No Run on the Bank

Said a Cypriot lady, Maria,
At a bank branch in old Nicosia:
"With the caps they impose
On capital flows,
Withdrawal's a useless idea."

A Peripheral Question

When the banks on the euro zone's fringes
Must be rescued from too many binges,
There's something to lose
And the rescuers choose
The party on whom it impinges.

When the eurozone finally begins
To determine who loses and wins,
Will the outcome be fair
To depositors there
Or the wishes of Germans and Finns?

Guest Post: ECB Tries Again

My friend Andy Fately sent a brilliant pair of limericks to his clients this morning. Andy, a Corporate FX Risk Strategist for Barclays Capital who used to tweet as @fx_poet, is a foreign exchange limericker, a rare subspecies of financial poet. Here are his verses today:

There once was a group of old fossils
Whose policy slips were colossal,
And later today,
They’re likely to say
Come follow us, like we’re apostles.

But what can they possibly do
To fix all the things that they blew?
The popular theme’s
A new banking scheme
To help failing banks to pull through.

#Grelex

A political analyst noted,
On the day that Athenians voted,
That whoever's elected,
An exit's expected -
From euro to drachma demoted.

"Europe can exhale." So enthused the Munich-based Süddeutsche Zeitung after pro-European parties narrowly won the most closely watched Greek election in modern times. The radical-left Syriza Party, which wanted to reject the austerity measures forced on the country as a condition of continued eurozone membership and financial support, made a strong showing, if even in defeat. So, Europe stays together.

But, can the eurozone members collectively exhale? Despite the narrowly pro-European election result, the financial and political pressures on the Greek people remain immense, and the road to stability and prosperity is long and treacherous.

Spanish Bank Bailout

The ECB, EU and Spain
Gave a lesson in legerdemain,
In pledging a sum,
Knowing not where it's from,
Or where it would end up a-gain.

A €100 billion "bailout" of Spanish banks announced on the weekend turned out to be less than meets the eye. Global equity markets tumbled and Spanish government bond yields jumped to 6.521% as investors considered the unresolved issues in the European initiative. For starters, nobody knows yet where the money will come from - the old European Financial Stability Facility, or the new European Stabilization Mechanism. If the latter, the "aid" will comprise a loan to the Spanish government, the proceeds of which will be invested in Spanish banks. This government loan, equal to 10% of existing government debt, would be senior to that existing debt. This means that a short-term fix for the banks would end up damaging the attractiveness of Spanish government bonds, the core holders of which are...Spanish banks.

Can You Have It All?

Politicians who like popularity
May advocate "growth with austerity",
An odd formulation
Of vague calculation,
But perfect political clarity.

European growth vs. fiscal austerity? "We need both," says ECB Executive Board member Jörg Asmussen. Mr. Asmussen, who recently joined the European Central Bank from the German finance ministry, maintained in a speech in Berlin that "the fiscal compact can be complemented by growth-enhancing measures." However, it is clear that, as a good German, he advocates fealty to fiscal discipline first and foremost; growth measures "make sense as a supplement, but the fiscal compact cannot be renegotiated or softened." Most likely Mr. Asmussen is just doing his bit to calm the political waters that have recently swept away such austerity advocates as Nicholas Sarkozy, as well as his own Christian Democrats in a recent regional election. After all, even an elite central banker would have trouble explaining how a government could simultaneously grow the economy while shrinking itself.

No Exit to Athens

Said the Austrian Minister Fekter,
Alarmed at a Greek exit specter:
"For leaving the 'zone,
The course is unknown"
(A point on which few would correct 'er).

"For Greece, any expert you dial up
On making a roadmap worthwhile up,
Most likely expects it
Is less like an exit
And more like a 20-car pile-up."

"If I go there will be trouble; if I stay it will be double."

