Τι πρέπει να αποφύγουμε και τι να προσπαθήσουμε

του Νίκου Oικονομίδη

Καθημερινή
31 Δεκεμβρίου 2011

Μπαίνοντας στον τρίτο και δυσκολότερο χρόνο της κρίσης, επικεντρώνομαι σε τρεις μόνο προτάσεις για το τι πρέπει να αποφύγουμε με κάθε τρόπο και για το τι πρέπει να προσπαθήσουμε πάση θυσία.

Τι πρέπει να αποφύγουμε πάση θυσία; Την έξοδο απ’ το ευρώ. Αυτός είναι ο πρώτος στόχος.

Πέρα από τους σημαντικότατους πολιτικούς και εθνικούς λόγους που βάζουν την Ελλάδα στον πυρήνα της Ευρώπης, οι οικονομικοί λόγοι είναι εξίσου σημαντικοί.

Τι θα συμβεί αν βγει η Ελλάδα από το ευρώ; Πρώτο, η Ελλάδα δεν θα πάει «πίσω στη δραχμή» με την παλιά ισοτιμία των 340,750 δραχμών ανά ευρώ άλλα στη Νέα Δραχμή (ΝΔΡ) με ισοτιμία 1.000 ΝΔΡ ανά ευρώ. Αυτό σημαίνει ότι όλα τα εισαγόμενα προϊόντα (και πολλά ελληνικά παρόμοια) θα πουλιούνται ξαφνικά σχεδόν τρεις φορές πιο ακριβά από σήμερα. Οι Ελληνες θα γίνουν ξαφνικά 60% φτωχότεροι. Δεύτερο, η Ελλάδα, μην μπορώντας να δανειστεί από την Ε.Ε. ή από τις χρηματαγορές, θα τυπώσει μαζικά νέες δραχμές για να πληρώσει μισθούς και συντάξεις, με αποτέλεσμα τον υπερπληθωρισμό και μακροχρόνιες βλάβες της οικονομίας. Τρίτο, και πολύ σημαντικό, αναμένοντας την έξοδο της Ελλάδας από το ευρώ, οι Ελληνες θα αποσύρουν τις καταθέσεις τους (όσες λίγες έχουν μείνει) από τις τράπεζες φοβούμενοι την υποχρεωτική μετατροπή τους σε νέες δραχμές ποιος ξέρει με ποια ισοτιμία. Η συνεπόμενη κατάρρευση των ελληνικών τραπεζών (πριν ακόμα κυκλοφορήσει η νέα δραχμή) θα είναι καταστροφική για την Ελλάδα. Αρα η έξοδος από το ευρώ είναι καταστροφή. Αντίθετα, μέσα στο ευρώ η Ελλάδα δανείζεται με πολύ συμφέροντες όρους και της δίνεται χρόνος να ανάκαμψη.

Ακόμα κι αν τα πράγματα πάνε πολύ στραβά και αναγκαστεί η Ελλάδα να φτάσει στην ανεξέλεγκτη χρεοκοπία, πάλι δεν πρέπει να φύγει από το ευρώ. Αν γίνει ανεξέλεγκτη χρεοκοπία, η Ελλάδα θα αποκοπεί εντελώς από το διεθνές τραπεζικό σύστημα, και θα αναγκαστεί να δημιουργήσει πλεόνασμα στον δημόσιο τομέα. Για να γίνει αυτό, θα χρειαστούν επώδυνες περικοπές στις κρατικές δαπάνες. Ομως είναι πολύ καλύτερα να παραμείνει η Ελλάδα στο ευρώ και να μειώσει τον δημόσιο τομέα κατά 20-30% σαν αποτέλεσμα της ανεξέλεγκτης χρεοκοπίας, παρά να φτάσουμε στο χάος της διάλυσης των τραπεζών, στην περικοπή της αγοραστικής δύναμης όλων των Ελλήνων κατά 60%, και στον υπερπληθωρισμό αν η Ελλάδα βγει από το ευρώ.

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Randy Bish: No Euros, Please

∆εν φταίνε οι αγορές, φταίει η αβεβαιότητα

του Δημήτρη Καρυαμπά

Το Βήμα
31 Δεκεμβρίου 2011

Ενα έτος (2011) γεµάτο από νέες οικονοµικές έννοιες για τους περισσότερους, διαρκείς αγώνες µε τις διαβόητες «αγορές», νέες ρυθµιστικές αρχές-νοµοθεσίες και µια σταθερά (οικονοµική και πολιτική) η οποία µε δυσκολία θα τεθεί υπό διαχείριση-έλεγχο το ερχόµενο έτος: την Αβεβαιότητα.

Η αυλαία του έτους «κλείνει» µε το περίφηµο PSI. Οι διαπραγµατεύσεις πιο σκληρές αυτή τη φορά.

Η αγορά παρουσιάζεται για ακόµη µια φορά ως τέρας. Θα δανειστώ τα λόγια του Α. Χατζή από το άρθρο «12 Μύθοι για την Αγορά»: «Στο συλλογικό φαντασιακό έχουν αναλάβει τον ρόλο του µπαµπούλα που τροµοκρατεί τους πολίτες, τις κυβερνήσεις, ακόµη και τους διεθνείς οργανισµούς». Μια άλλη περιγραφή δίνεται από το Economist: «Η αγορά αποτελείται από... απερίσκεπτα θηρία, των οποίων η εµµονή µε τους αριθµούς είναι µια µορφή αυτισµού». Πόσες φορές δεν έχω δεχθεί την ερώτηση: «Γιατί η αγορά επιτίθεται τώρα στην (λ.χ.) Ιταλία;».

Οι πολιτικές αποφάσεις που πάρθηκαν το 2011 οδήγησαν σε όλες τις περιπτώσεις σε αύξηση της αβεβαιότητας, µίας από τις βασικότερες έννοιες της Χρηµατοοικονοµικής. Η εύλογη λοιπόν ερώτηση που δηµιουργείται: «είναι κακή η αγορά ή υπάρχει παντελής άγνοια βασικών οικονοµικών εννοιών και αρχών βάσει των οποίων δρουν τα µέλη της;».

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Europe at the Brink - A WSJ Documentary

Wall Street Journal
December 30, 2011

In this documentary, Wall Street Journal editors and reporters examine the origins of Europe's debt crisis and why it spread with such ferocity to engulf much of the continent and threaten the entire world.

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Ευρώ: ένα νόμισµα χωρίς κράτος

του Γιάννη Στουρνάρα

Το Βήμα
31 Δεκεμβρίου 2011

Η χρηµατοπιστωτική κρίση και η κρίση δηµοσίου χρέους της ευρωζώνης οφείλονται στο βασικό πρόβληµα της αρχιτεκτονικής της. ∆ηλαδή ότι αποτελεί « ένα νόµισµα χωρίς κράτος », χωρίς ενιαία πολιτική δηµοσίου χρέους, χωρίς έναν «ύστατο δανειστή» σε περίπτωση ανάγκης όπως η σηµερινή, χωρίς έναν δηµοσιονοµικό πυλώνα ισοβαρή µε την Ευρωπαϊκή Κεντρική Τράπεζα (ΕΚΤ). Αυτή η ασυµµετρία δεν δηµιουργούσε προβλήµατα όσο οι χρηµατοπιστωτικές αγορές χρηµατοδοτούσαν τα ελλείµµατα του ισοζυγίου τρεχουσών συναλλαγών των µελών της ευρωζώνης, σήµερα όµως εξελίσσεται σε παράγοντα αποσταθεροποίησής της. H Ελλάδα ήταν απλώς η αφορµή της κρίσης, όχι η αιτία. Τέσσερις αρχές απαιτούνται να υιοθετηθούν για την αποκατάσταση της ισορροπίας.

