The Euro zone has learnt nothing from dealing with Greece as Ireland and Portugal have to wait for help as she did

Yesterday saw two quite different factors influence world markets. Firstly we saw a substantial falls in Chinese equity markets with the Shanghai Composite index falling by 8% in 3 trading days and secondly we saw the Euro zone crisis develop further as Euro zone ministers and officials met without coming to any solution for the two nations, Ireland and Portugal, which are in financial distress at this time. As these two combined then equity markets around the world had substantial falls symbolised by the US Dow Jones Industrial Average falling by 178 points to 11,023.

Overnight we have seen a further development as Chinese Prime Minister Wen Jiabao has stated that China is preparing measures to deal with the inflation that she is currently suffering from. Accordingly there were more fears of an interest-rate rise to help combat her inflationary problems and this led to a further fall of 1.92% in the Shanghai Composite Index making it 10% in 4 trading days and raising the prospect of a bear market developing.One piece of evidence that did arise on the subject was that MacDonald’s have just raised their prices in China, so if you want a Big Mac from Ronald MacDonald you now have to pay more and Bloomberg found Zhang Chen who said “Everybody is getting used to price increases nowadays.” Seeing as not following the party line can appear to affect your life expectancy in China I would suggest for a start that this individual steers clear of Tiananmen Square and any tanks for a while!

Market Movements which may surprise: A failure for QE2?

Whilst the media are concentrating on other matters there are some financial moves going on in the background which may get ignored in the melee. Firstly the US dollar has regained some strength recently with the US dollar index which is trade-weighted rising to 79.25 which is 3.3% above the benchmark of 76.68 I set just before the US FOMC announcement of QE2 on November 3rd. So at this point the impact of QE2 appears to have led to a dollar rise which was far from expected well let me continue with this theme as you see long-term interest rates have risen too as if we look at US government bond yields then the ten-year has risen from 2.57% to 2.85% and the thirty-year or long bond has risen from 3.91% to 4.27%. Just to complete the set the Dow Jones at 11,023 is below the 11,188 benchmark I set. So there you have it as we stand if you measure events since the FOMC’s statement we have a higher dollar,higher long-term interest rates and a lower US equity market! We have pretty much exactly the reverse of expectations and not the result that the FOMC  was looking for. There is always the cautionary note that markets particularly at times like this can be volatile and spin on a sixpence but as we stand QE2 has not led to an outright improvement in the markets it was supposed to influence.

Japanese markets cheer events

I add this in because there have been considerable consequences for Japan. Almost without notice or mention the Yen has sneaked above the level against the dollar which led to the intervention on September 15th and now stands at 83.45. This is a subject I have discussed before as I feel that currency intervention is invariably a failure and my main article on this subject was on the 25th of August. I tend to feel that it reinforces my point on the subject that as market attention has moved to QE2,Ireland,Portugal and China and so on that currency trends have reversed for now. Of course there is no actual proof because the intervention took place and cannot be changed. One follow-on effect has been for the spread between the Dow Jones Industrial Average and the Nikkei 225 equity index which had risen as high as 2000 points and is now 1211. Just to add a point of context they were at the same level earlier this year.

The Euro zone crisis: Its’s just like deja vu all over again…..

In case you are wondering the second part of the title is a quote from a baseball coach famous for such things. However there is a serious point if we return to the spring of this year and look at the Greek crisis and compare it to now with the Irish and Portuguese one then it would appear that the Euro zone and its officials and politician’s have learnt nothing. Here is a quote from the beginning of the Greek crisis from here back in March.

The Chairman of the talks Luxembourg Prime Minister Jean-Claude Juncker said

“We think the question (of aid for Greece) will not arise”

One might idly muse as to why they were discussing the subject then.

As the talks continue with no result in sight and all sorts of options being discussed in the media I would like to make the point that having gone through this once surely any half-way competent body would be ready this time. Yet it would appear from all the disputes that the Euro zone was not and indeed is not and the disputes are making things worse, just like they did for Greece.

Another Disturbing Feature

This time some of the Euro zone nations appear to be actively against what is going on. For example  the Austrian Finance Minister  said the payment of the next tranche of aid for Greece will be delayed until January after the government in Athens missed a revenue-raising target. So we have a clear issue for the Greek programme going forwards as it would appear that at least one country takes the conditions on the loans seriously which is likely to come as a shock to some of the others. Then Finland added to the atmosphere of confusion by stating that Ireland should be forced to put up collateral for any aid.

