December 2

Default, departures or denial? Buttonwood.

The euro at mid-crisis. Kenneth Rogoff.

probably only at the mid-point of the crisis. To be sure, a huge, sustained burst of growth could still cure all of Europe’s debt problems – as it would anyone’s. But that halcyon scenario looks increasingly improbable. The endgame is far more likely to entail a wave of debt write-downs, similar to the one that finally wound up the Latin American debt crisis of the 1980’s. For starters, there are more bailouts to come, with Portugal at the top of the list. With an average growth rate of less than 1% over the past decade, and arguably the most sclerotic labor market in Europe, it is hard to see how Portugal can grow out of its massive debt burden....

But bailouts for Portugal and Spain are only the next – and not necessarily final – phase of the crisis. Ultimately, a significant restructuring of private and/or public debt is likely to be needed in all of the debt-distressed eurozone countries. After all, bailouts from the EU and the IMF are only a temporizing measure: even sweetheart loans, after all, eventually must be repaid. Already facing sluggish growth before fiscal austerity set in, the so-called “PIGS” (Portugal, Ireland, Greece, and Spain) face the prospect of a “lost decade” much as Latin America experienced in the 1980’s. Latin America’s rebirth and modern growth dynamic really only began to unfold after the 1987 “Brady plan” orchestrated massive debt write-downs across the region. Surely, a similar restructuring is the most plausible scenario in Europe as well....

Here is where the latest Irish bailout is particularly disconcerting. What Europe and the IMF have essentially done is to convert a private-debt problem into a sovereign-debt problem. Private bondholders, people and entities who lent money to banks, are being allowed to pull out their money en masse and have it replaced by public debt. Have the Europeans decided that sovereign default is easier, or are they just dreaming that it won’t happen? By nationalizing private debts, Europe is following the path of the 1980’s debt crisis in Latin America. There, too, governments widely “guaranteed” private-sector debt, and then proceeded to default on it. Finally, under the 1987 Brady plan, debts were written down by roughly 30%, four years after the crisis hit full throttle.

Imminent Eurozone default: how likely? Simon Johnson.

The prevailing consensus – and definite official spin – is that over the weekend European leaders backed away from the German proposal to impose losses on creditors as a condition of future bailouts, i.e., from 2013. The markets, in this view, should and likely will calm now; there is no immediate prospect of any kind of sovereign default... But a close reading of the Eurogroup ministers’ statement from Sunday suggests quite a different interpretation... [I]t has potentially momentous consequences – as it envisages dividing future eurozone crises into two kinds. “For countries considered solvent, on the basis of the debt sustainability analysis conducted by the [European] Commission and the IMF, in liaison with the ECB, the private sector creditors would be encouraged to maintain their exposure according to international rules and fully in line with the IMF practices. In the unexpected event that a country would appear to be insolvent, the Member State has to negotiate a comprehensive restructuring plan with its private sector creditors, in line with IMF practices with a view to restoring debt sustainability. If debt sustainability can be reached through these measures, the ESM [European Stability Mechanism] may provide liquidity assistance.”

Translation: if it is decided your country is “insolvent”, rather than illiquid, then you have to restructure your debts. But who exactly will decide?... the bombshell: “On this basis, the Eurogroup Ministers will take a unanimous decision on providing assistance.”

In other words, any one member of the eurozone can veto a country being determined merely illiquid – thus cutting them off from cheap and endless credit (from the ECB or ESM or any window to be named later). So now Germany effectively has a veto – as do other fiscally austere countries. Most likely we will witness the creation of an Austere Coalition (actually a modified Hanseatic League) of Germany, Austria, Finland, Estonia, and a few of the smaller countries.

The man with the magic words. Richard Smith.
Monday/Tuesday, panic re: Euro; Wednesday, all calm. why? Trichet soothed markets, suggesting ECB will buy PIGS debt, but also that a monetary federation, which they have, is not enough, that they "need a quasi-budget federation as well"; but is that do-able? is there political wherewithal? or, more likely, will Merkel and Weber rile markets up again? either way:

ECB funding programmes won’t fix any of that. Handouts or haircuts: the next stage of the political debate in Euroland will have to deliver a choice, and a plan

More thoughts on the ECB decision. Marc Chandler.

European officials must have known they were going to disappoint the market with the decision to simply postpone draining liquidity. The firewall around Greece failed. The firewall around Ireland has failed. The politicians have dropped the ball and the left Trichet holding the bag. Many from the periphery appeared to lobby the ECB to help out. Trichet in essence says there is little it can do and that it is really up to the governments. What Trichet announced today seems like the bare minimum of what it could do without immediately intensifying the crisis

Are the banks insolvent? Fair question, given this... Karl Denninger.

The big economic story, and why Obama isn't telling it. Robert Reich.

Albert Edwards: China's leading indicators are flashing warning light. zero hedge.

Viral! Rick Bookstaber.
discusses the age of private information, the age of too much information, and the age of viral information:

The new, viral world means more surprises and more volatility; and not because of market shocks precipitated by content, but because of the randomness in what might happen to catch on and reverberate through the internet.

other fare:
Sarah Palin wasn't the only one: Tom Flanagan, an advisor to PM Harper, in a live TV intereview, also called for the assassination of Wikileaks founder, Julian Assange. Telegraph.