1. Η λειτουργία της ΕΚΤ ως ύστατου δανειστή. Με τις συνθήκες που επικρατούν σήµερα, αυτή η λειτουργία δεν θέτει σε κίνδυνο τον στόχο του χαµηλού πληθωρισµού.

2. Η έκδοση ευρωοµολόγου. Ουδείς έγκυρος οικονοµολόγος σήµερα πιστεύει ότι το ευρώ θα επιβιώσει χωρίς ευρωοµόλογο. Οµως η γερµανική κυβέρνηση έχει αυτοπαγιδευθεί στην αρχική ρητορική της και δεν θέλει ούτε να αναφέρει τη λέξη αυτή. Επειδή όµως οι χρηµατοπιστωτικές αγορές δεν αποδέχονται πλέον ηµιτελείς λύσεις και είναι αρκετά πιθανόν να δοκιµάσουν σύντοµα τις αντοχές µιας µεγάλης περιφερειακής χώρας της ευρωζώνης, το ευρωοµόλογο είναι sine qua non για την επιβίωση του ευρώ.

3. Η σταδιακή δηµοσιονοµική (και πολιτική) ενοποίηση, µε τροποποίηση των συνθηκών και τη δηµιουργία ενός υπουργείου Οικονοµικών της ευρωζώνης.

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H παραμονή μας στο ευρώ είναι μονόδροµος

του Γιώργου Α. Προβόπουλου

Το Βήμα
31 Δεκεμβρίου 2011

Η είσοδος της Ελλάδας στην ΟΝΕ και η υιοθέτηση του κοινού ευρωπαϊκού νοµίσµατος ήταν ένα σηµαντικό ορόσηµο στη µεταπολεµική ιστορία, που επικύρωσε την ευρωπαϊκή πορεία της χώρας. Το γεγονός αυτό διαµόρφωσε µια νέα πραγµατικότητα στην οποία έπρεπε να προσαρµοστούµε για να εκµεταλλευθούµε τις µεγάλες ευκαιρίες που δηµιουργούσε ένα ισχυρό διεθνές νόµισµα.

Με την υιοθέτηση του ευρώ (αλλά και κατά τη διάρκεια της προετοιµασίας για την είσοδο στην ΟΝΕ) η χώρα µας πέτυχε σηµαντική αποκλιµάκωση του πληθωρισµού, η οποία συνέβαλε στην αύξηση των επενδύσεων και στην επιτάχυνση του ρυθµού οικονοµικής ανάπτυξης. Παράλληλα, ενισχύθηκε σηµαντικά η πρόσβαση του Ελληνικού ∆ηµοσίου στις αγορές οµολόγων, ενώ µειώθηκε ουσιαστικά και το κόστος χρηµατοδότησης για τις επιχειρήσεις και τα νοικοκυριά, µε αποτέλεσµα να ενισχυθούν οι επενδύσεις αλλά και η κατανάλωση.

Τέλος, µε την εξάλειψη του συναλλαγµατικού κινδύνου, η συµµετοχή στο κοινό νόµισµα επέφερε µείωση του κόστους για το εµπόριο και τις επενδύσεις. Αποτέλεσµα αυτών των αλλαγών ήταν η ισχυρή ανάπτυξη, που διήρκεσε περίπου µία δεκαετία.

Ωστόσο τα µεγάλα οφέλη πουαπεκόµισε η χώρα από τη συµµετοχή στη ζώνη του ευρώ υπονοµεύθηκαν από αστοχίες καιπαραλείψεις της οικονοµικής πολιτικής, η οποία δενέλαβε σοβαρά υπόψη τανέα δεδοµένα που επέβαλλε η υιοθέτηση κοινής νοµισµατικής πολιτικής.

Η σηµαντικότερη από τις αλλαγές αυτές ήταν ότι, µε δεδοµένη τη νοµισµατική πολιτική, το βάρος για τη διόρθωση των ανισορροπιών ανελάµβανε πλέον εξ ολοκλήρου η δηµοσιονοµική και διαρθρωτική πολιτική.

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Europe's Dance of Death

by David Miles

Huffington Post
December 30, 2011

"It's a Ponzi scheme, it's a fraud, it's a sham," observed Jim Rogers this week when interviewed on the BBC World Service. One of the world's most successful investors was, however, not giving his verdict on the dastardly deeds which have confined Bernard Madoff to prison for 150 years, but rather the current strategy of the European Central Bank (ECB) and European leaders in trying to solve the euro zone sovereign debt crisis. For Rogers, their approach is based more on Peter Pan than sound monetary policy.

Ever since euro zone banks snapped up almost half a trillion euros in very low interest three-year loans offered by the ECB last week, the question was to what extent these banks would do the sovereigns a favour, as Nicholas Sarkozy hoped, by buying the bonds of euro zone governments. The answer, based on the results of Italy's latest bond auction on Thursday, is not encouraging. Investors are simply not prepared to lend money to Italy on a long-term basis without a cripplingly high premium, which at 6.98% is barely below the 7% level that forced Ireland, Greece and Portugal to request international bailouts.

If investors in government bonds seem a little nervous at the prospect of buying what until recently were seen as virtually risk-free financial assets, the reason for this reticence, as Jim Rogers observed, is not hard to discern. Money, as Harvard historian Niall Ferguson notes, is about trust and over the last two years the euro zone's political leaders have been extraordinarily successful at blowing every opportunity to solve the debt crisis and restore trust in the single currency project. When ordinary citizens can borrow money at less interest than the Italian state, then it's clear just how serious this crisis has become. For Anthony Crescenzi, executive vice president at Pimco, the largest bond fund in the world, European sovereign debt is "toxic" with about the same status that subprime mortgage assets have had ever since the financial crisis of 2008.

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The Lies that Europe's Politicians Tell Themselves

by Armin Mahler

Spiegel
December 30, 2011

Since its inception, the euro zone has been built on lies, the most grievous of which is the idea that the common currency could work without political union. But Europe's politicians are currently suffering under a different but equally fatal delusion -- that they have all the time in the world to fix the crisis.

How much does time cost? That depends what you need it for. The time that Europe's leaders want to buy to tackle the euro crisis is a precious commodity. And its price keeps going up and up.

Initially, it was supposed to cost €110 billion ($130 billion). That's how expensive the first EU bailout package for Greece was. Soon, it was expanded via a comprehensive rescue fund that helped out Portugal and Ireland. Then came a second bailout package for Greece, followed by an even more comprehensive rescue fund for the rest.

In late September 2011, representatives in Germany's parliament, the Bundestag, had not yet voted on this expanded package -- which would put Germany alone on the hook for €211 billion -- but it was already clear to them that even that wouldn't be enough. But nobody could say that out loud, and especially not Finance Minister Wolfgang Schäuble, because they obviously didn't want to endanger the government's majority in parliament -- and, thereby, its own ability to govern.

On top of that, the European Central Bank (ECB) is buying up sovereign bonds of debt-ridden euro-zone countries. At first, it was Greece, Portugal and Ireland. Then, beginning in the summer of 2011, it bought bonds from Italy and Spain. It now has a grand total of over €195 billion of bonds on its books. If things should go south, Germany will also ultimately be responsible for 27 percent of that figure, corresponding to Germany's share of the ECB's capital.

