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Tuesday, May 08, 2012


Francois Hollande has ten weeks to avert a French bond crisis

There will be no speculative attack against French bonds on Monday morning because François Hollande has been elected president, the first socialist to take the Élysée since the Mitterrand debacle of 1981.


8:02PM BST 06 May 2012



The phantom army waiting to pounce is the cynical invention of the Sarkozy campaign. Any fears of a Leftist lurch have been in the price for weeks.
What is true is that the CAC-40 index of French stocks has underperformed Germany’s DAX by 20pc since last August, an ominous divergence for two countries yoked so tightly together. The yield spread of German 10-year Bunds over French OAT bonds has jumped 90 basis points.
This parting of the ways pre-dates the "Hollande scare". It goes beyond downgrade jitters, or fears of contagion from $710bn of French bank exposure to Italy, Spain, Greece, Ireland, and Portugal (IMF data). It reflects a gut feeling in global markets that France is sliding into deep trouble, clinging to a ruinously expensive social model in a Teutonic monetary union and a Chinese trading world.
French economists say the moment of danger will come later this summer - whoever is elected - as the full force of Europe’s contraction crisis hits France.
“They absolutely must cut public spending and control the debt,” said Marc Touati from Global Equities in Paris. “It will soon be clear that we are in deep recession. If they don’t act fast, interest rates will shoot up and we will have a catastrophe by September,” he said.
Fiscal tightening a l’outrance across Euroland is a grave policy error, he said, but ‘AA’ France nevertheless has to deal with reality.
The country lacks the credibility to go for growth alone under the constraints of monetary union. It is trapped.
Mr Touati blames the European Central Bank - BCE in French or “Banque Contre L‘Economie” as he calls it - for making matters far worse by needlessly pushing the whole Euro zone system into a slump out of “blind ideology”.
Star fund manager Edouard Carmignac makes much the same critique. His indictment of the pre-Draghi ECB is ferocious, but that does not alter the strategic dilemma for French leaders. Protracted slump makes it all the more imperative for each euro member to put its own house in order.
“If Hollande strays too far from virtue, French rates will go through the roof. France will not be able to borrow,” he said.
My own view is slightly different. The German deflation regime is - in the current circumstances - the greater threat to Greco-Latin societies, and to post-War comity in Europe. Sometimes you have to go through a cathartic trauma to break free.
But it is also true that Germany’s own democracy may turn fractious if policy strays too far from German needs and Grundgesetz. This is EMU’s curse. It destabilizes each nation state in turn, each in different ways - a “negative sum game”.
The worst of all worlds would be a nasty spat between Mr Hollande and Chancellor Angela Merkel that poisoned the atmosphere without bringing about any substantive change to Europe‘s “asphyxiation compact”.
Watch the French debt auctions on May 3 and May 16 carefully, says Sophie van Straelen from the French hedge fund consultancy Asterias.
If they go well, a President Hollande may start to think that bond vigilantes will stomach his big state romanticism.
“Our belief is that he has no choice. He must increase taxes and cut spending, otherwise markets could panic and we will have a disaster,” she said. The crucial deadline is the budget proposal in July.
Mr Hollande has already hinted at complacency, suggesting that market calm over the last two weeks is a vote of confidence in his policies. It is no such thing.
Paris has a strange atmosphere right now. It is hard to get a table at the bistros of Saint-Germain, yet people have a sense of foreboding.
They know austerity has hardly begun. The press is full of stories that the biggest property bubble ever known in France has begun to deflate. Yet the party goes on. Perhaps this is what it felt like in May 1931, avant le déluge.
Germany took its medicine with the Hartz IV labour reforms eight years ago - under a Social Democrat, nota bene - when the world was humming and EMU competitors were merrily inflating their way into varying degrees of fixed exchange rate Hell.
France will have to take its medicine in less propitious times, somehow clawing back 20pc in unit labour competitiveness against an austere Germany.
It is not easy to see how France can pull this off. Little has been done so far beyond repeal of the infamous 35-hour week. Labour rigidities - employment protection, high tax wedge and minimum wage (SMIC), etc - are among the most entrenched in the OECD club. The unreformed French state takes 55pc of GDP.
The current account has swung from a surplus of 3pc of GDP to a deficit of nearly 2pc in twelve years. France’s share of EMU exports has dropped from 17pc to 13pc. French trade data has become an “event risk”, keenly watched by traders.
Mr Hollande must know the dangers of “socialism in one country” under a currency peg. He was a Mitterrand aide when such an experiment blew up in 1983, leading to the `tournant de la rigueur’ or epic U-turn.
Markets won’t wait so long this time.
Yet he may be prisoner of events if he fails to win an outright majority in the legislative elections in June and has to rely on the fast-rising Front de Gauche -- the neo-Communist movement of Jean-Luc Melenchon with 11pc of the vote.
History buffs will remember the events of 1936 when Leon Blum’s Front Populaire came to power with “New Deal” rhetoric and Communist backing. Investors rushed for the exits, forcing the franc off the Gold Standard. The money crossed the Channel.
“Conversations in French became increasingly commonplace in the City of London, as French citizens made arrangements to open sterling bank accounts,” writes Barry Eichengreen in Golden Fetters, my favourite book on the Great Depression.
There are signs that it is happening again, says Louise Cooper from BGC Partners. If Italians were the biggest foreign buyers of top properties in London last year, the French are catching up this year in the £3m to £5m range.
“London property is like German Bunds - somewhere safe to park cash,” she said. Is it capital flight? Hard to tell.
Historian Nicolas Baverez said the French are in a natoinal sulk, idealizing a mythical past and retreating behind a new Maginot Line. Europe has become the great scapegoat.
“I am convinced that France will stand at the centre of the next Euro zone crisis,” he says.
Luckily for Mr Hollande, global markets have not yet reached their merciless verdict.