The European Financial Stability Facility has yet more problems

I have questioned how effective this mechanism it is likely to be ever since it was announced and my first article seriously questioning it was back on the 25th of June . I would like to add an additional feature today and quote from its own website. The first feature is that two countries Belgium and Slovenia have not fully ratified it yet and this may be a reason behind the delay in its use, particularly after the moves above by Austria and Finland suggest that other countries may be having second thoughts. I still have the feeling that Euro zone politicians never actually believed that the EFSF would ever have to be used.

As to how flexible it is let me quote from the EFSF website.

If there is a request from a euro area Member State for financial assistance, it will take three to four weeks to draw up a support programme including sending experts from the Commission, the IMF and the ECB to the country in difficulty. Once euro area finance ministers have approved the country programme, the EFSF would need several working days to raise the necessary funds and disburse the loan.

My first point is that if they expect it to be in operation by Christmas they need to get a move on if you look at the calendar and the suggested timetable. That of course assumes that bureaucrats,officials and politicians can achieve their own timetable as so far this has not been a strength for them.

Secondly I wonder if this will work at all. It was always likely that the EFSF would be called into operation at a time of rising long-term interest rates and yet no-one seemed to consider that as it starts by funding itself in financial markets the funding accordingly was likely to be more expensive than anticipated. Also for some countries they might find that the effect of further borrowing is to raise interest rates on their own debt.Should they then hit trouble they may have to pay a higher interest-rate than the one at which they have used to help another country. It is not impossible that financial markets hit such distress that the EFSF may struggle to borrow much at all. Back on the 25th of June I suggested this amongst other things.

The idea that the EFSF will issue securities or bonds when a sovereign needs help seems to assume that nation is the only problem at that time.Should it not be so then issuing such paper may be difficult or even impossible. What if several are in trouble at once or the problems are associated with financial markets being in trouble themselves?

The UK’s involvement

You know that things are not going well when there is talk of UK involvement in a Euro zone bailout. As I discussed yesterday I have wondered all along if the EU could manage to disburse funds from the European Commission Budget without involving nations which are not part of the Euro.EU officials have continued to imply that the other 9 EU nations would not be involved until now in what I suspect is another case of hoping for the best or misrepresentation. However when I heard that the UK Chancellor George Osborne  had said that the UK was “ready to support Ireland” it became clear that we are likely to be involved.

This will cause trouble as the previous Chancellor Alistair Darling said that we would not be involved and will be subject to some criticism should this turn out not to be true. Also whilst one wing of the UK coalition government the Liberal Democrats are likely to support such moves the main party the Conservatives has had quite a few splits on this issue. I suspect a lot of questions will be raised along the line of, how did we get involved in something to which we are not a party?

Market Response

The lack of any real progress has led to longer-term interest rates rising again in the countries concerned. Irish ten-year government bond yields rose to 8.18% and the Greek equivalent rose to 11.72%. So far today Irish yields are rising again but the situation is plainly volatile and could change at a moments notice.

The nations which might contribute are seeing their bond yields rise too. For example the German ten-year bund’s yield has risen to 2.61% and as we are now possibly a contributor to an aid package the UK ten-year gilt yield has risen to 3.3%. For Spain it is hard to say whether the rise in her government bond yields is from the likelihood of her paying into an aid package or being a recipient (or of course both!) but her ten-year government bond yield has risen to 4.6%. This rise may have further implications for her as her government had spotted that the yields on her debt had fallen and had factored this into her public expenditure which is somewhat awkward to say the least now.

A year on

Last weekend was a year of blogging for me. Apart from the obvious thought of how fast it feels it has gone I have been very happy with the results and progress. Thank you to those who make comments because I believe the quality of them has become a strength of this blog. To add to the feeling yesterday was its busiest day so far.


26 thoughts on “The Euro zone has learnt nothing from dealing with Greece as Ireland and Portugal have to wait for help as she did

  1. Thanks SHaun, congratulations on your blogging anniversary. Your posts have a breadth,detail and regularity which I find of tremendous use and interest.

