Europe

The Euro is Already Gone

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Today I read an article about the fact that the German government can issue debt with a negative yield.

Germany sold six-month treasury bills at a negative yield for the first time amid demand for the debt securities of Europe’s biggest economy as a haven from the sovereign debt crisis roiling the region. The government auctioned 3.9 billion euros ($4.98 billion) of securities maturing in July at an average yield of minus 0.0122 percent, the Federal Finance Agency said in an e-mailed statement today. It was the first time it sold the securities at a negative yield, Joerg Mueller, a spokesman in Frankfurt, said in a telephone interview. The Netherlands sold 107-day bills at minus 0.007 percent on Dec. 12.

Thus purchasers are paying the German (and Dutch) governments for the privilege of lending them money.

Meanwhile, Italy is having a tough time finding buyers for its bonds. In order to sell debt, the yield is now above 7%, a line that (for some reason) in the popular press is read as the dividing line for “unsustainable”, kind of like the “Mendoza line” for baseball batting averages.

Italian bond yields rose above 7% on Friday (Dec 23) as worries about the government’s debt problems resurfaced. The yield on 10-year Italian government bonds edged up to 7.04%, after falling below 6% earlier this month. Italian yields first topped 7% in November amid fears that Italy could fall victim to the same debt crisis that led to bailouts for Greece, Ireland and Portugal.

On the face of it, this seems odd. Germany and the Netherlands are issuing bonds in Euros, just like the Greeks, Italians, Ireland and Portugal. Theoretically, all of these countries have the same “backstops” built into the Euro, and there is no exit mechanism.

The debt market is saying something different than what the politicians are saying – the debt market doesn’t believe the hype and, when the dust settles, they want to be holding paper from the creditworthy countries (Germany and the Netherlands) and not the PIIGS (the above countries plus Spain).

Back when Dan and I were in college we had a friend nicknamed “Strohs”. Since we were all very poor back then when we played poker often people used “markers” instead of cash. At the end of the game (generally when we ran out of beer and / or someone passed out) you might hold cash or you might hold “markers” which were really IOU’s from each person at the game. “Strohs” markers were a deck of cards marked with the ubiquitous “Dogs playing poker” picture, and thus at the end of the game if you held his marker, they were “Dogs”. “Strohs”, while a good friend of ours, wasn’t an especially credit-worthy guy (at the time). He earned his nickname by showing up for college with some clothes in a hefty trash bag and a pallet of Strohs 30 packs with which he filled his entire closet top to bottom.

So as the night wore on, if you held “Dogs” in your pile of chips and markers, your betting became especially reckless. It was common to say “I’ll raise you a bucket of dogs” which probably meant you were bluffing because if you lost all you did was remove the markers with which payment was unlikely to happen out of your stack of chips, for the promise of winning “real” markers (equivalent to the German debt above) or actual cash, instead.

For years books and magazines have focused on “yield” and also the credit worthiness of individual companies and (mostly) ignored currency risk. A friend of mine in the investment business talked about a customer who bought a huge Australian debt position and their piddly yield was irrelevant as currency gains from the Australian dollar (which I wrote about here) drove the position to a huge gain, when translated back into (weak) US dollars. Obviously this trader was ignoring yield and betting on currencies.

This is what appears to be happening today. When Europe’s dust cloud settles, people don’t want to be holding “a bucket of dogs” backed by promises from PIIGS governments’, they want the equivalent of the old Deutschmark from Germany. That is why they are essentially ignoring yield and accepting a negative yield from one country and demanding a 7% yield from another country ostensibly backed from the same currency.

Cross posted at LITGM

The Dangers of Demonology

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A writer at The Economist notes that hatred of bankers is one of the world’s oldest and most dangerous prejudices:

Civilisations that have eased the ban on moneylending have grown rich. Those that have retained it have stagnated. Northern Italy boomed in the 15th century when the Medicis and other banking families found ways to bend the rules. Economic leadership passed to Protestant Europe when Luther and Calvin made moneylending acceptable. As Europe pulled ahead, the usury-banning Islamic world remained mired in poverty.

and

In medieval Europe Jews were persecuted not only because they were not Christians but also because killing them was a quick way to expunge debts. Karl Marx, who came from a Jewish family, regarded Jews as the embodiments of capitalism who could only be rescued from their ancestral curse through revolution. The forgers of the “Protocols of the Learned Elders of Zion” wanted people to believe that Jewish financiers were engaged in a fiendish global conspiracy. Louis McFadden, the chairman of the United States House Committee on Banking and Currency in the 1930s, claimed that “the Gentiles have the slips of paper while the Jews have the lawful money.” The same canards have been used against Chinese minorities across Asia.

It can be reasonably argued that the financial industry in the US, and probably also in Europe, is too large as a % of the overall economy and also far too influential in political affairs–see my post about sticky governors. But the unthinking demonization of finance as an activity, and of people involved in that activity, is counterproductive, and, as the Economist author argues, dangerous.

via Stuart Schneiderman

Portugal’s Prime Minister Tells Citizens to Emigrate

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Portugal is an EU and Euro member with a population of 10.5M. Portugal is one of the “PIIGS” (along with Ireland, Italy, Greece and Spain) that are having severe debt and austerity problems caused by a lack of confidence in their ability to service their huge financial burdens.

Portugal is relatively uncompetitive within the EU. They benefited from inflows and subsidies from the EU over the years and used it to raise living standards and develop a large and expensive public sector.

One advantage Portugal does have is their connections to former “empire” countries that also speak Portuguese including Angola and Brazil. These countries, while they have their own very significant problems, are not shackled with the anti-competitive rules and regulations that burden companies in the EU. While Portuguese citizens are not at the top of the education group in EU terms, in Angolan or Brazilian (general) terms they are very well educated and can assist multi-nationals taking advantage of the natural resources that Angola and Brazil are blessed with.

In this context, when asked what young people should do when faced with high unemployment, this article the conservative prime minister told them to “just emigrate”.

While many thought that his comments were not appropriate, there are few avenues for ambitious young people since the gravy train of EU subsidies is drying up and EU labor policies make it very difficult for companies to remove redundant staff in order to make room for more productive and cost compeititive new graduates.

This is a practical, if sad, solution to the problem of a non-competitive state which is forced to support the high cost and social benefits of the EU. It also perfectly crystalizes the “fixed pie” view of the left – keep jobs and barriers high for those that have them, and watch as the nation slowly loses competitiveness, falling hardest on those newest to the work force.

It is a blessing to the former colonies, however, who will receive the youngest, most productive and aggressive citizens who can make their fortune overseas rather than waiting in line (in vain) for a spot in the bureaucratic system.

Cross posted at LITGM

Vaclav Havel

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To me the Cold War is very real, perhaps because my family was involved in various ways and, towards the end, I was, too. The news of the great men and women of that fight dying comes with very special sadness and also with many conflicting thoughts. Vaclav Havel, for instance, was a great symbol of that struggle against Communism but as a politician he did not live up to that and so one see-saws between various opinions.

I have tried to sum it all up on Your Freedom and Ours (though the posting starts with the death of Kim Jong-il). I may get beaten up (figuratively speaking).