseline expectations. Romer and Bernstein appear to have both severely under-estimated the depth of the crisis, and over-estimated the effectiveness of the stimulus package. Obama might talk about spreading the wealth around, but the aggregate effect of the policies pursued during his administration have squarely benefited large corporations and the financial sector, and not the middle class or small business. Is reinflating financial bubbles and pumping up corporate profits Obama’s idea of recovery? The money isn’t trickling down, and small businesses and the middle class are more in debt than they were before the crisis started.

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European Banks Need To Sell Up $4.5 Trillion In Assets In Next 14 Months, IMF Warns


While yesterday it was the sovereigns who suffered the wrath of the IMF’s wholesale growth outlook downgrade (unbeknownst to Christine Lagarde), today it is the turn of the financial sector (which is increasingly being blurred with the former in a world in which central banks are used to both backstop bank liabilities and fund endless public deficits, unafraid of the consequences in a closed loop fiat world in which defection is, so far, impossible) to be greeted by a cold dose of reality emanating from the IMF’s “Global Financial Stability Report” especially as pertains to Europe’s insolvent banking system. The most notable finding of said report is the admission that the IMF was only kidding when it said six months ago, in April of this year, that the worst case outlook now has European banks deleveraging to the tune of $3.8 trillion through the end of 2013, or over the next 14 months: now this number is 18% higher, or a gargantuan $4.5 trillion (12% of bank assets). This is how much debt Eurobanks will need to shed in a “weak policies” case in which Europe continues to delay implementing fiscal reform, aka austerity, as per Figure 2.14. Even the baseline (and this being the IMF it means it has zero chance of happening) scenario is not much better, at a revised $2.8 (7.3%) trillion in deleveraging. The reason for the increase is due to “lower expected earnings, higher losses linked to worsened economic conditions, and greater funding pressures on banks.”

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