Economic Presence
  • Home
  • Paradox found
    • Paradox found

Hussman on Eurobonds and ECB back door European Bank recapitalization

5/28/2012

1 Comment

 
I discussed these two points in my very last post. Seems like Hussman sees the world close to the same way I do.  Here is Hussman's take:

"Two main hopes have kept investors relatively complacent about the growing risks in Europe: the hope for Eurobonds, and the hope for large-scale ECB purchases of distressed sovereign debt (essentially money-printing). 

With respect to Eurobonds, investors should understand that  what is really being proposed is a system where all European countries share  the collective credit risk of European member countries, allowing each country to issue debt on that collective credit standing, but leaving the more  fiscally responsible ones - Germany and a handful of other European states -  actually obligated to make good on the debt. 

This is like 9 broke guys walking up to Warren Buffett and proposing that they all get together so each of them can issue "Warrenbonds."  About 90% of the group would agree on the wisdom of that idea, and Warren would  be criticized as a "holdout" to the success of the plan. You'd have 9 guys issuing press releases on their "general agreement" about the concept, and in  his weaker moments, Buffett might even offer to "study" the proposal. But Buffett would never agree unless he could impose spending austerity and nearly complete authority over the budgets of those 9 guys. None of them would be  willing to give up that much sovereignty, so the idea would never get off the ground. Without major steps toward fiscal union involving a substantial loss of  national sovereignty, the same is true for Eurobonds.  

Moving to the European Central Bank, large scale ECB  purchases of sovereign debt would simply be the money-printing version of  Eurobond issuance. When the ECB purchases the bonds of a given country, and  creates Euros for them, it has essentially printed money until the point in time  that the bond is paid off. If that day never comes, as is the concern with   distressed European debt, then the ECB has essentially printed permanent Euros  in order to finance the spending of the country whose bonds it purchased. In  order to guard against this sort of backdoor fiscal policy, the ECB only buys bonds after ensuring that it has a senior position to other bondholders. So if  the ECB was to purchase distressed European debt on a grand scale, the result  would be that the remaining bonds would be subordinated, making the  prospective losses on those bonds even higher than they were previously. 

Ultimately, what investors really want is for the debt of  various countries to be wiped away by the ECB simply printing money to
retire that debt, or by having Germany and stronger Euro-area members  to make endless transfers to peripheral European countries. The whole system  rides on this willingness to transfer fiscal resources, or to allow money printing (with no revenue to stronger members from that money printing) in order  to finance heavily indebted members. The reason the recent elections in
Greece  and France matter is that they send a signal from the public to European governments: the people are unwilling to make any more "austerity bargains" that  put the public behind bank and government bondholders. So Germany is now being  asked to continue its transfers without any end in sight. 

We can't rule out the chance that Europe will cobble together  enough temporary liquidity for Greece and troubled banks to kick the  can down the road another time or two, but these kicks will become increasingly  weak and short-lived in the context of a new recession. Even in the event of  various liquidity injections, there is virtually no chance of  addressing the solvency of Europe - the ability of each  government  (much less the banking system) to sustainably pay their debts -  within the  constraints of the Euro. As long as the Euro exists as a single  currency,  individual countries can't inflate away the real value of their debt,
or restore  their trade competitiveness through exchange rate depreciation against other  countries.

Under these strains, I expect that the Euro will fracture  well beyond a Greek exit. Ultimately, the result might be a "strong Euro" that  reflects the union of Europe's most fiscally responsible countries, or we might  instead see a "weak Euro" that follows the departure of Germany from the currency union and leaves peripheral members free to inflate. So it's not clear  which direction the value of any surviving Euro may take until it is clear which  member countries will remain. In any event, however, what we are unlikely  to see  is a single Euro that combines fiscally responsible and fiscally irresponsible  countries, and requires endless one-way transfers of sovereign  public resources  in order to hold the system together."
1 Comment
Arizona Water Softeners link
3/15/2023 07:30:30 pm

Thanks for wriiting

Reply



Leave a Reply.