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Europe’s Market-Led Integration

by Joschka Fischer

Project Syndicate
December 30, 2011

For two years now, one European summit after another has ended with assurances that – at long last – the necessary measures for containing the eurozone’s sovereign-debt crisis have been taken. Most were publicly portrayed as breakthroughs, though they were nothing of the sort. As a rule, it took about three days before markets caught on and the crisis entered another round.

Because Europe’s political leaders have failed to manage the crisis effectively, the cost of ending it has risen. Indeed, an easily manageable financial crisis in Greece was allowed to grow into a life-threatening emergency for the states on the southern periphery of the European Union – and for the European project as a whole. This was statecraft at its worst, for which most of the blame can be laid at German Chancellor Angela Merkel’s door.

Indeed, prior to the European summit in Brussels in December, the stock of trust in the European Council had become so depleted that no one seemed to take its decisions seriously. Of course, it could be that the United Kingdom’s veto of the summit’s proposed changes to the EU’s Lisbon Treaty drowned out all else, while further increasing distrust on the part of the public and financial markets of a divided Europe.

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Making a Voluntary Greek Debt Exchange Work

by G. Mitu Gulati and Jeromin Zettelmeyer

Duke Law School
December 30, 2011

Within the next few months, the Greek government, is supposed to persuade private creditors holding about EUR 200bn in its bonds to voluntarily exchange their existing bonds for new bonds that pay roughly 50 percent less. This may work with large creditors whose failure to participate in a debt exchange could trigger a Greek default, but may not persuade smaller creditors, who will be told that their claims will continue to be fully serviced if they do not participate in the exchange. This paper proposes an approach to dealing with this free rider problem that exploits the fact that with some probability, the proposed exchange might be followed by an involuntary restructuring some time in the future. The idea is to design the new bonds that creditors are offered in the exchange in a way that make them much harder to restructure than the current Greek government bonds. This is easy to do because the vast majority of outstanding Greek government bonds lack standard creditor protections. Hence, creditors would be offered a bond that performs much worse than their current bond if things go according to plan, but much better if things do not. They will accept this instrument if (1) the risk of a new Greek debt restructuring in the medium term is sufficiently high; (2) there is an expectation that the next restucturing probably will not be voluntary.

Read the Paper

Decline and fall of Greece’s Olympic legacy

Financial Times
December 30, 2012

In August 2004, the Galatsi Hall was the scene of table tennis rapture. South Korea’s Ryu Seung-min had just smashed a forehand to beat China’s Wang Hao and claim gold at the Athens Olympics. As Ryu leapt into his coach’s arms, the 6,500-seat facility roared.

Today Galatsi lies silent. A fence encircles the property and the main gate is padlocked. “Nobody’s been here in months,” says a security guard. “It hasn’t been used since the games.”

Galatsi’s fate is emblematic of an array of properties on which Greece spent billions of euros for the 2004 Olympics, which now mostly sit idle or underused.

Such facilities were once a source of national pride – the physical manifestation of a can-do spirit that allowed Greece to overcome doubters and construction delays to stage a well received games. Long after the closing ceremony they were supposed to yield further benefits, either by supporting local athletes or passing into the hands of private developers who could transform them into lucrative commercial properties.

But in a cautionary tale for other Olympic organisers – and a blow to Greece’s grand plan to sell off €50bn in state assets to reduce its crippling debts – many lie in various states of disuse, victims of legal squabbles, local corruption and poor planning.

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Browne on Europe Debt Crisis, Global Economy

Bloomberg
December 30, 2011

John Browne, senior economic consultant at Euro Pacific Capital Inc., talks about the outlook for Europe's sovereign debt crisis in 2012 and its possible impact on the global economy. He speaks with Matt Miller on Bloomberg Television's "Bottom Line."



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Three big questions for the eurozone

by Paul Mason

BBC News
December 30, 2011

In a normal year predicting economics is like predicting the outcome of a card game: there are too many variables and the only certainty being that the suckers will lose and the stealthily self-interested will win.

In 2012 however, the shape of the crisis is heavily predetermined: there are a series of crucial stages the eurocrisis has to go through and the way they're resolved will affect everything else.

Starting from where we are now, there are three big questions:

• Is the ECB's unofficial money printing operation - a massively expanded bond-buying venture combined with unlimited provision of cash by global central banks - going to be enough to prevent a second credit crunch, centred on Italy?
• Does Greece spiral finally into default, social crisis and chaos, raising the prospect of the near-dictatorial economic policies needed if you have to exit the Euro?
• Do the French banks take so many losses on the sovereign debt of southern Europe that they have to be part nationalised, thus removing the country's AAA credit rating and the all-important financial parity between Germany and France that lies at the heart of the European system?

Right now my answers to these questions would be yes, yes and yes.

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The Eurozone Crisis For Dummies

by Simone Foxman

Business Insider
December 30, 2011

The market still seems to be moving to every headline out of the eurozone, but it's hard to remember what's important.

So let's bring this back into perspective.

A little background:

• Since joining the euro back in 1999, the governments of Greece and Portugal (among other offenders) have gotten used to spending a LOT of money. When times were good, it wasn't a problem — banks and other investors were willing to lend them money on the cheap and their public sectors became bloated.
• When the financial crisis hit, however, problems came to a head. Debt levels in Portugal, Italy, and Greece became unsustainable, and taxes in a contracting economy are no longer enough to pay the bills.
• Greece, Portugal, and Ireland are still struggling to bring their public debt under control, after receiving billions of euros in bailout aid from the European Commission, the International Monetary Fund, and the European Central Bank (the so-called troika). Some of this aid was provided through a temporary Special Purpose Vehicle called the European Financial Stability Facility (EFSF).
• These governments needed this money because it became too expensive for them to borrow cash on the open markets, with speculators demanding high rates for lending and traders even betting on a disorderly sovereign default.
• The initial round of aid money helped these governments prop up their banks and pay their bills.
• The ECB also started buying government bonds on the secondary market in order to keep borrowing costs low.
• But now Greece needs more dough to stay solvent. EU leaders agreed back in July that a "selective default" was the only option for Greece. Under this situation, euro area nations will guarantee payouts on Greek sovereign debt, but the private sector will bear take a loss — a "haircut" — on their debt holdings, reducing the face value of those holdings.
• Italy and Spain are now crucial to the debate. The former has an incredible level of public debt (120% in 2010) and the latter has been crushed by a housing bubble and subsequent banking crisis.
• The July agreement also expanded the EFSF to €440 billion and allowed the ECB to purchase Spanish and Italian government bonds.

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A Voluntary Greek Debt Deal?

by Matina Stevis

Wall Street Journal
December 30, 2011

Many analysts have been pessimistic about the likely success of efforts to lower Greece’s debt burden by restructuring its government bonds.

But a new paper by financial-law academic Mitu Gulati and Jeromin Zettelmeyer of the European Bank for Reconstruction and Development, published today, puts a, sort of, positive spin on the gloom over Greek “private sector involvement” or PSI.

Messrs. Gulati and Zettelmeyer build an elegant model that calculates what it will take for private creditors to participate voluntarily in the Greek restructuring deal and therefore make PSI a success.

The two conclude that success is within reach if creditors perceive a 50% or higher probability that Greece will be forced into or opt for another debt restructuring in the medium-run. That second restructuring would probably not be voluntary.

