Unintended Consequences Of Bailouts: Greece Gets Slammed

Wolf Richter   www.testosteronepit.com   www.amazon.com/author/wolfrichter

Bailouts, particularly those by central banks, have become known for their so-called “unintended consequences”—however intended they might have been. And now, unintended consequences strike again. The ECB’s massive purchases of decomposing Greek debt—an under-the-radar bailout of banks and insurance companies that were holding it—are making the favorite solution to the Greek crisis, namely another deep haircut, legally impossible, said Bundesbank President Jens Weidmann.

Weidmann, an outspoken opponent of the ECB’s bond purchasing programs who has likened them to a pact with the devil [Monetary Schizophrenia in Germany], has seen the writing on the wall. “Apparently,” he said during an interview, “the political world has decided to continue financing Greece.”

In theory, the next bailout payment of €31.5 billion is contingent on the big report that the Troika—the ever so successful bailout and austerity gang from the ECB, the IMF, and the EU—is putting together. They’ve been working on it since June. No money would be transferred to Greece unless the report would show that Greece is implementing to the last iota the agreed-upon reform program.

In practice, Weidmann questioned the independence of the report. Politicians have been dripping with admiration for Greece’s progress and have been expressing their intention to restart the aid flow, though the report isn’t even finished. And he wondered how you could objectively evaluate Greece’s performance in implementing the reform program, “when you’re too afraid of the consequences of a negative judgment?”

Political careers might be at stake, even in Germany, as Greece would be cut loose from the bailout pipeline, if the judgment were “negative.” The country would default and possibly walk away from the Eurozone. It would be messy. And it would happen before next year’s election in Germany. Unthinkable.

But Weidmann, in staying clear of political ramifications, worried about the Euro System—the ECB and the national central banks—that has become “one of the largest creditors” of Greece during the crisis. One of the solutions to the Greek debacle that has recently been pitched in all corners calls for another haircut, but this time on public-sector creditors, namely the Euro System. It would be a much deeper default. But it would grant debt relief to Greece.

Impossible. Weidmann objected to the comparison between the private-sector holders of Greek debt who were arm-twisted earlier this year into accepting a haircut. Banks and insurance companies had originally bought that debt to make a profit, he said, and they had to bear the risks associated with it. But the Euro System bought Greek debt during the crisis in its role as helper. “So the comparison is limping,” he explained.

That was just his warm-up for the unintended consequences of the attempted bailout via bond purchases: “The central banks must not cancel Greece’s debt,” he said, because that would be a “direct transfer and would be equal to the prohibited monetary funding of the government.”

In other words, if the private sector were still holding this debt, the solution would be another bout of arm-twisting, and another haircut. Greece would have gotten rid of most of its debt. That, Weidmann said, is no longer possible. By extension, it would apply to all other crisis states: once the ECB buys their debt to bail them out, any debt relief through a public-sector haircut is out of the question. Watch out, Spain, he seemed to say. You can’t get rid of your debt once the ECB is holding it.

But a haircut wouldn’t resolve the problems anyway, he said. “What good does it do to forgive Athens its debt if in ten years the country is back at the same point where it is today?” No, he said, Greece would have to fundamentally reform itself and become competitive.

The Eurozone has bigger problems than Greece: it seeped out that the German Finance Minister Wolfgang Schäuble broached an unprecedented topic with Germany’s Council of Economic Experts. Could they produce a reform concept for the troubled French economy? It revealed a threat that terrorizes the German government. Read….. Germany’s Fear And Desperation Leak Out.

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Will Obama II Be Reagan I Or Truman III?

There are plenty of analogs for market and economic behavior currently echoing the past – some scary, some terrifying, and some hopeful. Barclays found two interestingly similar election-bound relationships to the current environment but with very different outcomes: Harry Truman’s successful ‘Fair Deal’ 1948 campaign and Jimmy Carter’s unsuccessful 1980 re-election effort.


Via Barclays:

In both cases business confidence and capital spending were soft during the election year; however, during the sprint to the November elections the market went in completely different directions.