48 comments:

  1. Meanwhile, Nat Gas hit $2.44 today. That's up a little over 25% since the bottom a couple of weeks ago. If we get another injection with a twenty handle look for the price to Explode upwards.

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  2. Early indications are that the U.S. will post a Budget Surplus for April (about $50 Billion.)

    That will be the first Surplus since Bush, and the Republicans crashed the economy in Sept of '08.

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    1. Since Bwarney Frwank and friends and the housing bubble crashed the economy, you mean.

      Cause Bush had warned about it in every State of the Union he ever gave.

      b

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  3. And, other than that, never did a damned thing

    (except prance around the stage and blather on about the "Ownership Society," that is.)

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    1. The Democrats didn't listen to his advice, to rope in Fanny and Freddie. What's he supposed to do, dissolve Congress?

      b

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    2. He might've started by "Vetoing" something, for a change.

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    3. I do agree with that. I can't remember anything he ever did veto.

      b

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  4. Mariano Rajoy, Prime Minister of Spain, made a very interesting comment in the Senate today. He told the politicians that virtually EVERYONE in Spain, including banks, corporations and regional governments, have been locked out of credit markets. The only institution that is still able to issue debt, according to Rajoy, is the Spanish Treasury itself. Now, that's a frightening statement for the leader of a country to make in public - yet what's even more frightening for the Spanish people, one-fourth of whom are unemployed, is that it can't be too far from the truth.

    Emma-Ross Thomas reports from Madrid for Bloomberg (h/t po1):


    Spain Says Treasury Is Only Entity Left Able to Get Funding

    Prime Minister Mariano Rajoy said the debt agency is the only borrower left in Spain that can finance itself on markets as banks, companies and regional administrations have been shut out.

    "Today, the Treasury is practically the only one that finances itself on the markets," he said in the Senate in Madrid today. Being locked out of debt markets isn't "theoretical" as it's "happening to the immense majority of regions, our whole financial sector and most big companies."

    Rajoy once again raised the threat of an international bailout as he seeks to convince Spaniards to accept spending cuts even as unemployment approaches 25 percent . . . . .