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IMF Warned Greece on Debt Levels

Wall Street Journal
December 30, 2011

The International Monetary Fund recently told the Greek government that a worsening economic outlook suggests the beleaguered nation may be unable to reduce its debt to sustainable levels even with a planned 50% write down in privately-held Greek government bonds, according to two officials familiar with the conversations.

"A 50% haircut may no longer be enough" to bring Greece's debt to sustainable levels given the new IMF economic forecasts, said one of the officials.

An official at the IMF confirmed staff are working on starker economic assessment than outlined last month in its loan-program review for the country. Some IMF officials think "the debt sustainability analysis is not valid anymore" under the new economic forecasts, the official said. For Greece's debt to be sustainable now "requires either a deeper haircut or additional loans from Europe," he said.

The comments underscore the fragility of Greece's finances and speculation in markets that it is heading towards a default on its debt.

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Europe's Leaders May Need History Lesson

by Stephen Fidler

Wall Street Journal
December 30, 2011

Given their record to date, is there any reason for faith that Europe's leaders will succeed in 2012 in doing what they signally failed to do in 2011 and stem the crisis that now threatens the existence of the euro zone?

The auguries aren't good. The culmination of their work over the year, as the Journal's reconstructions published over the past two days have shown, is to have guided a debt crisis in three small economies into a survival struggle for the single currency.

Many of those players have already left the political stage: Brian Cowen, José Sócrates, George Papandreou, José Luis Rodríguez Zapatero, Silvio Berlusconi.

Technocrats rule troublesome Greece and Italy, and governments with new mandates have taken over in Spain, Ireland and Portugal. But pessimism over the future of the euro and the ability of governments to boss events appears close to an all-time high.

As this column pointed out last week, the leaders' muddling-through isn't yet doomed to failure. And perhaps we whose job it is to attend on serial summits and ministerial meetings invest them with too much significance.

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Deepening Crisis Over Euro Pits Leader Against Leader

Wall Street Journal
December 30, 2011

On a chilly October evening in her austere chancellery, Angela Merkel placed a confidential call to Rome to help save the euro.

Two years after the European debt crisis erupted in little Greece, the unthinkable had happened: Investors were fleeing the government debt of Italy—one of the world's biggest economies. If the selloff couldn't be stopped, Italy would go down, taking with it Europe's shared currency.

Her phone call that night to the 16th-century Quirinale Palace, once a residence of popes, now home to Italy's octogenarian head of state, President Giorgio Napolitano, trod on delicate ground for a German chancellor. Europe's leaders have an unwritten rule not to intervene in one another's domestic politics. But Ms. Merkel was gently prodding Italy to change its prime minister, if the incumbent—Silvio Berlusconi—couldn't change Italy.

Details of Ms. Merkel's diplomatic channel to Rome haven't previously been reported.

Her impatience shows the extent to which Italy's woes undid Europe's strategy to fight the crisis. Until then, Europe had followed a simple formula to preserve the euro: The financially strong would save the weak. But Italy, with nearly €2 trillion, or about $2.6 trillion, in national debt, was simply too big to save.

This Wall Street Journal reconstruction, based on interviews with more than two dozen policy makers, including many leading actors, as well as examinations of key documents, reveals how Germany responded to the dangers in Italy by imposing its power on a divided euro zone. Ms. Merkel, widely criticized for not dealing forcefully with the crisis in its early phase, was at the center of the action, grappling with personal tensions and Byzantine politics among the 17 euro nations.

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Our age of mounting indignation

by Gideon Rachman

Financial Times
December 29, 2011

It has been many centuries since the Mediterranean Sea was the centre of civilisation. But in 2011 the Med was back – not just as a holiday destination – but at the very centre of world affairs. This was a year of global indignation, from the Occupy Wall Street movement to the Moscow election protests and China’s village revolts. It was popular protests on either side of the Mediterranean – in Tahrir Square in Cairo and Syntagma Square in Athens – that set the tone for 2011.

Revolutions in Egypt and Tunisia at the beginning of the year sparked off the Arab spring, a political earthquake whose after-shocks were felt as far afield as Moscow and Beijing. On the other side of Mare Nostrum, Europe’s sovereign debt crisis spread from riotous Greece to Portugal, and then to Italy and Spain. By the end of the year, the fate of the world economy seemed to hang on the ability of southern Europe to service its debts.

For that reason this column – devoted to my annual list of the five most important events of year – has to begin with the Arab spring and Europe’s debt crisis: regional crises with global implications. Both events brought crowds on to the streets. But the Arab uprisings were also marked by bloodshed and warfare. Even the relatively peaceful transition in Egypt cost some 800 lives, while Muammer Gaddafi in Libya was only deposed (and ultimately murdered) after a full insurrection, backed by western air power.

However, while the costs of the Arab spring were far higher, it, at least, was driven by a faith that the future could be better. Europe’s debt crisis, by contrast, was characterised by fear of the future. The revolutions in Egypt and Tunisia gave many ordinary people a heady sense that, at last, they had the chance to take control of their own destiny, while Europe’s debt problems left most citizens feeling they were at the mercy of economic forces that they could not control.

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Two Models for Europe

by Hans-Werner Sinn

Project Syndicate
December 29, 2011

Interest rates for public debt within the eurozone have spread once again, just as they did before the introduction of the euro. Balance-of-payment disparities are steadily increasing. The sovereign-debt crisis is eating its way from the periphery to the core, and the exodus of capital is accelerating. Since the summer, €300 billion, in net terms, may well have fled from Italy and France.

The printing presses at the Banque de France and the Banca d’Italia are working overtime to make up for the outflow of money. But this only furthers the exodus, because creating more money prevents interest rates from rising to a point at which capital would find it attractive to stay.

If Europe had the same rules as the United States, where the Federal Reserve’s regional banks have to pay the Fed for any special money creation with securities collateralized in gold, they would not create this much supplementary money, and capital flight would be limited. Instead, local printing of money is essentially aiding and abetting the exodus.

If the eurozone does not want to embrace capital controls, it has only two alternatives: make the local printing of money more difficult, or offer investment guarantees in countries that markets view as insecure.

The first option is the American way, which also demands that the buyers bear the risks inherent in public or private securities. The taxpayer is not called upon, even in extreme cases, and states can go bankrupt.

The second option is the socialist way. Investment guarantees will lead, via issuance of Eurobonds, to socialization of the risks inherent in public debt. Because all the member states provide one another with free credit guarantees, interest rates for government securities can no longer differ in accordance with creditworthiness or likelihood of repayment. The less sound a country is, the lower its effective expected interest rate.

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Greek bond swap deal may soon be reached

Reuters
December 29, 2011

Greece could soon reach a deal with banks and private creditors on a bond swap to reduce its mountain of debt, the government spokesman said on Thursday, as it tries to resolve differences with its creditors and avoid default.

The deal is a pivotal part of a second, 130 billion euro ($168.3 billion) bailout package for Athens agreed by euro zone leaders in October. Greece, which faces bond redemptions of 14.5 billion euros in March, needs to seal the deal to avert a costly default.

"I think there will be an agreement relatively soon. I don't think there will be a problem with this deal," government spokesman Pantelis Kapsis told Real News radio.

"Apart from that, (the issue is) how many (bondholders) will participate, which will be seen at the end of next month or in early February," he said.

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Euro break-up

Financial Times
December 29, 2011

Once upon a time, conversations about Italy centred on football or holidays in Tuscany. That changed in 2011. Suddenly, all anyone could talk about was Italy’s 10-year bond yields (around 7 per cent, since you ask). This reflects a rather complacent bit of received wisdom – that such high borrowing costs are not sustainable, that Italy will soon not be able to afford them and will have to default on its €1.9tn of sovereign debt, and that this is the event that will destroy the eurozone.