So sang The Clash 30 years ago, in a eerie presentiment of the dilemma facing eurozone policymakers today. Should Greece stay in the euro, as Angela Merkel now advocates in a newly full-throated campaign? This would underpin European unity and lessen the contagion risk for Spain and Italy. It would also shackle the Greek economy to an overly strong currency and obligate the "core" countries to provide an indefinite flow of subsidies, as Hans-Werner Sinn, chief economist of Germany's IFO Institute, recently complained. And yet, the exit from the euro is not only uncertain and fraught with risk, it isn't even legal.

Thus, Austrian Finance Minister Maria Fekter told inquiring reporters flat out: "It isn't possible to leave the eurozone." Though such legal hurdles might be surmounted, experts who have studied the situation voice concerns about uncontrollable bank runs in Greece, as savers there fear the replacement of their euro nest eggs with cheaper New Drachmas. Indeed, such fears provoked the withdrawal of €700 million from Greek banks on Monday. It seems that the one thing that cannot be tolerated in the eurozone is more uncertainty.

"So you've just got to let me know, should I stay or should I go?"

The Oracle of Limerick

Said the Irish economist, Kinsella:
"Our economy isn't quite insular;
We may seem like a rock
'Til we're hit by a shock
From Madrid or the Roman peninsula."

This weekend marked Limerick Day, otherwise known as the birthday of Edward Lear, who first popularized the limerick. On that day, the thoughts of an economic limericker naturally turn to Limerick's economist Stephen Kinsella. Professor Kinsella of the University of Limerick recently wrote a blog post asking "What Is The Important Thing No-One Is Saying?" His answer:

Irish people, I think, see that we really aren't the masters of our own destiny: that events in another country anther state could spell the end for us regardless of the choices we make. Were Spain or Italy to default, if the bond markets do not recover sufficiently from their current turmoil, and if the European authorities do not recognize the need for growth in the periphery to offset unsustainable increases in private debt that have been made public, we are sunk.

We can only hope that our next Limerick Day will find less anxious times for the citizens of Limerick.

Which Recovery Matters Most?

When the market was all of a-tatter,
To revive was a serious matter
In housing and jobs,
With the preference, obvs,
For the former ahead of the latter.

Q: If initial jobless claims fall less than expected, and the EU's economic sentiment indicator falls more than expected, how does the Dow react?
A: It jumps up by 100 points, provided that existing home sales rise more than expected.
The National Association of Realtors said on Thursday that its seasonally adjusted index for pending sales of existing homes jumped 4.1% from the previous month, vs. the 1.3% increase expected by economists. On the strength of this news, and against the headwinds from the US hiring slowdown and the European malaise, the Dow Jones Industrial index rose 114 points, or 0.9%, to reach 13,205. Investors evidently believe that the first sign of a US recovery will be in the housing market, whence all of our financial crisis troubles have come.

Die Eine Drei

Of the euro zone countries today,
Only one truly rates triple-A;
We needn't say who,
But, to give you a clue,
They're north of the Appian way.

The answer to whose credit is best in the euro zone is the same as whose cooking is Wurst. Aside from Germany, only three other EU members still enjoy AAA ratings: Finland, Luxembourg and the Netherlands. Most knowledgeable and objective observers agree, however, that it's only a matter of time before the latter three are knocked from the top rating level.

First to go may be the Netherlands, whose minority coalition government resigned on Monday amid an impasse over budget negotiations. Long a fierce advocate of euro fiscal discipline, the Dutch could not agree on how to get their national deficit within the required limit of 3% of GDP, as opposed to the currently projected 4.6%. Discussions broke down after the right-wing Freedom Party, headed by the flamboyant Geerd Wilders, pulled out of talks with the center-right liberal party of Prime Minister Mark Rutte. Ratcheting up the tension, Moody's warned that a "weaker commitment to fiscal discipline" in the Netherlands could put "downward pressure" on the country's triple-A rating. It may soon be einsam at the top for Germany.