    Spain is frozen out

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    1. 25% unemployment. I wonder if their numbers underestimate, like ours do, not counting people who have dropped out of the labor market. It sure sounds like an impossible situation, doesn't it.

      b

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  5. Hillary no longer cares how she looks -

    http://www.politico.com/blogs/click/2012/05/hillary-clinton-on-makeup-hair-who-cares-122745.html


    video of the old witch
    b

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  6. Why is Germany so determined, and insistant, that the only way forward for Europe is by way of the single currency Euro?. Their exports are holding up well to countries outside the Eurozone so why are they spending so much political time and billions by propping up a failing Euro?. As for Greece the only way that they can even start to become competetive in the world market is by a substantial devaluation of their currency, which is impossible under the constraints of the Euro. The only hope for the Greeks is to leave the Euro, either voluntarily or by being 'ejected,' and a rebalancing of their economy through a massive devaluation/default. Since WW2 there have been many countries who have had to default on their debts, how many are still in default, very few. All suffered shorterm hardship but went on to recover within several years. Greece has already suffered 2 years of austerity, with many ordinary Greeks living on the poverty line, with no end result in sight. They should bite the bullet default and start again!.

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  7. the increasingly heavy hand of the US government

    That’s what some of the world’s largest wealth-management firms are saying ahead of Washington’s implementation of the Foreign Account Tax Compliance Act, known as Fatca, which seeks to prevent tax evasion by Americans with offshore accounts. HSBC Holdings Plc (HSBA), Deutsche Bank AG, Bank of Singapore Ltd. and DBS Group Holdings Ltd. (DBS) all say they have turned away business.
    Bank of Singapore, which managed $32 billion at the end of 2011, is the private banking arm of Southeast Asia’s second-largest lender, Oversea-Chinese Banking Corp. Photographer: Munshi Ahmed/Bloomberg
    “I don’t open U.S. accounts, period,” said Su Shan Tan, head of private banking at Singapore-based DBS, Southeast Asia’s largest lender, who described regulatory attitudes toward U.S. clients as “Draconian.”
    The 2010 law, to be phased in starting Jan. 1, 2013, requires financial institutions based outside the U.S. to obtain and report information about income and interest payments accrued to the accounts of American clients. It means additional compliance costs for banks and fewer investment options and advisers for all U.S. citizens living abroad, which could affect their ability to generate returns.
    “In the long run, if Americans have less and less opportunities to invest overseas, it would be a disadvantage,” Marc Faber, the fund manager and publisher of the Gloom, Boom and Doom report, said last month in Singapore.
    The almost 400 pages of proposed rules issued by the U.S. Internal Revenue Service in February create “unnecessary burdens and costs,” the Institute of International Bankers and the European Banking Federation said in an April 30 letter to the IRS, one of more than 200 submitted to the agency. The IRS plans to hold a hearing May 15 and could amend how and when some aspects of the rules are implemented. It can’t rescind the law.

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  8. Recall when income tax started is was only for the upper .01%. Most sales taxes started at 1-2%. Govenrment always initiates new repression by starting with an unpopular minority.

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  9. How Greece Could Take Down Wall Street:

    The Houses of Morgan, Goldman and the other Big Five are justifiably worried right now, because an “event of default” declared on European sovereign debt could jeopardize their $32 trillion derivatives scheme. According to Rudy Avizius in an article on The Market Oracle (UK) on February 15th, that explains what happened at MF Global, and why the 50% Greek bond write-down was not declared an event of default.

    LINK

    Original article by Rudy Avizius: LINK

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  10. I really wish I could come up with something illuminating on Europe, but I can't.

    They took Socialism one step too far, screwed the pooch with the Euro, and now they're running out of affordable energy. They're in a hell of a mess.

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    Replies
    1. The Spaniards were going to run Spain on sunshine and it didn't work.

      b

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  11. And, as bad a mess as they're in, we might be in a worse one come February.

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  12. When nat gas hits $15.00/kcuft in Feb that wind, and solar might start looking pretty good.

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    1. .

      Where do you come up with this stuff?

      .

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  13. Speaking of which, Germany is th number one "solar" nation on earth. It seems to be working pretty well for them (their cost for "peak-time electricity" has gone Down in the last year.)

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  14. If more investors begin to protest, Lynn expects three big changes and believes it could be good news for shareholders and the wider economy.

    ...

