A 'Lehman-style' tsunami hits Spain and Portugal

Fears of 'Lehman-style' tsunami as crisis hits Spain and Portugal

The Greek debt crisis has spread to Spain and Portugal in a dangerous escalation as global markets test whether Europe is willing to shore up monetary union with muscle rather than mere words.

By Ambrose Evans-Pritchard Telegraph
Published: 7:29PM GMT 04 Feb 2010

Julian Callow from Barclays Capital said the EU may to need to invoke emergency treaty powers under Article 122 to halt the contagion, issuing an EU guarantee for Greek debt. “If not contained, this could result in a `Lehman-style’ tsunami spreading across much of the EU.”

Credit default swaps (CDS) measuring bankruptcy risk on Portuguese debt surged 28 basis points on Thursday to a record 222 on reports that Jose Socrates was about to resign as prime minister after failing to secure enough votes in parliament to carry out austerity measures.

Parliament minister Jorge Lacao said the political dispute has raised fears that the country is no longer governable. “What is at stake is the credibility of the Portuguese state,” he said.

Portugal has been in political crisis since the Maoist-Trotskyist Bloco won 10pc of the vote last year. This is rapidly turning into a market crisis as well as investors digest a revised budget deficit of 9.3pc of GDP for 2009, much higher than thought. A €500m debt auction failed on Wednesday. The yield spread on 10-year Portuguese bonds has risen to 155 basis points over German bunds.

Daniel Gross from the Centre for European Policy Studies said Portgual and Greece need to cut consumption by 10pc to clean house, but such draconian measures risk street protests. “This is what is making the markets so nervous,” he said.

In Spain, default insurance surged 16 basis points after Nobel economist Paul Krugman said that “the biggest trouble spot isn’t Greece, it’s Spain”. He blamed EMU’s one-size-fits-all monetary system, which has left the country with no defence against an adverse shock. The Madrid’s IBEX index fell 6pc.

Finance minister Elena Salgado said Professor Krugman did not “understand” the eurozone, but reserved her full wrath for the EU economics commissioner, Joaquin Almunia, who helped trigger the panic flight from Iberian debt by blurting out that Spain and Portugal were in much the same mess as Greece.

Mrs Salgado called the comparison simplistic and imprudent. “In Spain we have time for measures to overcome the crisis,” she said. It is precisely this assumption that is now in doubt. The budget deficit exploded to 11.4pc last year, yet the economy is still contracting.

Jacques Cailloux, Europe economist at RBS, said markets want the EU to spell out exactly how it is going to shore up Club Med states. “They are working on a different time-horizon from the EU. They don’t think words are enough: they want action now. They are basically testing the solidarity of monetary union. That is why contagion risk is growing,” he said.

“In my view they underestimate the political cohesion of the EMU Project. What the Commission did this week in calling for surveillance of Greece has never been done before,” he said.

Mr Callow of Barclays said EU leaders will come to the rescue in the end, but Germany has yet to blink in this game of “brinkmanship”. The core issue is that EMU’s credit bubble has left southern Europe with huge foreign liabilities: Spain at 91pc of GDP (€950bn); Portugal 108pc (€177bn). This compares with 87pc for Greece (€208bn). By this gauge, Iberian imbalances are worse than those of Greece, and the sums are far greater. The danger is that foreign creditors will cut off funding, setting off an internal EMU version of the Asian financial crisis in 1998.

Jean-Claude Trichet, head of the European Central Bank, gave no hint yesterday that Frankfurt will bend to help these countries, either through loans or a more subtle form of bail-out through looser monetary policy or lax rules on collateral. The ultra-hawkish ECB has instead let the M3 money supply contract over recent months.

Mr Trichet said euro members drew down their benefits in advance -- "ex ante" -- when they joined EMU and enjoyed "very easy financing" for their current account deficits. They cannot expect "ex post" help if they get into trouble later. These are the rules of the club.

Market chokes on treasury $100bn offering, $900bn more by September.

