Upcoming Eurozone Issues

Eurozone Unemployment Last 18 Months

EU Chiefs Seeking to Stave Off Euro Crisis Turn to Cyprus – Bloomberg.

The Eurocrisis has been on hiatus for a few days but returns this week.  Look for nothing to be resolved while the crisis keeps plodding along.

Italian Elections.  Who knew Italian elections could be so much fun and so confusing? An interesting situation has arisen in the aftermath of voting that will  undoubtedly be studied in universities around the world during classes on game theory.  The election has split three ways. If any two parties decide to work together, they can form a government.  A will work with C, but not with B.  B has not ruled out working with either A or C, but they have vowed not to work with B.  C  won’t work with anybody.  What happens next?

Bond markets are pricing in a grand coalition government between, A and B, Bersani and Berlusconi.  If this scenario begins to fade, Italian bonds yields will rise.  Once they reach unacceptable levels, Bersani will back off his vow never to work with Berlusconi.  This government will prove to be weak, and a second round of elections will merely be delayed.

Cyprus Bailout.  There are sticking points in negotiations that we reviewed previously in Key Cyprus Bailout Issues.  Suffice it to say, that Cyprus will get its money and Germany its face-saving conditions.  These will include budget cuts that will worsen the Cypriot recession and remedies to stop Cyprus from laundering money.  The latter will destroy Cyprus’ most reliable money-maker, so no one knows how it will pay off its debt to move from 140%  of GDP after its proposed bailout to 100% by 2020. Don’t count out the troika.  It has the tool guaranteed to make the numbers work— a spreadsheet with fantastic economic growth projections.  It worked for Greece and will work for Cyprus.

In the meantime, bailout “negotiations” will take a few months to persuade Cyprus to “agree” to the conditions.  Expect the ECB to finance Cyprus until the 1st bailout package becomes effective using the ELA program just like it did for Greece during its inter-bailout periods.

Rising Eurozone Unemployment and Economic Contraction.  Despite what you may have read in the mainstream media, there are no prospects of a European turnaround in the cards for the second half of the year.

Economic forecasts are reliable for ninety days out.  After that, economists do no better than chance in forecasting.  Economists see the recession continuing through the next quarter with growth finally asserting itself in the third and fourth. Take those forecasts with a grain of salt as the second half of the year falls outside the 90-day accuracy window.

Europe’s internal demand shows no signs of revival, so growth in the third and fourth quarters will have to rely on an export driven boom to the United States and China.  If the economic activity in these countries does not pick up significantly, then Europe will at best remain stagnant in the second half.

ECB Put.  With economic contraction, high unemployment and no political progress accomplished on a closer union, the only thing keeping the Eurozone on the rails is the ECB Put.  As long as the OMT is not tested, it should continue to act as a guarantee on the value of periphery debt.

The problem with OMT is that the program is treated by investors as being unconditional support for periphery bond prices; however, the program actually is conditional upon implementing tax increases, budget cuts and severe labor market reforms.  What happens when a country refuses to accede to the conditions? We may find out if the Italian stalemate continues.

Happy Talk.  None of these facts matter as Wolfgang Schaeuble continues his masterful spin of the crisis:

We haven’t turned the corner yet, but we’re on a good path…It would be wrong at this point to change course.”

Unemployment continues to increase, GDP to decrease and crisis countries budget deficits are growing.  What would the bad path look like?



2 thoughts on “Upcoming Eurozone Issues

  1. I would not just yet hang my hat on Merkel and Cyprus.
    Though she is quite popular (surprisingly to me).

    January loss


    March loss


    Given two losses Green party growing


    I imagine Merkel has but one choice, talk alot but postpone Cyprus as long as possible and past the next elections.

    It also (quite frankly) seems as if the IMF already backed out of supporting Cyprus. There appears a no go there, but we do not know who is directing that.

    While the perhaps or I may infer opposite may have been written in news reports by such organizations as Bloomberg, I find for example, and in my own personal opinion and as my view, Bloomberg often far off the mark in any recent reporting.

    In fact, when I started to get that “feeling” I began reading quite a bit of Bloomberg recently, meaning news and opinions on the Bloomberg site, and have found, in my opinion, and as my personal view, a strict bias toward writings suggesting “all is well” “you should invest”

    I have found, again in my opinion, and personal belief, Bloomberg writings to paint a rose on Japan, EU, US, the Fed, the central banks, the housing markets, everything. I really believe I have found a most disturbing bias, of course the reader will have to form their own opinion. Accordingly I no longer have any faith whatsover in anything Bloomberg has been writing, but again, each reader may make their own judgment.

    • that said it is bloomberg that also reports the following:

      ” Backed by the Netherlands and Finland, Schaeuble’s officials have called for seizing part of Cypriot bank accounts above the insured limit of 100,000 euros to help pay for the rescue. Schaeuble on Jan. 21 voiced suspicions that money laundering explains investment flows between Russia and Cyprus. He has called for an investigation into whether Russia is using the island as a haven for illegal funds. ”

      [ Cyprus will have to undergo ] , bank-by-bank assessment of its enforcement of anti- money laundering legislation. It is also under pressure to sell stakes in at least a half-dozen state-run companies, raise its corporate tax rate and sign up for a financial transaction tax now being explored by 11 European countries.

      Up to now, Germany has also insisted that the IMF put its stamp of legitimacy on the Cypriot package by putting up money. The IMF has made loans to Greece, Portugal and Ireland, the first three countries to fall back on rescue aid. It didn’t chip in on Spain, because that program was for banks only.

      Europe doesn’t need the IMF’s money for Cyprus, Meister said. Officials have estimated the IMF’s share at about 1.5 billion euros.

      IMF Role

      “We’re not insisting on” an IMF financial role, Meister said. “What we want is the fund on board making its mark on the bailout package. That’s of central importance to us.”

      Germany Eases Demands on Cyprus Aid, Merkel Ally Says
      By Brian Parkin & James G. Neuger – Mar 12, 2013

      – So why is it, suddenly, Germany is saying, you know what IMF
      isn’t really needed. I have the feeling IMF is saying no go.

      And if Merkel takes this on her own given the most recent losses
      she is in for a big surprise come September.

      I can’t imagine she would do it. Though I have been wrong before !
      Insanity the entire lot of em !!

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