It is true that if Italy fails, the eurozone fails. The biggest threat Rome faces, in fact, is not that its debt becomes unaffordable but that investors stop buying it at any price. Yet the corollary – that if Italy is saved the eurozone is saved – is not true. The bloc’s structural flaws will remain. In particular, the virus that the eurozone has incubated from birth – Greece – will still be in its bloodstream. The eurozone will not be saved until it finally sorts out the Greek mess. The only way to do that is for Greece to leave.

The eurozone’s financial crisis has endured because policymakers have refused to acknowledge this. That stance began to shift in 2011 during the events that led to the collapse of George Papandreou’s government. Yet it remains the most important unaddressed question now facing eurozone policymakers, who should consider a Greek exit as a policy option rather than a taboo. Every attempt to bail out Greece is failing, and each exercise just increases the debt burden while shrinking the economy and its ability to repay.

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It’s time for the IMF to stand up to the European bullies

by Mohamed El-Erian

Financial Times
December 29, 2011

Sovereign risk was a principal theme in 2011 – most visibly in Europe and, to a lesser extent, in America’s loss of its triple A rating. Along with poor growth and rising inequality, it will continue to raise serious questions next year about the functioning of the global economy. As this occurs, one institution – the International Monetary Fund – will attract special attention. The key question is whether it can finally step up to the role of global conductor, rather than suffering yet more erosion of its credibility.

The sovereign risk crisis has not been kind to the IMF, especially when it comes to Europe. There is no denying that too many of the adjustment programmes it has overseen have fallen short of their objectives. Whether it jumped or was pushed, the institution sacrificed some of its own rules, including those previously deemed sacrosanct.

For two years, the IMF agreed to a series of programmes that were partially designed, inadequately funded and, in some cases, even threatened its preferred creditor status. In each case, the IMF ended up supporting an weak attempt to muddle through, rather than a plan sustainable in the medium term.

This shortfall has accentuated prior concerns about the IMF’s governance, representation and legitimacy. The damage has been material, though fortunately not irreversible.

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European Fiscal Zombies

by Paul Krugman

New York Times
December 29, 2011

Dean Baker is unhappy at seeing yet another article asserting as fact something that is actually just something fiscal hawks imagine: the claim that Europe’s problem economies were running up government debt before the crisis.

Dean, this is a zombie; you can’t kill it unless you shoot it in the head.

Maybe the problem is that when Dean and I try to point out that Spain and Ireland don’t look anything like Greece, that’s just too complicated. So here’s another attempt: let’s construct an “average” troubled European government. I take debt to GDP from the IMF debt database, and weight the five GIPSI countries by their GDP in 2007. Here’s what I get:

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Greek Tax Officials Strike

Wall Street Journal
December 29, 2011

Greek tax officials began a 48-hour walkout Thursday to protest wage cuts and other changes imposed by the government as Greece struggles to meet revenue targets it has promised international creditors.

The strike closed tax offices around the country on the last two working days of the year, and forced the government to extend deadlines for the payment of some year-end taxes.

Greece is now in the second year of an austerity drive aimed at closing a yawning budget gap that has forced it to seek official aid from its European partners and the International Monetary Fund.

It has introduced a range of new taxes and deep spending cuts. But lagging tax collections have forced the government to admit it will miss its deficit targets this year, with a budget gap expected to be 9% of gross domestic product, or €19.68 billion.

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Greece must not leave asylum seekers at the mercy of extremists

by Hans Lucht

Guardian
December 29, 2011

On the morning of 25 May, Kelly from Ghana was on the bus going to a pickup place at the outskirts of Athens, where African immigrants and asylum seekers go to look for work, when he was attacked by a mob. He saw them from afar, standing at the bus stop – a group of about 10 young men – but thought nothing of it. They were probably going to one of the demonstrations, he supposed. But as they entered the bus, they pulled out bats, iron rods and knives, and attacked him.

As Greece struggles to avoid economic meltdown, dark-skinned immigrants and asylum seekers have become scapegoats in racially motivated attacks that, according to the United Nations high commissioner for refugees, have become an almost daily occurrence in Athens.

Last week, in cases pertaining to asylum seekers caught entering the UK and Ireland, the European court of justice upheld that asylum seekers could not be sent back to Greece because they risk being subjected to "inhuman or degrading treatment".

Ninety per cent of undocumented immigrants enter the EU via Greece. The Greek response has been to announce the construction of a barbed wire wall on the Turkish border, though the EU has made clear that such a wall will receive no funding. The influx of migrants has not been welcomed by some segments of the Greek population. Thus the extreme rightwing party Golden Dawn won its first ever seat on the Athens city council in November 2010 on an anti-immigrant agenda.

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Dithering at the Top Turned EU Crisis to Global Threat

Wall Street Journal
December 29, 2011

At a closed-door meeting in Washington on April 14, Europe's effort to contain its debt crisis began to unravel.

Inside the French ambassador's 19-bedroom mansion, finance ministers and central bankers from the world's largest economies heard Dominique Strauss-Kahn, then-head of the International Monetary Fund, deliver an ultimatum.

Greece, the country that triggered the euro-zone debt crisis, would need a much bigger bailout than planned, Mr. Strauss-Kahn said. Unless Europe coughed up extra cash, the IMF, which a year earlier had agreed to share the burden with European countries, wouldn't release any more aid for Athens.

The warning prompted a split among the euro zone's representatives over who should pay to save Greece from the biggest sovereign bankruptcy in history. European taxpayers alone? Or should the banks that had lent Greece too much during the global credit bubble also suffer?

The IMF didn't mind how Europe proceeded, as long as there was clarity by summer. "We need a decision," said Mr. Strauss-Kahn.

It was to be Europe's fateful spring. A Wall Street Journal investigation, based on more than two dozen interviews with euro-zone policy makers, revealed how the currency union floundered in indecision—failing to address either the immediate concerns of investors or the fundamental weaknesses undermining the euro. The consequence was that a crisis in a few small economies turned into a threat to the survival of Europe's common currency and a menace to the global economy.

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Europe's Banks Face Pressure on Collateral

Wall Street Journal
December 29, 2011

Even after the European Central Bank doled out nearly half a trillion euros of loans to cash-strapped banks last week, fears about potential financial problems are still stalking the sector. One big reason: concerns about collateral.

The only way European banks can now convince anyone—institutional investors, fellow banks or the ECB—to lend them money is if they pledge high-quality assets as collateral.

Now some regulators and bankers are becoming nervous that some lenders' supplies of such assets, which include European government bonds and investment-grade non-government debt, are running low.

If banks exhaust their stockpiles of assets that are eligible to serve as collateral, they could encounter liquidity problems. That is what happened this past fall to Franco-Belgian lender Dexia SA, which ran out of money and required a government bailout.

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TF's Tchir on Europe Sovereign Debt Crisis

Bloomberg
December 28, 2011

Peter Tchir, founder of TF Market Advisors, talks about Europe's sovereign debt crisis and the possibility that Greece will default on its debt. He speaks with Adam Johnson on Bloomberg Television's "Street Smart."



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Grim lessons from the 30 years war

by Wolfgang Münchau

Financial Times
December 28, 2011

The financial crisis has given rise to several historical comparisons, not least the Great Depression. I would like to invoke another for the eurozone crisis – the 30 years war, which ravaged central Europe from 1618 to 1648.