The global bond markets are beyond the ability of any one government to control for more than a short period of time. That period is rapidly ending for the US. A few months ago long term bond yields were less than half of what they are today. The fed is monetising debt faster than the world is willing to accept, except at higher and higher pricing.

The current economic crisis started with housing. Yesterday, the US Mortgage Bankers Association reported that 12pc of homeowners are either behind on their payments or facing foreclosure, the highest level since records began.

I cannot guess as to the number of posts made on this subject. Most were met with a damn the consequences, let them lose their homes. Very few people understood the far reaching consequences to the banking system, the economy and ultimately themselves.

Mortgage rates will follow raising bond rates. Housing will continue the decline because of lack of leadership, vision and understanding of the peril to everyone because of the damage done to and by a few.

That will teach them a lesson.

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Bond markets defy Fed as Treasury yields spike

The US Federal Reserve may soon be forced to launch fresh blitz of quantitative easing whatever the consequences for the US dollar, or risk seeing economic recovery snuffed out by the latest surge in long-term borrowing costs.

By Ambrose Evans-Pritchard Telegraph
Last Updated: 5:51AM BST 29 May 2009

Yields on 10-year Treasury bonds have risen relentlessly since March when the Fed first announced its plan to buy $300bn (£188bn) of US government debt directly, a move that briefly forced rates down to nearly 2.5pc, a level thought to be the Fed's implicit target.

Yields have jumped to 3.69pc – after spiking as high as 3.74pc on Wednesday – pushing up the standard 30-year mortgage loan to 5.08pc and lifting the borrowing cost for corporations.

"The Fed is going to have to consider doubling its purchases of Treasuries," said Ashraf Laidi, from CMC Capital Markets. "We could be nearing the end-game for the US dollar but the Fed has little choice at this point. We're in a vicious circle where any policy aimed at supporting the US economy must be at the expense of the dollar."

The US Mortgage Bankers Association yesterday highlighted the fragility of the US housing market, reporting that 12pc of homeowners are either behind on their payments or facing foreclosure, the highest level since records began.

Almost 6pc of "prime" borrowers are in arrears, showing how far the crisis has moved beyond the sub-prime. Most arrears are caused by job losses. The US unemployment rate has reached 8.1pc, and is even higher under older definitions, running at 15.8pc under Clinton-era metrics.

It is unclear why US bond yields have spiked so violently, with spill-over effects on gilts and bunds. One camp of investors is worried that inflation is rearing its ugly head again: others fear a sovereign debt crisis as over-extended states loses their AAA ratings.

What is clear is that the market choked on $100bn of US Treasury debt issued in three auctions this week, and on the knowledge that Washington must raise a further $900bn by September. Governments around the world must fund $6 trillion of deficits this year, exhausting the capital markets.

The US is at the front of the firing line. Beijing is clearly losing its patience with the Fed's policy of printing paper, seen as a form of stealth default. There is some risk that further moves to step up quantitative easing could cause China to boycott US Treasury auctions. China and Japan together hold 23pc of all US federal debt.

Dallas Fed chief Richard Fisher said his recent trip to Asia was an eye opener. "Chinese government senior officials grilled me about whether or not we are going to monetise the actions of our legislature.

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Topple the dollar, and with it goes American power.

The Barack Obama vision of a more social-democratic country was conceived almost without reference to the greatest economic catastrophe to hit America for 80 years.

Obama's house of prosperity may yet be a castle in the air

He feels like the right man to be President, but has he come at the right time, asks Charles Moore in Washington.

Charles Moore The Telegraph
Last Updated: 7:51PM BST 17 Apr 2009

The best way to arrive in Washington is by rail. You leave the platform and enter the magnificent main hall of Union Station. Then, through the glass doors, you see the Capitol proud on the hill in front of you. When I came that way this week, and saw it all in the blossom-filled spring sunlight, I momentarily felt the slightly insane optimism that grips James Stewart when he first claps eyes on the same view in the classic film Mr Smith Goes to Washington. He is the tall, thin, young senator whose innocence, against all the odds, prevails.

