What about a country that adopts a foreign currency? Part Two

Yet another rescue plan for the EMU is making its way through central Europe—with the ECB acting as lender of last resort to Euro-banks. It is trying the tried-and-failed Fed method of rescue. As we now know the Fed lent and spent over $29 TRILLION trying to rescue (mostly) US banks. It did not work. The biggest banks are still insolvent, and have continued their massive frauds trying to cover up their insolvencies. You cannot paper-over insolvency through massive lending by the central bank. And the Euroland problems are compounded by the insolvencies of virtually all their member states

The only real solution to the European debt crisis is credit writedowns

Like many, we at the Global Macro Monitor believe the only solution to the European debt crisis is to write down bad debts, but we’re also realistic that it will take time because of the weak and highly levered balance sheets of many of the European banks holding the sovereign debt. Bridge solutions will have to do for now as banks bolster their capital. Germany seems to understand this as the sovereign debt crisis has created systemic problems in their own banking system

National Solvency and the Special Case of the US Dollar

The US can run budget deficits that help to fuel current account deficits without worry about government or national insolvency precisely because the rest of the world wants Dollars. But surely that cannot be true of any other nation. Today, the US Dollar is the international reserve currency—making the US special. Isn’t the US special? Let us examine this argument

Auerback: In Europe, national solvency first, then aggregate demand

Marshall Auerback was on BNN yesterday talking about the sovereign debt crisis. He believes that there are two distinct issues at play. One is national solvency, the other is aggregate demand. In his view, the national solvency issues take precedence at this puts the ECB on the hot seat.

Video below

Ignore Egan-Jones at Your Peril

If you are still inclined to give Greece the benefit of the doubt, I suggest you study the works of Egan-Jones, a credit rating company located in Haverford, Pennsylvania. Contrary to most other rating companies, Egan-Jones does not receive any compensation from bond issuers (a huge conflict of interest in the world of credit rating agencies) and, unlike most of its competitors who haven’t exactly covered themselves in glory in recent years, Egan-Jones has a formidable track record (see it here).

Sean Egan, co-head of Egan-Jones, predicts the eventual haircut on Greece to be close to 90%. He has done his homework and believes that Greece can support no more than €40 billion of debt through tax revenues. That amounts to only 10-15% of outstanding Greek sovereign debt. Sean put his case forward brilliantly in an interview in Barron’s earlier this year

Italy’s debt woes and Germany’s intransigence lead to Depression

Countries like Italy are simply not going to be able to grow their way out of the problem. Everyone is recognizing this now. Until Italy was at the heart of the crisis, we could all delude ourselves that this crisis could be met with crushing levels of austerity in the periphery, even if that forced the economies there into depression. If Spain’s debt woes and Germany’s intransigence lead to double dip, then Italy’s debt woes and Germany’s intransigence lead to a Depression (with a capital ‘D’)

Why Investors will buy Italian bonds after ECB monetisation

If a central bank guarantees investors credibly that they can invest in certain debt instruments and not suffer principal or interest repayment risk, but only currency and inflation risk, some investors are almost definitely going to buy the debt instruments with the greatest yield pick up. Put another way, the only reason not to buy Italian debt at 2 or 300 basis points over Bunds, or Greek debt at 3 or 400 basis points over Bunds is because those governments are not credibly backstopped by the

Why questioning Italy’s solvency leads inevitably to monetisation

Last week we witnessed a flight to quality within the euro zone government bond market. The yield on 10-year German government bonds dropped a record 35 points last week. They now yield 1.82 percent. Meanwhile, the yield on 10-year Italian government bonds continues to rise, last quoted by Bloomberg at 6.37% a record 455 basis points higher than German government bonds.

Clearly, Italy is now the biggest focal point of the European sovereign debt crisis. And, make no bones about, while the immediate concern for Italy is liquidity, at heart the European Sovereign Debt Crisis is a solvency crisis. Let’s take a look at Italy to see why

Rogoff sees ECB monetisation followed by recapitalisation or seigniorage and currency depreciation

Harvard Economist Kenneth Rogoff has a post up at Project Syndicate which does a good job in laying out the conundrum that Europe faces in the sovereign debt crisis. He theme is exchange rates and currency revulsion. But the underlying framework Rogoff presents is anchored in a presentation of debt and monetary policy issues that is similar to what you read at Credit Writedowns

More on liquidity, solvency (and elitism) during the Great Depression

Liquidity crises are always solvency crises. The question is about determining which company, nation, or debtor is insolvent in a world of incomplete information. This leads to panic and a wider liquidity crisis that stresses the balance sheets of everyone, including the insolvent debtors. Indeed, the insolvent almost always are shaken out and bankrupted by this process (or are bailed out by government). The problem is that the shake out process kills a lot of other companies too.

This is what debt deflation is all about

Mario Draghi: Fears of Italian debt spiral

One should fear an Italian debt spiral, yes. However, fiscal consolidation is an anti-growth policy that leads to higher deficits in the short-to-medium term. So what Draghi is saying doesn’t make a lot of sense

In which Jim O’Neill says muddling through leads to deepening crisis

Muddling through means deepening crisis for the euro zone