Eurozone Debt Hurts Stock Markets

The original post was deceptive. The Australian market generally follows the European and American markets, not the other way around, and today (wednesday), the market gained more than 1%.

A minor point in the overall scheme of things though, given that Australia's market doesn't have much of an impact on Europe's worries.

Mmmm double dip

innonimatu said:

One question: if debt (public and private) in most countries around the world has never been higher, if savings are at a very low point, where has the money for the loans come from?

The foundation of accounting is that assets and credits must balance. If someone owes money, someone else is a creditor. For people and for institutions. So, who is holding the credits? Who accumulated all that wealth? And why is not that being taxed by the states deep in deficit?

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http://www.youtube.com/watch?v=vVkFb26u9g8

Mise said:

If we take German reticence towards boosting domestic demand as a given, then shouldn't we be arguing for looser monetary policy, and perhaps a higher inflation target? Increased inflation expectations should encourage spending in Germany but would also make it easier for governments and employers in Greece, Spain, etc to reduce real wages, as it would require a smaller decrease in nominal wages/pensions/benefits/etc to produce the same real wage reduction (=> increased competitiveness). It will of course mean slightly higher premia on sovereign debt, but thanks to the ECB's move to buy more sovereign debt, we won't have to worry about that for a few years yet.

Yes, I know this will be highly unpalatable for the German government, Bundesbank and electorate, but the ECB is supposed to be independent... right?

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I've been arguing for more aggressive monetary policy for ~15 months. Finally you guys catch on.

While a higher inflation target isn't ideal, it is about the most 'conventional' way to achieve monetary easing.

Uhoh, every change in the ECB's inflation target (currently <=2 %) may easily trigger Germany's exit from the Eurozone. It's a shame you guys can't read German but the media reaction to the ECB's new policy of buying bonds already was hysterical (even in the quality newspapers).

This is assuming the government actually had the balls to pull that off.

Not that I want it to happen.

I commented on this a couple years ago but I think it bears repeating. In January 2008, Landesbank, Germany's largest state owned bank, reported 2007 profit would be €300 million because of a drop in prices of banking and government securities.

So you ask how did they manage to do this?
Well, according to Basel II, an OECD bank can sell a CDS on a sovereign debt and the security does not have to be marked to market (it was assumed the debt would not default) and would also not require the selling bank to put aside collateral on their balance sheet (again it is assumed that the country which the CDS was written wouldn't default).

Following me? OK so now that spreads are widening and all the sudden what was a risk (and capital) free trade represents the worst of both worlds for European banks. They now are not only not so interested in writing these contracts but instead are trying to buy them back before they move to far against them. In the meantime, it now puts their balance sheets under pressure while cutting down the income they once received by writing CDS' on these weaker credits. Ever wonder why speculators are so interested in this?

Since there are often unintended consequences of events like this it should also be interesting to see how US/China "currency manipulation" talks proceed now that Germany's trade surplus with China will widen further with euro and dollar headed in opposite directions.

I don't want to disagree with you, but there is no German bank called "Landesbank". There are several Landesbanken in Germany, associated with their respective federal state.

Leoreth said:

I don't want to disagree with you, but there is no German bank called "Landesbank". There are several Landesbanken in Germany, associated with their respective federal state.

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You do know that if you point out mistakes in a moderator's post, they'll permaban you. Right?

Anyway, are there any historical examples for what is happening now? Has there been any other countries on the verge of bankrupcy that has been unable to devalue their currency? Has there been any monetary unions between independent countries that has broken up, because of something like this?

Leoreth said:

I don't want to disagree with you, but there is no German bank called "Landesbank". There are several Landesbanken in Germany, associated with their respective federal state.

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Not only that but there's also another mistake. Germany doesn't run a trade surplus with China. Quite the opposite is true. Germany has a considerable trade deficit (for such a small economy as Germany's) with China: €19 bn.

As for the Landesbanken, they're indeed in a deep mess and probably will cost us a lot more money. However, without the EU's liberalisation policy the problem would be much smaller or even non-existing. Here's why: they were traditionally vehicles for state governments to promote industrial projects, help small businesses etc. Therefore they enjoyed state guarantees (the keyword in German is 'Gewährträgerhaftung' for everyone how wants to look it up) and consequently high credit ratings. Now in 2001, the European Commission ruled that such aid would be against EU competition laws and declared the state guarantees illegal. So they were taken away by 2005. To remain profitable with significantly lower credit ratings they engaged into more risky investments. For example, they suddenly got lots of US subprime loans in their books. The people running these banks had no experiences at all with risky investments, CDS and other investment vehicles. We know the consequences now. But it's pretty clear that a big part of this particular mess was caused by EU's liberalisation dogma. They apparently didn't make up their mind about the consequences. What's more, I wouldn't be too surprised if it turned out one day that private banks exploited the deal. Deutsche Bank for example is already accused to have offloaded lots of their bad assets to banks that meanwhile went bust (the IKB for example. It wouldn't really come as a surprise if they did the same to the Landesbanken, given the latters' lack of knowledge and experience with these investments.

If I'm writing in red it's moderation otherwise I'm just another poster.

The name of the bank (and I may be spelling it wrong) is Landesbank Baden-Wuerttemberg.
Lillefix--look up Latin Monetary Union.

kronic said:

Not only that but there's also another mistake. Germany doesn't run a trade surplus with China. Quite the opposite is true. Germany has a considerable trade deficit (for such a small economy as Germany's) with China: €19 bn.

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I suppose it depends on whose data you use. Considering the destruction of the Euro it will only widen from here.

According to Chinese customs figures, Germany had a $3.1 billion trade surplus with China in the first four months of this year while the U.S. had a $42.7 billion trade deficit. EU figures show a small deficit. In 2009 Germany had a 9.5 billion euro deficit with China on total trade of 82.4 billion euros.

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http://www.businessweek.com/news/20...-should-guide-u-s-in-china-companies-say.html

Lillefix said:

You do know that if you point out mistakes in a moderator's post, they'll permaban you. Right?

Anyway, are there any historical examples for what is happening now? Has there been any other countries on the verge of bankrupcy that has been unable to devalue their currency? Has there been any monetary unions between independent countries that has broken up, because of something like this?

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The Papal States' debasement of its currency under the latin monetary union may turn out to be a comparable situation. While the member states of the "eurozone" cannot, theoretically, create their own euros, if everything went to hell they might well try. It would work just as well as the Papal State's attempt, though...