    On the EFSF point I note that in addition to the arrangements fees, the tripleA interest, the margin of 300bps etc. the borrower may have to compensate the fund out of the loan advance for ensuring the tripleA is maintained? So, the more troubled sovereigns use the fund, the more compensation they will pay to maintain the credit rating of the Fund? So, those who take aid at the start could well be better off than those who take it later?Is this why I have read the IMF would be a preferred route for all concerned, putting aside I have read this is all looking like a liability transfer pact and Mr Osborne needs to be cautious.

    • Hi Shire
      The current situation is starting to look at lot worse than the usual prescribed dose of some Euro fudge. I have written a letter to the Evening Standard to suggest my views on what sholud happen going forwards. You will have bigger surprises than reading that I pointed out the weaknesses of the EFSF and that in my opinion politicians in the Euro zone had done a lot of boasting and it was now time for some doing.

      I also suggested that we should not support Ireland from the UK at this time.However I am not averse to helping out Ireland as a principle my point is that the Euro zone has the funds if it wants too and if we end up bailing out Euro nations with bilateral loans we are opening up yet another moral hazard. In short to use an Americanism Euro zone politicians talked the talk and now it is time to walk the walk…..

      So in the end the IMF as I have suggested all along is the better route and we in the UK share in that which is our proper role.

  2. With regard to you blogging efforts, superb, probably one of the best around (and certainly my first port of call on a daily basis even while on holiday recently!). Keep up the good work I take every opportunity I can to spread the word of what you publish

  3. Shaun,

    If the world had more guys like you willing to stand up…..the world would be a better place. I saw you comments on ZH and found your blog. It’s now on my list. I worked for an Investment Bank as an advisor and elected to leave when markets melted down in 2008. I felt that something had changed. Markets cannot be supported by printed money. This is what has been happening for 2 years. I now trade currency on my own with my own funds – some blogging, but I’m much happier knowing that I also stood up.


  4. Shaun,
    I would like to congratulate you on your anniversary. Your blog has become essential reading for me as small businessman, with an interest in your subject. I have learnt much in the last 8 months since I found your blog.
    I do wonder whether there has been a 12 month period in recent years with so much happening across the world of economics. It makes great reading, I may however feel that the world could do with a more quiet time! With the latest issues in Europe and across the world, I may foresee that your blog will not be short of material from which to offer us your considered, insightful, and balanced views.

  5. Thanks for your detailed reports, like the one of today and the news of Austria and Finland resisting seigniorage aid for Greece. My reserach on Austria is that it has provided carry trade loans for investment and mortgages in developing Europe. I believe the reason for this was greed and not sound business and lending planning. There are a number of mortgages that are not being paid by Hungarians. And as a result, when Austria, EWO, trades, it swings quite volatilily in proportion to Europe, VGK. For example, today’s One Year MSN Finance chart of EWO compard to VGK, shows the booming rise in Austria to catch up with Europe since the EFSF Authority was announced and the Euro, FXE, recovered. But then when one switches to the One Month chart, Austria has lost more value than Europe since November 5, 2010. So, I say, Austria: if one lives in a glass house, one should not throw stones.

    I would like to present my view on gold, in light of recent bond, currency and stock market activity since November 5, 2010.

    As I look at the chart of Gold, $GOLD, it could easily fall back to the Friday October 1, 2010 price of $1,319. I’m invested in gold, and if I had money, I would buy on this price dip, as my investment maxim is in a bull market to buy on dips and in a bear market to sell on price rises.

    In my financial market report for November 16, 2010, … Currency Traders Sell World Currencies In Their Ongoing Global Currency War Against The Central Bankers … I document that a global competitive deflationary currency war is underway at the hands of the bond traders and currency traders.

    The currency traders continued with their global currency war on the world’s central bankers, which they commenced November 5, 2010, when the bond vigilantes called the Interest Rate on the US 30 Year Government Bond, $TYX, higher above 4.0%, on concern that the US Federal Reserve’s Quantitative Easing constitutes monetization of debt.

    The ongoing sell off in the worlds currencies, DBV, and the emerging market currencies, CEW, strengthened the world-wide stock sell off that commenced on November 5, 2010.

    Debt deflation continued in sovereign debt. Bond vigilantes continued calling interest rates higher globally. And as currency traders sold the world’s currencies, International Government Bonds, BWX, and Emerging Market Bonds, EMB, fell sharply lower.