    “CEOs will be paid far more modestly and will only be rewarded for genuinely improving the business they are running,” he said. In effect, Lynn added, that means they will have to focus more on slowly and patiently building market share — and you can only do that through investment.

    “Lastly, we may well see higher stock markets,” Lynn concluded. “It can hardly be a coincidence that as CEO pay has soared, stocks have stagnated. Companies became vehicles for enriching their senior staff, rather than their investors — with banks as the most extreme example, but with many others guilty of precisely the same thing.”

    LINK

    IF they do it, that makes Richard Finger's suggestions 1 for 4.

    *************************

    With $100 million in the bank already for the 2012 cycle, Crossroads is the largest and most feared of the new kind of campaign group unleashed by a series of court decisions removing all limits on cash donations for spending on elections.

    In this year’s presidential, Senate and House elections, the super-political action committees, or super-Pacs, such as Crossroads have the firepower to swing a crucial state or seat.

    “They can get 20 guys around a table and say, ‘We can win this seat if we spend $20 million, and I’d like you all to put in one million dollars each.’ It changes the whole dynamic,” said a prominent Republican fundraiser.

    ...

    Mr. Law said Crossroads is on track to meet its fundraising target of between $240 million and $300 million for the 2012 elections. By contrast, Priorities USA Action, the prime pro-Obama super-Pac, has raised a paltry $9 million.

    LINK

    Which is (halfways) good since incumbents need to go - quietly with dignity or screaming and yelling - their choice.

    Second is that it *looks* like USA is beginning to course-correct. How *real* any of it is remains to be seen. But the noises are sounding more harmonic.

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  15. If Greece leaves the Euro zone I wonder if that invalidates the CDS's held by the investment houses.

    A quick look at the curtain which they hide behind reveals one shadowy organization that represents the interests of these money masters, the International Swaps and Derivatives Association also known as ISDA. The officers and directors of this organization include some of the largest hedge funds and most of the major banks in the world including the largest banks in the United States. One of the purposes of the ISDA is determine if a “credit event” is actually a default. If a “credit event” is declared to be a default, then Credit Default Swap (CDS) contracts come into play.

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  16. Every decade, he says, the thickness of silicon wafers have been cut in half while efficiencies have increased. He believes that companies can realistically reduce the thickness of wafers from 180 microns today all the way down to 50 microns while still maintaining efficiencies.

    “The industry is just now moving into the second generation,” explains Gay, where manufacturers are using printed circuits, textured cells, different interconnect wires, better sawing techniques and photoluminescence technologies to inspect cells at a higher throughput. “Crystalline silicon has a very long continuum of progress.”

    Also nipping at the heels of conventional silicon are a variety of thin films that can be manufactured at an even lower cost – but also come with lower efficiencies.

    First Solar has driven the cost of manufacturing cadmium-telluride thin films (which are about 15% of the market) to under 70 cents a watt; . . . . .


    How to Continue with Ferocious Solar Cost Reductions

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  17. “The biggest deterrent to an energy plan in America is Koch Industries,” the BP Capital founder tells Yahoo’s Aaron Task. “They do not want an energy plan for America because they have the cheapest natural gas price they’ve ever had, and they’re in the fertilizer business and they’re in the chemical business. So their margins are huge. And they do not want you to have an energy plan, because if you had a plan, then natural gas prices would come up.”

    *************

    The American Legislative Exchange Council’s anti-environment agenda is fueled by none other than Big Oil companies, which sit on ALEC’s “task forces.”

    The watchdog group Common Cause published ALEC’s full member list, revealing four of the five major oil companies behind the group’s anti-environment legislation. These four oil companies — Shell, BP, Chevron, and ExxonMobil — are also the four most profitable, taking a combined $30.6 billion profits in just three months this year.

    Koch Industries, ubiquitous in funding right-wing causes, is also one of ALEC’s corporate members, while ConocoPhillips has its own history of funding the group.

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  18. Nothing nobody don't already know.

    Nouriel Roubini's negative "slow train wreck" prognosis for Europe is being rebutted by EUropean finance guys like Pierre Lagrange who predicts some kind of fiscal union, although the time frame is slow motion - 3 years or so.