Until January, Barack Obama was a tall, thin, young senator, and one reason he is President of the United States today is because he answered – in modernised form – that American yearning for purity and simplicity. He knows that his appeal is still strong, which explains why, virtually every day, he makes a speech.

On Tuesday, at Georgetown University here in Washington, Mr Obama spoke about the economy. I was told that the White House, hypersensitive to conveying the wrong visual message, insisted that the university's device, which includes the initials IHS, the traditional, particularly Jesuit, abbreviation for Jesus Christ, be obliterated from the backdrop. But the President invoked the Sermon on the Mount all the same.

He reminded his audience of how the well-meaning attempt to spread home-ownership in America had been perverted into forms of debt so ill- or unsecured that they had provoked the world financial crisis. He repeated Jesus's parable of the two houses. One was built on "a pile of sand", and so fell when the rain came. The other was built upon a rock. "We must build our house upon a rock," said the President.

The house that Barack wants to build is architecturally grand. It will have five pillars, he announced. The first is that Wall Street will have new rules to reward "drive and innovation, not reckless risk-taking". The last is that "new savings in the federal budget… will bring down the debt for future generations". Sandwiched between these pillars are the other three. Each of these involves "new investments" – education, renewable energy, and health care. This, said Mr Obama, would be the "new foundation".

How rock-like is that foundation likely to be? Back in Britain, we still await Alistair Darling's Budget, to find out how he proposes to restore financial order to government, but in America, Mr Obama's is already there for all to read. I am grateful to Larry Lindsey, former economic adviser to three Presidents, for drawing my attention to Table S.9. It states that the total "required to be borrowed from the public" (the PSBR, in British-speak) in the fiscal year 2009 is $2.562 trillion. That is 18 per cent of American GDP. Fiscal 2009 ends on September 30. Given what the federal government needs to borrow in the time that remains, the sum works out at between $6 and $10 billion per day. I make that roughly the entire British annual defence budget in one week.

Normally, a country borrowing on that scale faces collapse, and has to call in the IMF. America is not a normal country, of course: it is the axis on which the world turns, with the currency to which people resort for safety. In the past, its huge deficits have never produced the catastrophe predicted for them. Perhaps they will not do so this time, although what the nation faces today is more than twice as big as the largest previous deficits in US history (under Ronald Reagan). But it does make one wonder whether the President's five-pillared house is a castle in the air.

Like New Labour, Mr Obama likes to speak – he used their favourite phrase again in Georgetown – of "tough choices". So when he offers his social reforms to the American people, he argues that they will be financially as well as morally virtuous. He says he is attacking entitlements – what Tony Blair and later David Cameron called "the bills of social failure" – and he rightly castigates the waste and fraud in existing US medical provision. But it is not clear that these choices are actually going to be made. What is clear – it is publicly stated – is that an extra $634 billion has been allocated in the Budget to begin to create his new health-care system. When Aneurin Bevan set up our own dear NHS, one of his beliefs was that better health care, by making people well, would lead to lower health spending. To say that these savings did not materialise is the understatement of the century.

Two thoughts occur.

The first is to ask what markets will think of this as it sinks in. Suppose, for example, that this burden of debt crowds out the economic recovery that Mr Obama is trying to engineer. Suppose that the small stirrings of life showing just now disappear in the third quarter as nervous Americans continue to save, not spend, and more people lose their jobs. The world contemplating buying US government debt will understand why it might be worth spending big to repair the banks. Would it feel the same about money borrowed for a US-style NHS and lots of windmills? If the world really doubted America's dedication to its own fiscal and financial order, that would topple the dollar, and with it American power.

The second thought occurred to me because I had made my train journey to Washington from Princeton University. There I had been lecturing, 30 years on, about how Margaret Thatcher confronted economic crisis when she first came to power in 1979. The point that strikes one is that it was the crisis which, above all, galvanised her, captured her intellect, harnessed her energy. Like Churchill in relation to the Second World War, she felt that all her life had been a preparation for that hour. Her vision of what was wrong with her country, and how to put it right, was seen entirely through the prism of the crisis.