    Risk appetite has turned to risk aversion causing carry trade investment disinvestment in Junk bonds, JNK.

    An unwinding of carry trade investment globally is documented by the developed market currencies, DBV, and the emerging market currencies, CEW, falling more than the Yen, FXY.

    With World Government Debt, BWX, and World Stocks, ACWI, falling lower, carry trade investment is starting to come out of the HUI Precious Metal Stocks, ^HUI, traded by the ETF, GDX, and the junior gold mining shares, GDXJ.

    Gold mining stocks are not the same things as physical gold; gold stocks are bought and sold as a speculative investment; this is readily seen in the chart of the junior gold mining shares, GDXJ, relative to gold, GLD, GDXJ:GLD, turning lower.

    Research documents that CONSISTENTLY the precious metal mining shares turn down, when the US sovereign debt turns lower. US Government debt and the precious metal mining shares ALWAYS turn lower together. This is seen in today’s fall in the HUI relative to US 30 Year bonds in the futures market, $HUI:$USB.

    Stocks in the precious metal mining category include, Keegan Resources, KGN, Great Basin Gold, GBG, Nevsun Resources, NSU, Allied Nevada Goldfield, ANV, Golden Star Resources, GSS, Aurizon Mines, AZK and ASA, ASA.

    Inverse Volatility, XXV, has now fallen lower. S&P Volatility, VXZ, has turned up withe the US Dollar, $USD, suggesting that an unwinding of Dollar carry trades is underway.

    The bond traders have seized control of both long-term interest rates, such as the Interest Rate on The US 30 Year Government Bond, $TYX, and short term rates that were formerly under the control of the central bankers. Joe Weisenthal reported Mortgage Rates Just Hit A Four-Month High — his chart shows an explosive jump in mortgage rates in just the last few days.

    The currency traders have established themselves as the world’s sovereign governing power; their rule over the world governments began on November 5, 2010 when the Interest rate on the US Government Bond, $TYX, sustained above 4%, and as they sold the major currencies, DBV, and emerging market currencies, CEW, which called the US Dollar, $USD, for now higher.

    I appreciate those who have given their time to document Quantitative Easing. Their reports are both awakening and sobering.

    Gary Dorsch, Editor, Global Money Trends Crossing The Rubicon Into The World Of QE-2

    Chris Martenson, QE II Has Lit the Fuse

    Doug Noland, Prudent Bear, The Official Start Of QE 2

    Greg Hunter, USA Watchdog, Insanity Or Ingenious?

    Paul J. Lim, New York Times, A Calmer Market? Not For Long Bonds

    Mary Williams Walsh, New York Times, Municipal Bond Market Shudders

    “Götterdämmerung”, is a word used by Ambrose Evans Pritchard in a recent Telegraph article, and is an apt word to describe the apparent fatal wound to the world’s financial, economic and political systems which is coming soon, as bond traders continue calling interest rates higher, such as the US mortgage rates, and the Interest Rate on the US Government 30 Year US Treasury bond; and as currency traders continue a global sell off of the world’s currencies, as both conduct a war for sovereignty against the world central bankers and world leaders.

    God was gracious to provide Revelation 13:3, which reveals that the soon coming apparent fatal wound to the world’s economic and political systems will be healed.

    But that it will come at the cost of the rise to power of a world Sovereign and also a world Seignior, the latter term comes from Old English meaning top dog banker who takes a cut.

    Yes out of the coming investment “flame out” a global Leader and a global Banker will rise to establish order.

    Perhaps Herman Van Rompuy will rise to be The Sovereign … and perhaps Tony Blair, because of his business connections, will rise to be The Seignior.

    All seigniorage will come and go through the Seignior: all sovereign wealth funds, and banks will report to him, as there will be unified regulation of banking globally.

    Soon there will be no national seigniorage as sovereign debt interest rates will explode to the point where there will be no buyers. This is already the case for Portugal, Italy, Ireland, Greece and Spain.

    Sovereign nations and their constitutions will be history, as principles of global governance working through regional economic and security pacts and leaders’ agreements will serve as the basis for regional currencies or a global currency.

    The Seignior’s financial and economic power will complement the military and political power of the Sovereign; and between the two they own the world “lock, stock and barrel”.

    Well, I am wishing good investing to all.