    Not a done deal by any means.

    Looks like Obama has a serious fight in front of him.

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  19. There have been "hit and run" protests in Damascus and Aleppo as dozens of activists will coordinate through social media and show up at a designated street corner or parking lot and chant anti-Assad slogans for a few minutes, disappearing before state security has a chance to respond. News of the protests sweeps through the neighborhoods and districts, giving heart to opponents of the regime and striking fear in the hears of its supporters.

    from the most reliable source of all, American Thinker

    And if this keeps up Assad is toast too.

    http://www.americanthinker.com/blog/2012/05/finally_the_syrian_revolt_reaches_the_capitol.html

    All these new communications devices are having a real impact on the uprisings of late. It is interesting to watch, though I wouldn't want to be part of it.

    b

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  20. Obama administration, including his czars and his closest Progressive supporters, are planning a manufactured insurgency against America. Using the media to garner both sympathy and support for his unfinished goals

    LINK

    [h/t BC]

    Everyone should read this and make his/her own judgments.

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    1. Obama situation room take down Osama photo is a fake

      Read here -

      http://www.americanthinker.com/2012/05/strange_anomalies_in_the_famous_situation_room_photo.html

      All the experts in the comments section seem to agree, the photo is phoney.

      All the details available to you courtesy of American Thinker. You too can understand why the photo is photo shopped.

      b

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    2. My judgement is the people at Canada Free Press have been smoking weed.

      b

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    3. And if American Thinker, the news source you can trust, should ever say differently, I'll let you know.

      b

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    4. Somethin' stronger than any weed I've ever smoked.

      from the link: "“The Obama administration is working closely with Bernanke, Geithner and others not to save our economy, but to outright destroy it."


      That's getting pretty far out into the "weeds," I'd say. :)

      Delete
    5. I'm out the door again but I think reality is somewhere in the middle.

      Some of those youngish operatives come hard-wired with that "grim and determined" gleam in their eyes leaving good judgment to search for another place in history.

      But those Canadians. They're quite the hoots. Payback for Keystone???

      Delete
    6. Need to take a look at (private investigator) Hagmann's recent columns. Seems to be a central focus.

      What makes the conspiracy subjects hard - maddening - is the intricate interplay of reality with fantasy - multiple levels of reality and multiple levels of fantasy.

      For example this National Defense Authorization Act has a "creepy" feel to it, as do the legal assaults under GWB prepared by John Yoo (ref Quirk) and the potential for using drones as a common instrument of civilian law enforcement.

      The general milieu is "itchy." Mix in a handful of intensely driven political operatives with devotional motivation to a cause and the blood sport of American politics becomes an energy force field unto itself.

      Geithner is about as far from being a socialist (or a marxist) as I am from being Lady GaGa. He is a Bank(st)er.

      More from Hagmann: LINK

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    7. .

      I made it through 3 or 4 paragraphs and decided the author was so freakin full of himself it was a waste of my time going any further.

      .

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  21. Why Obama is going to get clobbered here ==

    http://nationaljournal.com/columns/against-the-grain/obama-the-underdog-20120508


    b

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  22. Apparently I'm not going anywhere.

    The future of Greek CDS's:

    3) The ISDA has not yet given a clear statement if such a deal will be considered as a credit event causing CDS to be paid out.

    4) If agreement was ruled as a no-credit event, hedge funds might take it to Greek courts, holding up the debt swap ad infinitum.

    I would like to point that if CDS is not paid, this will even be a far worse scenario that having the CDS paid. The reason is that market participants, who have bought Greek CDS to avoid a default (A haircut of 1% is considered a default for any CDS holder) will expect a compensation for their losses, and without this payment, the CDS market will have no purpose, it will collapse. If market participants had no guarantees against their sovereign holdings, not only they will dump their CDSs but the sovereign bonds they held these CDS against. Remember, Greece is just the current can on the road but other cans are still on the road, we'll have to deal with Portugal, Italy and Spain.