Both the eurozone crisis and that terrible war occurred amid sudden power shifts; they were triggered by seemly trivial events; and they became incredibly complicated. They are also marked by sudden regional power shifts. Before 1618, the Holy Roman Empire was almost equally divided into Catholic and Protestant electorates. The truce ended when the balance of power shifted with the ascension in 1617 of the Catholic Ferdinand as king of Bohemia, who was one of the seven electors of the emperor. The actual war started a year later when rebels threw some of the king’s advisers out of a window. The famous defenestration of Prague triggered the first battles of a war between Protestants and Catholics, which went completely out of control. The war had four phases, and drew in outside nations – the Danes, the Swedes and finally the French.

The eurozone, too, has been subject to an internal power shift in the past five years, with the relative rise of German economic power. The eurozone crisis also had a comparatively trivial trigger, a fiscal meltdown of a small country at its outer perimeter. This too unleashed a wider economic conflict between a largely Protestant north and a Catholic/Orthodox south. When the eurozone’s modern rulers assembled in Brussels this month to sign the modern equivalent of a peace treaty, they were interrupted by the cross-current of a much older conflict – a UK-versus-the-rest dispute. So instead of one peace treaty, they ended up with two overlapping and interacting conflicts. Europe is once again getting absurdly complicated.

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What has the ECB done in the crisis? The role of TARGET balances

by Martin Wolf

Financial Times
December 28, 2011

Will the European Central Bank save the eurozone? This is an extremely controversial question. What is clear, however, is that the central bank is the only entity with the capacity and the calling to do so. Without the euro, the ECB ceases to exist. That is true of no other eurozone institution. It gives it the incentive to act. It is also acting on a large scale.

The resistance to funding governments by purchasing bonds on a large scale, even in secondary markets, remains strong, as Mario Draghi, the new president of the ECB made plain in his interview with the FT on December 18.

Nevertheless, he argued, the ECB took important action the week before:

We cut the main interest rate by 25 basis points. We announced two long-term refinancing operations, which for the first time will last three years. We halved the minimum reserve ratio from 2 per cent to 1 per cent. We broadened collateral eligibility rules. Finally, the ECB governing council agreed that the ECB would act as an agent for the European Financial Stability Facility (EFSF).

Thus the ECB is determined to fund banks freely, at low rates of interest, thereby subsidising them directly and the governments they lend to, indirectly. Why lending to banks that use the money they borrow to lend to governments is good, while lending to governments directly is bad, is hard to understand. The only obvious difference is that in the case of lending via banks, the intermediaries may themselves go broke. That makes them unavoidably unreliable conduits. Yet if this complex procedure gets round theological objections to direct financing of governments, those who believe some financing of governments is now needed should be content.

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Interview with Ex-German High Court Justice: 'It Is a Mistake To Pursue a United States of Europe'

Spiegel
December 28, 2011

In an interview conducted as he heads into retirement, German Constitutional Court Judge Udo Di Fabio explains why he believes the high court's recent decisions on the European Union will not necessarily hinder further European integration and how he believes debates over possible changes to Germany's constitution to strip power from Karlsruhe are "phoney."

The Lisbon Treaty, which went into effect on Dec. 1 2009, represents the last major reform of the structures of the European Union. Germany's Federal Constitutional Court subsequently issued a landmark decision on the treaty, authored by Judge Udo Di Fabio, which stated that the Treaty conformed with Germany's constitution. Nevertheless, the court also underscored that the parliament in Berlin must have greater participation in decisions made by the country at the EU level. Many politicians and journalists believe the ruling could hinder a future deepening of European integration.

In an interview with SPIEGEL, Di Fabio discusses why he believes the Lisbon ruling isn't nearly as critical of the EU as some have interpreted and why strong democratic states are essential to a continuing integrated Europe.

SPIEGEL: Professor Di Fabio, you were the German Constitutional Court's expert on Europe and the author of the controversial decision on the Lisbon Treaty, which has governed the workings of the European Union since 2009. Will politicians in Berlin heave a sigh of relief now that you are retiring from the court?

Di Fabio: I can't imagine that they will. A chamber of the Constitutional Court is a collective decision-making body. You shouldn't overestimate the power of a single judge.

SPIEGEL: Does the government still have to fear that the court in Karlsruhe will put the brakes on European integration?

Di Fabio: I don't think that the Constitutional Court stands in the way of integration efforts. In many respects the court has even strengthened Germany's position.

SPIEGEL: But your president, Andreas Vosskuhle, only recently said with regard to further integration steps that the scope of Germany's constitution, the Basic Law, had been "largely exhausted."

Di Fabio: I think such statements concern sweeping transfers of responsibilities that are currently not up for debate.

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Greek economic crisis turns tragic for children abandoned by their families

Guardian
December 28, 2011

Even before Greece's economic crisis engulfed his own home, Dimitris Gasparinatos found it hard to provide for his six sons and four daughters. His wife, Christina, who was struggling to make ends meet with his salary of €960 (£800) a month and welfare aid of about €460 every two months, was unhappy and desperate.

Deep in debt, the couple owed money to the butcher, baker and grocer – the very people who had kept them going in the port of Patras, west of Athens. In their tiny flat, the family slipped increasingly into a life of squalor.

"Psychologically we were all in a bit of a mess," said Gasparinatos. "We were sleeping on mattresses on the floor, the rent hadn't been paid for months, something had to be done."

And so, with Christmas approaching, the 42-year-old took the decision to put in an official request for three of his boys and one daughter to be taken into care.

"The crisis had killed us. I am ashamed to say but it had got to the point where I couldn't even afford the €2 needed to buy bread," he told the Guardian. "We didn't want to break up the family but we did think it would be easier for them if four of my children were sent to an institution for maybe two or three years."

The next day, his 37-year-old wife visited the local town hall and asked that her children be "saved".

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Greece jails Abbot Ephraim in Mount Athos fraud case

BBC News
December 28, 2011

The abbot of the prestigious Vatopedi monastery on Mount Athos in Greece has been jailed pending trial for alleged fraud and embezzlement.

Abbot Ephraim, 56, is accused of arranging land swaps between Vatopedi and the state which are thought to have cost the government millions of euros.

The abbot, now being held in Korydallos prison in Athens, denies wrongdoing. His arrest has triggered protests.

The property scandal contributed to the conservative government's fall in 2009.

Greek Orthodox monks rallied outside the prison in support of Abbot Ephraim on Wednesday.

Russia's foreign ministry and the Russian Orthodox Church also criticised the imprisonment of Abbot Ephraim.

No trial date has been set yet.

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Nobel Laureate Michael Spence on Europe Crisis

Bloomberg
December 28, 2011

Nobel laureate Michael Spence, a professor of economics at New York University, talks about Europe's debt crisis. Spence, speaking with Sara Eisen on Bloomberg Television's "InsideTrack," also discusses the outlook for emerging markets.



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Liquidity Returns to Flood ECB Basement

Wall Street Journal
December 28, 2011

The European Central Bank turned the fire hose on the euro-zone banking system last week. The fire is still burning, but the liquidity has simply returned to flood the ECB’s basement — at least for the time being.

The amount of money parked by euro-zone banks in the ECB’s 0.25% deposit facility surged to another new record of €452.03 billion Tuesday, up from €411.81 billion over the Christmas break and well above the previous record high of €384 billion.

Use of the deposit facility is frequently seen as an indicator of stress in the financial system, but the latest surge probably doesn’t reflect any deterioration in the situation since last week. “This is just a mirror image of the liquidity that the ECB is pushing into the system,” said Jacques Cailloux, chief euro-zone economist at Royal Bank of Scotland in London.