  6. Congratulations on your first ‘birthday’! As an ordinary (Irish) person (and boy are we centre-stage!!) I find your blog down-to-earth, no nonsense, accessible, informative, accurate, insightful and very often prescient. Thank you. K

    eep up the good work and, for what it’s worth at the moment, the very best of Irish Luck for the future. 🙂

    Kind regards,

  7. Shaun,
    Congratulations on the twelve months. Judging by the number of references your blog receives from those who are responding to Robert Peston or Stephanie’s BBC pieces, the quiet authority you are bringing to these debates is held in some regard.
    Currently, my worry is that not all that long ago, many were applauding Ireland’s “brave but severe” cuts, contrasted with our Labour government’s pre-election vaccilations. They seem to have been to no avail and Ireland’s crisis continues. Do our Coalition’s planned measures compare with Ireland’s, and therefore what is to stop us following in their footsteps? I could be wrong about the comparison because the Labour Party have not made much of it. I do, however understand that RBS and Halifax have fairly hair-raising commitments in Ireland so, unfair as it may seem to many, we have a significant interest in Ireland’s wellbeing .

  8. Happy Anniversary Shaun.

    I’ve been daily reader for the last year, quietly feeding off everyone’s words of wisdom on this blog. Our politicians, and others misguiding them, should do the same.

    I’m sure its ‘old hat’ to all contributors here but I feel its worth adding this link to yet another website as a reminder of what is facing us.

    Good luck to all you who are trying to figure a way out of this mess.

    (The Ascent of Money was my secret favourite gift last Christmas)

  9. Shaun, may I add my congratulations on the 1st anniversary of your great blog; it is consistently interesting, informative and thought provoking. May it long continue, and may it continue to develop its readership and academic recognition much further. Hope your career develops too as a result of your recognition.

  10. Congrats on reaching a year of informative and well supported, rational statements – unlike lets say our so called “media” who are meant to inform us……

    Hope you continue.

  11. Congratulations on the anniversary Shaun. Hope you keep it up! May I wish you many happy returns?

    PS: FT Alphaville has a nice graph on the shifting of Greek debt to the ECB and the Greek banks.

    PS2: Of course, the Austrians do have a point regarding the collection (the lack thereof that is) of taxes by the Greek state. The enormous size of the black market in Greece is well-known.

  12. Although it mitigates against me being a daily reader I do appreciate the detail on this blog. I don’t always agree with the views that are expressed, but there is little point in reading only things that do not challenge your own viewpoint. The facts don’t speak for themselves (and are subject to review).

    • and review and review and review and even then we are never entirely sure they are right. If over the last year I have put this fact into readers minds then I consider that an achievement. I do not see it discussed much elsewhere.

      As to agreeing with me that is by no means compulsory! Otherwise there would be illogic in my chosen title and with most facts being uncertain there is room for plenty of debate. However much of the mainstream media cluster around a consensus view in my opinion and there is an irony in that as they are doing so at a time when consensus views are performly poorly.

  13. I’d like to offer my best wishes and congratulations on the blog’s anniversary.

    Shaun, keep up the excellent work!

    Although I’m not sure you’ll see this, I’d like you to know that should you ever need professional web hosting etc, and migrate from the platform, I’d be very happy to host you for free in my company’s infrastructure.

    And no, the infrastructure is not based in Greece, so you won’t have any fears of it shutting down if things get uglier in the country 🙂

    Anyway, my kudos once more!


  14. A very happy anniversary to you Shaun,

    My thanks to you for all your efforts and for passing on in-depth info, opinions and statistics in the fine way you present them. All of which I would miss without your daily blog.

    For my part, I am a mino observer standing in the wings. I grew up in the affluent 50’s and have always had an interest in finance and financial matters, buying my first shares in ‘Letraset’ and my first kilo of ‘silver’ whilst an apprentice.

    How things have changed since those innocent days and the fun of the hunt, when you could look for trends and fashions and changes of management to find value in related shares.

    Sadly, I now find markets so manipulated and closed to the small investor that I have withdrawn from stock market holdings and now concentrate on wrestling with the world of properties. Why oh why did I get involved with a private pension? seemed so right at the time.

    So once again many thanks for allowing me to view things via your global periscope and I wish you every success in your ventures and if it’s not too soon who knows a ‘PROSPEROUS NEW YEAR’ to you and your readers.

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