    LINK

    And finally, the "money" graph:

    Additionally, the total exposure of banks in the United States is higher than German banks. US banks' total exposure of Greek debt amounted to around US$41 billion. But the nature of exposure US banks have is rather different, it is through guarantees or CDS. It shows that there could be potential problems for US banks [Goldman Sachs (GS), Morgan Stanley (MS)] if CDS were triggered and obviously problems for European banks [BNP Paribas (BNPQF.PK) Deutsche Bank (DB)] if bonds default.

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  23. Mr Judd rises in the polls. In 2008 he ran in the Idaho Democratic primary against Hillary and Zero, but only scored 1.7% of the vote. In West Virginia he got 41% against Zero. The fact that he is now a felon may have helped him in West Virginia, but on the downside, it is hard to campaign from a Federal prison.

    If only he had been able to get out there and shake a few hands and kiss a few babies, he might well have won

    Read all about it here--

    http://www.csmonitor.com/USA/Elections/President/2012/0509/Ouch!-Obama-loses-41-percent-of-W.Va.-primary-vote-to-federal-inmate

    Anybody want to be his delegate to the Convention? Contact him at the prison in Texarkana, Texas.

    b

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  24. .

    Obama came out in support of gay marriage today. I suspect it was a political calculation, but regardless, one more item on the list that I am pulling together for me to vote 'against' him rather than just not voting 'for' him.

    .

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    1. Why? What is the problem with couple of gays pledging eternal love?

      Delete
  25. Yeah, People being treated like "People," we sure can't have That.

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  26. We'll just vote for the guy that agrees with Ahmadinejad on gays. After all, God don't like Gays, right?

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  27. Probably ought to do something about those interracial marriages, also. You know that ain't "God's Way."

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  28. Then you got Jews marryin' Christians.

    And, injuns; what're we going to do about them injuns?

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  29. It's not a life style choice. If it were, the Church of Scientology could have dealt with John Travolta. It's not genetic, either. It is developmental, in the very early stages of fetal development, so I was reading in a long article by the Dean of Biology at Oxford, who is conducting an in depth study of the issue. Very early on a series of biochemical hoops, hurdles and switches have to be negotiated in the proper sequence, or you get 'other than normal'.

    b

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    1. One can though always push the choice back to the other world, where the choice would be made in Plato's meadows of decision where one picks a marker for the type of one's coming life. If one wanted to do that. And if one did, one might as well give up on reforming the individual here below, as it would be doubtful transcendental decisions can be so overturned.


      b

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  30. .

    Nonsense. Words have meaning. I find it objectionable to force changes in those meanings to fit a political agenda. Shades of 1984 and Newspeak.

    The word 'marriage' has been around for millenia and there has been a general acceptance that it was the union of a man and a women.

    Gay unions have been around for the same time (I assume), in some places accepted (Greece) and in others (Rome) not, but they weren't called marriage.

    Gays are gaining more and more acceptance in this country and around the world. The vast majority of of people in this country have no problem with gay civil unions and the legal rights that go with them if you can believe the polls. Likewise, I believe I saw that recently a small plurality favor allowing gays to marry (although 30 states have laws outlawing it). The trend is in the gays favor, with young people, Democrats, the NE states and California, and non-fundamentalists favoring allowing gays to marry. However, to my mind, you can't apply the democratic fallacy to this subject.

    When T was gay, she said she wanted the same legal rights as everyone else in this country. I asked her to explain to me the difference in legal rights between civil unions and "gay marriage". She couldn't. There is none. When I asked if she would be satisfied with a civil union that gave her the legal rights she wanted instead of gay marriage she said no.

    Gays definitely want equal rights and IMO they should get them. What they shouldn't get, again IMO, is to be able to redefine a perfectly good word that has had a particular meaning for thousands of years just to advance their agenda. And what is that agenda? They not only want to be treated as equal legally, they want their union to be accepted as identical with that of the marriage of a man and woman. To do that, there main objective is to define their union as the same as heterosexual marriage.

    The fact that you would so readily accept an oxymoron does not surprise, the fact that you do no see the agenda here, is even less surprising; however, your inference that gays are not being treated as People and won't be until gay marriage replaces civil unions is ludicrous.

    .

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