The same cannot be said of Barack Obama. This is not merely because he has no previous experience of governing. It is because his idea of what he wants to do is really something quite different from what is actually happening to his country. In his inauguration address, he spoke of the need to get on with the business of "remaking America". For him, that economic stuff is not really part of the remaking, but a distraction from it. His vision of a more social-democratic country was conceived almost without reference to the greatest economic catastrophe to hit America for 80 years. He barely had to argue, or even think about it before or during the campaign. It shows. He says that his education, energy and health reforms must happen so that "such a crisis [the financial one] never happens again", but he merely asserts the link: he does not prove it.

Through his astonishing personal qualities, allied with his ethnicity, Mr Obama feels like the right man to be President. But perhaps he has come at the wrong time.

The Dollar's Fall from Grace

Trust me folks, we do not want this to happen for many reasons. The best way to stop it is to achieve a balance of trade. That need not be done all at once and can be augmented by a reduction in military spending overseas. (It is absurd that we still have military bases in England and Germany.) 

We can reduce oil imports, but that cannot be done without domestic drilling. The Chinese are drilling off the coast of Florida, why shouldn't we? 

We can also be more cautious as to where we buy our imported goods. All trade imbalances are not equal. There are many ways, but the most important way is to stop the escalating rate of governmental spending.

Obama, last night, said that he would cut the deficit in half in ten years. Did you happen to notice where the half will take us? Try five hundred billion dollars. Not good. 

Can the Dollar be Saved?

Why is Bernanke only using words to help stabilize the dollar? Because he does not have the currency to do it. The Treasury has somehwere around $75 billion in foreign currency reserves with which it could intervene. Turkey, Poland and Libya each have more. China, alone added $75 billion in May.

Look at these headlines:

China's foreign reserves at $1.8 Trillion

THE ASSOCIATED PRESS

China's foreign reserves, already the world's largest, rose to US$1.8 trillion at the end of May but growth slowed, a government newspaper reported Friday.

The reserves grew by US$40.3 billion in May, well below the April increase of US$75 billion, the China Securities Journal said, citing data from the State Administration of Foreign Exchange.

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(Brazil) CENTRAL BANK: Foreign reserves exceed US$200bn for 1st time

SÃO PAULO, 6/27/08 - Brazil's foreign reserves have exceeded US$200 billion for the first time and reached US$200.231 billion.

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Nigeria: Foreign Reserves Rise to $60.84bn

Posted to the web 23 June 2008
Aminu Imam
Abuja

The Central Bank of Nigeria (CBN) on Thursday said that Nigeria's foreign currency reserve rose to $60.84 billion in mid June from $59.16 billion it recorded at the end of May.

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Mumbai,India, June 28: The country’s forex reserves jumped $1.79 billion to $312.48 billion for the week ended June 20 from $310.68 billion in the previous week. Foreign currency assets rose to $302.74 billion, up $1.78 billion, from $300.95 billion a week back. Gold reserves and special drawing rights during the week were static at $9.20 billion and $11 million, respectively. The country’s reserve position in the international monetary fund rose $5 billion to $524 million during the week.

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Russia piling up gold and currency reserves

RBC, 26.06.2008, Moscow

Russia's gold and currency reserves stood at $558.7bn as of June 20, up $7.2bn, or 1.3 percent, from the previous showing. Combined with a $70.5bn rise over the previous 18 weeks, reserves have climbed a total of $77.7bn, or 16 percent, in 95 working days. The rapid increase in reserves can be attributed to the euro's significant advance against the dollar on international exchanges, as well as a stepping-up in the Central Bank's purchases of foreign currency on the domestic market. As a result, Russia has somewhat narrowed the gap separating it from China and Japan, the global leaders in terms of reserves, which exceed $1.75 trillion in China and amount to roughly $1.015 trillion in Japan.