A Moving Target

Said Monti: "I honestly never knew,
When to balance the books I endeavored too,
How austerity tends
To lower the trends
Of output and government revenue."

Italy announced that it would not meet the 2013 balanced budget pledge that it made as part of the EU fiscal stability pact. It's not that the "technocratic" government of Prime Minister Mario Monti isn't committed to cutbacks; more so that a downwardly revised GDP forecast is undercutting the revenue side of the balance. The Italian economy, which had been forecast to shrink by 0.5% next year, now has a revised GDP growth outlook of -1.2%. Thus, a projected balanced budget has turned into a deficit equal to -0.5% of GDP. Unfortunately, by tightening fiscal policy in a recession, the government is making things worse. However, they are operating under constraints set by the European Union, and thus had no choice in the matter.

One Bond to Ring Them All

A Eurobond's needed because
It's one of the euro zone's flaws
That investment was hot
Where the wanting was not
And decidedly cool where it was.

In his latest blog post on saving the euro zone, Reuters' Felix Salmon gets to the heart of the matter:

The solution to this problem is eurobonds. If all the eurozone countries funded themselves jointly and severally, then the yields on European government debt would be very low, and there would be no fiscal crisis in Spain.

As it is, the combination of a single currency and separate fiscal authorities encourages the flow of of government bond investment in the wrong place at the wrong time, if European stability is the desired outcome. Thus, says Felix, "Fund managers at French and German banks were busily moving funds into Spanish and Greek bonds a number of years ago in search of higher yields, and Spanish and Portuguese fund managers are now buying German and Dutch government bonds for added safety, all without incurring foreign exchange risk." It's as if the United States had no Treasury bonds, and all the public debt issue were at the state and local level. The question is: how long before Europe bows to the inevitable, and decides to go joint and several?

€uro Myth

Said an overwrought Eurocrat wistfully,
At the nightmare he once dreamed of blissfully:
"The euro must break up
Or else we must take up
The topic of joining fiscally."

Among the 9 Economic Myths deconstructed by Cullen Roche in his Pragmatic Capitalist blog is that of the euro: specifically, that the euro has been saved by the ECB's LTRO (long-term refinancing operation). Euro-zone banks have borrowed a net €520 billion of 3-year LTRO loans, which the ECB hopes will encourage liquidity and lending among the banks in its member countries. Unfortunately, this is another example of can-kicking. Says Mr. Roche:

The problem in Europe is simple. Because none of the countries are autonomous currency issuers, they all suffer from solvency constraints. They can’t print euro without the approval of a foreign central bank, in essence. So, unlike the USA, they can “run out of money”. This makes for frightened bond investors. The problems all arise out of the [intra-European] trade imbalance, which essentially forces the core to lend to the periphery to maintain growth. This is only sustainable up to a point and that point has been reached.

Hat tip to the Reformed Broker, Josh Brown.

China's New Trade Deficit

A worsening balance of trade
In the land in which everything's made
May be read as a sign
Of commercial decline
In the rest of the world, I'm afraid.

The news of China's large global trade deficit in February came as a shock, and may evoke some Schadenfreude in Americans who have despaired over the size of our nation's trade deficit with China. However, this is no time for malicious glee in the centers of manufacturing, or legislation. For one thing, the $4.1 billion Chinese trade deficit in the first two months of the year did not redound to the benefit of the US, with which China still has a large trade surplus. Second, the Chinese trade deficit indicates weak consumption among its European trading partners, to which Chinese exports declined by 1.1%. This is a sign of a possible global slowdown, which benefits nobody.

IMF MD to EU

"If the euro would founder and fester
From the wounds that beset and distressed 'er,
Ideology marred
The chance," said Lagarde,
"Of avoiding zees awful deezester."

