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Monday, January 26, 2015 12:17 PM


Dutch Central Bank President Cites "Financial Bubbles", Voices Strong Opposition to QE in TV Interview; Death by 1,000 Pin Pricks


Mario Draghi has strong opposition to his QE program from two sources: German central bank president Jens Weidmann and Dutch central Bank president Klaas Knot.

In a television interview on Sunday, Dutch Central Bank Head Says He Doesn’t Support ECB Bond Purchases.

Mr. Knot, who sits on the ECB’s Governing Council, said in an interview on Dutch television that he wasn’t convinced of the “necessity and effectiveness” of the program, known as quantitative easing. “Even if you believe it worked [in the U.S.], you cannot project its alleged success onto the eurozone,” he said on the talk show “Buitenhof.”

Email from Bruno de Haas

I got the above story from Bruno de Haas, head of policy & research at a medium-sized Dutch pension fund and author of a book arguing that the Netherlands should leave the euro.

De Hass Writes ...

Hi Mish,

This Sunday morning the president of the Dutch central bank, Klaas Knot, was interviewed on Dutch television. In my view he made some remarkable comments on the main topic, namely the ECB’s decision to embark on QE.

Knot was very candid. He explained that he had not supported the decision because he thinks it is neither necessary nor effective. He doesn’t think it is necessary because there is no deflation in the eurozone once you strip out the effects of the lower oil price.

With regard to effectiveness, he doesn’t expect that buying sovereign bonds from banks will increase credit by banks. He does expect that “using the printing press” (a phrase he literally used) will result in higher stock prices and more expensive real estate, further inflating what he called a “bubble on financial markets”.

According to Knot asset prices already are far detached from the real economy, and although this situation may last a while, there will be a moment when the two will converge again.

In contrast to the US, where a wealth effect could be expected from inflating asset prices, Knot doesn’t find a positive wealth effect likely in the eurozone. The main reason is that most people have their assets in pension funds and insurers, and their solvency ratio decline because the negative impact of a lower interest rate on the mark-to-market value of their liabilities overshadows any gains in the solvency ratio from higher asset prices. This is indeed the case in the Netherlands where the two largest pension funds will have a funding gap at the end of January because of the low yield curve.

The only way that QE might support growth in the eurozone, Knot said, is through a devaluation of the euro, but he expects that to be a temporary effect. With respect to the position of Bundesbank-president Weidman he made it clear that they were in agreement on this. However, not all northern eurozone central bank president had voted against QE, Knot said. The Finnish president voted in favour.

I hope you find this of interest.

Bruno de Haas
Death by 1,000 Pin Pricks

I could not find much in English by de Haas. However, I did find a translation of a news article about him worthy of note.

Please consider "The Euro is Death by a Thousand Pinpricks"
Economist Bruno Haas pulls no punches in a Dutch financial newspaper article. According to Haas, the euro is a speeding train that runs straight into the abyss.

Haas knows whereof he speaks. He was involved in the drafting of the Maastricht Treaty and the department that oversees financial stability for the Dutch Ministry of Finance.

According to Haas, the EU's desperate attempts to pump more money into the rescue of the euro will fail. Moreover, these attempts will be at the expense of both the southern and northern European countries.

Naive Dream

The idea of ​​one large currency union among diverse economies, according to De Haas is an increasingly a naive dream. To break out of the downward spiral in the eurozone, De Haas believes the project needs to be shut down.

"Continuation of the euro project is costing us billions. It's death at the hands of a thousand pinpricks," said the economist.
Rational Arguments

Add Dutch central Bank president Klaas Knot to the list of those saying the right things for the right reasons.

Prince Michael: Prince Michael of Liechtenstein Warns "QE a Sign of Helplessness, Will Not Reach Economy"; Prince Michael vs. Martin Wolf

Mervyn King: More QE will not help the world.

Steen Jakobsen: "Lower Interest Rates May Reduce Consumption". Michael Pettis at China Financial Markets and Lacy Hunt at Hoisington Management both agreed.

Grand Experiment Failure

I wrote about Steen's theory in Grand Experiment Failure; Bankers Prefer Bubbles; Europe is not USA; Final Epitaph, a rebuttal to Bloomberg author Barry Ritholtz, also in favor of massive QE.

Note that the rationale of Dutch central Bank president Klaas Knot is nearly the same as that of Steen Jakobsen and Michael Pettis.