In 1948, the S&P 500 dropped 11% from June through late September, bounced in October then fell sharply after Truman won in a shocking upset.


In 1980, the S&P 500 rallied 36% from March through late September, had a 5% correction in October followed by a post-election rally to higher levels after Reagan won a decisive victory.




Capital spending fell sharply in late 1948 and 1H49, driving the economy into recession due in part to a monetary policy mistake (raising the reserve requirement), while in 1981 capital spending increased sharply.




This year’s election had similarities with both. Unfortunately the market traded as if this was 1980, but it turns out we could be headed for ‘Truman’s 3rd term’ (See Figures 3 and 4).


Clearly the risk is a policy mistake – this time fiscal – which could drive another capital spending bust and a shallow recession.


So, will Obama’s 2nd Term be more like Truman’s 3rd or Reagan’s 1st for the market and the economy – based on potential for policy mistake… or c) none of the above…

Chinese Gold Imports Surge In September, YTD Total Surpasses Official Indian Holdings

Anyone who may have been concerned by the slowdown in Chinese gold imports in August, when the country imported “only” 53.5 tons of gold from Hong Kong (down from 75.8 in July), can breathe a sigh of relief. According to the Hong Kong Census Bureau, in September Chinese gross imports soared by 30% reverting to the long-term trendline of 65 tons in gross imports per month, and rising to a total of 69.7 tons. Net imports were 40% less, although that excludes organic Chinese gold mining and recirculation, which is why for all intents and purposes the gross number is the apples to apples one. And using that, Year-To-Date China has now imported a whopping 582 tons of gold, more than the official holdings of India at 558 tons, and which through November has certainly surpassed the holdings of the Netherlands, and make China’s gross imports in just 2012 nominally the equivalent of Top 10 largest sovereign holder of gold.

This way at least we know where China is recycling all that vast trade surplus, which incidentally in October just printed, goalseeked or not, at the highest level – $32 billion – since January of 2009. Too bad China no longer recycles all those excess reserves into US Treasury paper (as we showed previously here).

YTD China gross imports from Hong Kong:

Where does this put China:

And in historical perspective: the recent surge in demand for gold is quite unmistakeable:

Preview Of The Boring Week Ahead

From Goldman Sachs

Politics and policy were paramount last week. In the US, President Obama gained reelection with a remarkably clear margin after a hard-fought campaign. Stock markets took a nosedive the next day even though the probabilities of an Obama victory had been estimated to be quite high in the days prior. While Republicans retained their lead in the House, Democrats remained in power in the Senate and even extended their majority there. This preserves the pre-election split in the distribution of power, a fact which has raised further concerns about a timely solution to the fiscal cliff at year-end. While we see a fair chance that the debate could drag into January 2013, we continue to anticipate a year-end agreement (although a “grand bargain” is unlikely during the lame-duck session). Meanwhile, the Greek parliament very narrowly passed a new round of budget cuts and structural reforms, helping to pave the way for the disbursement of the next €31.5 bn loan tranche.

At their meetings last week, central banks left policy rates broadly unchanged. The ECB did not signal a shift towards additional easing, although there were some noteworthy changes in the statement suggestive of greater concern about the economic outlook. We think that further ECB action will target the monetary policy transmission mechanism rather then policy rates overall, as the key problem remains that the ECB’s policy stance is not being transmitted evenly across the Euro area. In the UK, the BoE also left policy rates unchanged and did not extend its official QE program. It did, however, announce that coupon payments accumulated by the BoE’s Asset Purchase Facility (£35 bn by March 2013) will be transferred to the Treasury to pay down government debt, a step Governor King described as “having an effect similar” to further asset purchases. Monetary policy was also left unchanged in Korea, Indonesia, and Malaysia, in line with consensus expectations except in the latter case, where a cut was expected.

