Real e Finance means business
New EU Plan is
Much Ado About
Nothing..Friday,
December 9,
2011
Once again the EU has come up with a too-little, too-late solution to
deal with its very serious debt crises. Proposals for a tighter fiscal union
and the small amount of funds committed will only delay the inevitable
default.
Treaties only have meaning if their terms are actually followed. The
eurozone already has a treaty that created it. That treaty has very clear
fiscal benchmarks that all members must follow. The key benchmark
concerning a maximum 3% debt to GDP ratio for an annual budget was
almost universally ignored by all member states. Greece was only the
most extreme example. It finally admitted to lying about its numbers (it
was not "caught in the act" by the central EU head office even though
the numbers it submitted were too good to be true). Greece originally
reported a projected debt to GDP ratio of 2.0% for 2009. After many
revisions, it turned out to be 15.4%. It was not punished for its duplicity or
major violation of EU accords; instead it has been offered three bailout
packages so far.
The new treaty provisions once again state that the eurozone countries
need to have a balanced budget and should not violate the 3% debt
to GDP limit. This wasn't enforced the first time and there is no reason to
believe that it will be enforced the second time either. This time however
the new treaty states that there will be automatic consequences,
including possible sanctions. I'm sure they all had a good laugh about
those possible sanctions. This is a complete and total joke and should be
treated as such.
As for the current amount of money proposed to rescue the over
indebted EU countries, it is much too inadequate to be more than a
temporary stopgap measure (the only thing the Europeans seem
capable of doing). The debt problem for the troubled EU countries --
Greece, Ireland, Italy, Portugal, and Spain -- runs into the trillions. How
much is on the table now -- €200billion. The EU will loan this amount to
the IMF, which will in turn use it to provide the same amount of aid back
to the EU. Not only is this is a paltry sum, it is disturbing they need to
engage in a financial shell game as part of their bailout attempts. Even
more absurd is that the ESM (European Stability Mechanism), set up to
handle the debt crisis, will be capped at €500 billion. What will happen
when they run out of this money and there is still a large amount of debt
in danger of defaulting?
The problem with debt crises is that the amount needed to handle them
is a moving target. It keeps rising and rising with time because interest
rates keep rising and this makes borrowing costs continuously more
expensive. Greek one-year bond yields are at 353% today. Even with
three rescue packages, they continue to climb toward the stars.
Immediately after the announcement of each rescue plan, yields
dropped significantly for a short period of time, then they went much
higher than they had been before. Expect to see this pattern with the
other EU debt crisis countries. The EU is very good at getting its problems
under control for a few weeks with its band aid measures. Expect its
current efforts to be another short-term success that turns into a long-
term failure.
Disclosure: None
Author: "Inflation Investing - A Guide for the 2010s"
Daryl Montgomery
deal with its very serious debt crises. Proposals for a tighter fiscal union
and the small amount of funds committed will only delay the inevitable
default.
Treaties only have meaning if their terms are actually followed. The
eurozone already has a treaty that created it. That treaty has very clear
fiscal benchmarks that all members must follow. The key benchmark
concerning a maximum 3% debt to GDP ratio for an annual budget was
almost universally ignored by all member states. Greece was only the
most extreme example. It finally admitted to lying about its numbers (it
was not "caught in the act" by the central EU head office even though
the numbers it submitted were too good to be true). Greece originally
reported a projected debt to GDP ratio of 2.0% for 2009. After many
revisions, it turned out to be 15.4%. It was not punished for its duplicity or
major violation of EU accords; instead it has been offered three bailout
packages so far.
The new treaty provisions once again state that the eurozone countries
need to have a balanced budget and should not violate the 3% debt
to GDP limit. This wasn't enforced the first time and there is no reason to
believe that it will be enforced the second time either. This time however
the new treaty states that there will be automatic consequences,
including possible sanctions. I'm sure they all had a good laugh about
those possible sanctions. This is a complete and total joke and should be
treated as such.
As for the current amount of money proposed to rescue the over
indebted EU countries, it is much too inadequate to be more than a
temporary stopgap measure (the only thing the Europeans seem
capable of doing). The debt problem for the troubled EU countries --
Greece, Ireland, Italy, Portugal, and Spain -- runs into the trillions. How
much is on the table now -- €200billion. The EU will loan this amount to
the IMF, which will in turn use it to provide the same amount of aid back
to the EU. Not only is this is a paltry sum, it is disturbing they need to
engage in a financial shell game as part of their bailout attempts. Even
more absurd is that the ESM (European Stability Mechanism), set up to
handle the debt crisis, will be capped at €500 billion. What will happen
when they run out of this money and there is still a large amount of debt
in danger of defaulting?
The problem with debt crises is that the amount needed to handle them
is a moving target. It keeps rising and rising with time because interest
rates keep rising and this makes borrowing costs continuously more
expensive. Greek one-year bond yields are at 353% today. Even with
three rescue packages, they continue to climb toward the stars.
Immediately after the announcement of each rescue plan, yields
dropped significantly for a short period of time, then they went much
higher than they had been before. Expect to see this pattern with the
other EU debt crisis countries. The EU is very good at getting its problems
under control for a few weeks with its band aid measures. Expect its
current efforts to be another short-term success that turns into a long-
term failure.
Disclosure: None
Author: "Inflation Investing - A Guide for the 2010s"
Daryl Montgomery
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The 'Helicopter
Economics Investing
Guide' is meant to help
educate people on how
investing choices in the
current economic
environment. We have
coined this term to
describe the current
monetary and fiscal
policies of the U.S.
government, which
involve unprecedented
money printing. This is
the official blog of the
New York Investing
meetup.
Economics Investing
Guide' is meant to help
educate people on how
investing choices in the
current economic
environment. We have
coined this term to
describe the current
monetary and fiscal
policies of the U.S.
government, which
involve unprecedented
money printing. This is
the official blog of the
New York Investing
meetup.
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