The only thing QE can possibly do is create bigger bubbles. When they crash, what then?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

12:46 AM


Pact With the Devil? Syriza Projection 150 Seats; Coalition Deal Already; "Indisputable Mandate to Leave Austerity"


One Short of Outright Majority

With vote counting nearly over, it appears Syriza captured exactly half of the 300 member Greek parliament with approximately 36.3% of the vote compared to 27.8% for New Democracy.

That was a solid trouncing, nearly double the 4-5% expected margin (see Syriza Trounces New Democracy; Greeks Stop Paying Taxes; Run on Greek Banks Escalates; Get Out!)

Syriza is one vote short of an outright majority. However, Syriza has already secured an alliance with the Independent Greeks, a right-wing party that shares little common ground with Syriza except for its rejection of austerity measures.

The coalition would have at least 162 seats, and that's an allegedly comfortable governing majority.

I do not rule out other alliances. But holding them all may prove difficult. Certainly this was not the alliance most expected.

Can Syriza govern with the Independent Greeks on some issues and another party on others? Or will this all blow up soon? If the latter, before or after Grexit?

For now, it's party time for Syriza, albeit one vote short of an even bigger party. Of course, there is always the chance of a party shift. It only takes one shift.

New Clash for Europe

With that backdrop, please consider Greek Vote Sets Up New Europe Clash.

With nearly all votes counted, opposition party Syriza was on track to win about half the seats in Parliament. In the wee hours of the morning, it clinched a coalition deal with a small right-wing party also opposed to Europe’s economic policy to give the two a clear majority.

“Today the Greek people have written history,” Syriza’s young leader and likely new prime minister, Alexis Tsipras, said in his victory speech late Sunday. “The Greek people have given a clear, indisputable mandate for Greece to leave behind austerity.”

A Syriza victory marks an astonishing upset of Europe’s political order, which decades ago settled into an orthodox centrism while many in Syriza describe themselves as Marxists. It emboldens the challenges of other radical parties, from the right-wing National Front in France to the newly formed left-wing Podemos party in Spain, and it sets Greece on a collision course with Germany and its other eurozone rescuers.



Tsipras will have a mammoth task at home and abroad.

For one thing, Syriza is a broad coalition of the left that includes factions that believe Greece should leave the eurozone. Those factions would pressure Mr. Tsipras if he moves to compromise with Europe.

The pressure to compromise will be intense. Under the bailout program’s rigorous schedule, Greece is required to complete a review of its progress with the so-called troika of bailout inspectors by the end of February. Mr. Tsipras has said he doesn’t recognize the troika’s authority.
Pact With the Devil?

The Wall Street Journal called the coalition of 162 seats a "comfortable majority". I called it an "allegedly comfortable majority".

Time will tell which version is correct. But other alliances are possible as well.

It's interesting this coalition is the one that emerged rather than a coalition with one of the other leftist or centrist parties.

Perhaps there is more in common on the issues that is apparent at first glance. Then again, perhaps so many are so fed up with austerity they would sign a pact with the devil to get rid of it.

Bow to Austerity or Go Bust

The Telegraph reports Greece must bow to austerity or go bust, says EU
Eurozone finance ministers will on Monday threaten an end to negotiations on debt relief for Greece unless its new radical Left government promises to honour all existing austerity agreements.

Eurozone officials are convinced that the EU holds all the trump cards in the coming clash with Greece's leader-in-waiting, Alexis Tsipras, including the nuclear option of letting Greek banks collapse. They believe Mr Tsipras knows his weakness.

The hardline approach will be sugared with offers of flexibility on the detail of austerity measures, and a move to allow Greece more time to meet an end of February deadline for renewal of key EU loans that are keeping the country’s economy afloat.

Mr Tsipras will be reminded that unless he plays the EU game there will be no extension to a 28 February deadline for a review of Greek austerity measures by the hated “troika” of inspectors from the EU, European Central Bank and International Monetary Fund.
Nuclear Chips on Both Sides

The above sounds like a hard bargaining chip, and it is. But Tsipras would have to give up everything he has stood for to accept that stance. Also, his coalition would collapse and he would immediately be out of office. When do politicians voluntarily accept that fate?

Tsipras may easily decide he has nothing to lose.

Moreover, Tsipras has his own nuclear bargaining chip. If Greece exits the eurozone, the rest of the countries immediately become liable for Greek debt.

Revised Grexit Debt Liabilities 

On January 22, with thanks to Dr. Eric Dor, director of IESEG School of Management in Lille, I posted a Revised Greek Default Scenario that showed "Liabilities Shifted to German and French Taxpayers".

Who is bluffing whom with Italian liabilities at 48 billion euros and Spanish liabilities at nearly 33 billion euros. See link for other countries' liabilities.