IMF Managing Director Christine Lagarde, speaking in Berlin, sounded the euro-alarm as never before: "It is about avoiding a 1930s moment, in which inaction, insularity, and rigid ideology combine to cause a collapse in global demand," she said before the German Council on Foreign Relations; "A moment, ultimately, leading to a downward spiral that could engulf the entire world." The IMF managing director would like Germany, France, the ECB and other key players to strengthen their support of the eurozone's liquidity and financial stability, to avoid an Italian meltdown in particular. As Mme Lagarde expresses so dramatically, such a development would not be confined to Europe.

A Prime Minister Who Can Say No

Said Cameron: "I could have been cannier
In dealing with France and Germania,
But when they're on a roll
About Euro-control,
In my mind I can hear Rule Brittania."

When the 17 euro-zone governments announced a deal to save their common currency on Friday, it was not - as some had hoped - accompanied by a major, supporting treaty change among the 27 EU members. Britain's Prime Minister David Cameron, constrained by his "euro-skeptic" Conservative Party, vetoed changes that would have centralized more fiscal controls with the European Commission, EU executive and European Court of Justice. This left Britain isolated within the EU but bolstered Mr. Cameron's standing at home, where a clear majority desire a "Prime Minister [who] can say 'No,'" in the words of one prominent Conservative.

A Refined American Export

The GDP targets we've missed of late
Makes Americans' fuel use desist of late,
But with fuel usage surging
In markets emerging,
We ship more petroleum distillate.

The Wall Street Journal recently reported that booming US exports of gasoline and other refined petroleum products would soon make America a net fuel exporter for the first time in 62 years. Though still the world's leading importer of crude oil (that's right - we're still dependent on "foreign oil"), the US' huge and growing refining capacity feeds the demand from growth markets such as Mexico, Brazil and Singapore. Even moribund Europe are "PIGS" for Yankee petrol. Of course, there is a dark side to this good news: the net export balance is helped by our slow economy, which has reduced US fuel consumption.
Graphs courtesy of The Wall Street Journal.

Overheard Somewhere in Rome

"The euro zone debt crisis, gen'rally,
Is more easily overcome fed'rally,
If those on the Rhine
Would say "Ja" and not "Nein"
To issuance jointly and sev'rally."

As the European debt crisis drags on with no end in sight, some trial balloonists at the European Commission are set to come out with a paper that explores the potential of bonds issued or guaranteed by all of the 17 euro zone members. One immediate obstacle is the resolute opposition of the Germans, who fear liability for the debts of spendthrift neighbors such as Italy. However, combined euro zone debt issuance would carry much more weight in the market than the European Financial Stability Facility (EFSF), which does not appear up to the task of stabilizing the market for Italian treasury bonds.

Who Falls First?

Economists smartly conversed to,
Of three downturns, determine the worst two:
Those of debt uncontrolled
In the New World and Old,
Or of that which exports to the first two?

Writing in the Wall Street Journal, Ian Bremmer and Nouriel Roubini try to analyze, among Europe, China and the USA, whose economy has it the worst. They note that, in all three cases, "kicking the can down the road has staved off disaster so far, but the cans are getting bigger and heavier." Their unsurprising conclusion is that Europe will fall first and hardest due to the severity of its debt crisis. America and China may not indulge in schadenfreude, however, as both would see their exports to Europe reduced.

Greco-Franco-German Wrestling

EC President José Barroso
Says: "The scope of the Greek crisis grows so!
Will combined intervention
Of Germans and French in
This crisis suffice? I suppose so."

Like a pair of grappling Olympians, the leaders of Germany and France are trying to pin down the Greek credit crisis before it injures the Spaniards and Italians. Details of the new accord reached between German Chancellor Angela Merkel and French President Nicolas Sarkozy Wednesday night in Berlin have not yet been revealed, but are expected to include fresh emergency loans to Athens from euro zone governments and the IMF. European Commission president José Manuel Barroso warned all of his member states of the dire global economic consequences of failing to act decisively: "None of these Tea Party shenanigans," he admonished. #notreally