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Eurozone

Financial Times
December 28, 2011

So many meetings, so little achieved. European Union leaders have held no fewer than 15 summits since the Greek crisis first blew up in 2010. There have been five grand plans and many more incremental proposals. Heads of seven eurozone governments have changed as a direct result of the debt crisis – including the replacement of Italy’s Silvio Berlusconi and Greece’s George Papandreou by the technocrats Mario Monti and Lucas Papademos. Yet the tally of real achievements is deplorably small.

The European Financial Stability Facility was groomed as a €1tn rescue fund for the euro. But its firepower and mandate remain on a tight leash. Eurobonds remain a vague and controversial notion. A voluntary debt swap between Greece and its private sector creditors is elusive. The reluctant but inevitable push for fiscal union is heading into political opposition. True, banks are being pushed to recapitalise, but with such a lack of finesse that assets are flooding the market and lending has stalled. It has been left to the European Central Bank to inject much-needed, but temporary, liquidity.

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New Greek Government Runs Out of Steam

Spiegel
December 28, 2011

Six weeks after forming a transitional government to overcome its crisis, Greece is still failing to deliver its promised reforms. The cabinet of Prime Minister Lucas Papademos is deeply divided and has lost the public's confidence. Even the most urgent measures have ground to a halt.

The president of Greece's SEV business federation, Dimitris Daskalopoulos, recently invited journalists to his imposing neoclassical headquarters in Athens. He straightened his tie, leaned forward and with a grim expression spoke into half a dozen microphones arrayed in front of him. "Now the issue is simply whether we remain in Europe or not. The governing parties have an obligation to work together honestly to finally banish the nightmare of a return to the drachma. If this government doesn't get it right, Greece will go hungry."

His dramatic appeal was ignored, once again. The Socialist PASOK party, the conservative-liberal New Democracy party and the far-right LAOS party formed a transitional government six weeks ago under non-partisan former central banker Lucas Papademos. They vowed to avert a looming state bankruptcy. But they remain as divided as ever.

Instead of getting down to business, they are absorbed in policy wrangling that seems absurdly trivial given the scale of the tasks they face. At a cabinet meeting last Thursday, Finance Minister Evangelos Venizelos and Transport Minister Makis Voridis of LAOS fell out over a draft law to accelerate amicable divorces. Marriage, Voridis argued, was "a central component of our value system" -- therefore LAOS could not agree to the law. Papademos remained silent.

This isn't the first time the LAOS minister has blocked a decision. Recently he resisted the complete liberalization of the issue of taxi licenses, and publicly threatened to resign.

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Η έξοδος από το ευρώ δεν είναι λύση

του Πάνου Καζάκου

Books' Journal
Δεκέμβριος 2011

Η κοινωνία μας βρίσκεται σε μια περίεργη κατάσταση: Πολλοί δεν έχουν καταλάβει τίποτε και συμπεριφέρονται σαν να μη συνέβη τίποτε, άλλοι πάγωσαν ή παραιτήθηκαν, μερικοί αναζητούν διέξοδο ξέροντας πόσο δύσβατος θα είναι ο δρόμος στο μέλλον.

Στο μεταξύ η κατάσταση χειροτερεύει - παρά την ανάσα ελπίδας της νέας κυβέρνησης και … της έκτης δόσης!. Το 2011 πλήθαιναν οι προειδοποιήσεις ότι η Ελλάδα θα βρεθεί εκτός ευρωζώνης αν δεν καταφέρει να εξυγιάνει τη δημόσια οικονομία της και δεν εφαρμόσει με συνέπεια ένα ευρύ πρόγραμμα μεταρρυθμίσεων. Ξένα ιδρύματα και οίκοι υπολόγιζαν τις ποσοτικές επιπτώσεις της εξόδου και των πιθανών ισοζυγίων κόστους-ωφελειών για τις χώρες και τους πελάτες τους.

Ενώ για πολλούς η έξοδος της χώρας από την ευρωζώνη είναι αναπόφευκτη, για μερικούς είναι και επιθυμητή και αναγκαία για να ανακάμψει η ελληνική οικονομία. Υποθέτοντας ότι έχουμε ως χώρα ακόμη επιλογή, θα ασχοληθώ στη συνέχεια με τη σύσταση για επιστροφή στη δραχμή.

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Deposits at ECB Hit High

Wall Street Journal
December 28, 2011

Use of the European Central Bank's overnight deposit facility hit the second all-time high in a row Tuesday as euro area banks increased the amount of cash they park at the central bank's safe haven, ECB data showed Wednesday.

Banks parked €452.034 billion ($589.72 billion) at the ECB, up from €411.813 billion the previous day. The high level reflects prevailing distrust among banks which prefer using the ECB's facility rather than lending to each other.

The increase in deposits follows the ECB's first-ever three-year liquidity tender last week in which it allocated nearly half a trillion euros to more than 500 banks.

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Greeks Behaving Badly? The micro-origins of crisis and revival

by Aristos Doxiadis

Yale University
Stavros Niarchos Foundation Lecture
December 5, 2011

Aristos Doxiadis is an economist and entrepreneur living in Athens, Greece. In his youth, he worked on anti-poverty programs and on social and industrial policy for the European Commission and for the Greek state. Later, he managed consulting and auditing companies, and since 1995 he has worked for 'private equity' funds that invested in Greek companies. Having observed with amusement and exasperation dramatically different business cultures, he recently started publishing articles on the institutional and cultural determinants of the Greek economy. His blog is at aristosd.posterous.com. He has appeared in numerous discussions on Greek television and has written extensively about the Greek economy. He has degrees in Social Studies (Harvard) and Economics (London).

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The Federal Reserve's Covert Bailout of Europe

by Gerald P. O'Driscoll Jr.

Wall Street Journal
December 28, 2011

America's central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here.

The Fed is using what is termed a "temporary U.S. dollar liquidity swap arrangement" with the European Central Bank (ECB). There are similar arrangements with the central banks of Canada, England, Switzerland and Japan. Simply put, the Fed trades or "swaps" dollars for euros. The Fed is compensated by payment of an interest rate (currently 50 basis points, or one-half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made, then lends the dollars to European banks of its choosing.

Why are the Fed and the ECB doing this? The Fed could, after all, lend directly to U.S. branches of foreign banks. It did a great deal of lending to foreign banks under various special credit facilities in the aftermath of Lehman's collapse in the fall of 2008. Or, the ECB could lend euros to banks and they could purchase dollars in foreign-exchange markets. The world is, after all, awash in dollars.

The two central banks are engaging in this roundabout procedure because each needs a fig leaf. The Fed was embarrassed by the revelations of its prior largess with foreign banks. It does not want the debt of foreign banks on its books. A currency swap with the ECB is not technically a loan.

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Capitalism is dead; long live capitalism

Financial Times
Editorial
December 27, 2011

The market economy is the most successful mechanism for creating prosperity humanity knows. Allied to modern science, it has done more than transform the world economy; it has transformed the world. For the first time in history, the world’s principal states rely on the market economy to develop their economies. Almost as important, they rely on a global market economy. Contemporary states are destined to co-operate with one another if they are to prosper.

Yet the market economy is not as unchangeable as the laws of the Medes and the Persians in the book of Daniel. It is successful not because it stays the same, but because it does not. The driving force is the desire of all human beings to work for the betterment of themselves and their families. The mechanism is the equally natural search for a better deal. But institutional settings and relationships with political institutions have always been open to change. This very adaptability has ensured the survival of market economies.