No Solution?

Saxo Bank chief economist and CIO pinged me with this thought after the election ...
  1. The Syriza position is clear: They were given mandate to “ignore austerity”.
  2. IMF and ECB stance is also clear: There are room for talks on maturity and terms but no on substance and doubts about repayment.

The EU, being the political animal it is, will look for compromises and short cuts, but end of the day this process is running out of time there are no new “pockets” to move the problem to anymore.

Greece needs a haircut. Anyone can see that. Getting it and executing it is probably the biggest single challenge. Unlike what we are trained to believe often there are no solutions to a lot of the problems we face. That’s the real conclusion on last night election result.
Actually, there is a short-term, can-kicking solution of sorts, but that would require some compromises on both sides.

Longer term, even if some writedown of debt was worked out, all of the eurozone structural problems still remain.

Finally, it's one thing for two or three parties to work out a compromise. It's another thing indeed for 18 parties all to agree, especially when some of them perceive they have to contribute more than everyone else.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot

Sunday, January 25, 2015 9:00 PM


Ireland Proposes Debt Restructuring Conference for Spain, Greece, Ireland; A Turnip is a Turnip


Contagion? Well don't worry about that! German Chancellor Angela Merkel assures us that will not happen. However, a difference of opinion is forming in Greece, Spain, and Ireland.

Via translation from El Confidencial, SYRIZA Extends the Debate, "Ireland Stands Out: Seeks Conference to Restructure Debt, Including Spain."

The Greek elections this Sunday still shaking European foreign ministries. ...

The restructuring of the debt (about 319 billion euros in the case of Greece) scares the markets for contagion effect.

Christine Lagarde was quick to respond in the pages of the Irish Times during a visit to Dublin last Monday. "In principle, collective efforts are welcome, but at the same time a debt is a debt" she said.
Why Ireland Should Support Greek Plan

The above article was based on an Irish Times column Why Ireland Should Support Greek Plan to Write Down Eurozone Public Debt.
Contrary to many reports, Syriza is not threatening a unilateral default but wants Greece’s debt burden to be considered within a broader restructuring of sovereign debt in the euro zone. Its leader, Alexis Tsipras, has called for a “European Debt Conference”, based on the 1953 London Conference that wrote off half of post-war Germany’s debt and extended the repayment period for the rest over a number of decades. As Hans-Werner Sinn, one of Germany’s leading economists and president of the Ifo Institute for Economic Research, acknowledged recently, the 1953 conference was, along with the Marshall Plan, a key factor in enabling Germany’s post-war economic miracle.

The conference met from February 28th to August 28th, 1952, with the final agreement signed the following year and involved representatives from 20 creditor nations (including Greece, Portugal and Ireland) as well as Germany and the Bank for International Settlements. The United States, Britain and France took the lead, making clear from the outset that one of the aims of the conference was to strengthen the German economy.

The preamble to the agreement said it should help to “remove obstacles to normal economic relations between the Federal Republic of Germany and other countries and thereby to make a contribution to the development of a prosperous community of nations”.

Demanding that Germany pay all its debts was seen as incompatible with that aim and with hopes of rebuilding the country’s democracy and anchoring it in the West. The creditor countries acknowledged that the burden of repayments should not be so high as to endanger the welfare of the German people and explicitly spared Germany from any “structural adjustment” policy such as budget cuts or tax increases to fund debt repayments.

The final deal wrote off more than half of Germany’s debts, stretched out repayments on the remainder for 30 years and agreed that, from 1953 to 1958, Germany would only make interest payments. Finally, it was agreed that repayments in any given year should not exceed 5 per cent of Germany’s trade surplus. The agreement was a success – Germany paid off its remaining debts on time and with great ease and its economy rebounded to become the strongest in Europe.

Greece is not Germany and post-war Germany’s debt amounted to a much smaller proportion of its gross domestic product than Greece’s does today. Germany was, however, regarded internationally as a deadbeat debtor, having welched on various debt repayment deals between the two world wars. And the creditor nations’ forbearance in 1953 is all the more remarkable given how recently Germany had led Europe into a catastrophic war that also plunged its antagonists into debt.
Simple Math

I saw Lagarde's nonsensical "A Debt is a Debt" speech in numerous places last week. I nearly responded "A turnip is a turnip and gold is gold, but neither turnips nor gold can default."

And that is the essence of the debate isn't it?

Whether Germany agrees to restructuring or not, what cannot be paid back, won't. Germany either agrees to debt restructuring or Greece will default. Either way, Germany will pay a price.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.

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