Auerback: Austerity during recession is equivalent to medieval bloodletting

Here’s a good video performance by Marshall Auerback on BNN’s Business Day program. Marshall thinks the Greek default deal is actually a relatively good one. But sees a Portuguese default after the Greek default as a real possibility and envisions a scenario in which Portugal and Spain look to extract similar terms. Moreover, the quid pro quo for Greece is austerity – and that makes getting debt loads down harder when implemented during a downturn

On how Portugal is the next Greece

Portugal appears to be headed down that same road. While we have warned in the past of risks that Portugal would need a second aid package, it is only since S&P joined the other major rating agencies on January 13 that more market participants have come over to this view

Why I am not optimistic about Europe

I am not at all optimistic about the euro zone in terms of policy makers fashioning a solution to the problem. The euro leaders have the diagnosis all wrong. They keep harping on government debt and deficits as if that’s the problem. And this has caused them to go all in for austerity without a backup plan. The reality is that the sovereign debt crisis in Europe is not about government debt; it’s about private debt and intra-euro zone imbalances

Italy’s Political Drama: Tuesday Climax?

Assuming that the Greek and Italian political situation stabilize, the focus may shift back to the Iberia. The risk is that the new Spanish government will report a larger budget deficit and weaker finances in general than the outgoing government has recognized. Spain has three bond and four bill auctions before year-end.

Portugal needs to approve the 2012 budget and this will require acknowledgement that it is missing this year’s targets. While the euro zone as a whole only now looks to be entering a recession, the Portuguese economy contracted in both Q1 and Q2 and is likely to have contracted in Q3, when the preliminary data is reported on Nov 14. The Portuguese economy contracted in 2008 and 2009 before expanding last year. This year the contraction has resumed. The consensus forecasts calls for continued contraction in 2012 and 2013.

Such a bleak economic outlook does not appear conducive to political stability, let alone stabilizing debt situation and reassuring investors. If investors have been asked to “voluntarily” asked to forgive half of what Greece owes and accept a lower coupon, what will private sector investors in Portugal be asked to forgive

How the latest emergency euro summit addresses the sovereign debt crisis

Markets’ initial reaction to the latest EU emergency summit has been positive. Risk assets are trading up, risk-sensitive currencies are up, European bank stocks are up, and the broader stock market is as well. This relief rally is unexpectedly large. The bigger picture is quite a bit more downbeat. This summit does not address the core issues of the European sovereign debt crisis and is just the latest in stopgap measures on the way to a real fix to what ails Euroland.

Let’s step back a moment and look at how we got here

Holders of Sovereign Debt

Here’s a great chart just released by the International Monetary Fund for Greece, Portugal, and Ireland as well as Japan, the US and the UK. Note that almost half of the US federal government debt is held by the Federal Reserve and the government itself, such as the Social Security trust fund. Add to that the 22 percent foreign official holdings (mainly central banks) and almost 70 percent of the debt of the U.S. government is held by non-market/non-profit oriented investors

The widening European sovereign debt crisis

Euroland is coming apart at the seams. Belgian/Bund spreads are now also over 200bps along with Italy and Spain. Belgium has just entered the periphery and France is not far behind

Felix Zulauf on the inevitability of further crisis in Europe

Felix Zulauf spoke to Barron’s Alan Abelson about his thoughts on the European sovereign debt crisis now that Greece has received its second 100 billion euro bailout. Here I discuss what Abelson says about the conversation and why I think it means a state of permanent and rolling crisis in the euro zone

What the European Greek debt deal means

This step will calm markets – for how long is anybody’s guess. Nevertheless, the budget cuts that this deal requires must be rapid in order to try to calm markets by maintaining the fiction that Greece is not insolvent and that the budgetary crises in Portugal and Ireland are less sever than they are. This approach is another version of extend and pretend and will have the nasty side effect of slowing growth in the euro zone considerably. Muddling through means deepening crisis for the euro zone. My hope is that Europe will be ready to address the medium- and long-term issues when the crisis flares again

Europe: Contagion and Containment

Tolstoy tells us in the first line of Anna Karenina that “Happy families are all alike; every unhappy family is unhappy in its own way.” This is directly applicable to Europe. It is easy to tar all (growing) peripheral countries with the same brush, but that risks over simplification and the faulty analysis may generate poor investment decisions

The Euro and You

As Michael Lewitt says, “the interconnected nature of global financial markets render Europe’s problems the world’s problems. There is no longer any periphery.”

What Happens Next?

The question is not whether Greece will default but what will happen once it has. If Greece defaults but stays in the euro, not only will it not solve the underlying lack of competitiveness, but markets will immediately turn their attention to Portugal and Ireland and force those countries to default, and once they fold, Spain and possibly Italy will be next, so a Greek default on its own could quite possibly make matters worse for everyone. If Greece defaults and exits the euro at the same time, the market reaction won’t be much if any different to begin with, but things may actually take an interesting turn in one particular respect. Once the people of Portugal, Italy, Spain and Ireland see how the Greek economy actually benefits from the exit, they may in fact demand an exit in their countries too. It is therefore fair to say that a Greek default, with or without an exit from the eurozone, achieves nothing if the aim is to keep the eurozone intact. However, there is another way forward