The upcoming week comes less loaded with policy events. The only major one is the Eurogroup meeting on Monday, however EU officials have already confirmed that no decision on the next Greek aid tranche will be made before the Troika’s next report on Greece’s adherence to the bailout conditions. Greece has scheduled an auction for Tuesday in order to roll over €3.1 bn in T-bills expiring by the end of the week. Additionally, in the US, the President has invited leadership of both parties for a first round of talks on the fiscal cliff. The data calendars also look lighter, with the publication of the FOMC minutes on Wednesday, and US Philly Fed on Thursday.

In China, the leadership transition congress will end on Wednesday, with the personnel decisions to be made public on Thursday, We are also expecting data on M2 growth and CNY loans this week after the recent data releases were quite positive. Apart from a benign October CPI reading, Industrial Production and FAI (particularly the infrastructure subcomponent) also showed good momentum, while the Trade Balance beat market expectations. The only central bank meeting of the week will be in Chile on Tuesday, while the BoE will publish its inflation report on Wednesday.

The Week Ahead:

Monday, November 12

  • Eurogroup meeting
  • Also Interesting: Russia GDP, Israel Trade Balance, Czech Republic CA, Poland CA, Mexico IP

Tuesday, November 13

  • UK CPI: A slight uptick to 2.3%yoy from last month’s reading of 2.2%yoy is forecast.
  • Greece T-Bill Auction
  • Chile Monetary Policy Meeting: no change in the policy rate, currently at 5.0%, is forecast.
  • Also Interesting: Italy HCPI, Spain HCPI, Hungary Consumer Prices, UK CPI

Wednesday, November 14

  • China National Congress scheduled to end
  • US Retail Sales: Our expectation is for a reading of -1.2%, down from 1.1% last month, and lower than consensus at -0.2%.
  • US PPI: We expect a more subdued rise of 0.3%, in line with consensus expectations after a rise of 1.1% last month.
  • UK ILO Unemployment Rate (Sept): Our forecast is for the rate to remain stable from August at 7.9%.
  • UK BoE Inflation Report
  • Also Interesting: France HCPI, UK Employment Growth, Euro area IP, Poland Consumer Prices, Argentina CPI

Thursday, November 15

  • US Philadelphia Fed: We forecast a plus of 2.0, higher than consensus at 1.5 and lower than last month at 5.7.
  • US CPI: After last month’s rise of 0.6%, we forecast a stable reading from last month at 0.2%, in line with consensus.
  • US Empire Manufacturing Index
  • UK Retail Sales: Our forecast is for a decline to 2.2%yoy from last month’s 2.9%yoy.
  • Also Interesting: Russia Gross International Reserves, Turkey CA, Norway Trade Balance, Euro area GDP, Euro area HCPI, Canada
  • Manufacturing Sales, Canada Existing Home Sales

Friday, November 16

  • US IP: In line with consensus, we forecast a rise of 0.2% after a plus of 0.4% last month.
  • US Treasury International Capital (TIC)
  • Also Interesting: Italy Trade Balance, Hungary IP, Euro area Trade Balance, US Capacity Utilization, Mexico Real GDP

* * *

And for those who missed it before, here is a detailed calendar of Europen events until the end of the year from Deutsche.