    Author

    Karl Pinno

    Categories

    All
    60 Minutes
    Abnormal Returns
    Academic Publishing
    Advice For Econ Students
    Age
    Aid
    Algo Trading
    Aluminum
    Argentina
    Assortive Matching
    Austerity
    Bank Of England
    Behavioural Economics
    Bio Weapons
    Bis
    Bloomberg
    Bonds
    Bono
    Book Of Mormon
    Brain
    Brazil
    Brics
    Bridgewater Associates
    Buffet
    Calgary
    Canada
    Capital Flight
    Carola Binder
    Cds
    Central Banks
    Chainmail Bikinis
    Chanos
    Child Rearing
    China
    Chris Martenson
    Christmas Wishlist
    Climate Change
    College Humor
    Commercial Banks
    Commodities
    Community
    Computer Programming
    Confirmation Bias
    Conservatism
    Conservative
    Constructive Ambiquity
    Consumer Confidence
    Copper
    Corporate Lending
    Counterparty Risk
    Creativity
    Credit
    Culture
    Cwb
    David Einhorn
    David Rosenberg
    Debate
    Debt Crisis
    Deflation
    Demographics
    Depression
    Development
    Dragons
    Dr. Ed's Blog
    Econ Blogs
    Economics
    Ecri
    Education
    Electricity
    Eurasia Group
    Eurozone
    Excercise
    Externalities
    Falkenblog
    Ferguson
    Fertility
    Filtering
    Financial Crisis 2008
    Financial Engineering
    Financial Reform
    Financial Repression
    Financial Research
    Fiscal Policy
    Fiscal Stimulus
    Fisher
    Fixed Income
    Flood
    Food Prices
    Frank And Cook
    Fraud
    Freidman
    Ft
    Game Theory
    Gender
    Generalist
    George Soros
    Get Smart
    Giffen Good
    Global Banking
    Global Economy
    Gmo
    Godfather
    Gold
    Goldman Sachs
    Great Careers
    Greece
    Greenlight Capital
    Happiness
    Hayman Capital Management Lp
    Hbo
    Health
    Hedge Funds
    Homosexuality
    Housing Market
    Hubbard
    Hugh Hendry
    Hussman
    Ian Bremmer
    Imf
    Inception
    Income Smoothing
    India
    Inequality
    Inflation
    Inflationary Expectations
    Inside Job
    Interest Rates
    Interfluidity
    Intuition
    Inventories
    Iran
    Iraq
    Italy
    Janusian Thinking
    Japan
    Jordan Peterson
    Jp Morgan
    Judgement
    Kalecki Equation
    Krugman
    Kyle Bass
    Larry Smith
    Larry Summers
    Lehman Brothers
    Levitt
    Liberal
    Lonely Island
    Luck
    Macro
    Macro Intro
    Macro Predictions
    Management Consulting
    Marginal Revolution
    Market Design
    Market Monetarism
    Marx
    Matt Taibbi
    Mercantilism
    Michael Portillo
    Milton Friedman
    Mircea Eliade
    Mish
    Mishkin
    Monetary Policy
    Monetary Stimulus
    Multipliers
    Mundell
    Music
    Nanex
    Nfl
    Noahpinion
    Nobel Price In Economics
    Oil Price Volatility
    Oil Production
    Omitted Variable Bias
    Optimism Bias
    Overcomingbias
    Palantir
    Pettis
    Phillips Curve
    Placebo
    Podcasts
    Poker
    Poland
    Politico
    Politics
    Portfolio Management
    Prisoner's Dilemma
    Productivity
    Psychology
    Publishing
    Quality
    Quantitative Easing
    Race
    Rand Paul
    Ray Dalio
    Rbc Theory
    Real Interest Rates
    Reality Tv
    Recession
    Redistributionist Reform
    Regulators
    Regulatory Capture
    Remembrance Day
    Research
    Richard Wilkinson
    Riots
    Risk
    Risk Taking
    Robots
    Roubini
    Russia
    Ryan
    Sachs
    Salt
    Saudi Arabia
    Sec
    Seth Klarman
    Shadowbanking
    Shiller
    Signaling
    Smes
    Snap
    Social Policy
    Social Unrest
    Society
    Sorkin
    Soros
    S&P
    Spain
    Specialization
    Speculation
    State Sponsored Terrorism
    Status
    Steve Jobs
    Steven Keen
    Stress
    Structural Unemployment
    Structure Finance
    Sugar
    Suicide
    Svars
    Systemic Risk
    Tax
    Taylor Rule
    Technology
    Ted
    Television
    The Clash
    The Economist
    The Wire
    Thinking
    Thoureau
    Trade
    Trilemma
    Turkey
    Tyler Cowen
    U2
    Unemployment
    Us 2012 Election
    Us Economy
    Us Foreign Policy
    Velocity
    Volatility
    Welfare
    Williams
    Words
    Work
    Writing
    Zerohedge
    Zig Ziglar

    Archives

    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    June 2015
    May 2015
    April 2015
    February 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    January 2014
    December 2013
    November 2013
    October 2013
    September 2013
    August 2013
    July 2013
    June 2013
    May 2013
    April 2013
    March 2013
    February 2013
    January 2013
    December 2012
    November 2012
    October 2012
    September 2012
    August 2012
    July 2012
    June 2012
    May 2012
    April 2012
    March 2012
    February 2012
    January 2012
    December 2011
    November 2011
    October 2011
    September 2011
    August 2011

    RSS Feed

Powered by Create your own unique website with customizable templates.