Two centuries ago there was no limited liability, no personal bankruptcy, little central banking, no environmental regulation and no unemployment insurance. All these changes occurred in response to economic or political pressures. All brought with them new solutions and new challenges. At a time of ongoing financial shocks, this need for adaptation has not ended. On the contrary, it is as important as ever.

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Greek retail sees worst Christmas sales in decades

Reuters
December 27, 2011

Greece's stores had their worst Christmas in decades, with retail sales dropping by 30 percent compared with the same period last year as the economic crisis shattered consumer confidence, the ESEE retail federation said on Tuesday.

"Nine out of 10 Greeks are less generous, not out of choice but out of necessity," ESEE said. "Retailers endured a Christmas gloom that chipped away any optimism they had before the holidays."

The sharp drop in sales came despite widespread discounts by retailers in the run-up to Christmas.

Greeks have been suffering wage and pension cuts, rising inflation and a recession now into its fourth year, which has slashed living standards and forced them to cut spending.

Clothing and footwear sales dropped 40 percent, electrical goods by 30 percent, and sales in the food and drinks sector by 15 percent compared with the same period last year, ESEE said.

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Banks Bunker Hundreds of Billions in Deposits at ECB

Spiegel
December 27, 2011

Just before Christmas, the European Central Bank flooded the financial markets with 500 billion euros -- a move that may not ultimately have the desired effect of stabilizing banks. Instead of passing that money on in loans to businesses to spur the economy, European banks have redeposited the money with the ECB at low interest rates.

The sum of overnight deposits at the European Central Bank (ECB) is often considered to be an indicator of the level of fear brewing within the financial sector. The greater the degree of distrust between banks, the more money banks tend to deposit on a daily basis with the ECB, where interest rates are low, but deposits more secure. This week has seen the level of deposits at the ECB's overnight facility rise to close to €412 billion ($538.4 billion) -- the greatest amount seen since the euro's introduction, and representing a single overnight increase on Monday of €65 billion.

The previous record had been reached in the summer of 2010, when banks parked around €385 billion at the ECB.

Normally banks tend to lend any excess funds to each other. By doing so, they can make more money -- especially given that interest rates at banks are currently twice as high as those offered by the ECB. But the interbank market has been disrupted for weeks now, prompting concerns that the credit crunch last seen after the collapse of Lehman Brothers has returned. European banks no longer trust each other because it is unclear to what extent individual banks are exposed to government bonds from countries hit by the debt crisis, and whether those institutions are in jeopardy. Instead, they are turning to the ECB as a safe haven for their money.

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Greek conservatives drop February election demand

Reuters
December 27, 2011

Greece's conservative New Democracy party dropped its insistence on holding elections as early as February 19 on Tuesday, potentially giving technocrat Prime Minister Lucas Papademos a few more weeks to pass reforms and get a vital debt restructuring deal.

New Democracy spokesman Yannis Michelakis said the party could agree to an extension under certain circumstances but said that elections would have to be held at the latest by Greek Orthodox Easter, which falls on April 15.

"Any change to the agreed February 19 deadline depends on the debt swap talks," Michelakis told radio station Vima.

The election date had been tentatively scheduled before Papademos was appointed last month but a crowded reform agenda has piled pressure on the government to put back the date.

Political deadlock over the timing of the election has also complicated efforts to reach an accord on a 130 billion euro bailout plan that includes a crucial bond swap arrangement with private sector creditors.

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Restoring European Growth

by Jim Leitner, Nuno Monteiro and Ian Shapiro

Project Syndicate
December 27, 2011

Europe’s sovereign-debt crisis has rumbled on for so long that some people are beginning to take it for granted that eurozone leaders can continue to stumble from one non-solution to the next without risk of cataclysm. But if any troubled southern European economy fails to roll over its debt in the coming months, the resulting contagion will spread quickly from the eurozone throughout the global financial system, with consequences far more grave than what followed Lehman Brothers’ collapse in September 2008.

Despite the new agreement reached at the European Union’s summit in December, strengthening financial markets’ confidence in the eurozone remains an elusive goal. In the aftermath of the summit, the euro’s exchange rate sank to its lowest level of the year (around $1.30), while yields on Italian five-year bonds hit a new high (almost 6.5%). In France, Socialist presidential candidate François Hollande flatly declared that the latest agreement “is not the right answer,” because “without economic growth we will achieve none of the targets on deficit reduction.”

Hollande was right. Since the crisis erupted in Greece almost two years ago, EU leaders have failed to propose a solution that balances austerity with economic growth. Whenever the markets signal skepticism about the euro’s viability, European leaders rush to restore confidence through austerity measures, while ignoring the underlying need to reestablish the conditions for growth. The urgent crowds out the merely important. But, without growth, the EU’s long-term prospects are grim.

Since the crisis began, the need for economic growth in Europe’s debt-distressed countries has been portrayed as their problem. For creditors, especially German lenders, the main priority has been to impose austerity and discipline on the eurozone’s profligate south. Because German banks hold much of the debt owed by peripheral banks and governments, officials have focused on this financial link between Germany’s economy and those of troubled eurozone members. But German Chancellor Angela Merkel’s understandable desire to discipline the spendthrifts entails sawing away at the last remaining branch on which Germany’s bankers and taxpayers are perched.

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ECB Overnight Deposits Reach New High

Wall Street Journal
December 27, 2011

Use of the European Central Bank's overnight deposit facility reached a new, all-time high Monday, as euro-zone banks parked a growing surfeit of market liquidity in the central bank's safe haven for deposits.

Banks deposited €411.81 billion overnight Monday, up from €346.99 billion deposited overnight Thursday ahead of the Christmas holiday, ECB data showed Tuesday.

Monday night's deposit figure surpasses the previous record of €384.3 billion reached in June 2010, ahead of a 12-month tender operation and concerns about the then-nascent debt crisis.

The high level reflects ongoing distrust in inter-bank lending markets, where banks prefer using the low-risk ECB facility for excess funds rather than lending them to other banks.

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Fiscal Crisis Takes Toll on Health of Greeks

New York Times
December 26, 2011

The free clinic here opened about a year ago to serve illegal immigrants. But these days, it is mostly caring for Greeks like Vassiliki Ragamb, who was sitting in the waiting room hoping to get insulin for her young diabetic son.

Four days earlier, she had run out of insulin and, without insurance and unable to pay for more, she had gone from drugstore to drugstore, pleading for at least enough for a few days. It took her three hours to find a pharmacist who was willing to help.

“I tried a lot of them,” she said, gazing at the floor.

Greece used to have an extensive public health care system that pretty much ensured that everybody was covered for everything. But in the last two years, the nation’s creditors have pushed hard for dramatic cost savings to cut back the deficit. These measures are taking a brutal toll on the system and on the country’s growing numbers of poor and unemployed who cannot afford the new fees and co-payments instituted at public hospitals as part of the far-reaching austerity drive.

At public hospitals, doctors report shortages of all kinds of supplies, from toilet paper to catheters to syringes. Computerized equipment has gone unrepaired and is no longer in use. Nurses are handling four times the patients they should, and wait times for operations — even cancer surgeries — have grown longer.

Access to drugs has also been affected, as some drug manufacturers, owed tens of millions of dollars, are no longer willing to supply Greek hospitals. At the same time pharmacists, afraid that the government might not reimburse them, are asking for cash payments, even from those with insurance.

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