  • 10 November: VVD-PvdA (Liberal-Labour) government to assume power in the Netherlands.
  • 11 November: Greek 2013 Budget to be voted on in parliament.
  • 12 November: Merkel visits Portugal.
  • 12/13 November: Eurogroup/ECOFIN finance ministers’ meetings. Chances are EU finance  ministers will still be discussing how to finance an extension of the Greek loan programme. Cyprus had aimed to agree its aid programme with the Troika in time for this meeting, but with international lenders resuming talks with Cyprus only on 9 November, the Eurogroup on 3 December now looks to be the likely timetable target.
  • 13 November: Italy auction. Bills.
  • 13 November: Greece auction. Bills.
  • 14 November: Portuguese strike. The CGTP (General Confederation of Portuguese Workers), the largest trade union confederation in Portugal, is to stage a strike against the government’s austerity measures.
  • 14 November: Italy auction. Bonds.
  • 15 November: Q3 GDP reports. Eurostat will publish the flash estimate of euro area GDP growth for Q3 2012. DB’s current estimate is -0.2% qoq11.
  • 18 November: France UMP party leadership election. France’s main opposition party, the centreright UMP, is to elect its new leader. The congress is the party’s first since former French president (and then UMP leader) Nicolas Sarkozy lost the presidential elections in spring 2012. Francois Fillon, the moderate pro-European former prime minister under the presidency of Sarkozy, is favourite to be elected with Jean-Francois Cope, the Secretary General of UMP, being the other candidate.
  • 19-20 November: ECB workshop on excess liquidity and money market functioning. ”The workshop organised by the ECB intends bringing together central bankers, practitioners and academics to discuss the current state of health of money markets, the impact on their functioning of the recently implemented non-standard measures and the possible side effects of large amounts of excess liquidity currently present in many developed economies” (European Commission). The market will watch this closely for any suggestions about the operations of the OMT and/or prospects for policy rates to fall into negative territory.
  • 20 November: Spain auction. Bills.
  • 21 November: Spain auction. Bonds.
  • 22-23 November: EU Leaders’ Summit. Officially to discuss the EU Budget for 2014-2020, but also an occasion to address crisis  policies (including Greece, Spain and Cyprus if necessary). Following the UK parliament’s rejection of the Cameron government  position of a real-term freezing of the EU budget at worst — the opposition and rebels wanted a realterms cut — it appears unlikely the EU will yet reach a comprehensive agreement on the new Budget.
  • 25 November: Catalonia regional election. Early elections for the parliament of the autonomous region called by Arturo Mas, head of the Catalan regional government.
  • 25 November: Italy centre-left primaries, first round. The centre-left coalition led by the Italian Democratic Party (PD) is due to  elect a leader for the Italian parliamentary elections to be held no later than April 2013. PD’s incumbent leader Pierluigi Bersani looks  to be the favourite. with Matteo Renzi, the Mayor of Florence, likely to be his main challenger. Nichi Vendola, the governor of Puglia and leader of the junior coalition party SEL12, is the other prominent candidate. The first round is due to be held on 25 November. Should no candidate secure 50% of the vote, a second round run-off will be held on 2 December. PD is currently leading in the  opinion polls with 25%-29% support in the opinion polls held in October.
  • 27 November: Spain auction. Bills.
  • 27 November: Italy auction. Bonds.
  • 28 November: Italy auction. Bills.
  • 29 November: Italy auction. Bonds.


  • 2 December (tentative): Italy centre-left primaries, second round. See 25 November entry.
  • 3-4 December: Eurogroup/ECOFIN meetings. The regular meeting of the euro area 17 finance ministers followed by the EU 27  ministers.
  • 4-6 December: German SPD Annual Party Conference.
  • 5 December: Spain auction. Bonds.
  • 5-7 December: German CDU Annual Party Congress.
  • 6 December: ECB Governing Council meeting, followed by the interest rate announcement and press conference.
  • 9 December: German SPD Party Special Conference to elect challenger for 2013 federal elections.
  • 11 December: Spain auction. Bills.
  • 12 December: Italy auction. Bills.
  • 13-14 December: European Council summit. The final gathering of 2012 of the EU 27 heads of state and Government. One intention is to sign off on the legislation embodying the common bank supervisory regime under the ECB.
  • 13 December: Spain auction. Bonds.
  • 13 December: Italy auction. Bonds.
  • 16 December (tentative): Italy PDL primaries. The centre-right Italian People of Freedom (PDL) party is planning to hold primaries  to select its leader for the upcoming Italian parliamentary elections to be held no later than April 2013. The party was previously led by ex-Prime Minister Silvio Berlusconi, who announced on 24 October that he would not be running in the PDL primaries and would not be seeking re-election as Prime Minister.
  • 18 December: Spain auction. Bills.
  • 27 December: Italy auction. Bills.
  • 28 December: Italy auction. Bonds.

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