European endgame is at hand

Commentary: Failure of leadership coming together in another chaotic moment

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The one bright spot in the world is the resilience of the U.S. economy, not re-entering the recession so widely forecast last fall, and so far impervious to events in Europe.

However, the failure of leadership in Europe, and here — hell, everywhere — seems to be coming together in another chaotic moment. There is no dominant thread to events, instead a tangle rather like the first time the kids helped to take down the Christmas lights. Find the end of one string, then another …

Here in the U.S., a surge in consumer credit (10 percent annual growth rate in November) may or may not indicate consumer and banking revival, or survive revision, but it beats contraction. Consumer confidence numbers are in a sustained rise, sometimes correlating with a better job market.

Tempering that enthusiasm, the ballyhooed holiday retail sales did not take place: Fibbers on the stock-market channels oversold a mere 0.1 percent gain in December sales. Small-biz surveyor NFIB found a fourth-straight monthly gain, but shallow-slope, net index no better than last January.

Concerns about the rest of the world have pushed 10-year T-notes down to 1.85 percent today, but there is no mortgage follow-through, largely because of the unspeakably stupid mortgage-rate surcharge imposed to pay for part of the Social Security tax cut.

Outside the U.S., in approximate order of importance:

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The flame is rising under long-simmering Iran. Sanctions imposed to halt its nuclear program may produce unintended blowback in Hormuz, and today’s news of U.S. troop and naval movements add to the burden of already jumpy markets.

Consensus today has S&P downgrading the credit of most of Europe this weekend. Ordinarily, downgrades would have no more effect than the downgrade of the U.S. last summer; however, the European rescue funds (EFSF and ESM) are dependent on AAA ratings for contributors, especially France. No bailout funds … dawn of reality.

Greece faded in importance last fall as Italy and Spain came into play. The debt forgiveness that Greece needed seemed trivial by comparison, and nobody would be silly enough to tip the Greek domino by withholding pocket change. Right.

Talks broke down today, and default is again imminent. Most exposed: the ECB and its holdings of $150 billion in Greek debt. You want that in 100,000-drachma notes, or 1 million?

Time out for ethics in financial leadership. During a sustained effort by the Swiss National Bank (its "Fed") to weaken the too-strong Swiss franc versus all other currencies, the wife of the SNB Chairman Philipp Hildebrand placed long-dollar trades with the family banker, who confirmed the trades with the chairman. Upon exposure, the chairman attempted a cover-up with that banker, who refused (there are honest bankers). Philipp and Kashya Hildebrand met while working at a U.S. hedge fund (dang, what kids learn in those places!); he has resigned and accepted a $1 million severance.

The largest Italian bank, Unicredit, attempted to raise capital in accordance with suicidal instructions to banks everywhere, and very nearly succeeded. In suicide. Its stock is now wallpaper; a good bet for the first of the nationalization dominoes.

The ECB flooded Europe two weeks ago with $700 billion in liquidity to banks to stop a run. A similar sum has returned to the ECB for safety. Its chairman, Mario Draghi, yesterday said, helpfully, that the returning cash was not from the banks who borrowed. Got it. The banks who borrowed paid back the banks from whom they had previously borrowed, and those banks are not going to loan money to anybody, sending it back to the ECB, where it now sits safely in mayonnaise jars under the ECB’s porch. The ECB stopped the run for a while, but brought no economic or credit relief.

Yields on short-term Danish and German government bills have gone negative. In a phenomenon seen here in the 1930s, and very briefly in the current crisis, investors think it wise to pay 101 kroner or euros for the right to get back 100 some 90 days later.

Financial people have been asking each other since last July, "What’s the European endgame? What’s the trigger?" At the moment, it looks as though the whole stack of procrastination, half measures and self-deception is crumbling at once. But we’re OK.

Progress since summer, but …


Source: Calculated Risk blog.

Hard to call this progress: 


Source: Calculated Risk blog

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@pmglending.com.

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