Eurozone Faces Politcal Turmoil

As I have long predicted, the Eurozone's concept of "one size fits all" wrt interest rates is leading to political chaos.

Eurozone countries, that are having to enact austerity measures in order to stay within the Euro, are facing growing domestic resistance to the cuts being imposed. At the very least Europe is set to be hit by wave after wave of strikes this summer coupled, most likely, with street demonstrations and chaos.

The policy of "one size fits all" can never possibly be expected to work across 16 divergent economies unless, by some miracle, they are all in sync. On rare occasions (eg by luck or fraud) sync can occur. However, the norm is that 16 economies will be out of sync.

Those economies that tether themselves to the Euro and, by definition, interest rates set by the ECB are denying themselves the ability to manage their way out of their economic doldrums by way of currency devaluation. All that they have left is the heavy handed tool of fiscal austerity.

It is hardly surprising that the citizens of the Eurozone are revolting against the dictatorship of the Euro.

Biblical Plague Hits Greece

It would seem that the gods are sending Greece a warning today, by way of a plague of frogs that have managed to close a main road.

I suspect that gods have seen that the wheels are already beginning to fall off the IMF/EU bailout wagon, sent to rescue Greece from its own self inflicted follies of fraud and living to excess.

It is reported that Greece is trying to renegotiate the terms of the pension reform stipulated under the terms of the bailout.

Greece wants the EU and IMF to agree that full pensions should be payable after 37 years of contributions instead of 40, as set out in the deal, and allow the reform to be implemented later than agreed.

It seems that Greece hasn't quite grasped the fact that the bailout deal has not been warmly welcomed by the EU member states (most notably Germany). Any attempt to renege on the deal, especially as the ink is barely dry on the paper, will send the markets into tailspin.

Interest Rates

The OECD are calling for UK interest rates to be raised by the year end.

What's the betting that, if they are raised, the rates for savers are not raised?

Euro Heads For Parity

The Euro is heading for parity with the Dollar, as markets become increasingly unnerved by:

1 The likelihood of Greece ever repaying its debt

2 The severe austerity packages being introduced in Europe (Italy has just announced a 3 years Euro24BN austerity plan), and

3 The rolling takeover by the Bank of Spain of certain small banks.

Markets, once they build up sufficient momentum, are difficult to stop. The Euro's days may be numbered.

The Shabby Habit - How Low Will a Bank Go?

Given the lousy, but very well deserved, reputations of many banks it is hard to find a story that actually plumbs new depths wrt how badly they treat their customers.

However, the Times reports that Santander has plumbed new depths in the way it mistreated one of its customers over the theft of £10K from her Abbey bank account.

"Emma Woolf, a longstanding customer of the bank, had £10,000 withdrawn from her account without her knowledge, but Santander, formerly known as Abbey, refused to refund the money and instead suggested that her fiancé, Jonathan Groman, had stolen the cash.

The bank relented and returned the money more than a year later only when the police arrested a Santander employee for fraud, after finding financial documents of customers in her home. But the bank agreed to pay back the cash only if Ms Woolf signed a confidentiality agreement. The bank also refused to apologise to Ms Woolf and Mr Groman."

It seems that the banks have yet to realise that the rules of the game have changed, and that they are no longer "respected" or "trusted" as they once were.

Germany Backs Bailout

Germany's lower house of parliament has approved the country's contribution to the Euro750BN rescue deal for the eurozone.

The upper house is expected to follow suit.

Ironically some are openly postulating that it may not be Greece that leaves the Euro first, but Germany.

Germany Cocks It Up

It appears that yesterday's unilateral declaration of war by Germany on "naked" short selling, which predictably sent the Euro tumbling, was rather more of a cock up than first thought.

Stephanie Flanders reports that Bafin, the German regulator, allowed news of the ban to leak on Tuesday, before the Germans had been able to brief other governments.

Suffice to say, such cock ups will not inspire confidence and the Euro will doubtless take another battering.

Indeed the whole exercise, as the Telegraph notes, has been somewhat pointless:

"The practical effect of the German ban is virtually zero, as these markets are largely based not in the eurozone, but in London, New York and Hong Kong. What's more, the new BaFin rules are so riddled with exemptions as to make the whole exercise meaningless."

I would emphasise that markets are not rational, but operate on three fundamental principles:

- Greed
- Fear
- Momentum

All that Germany has achieved is to scare people, and enhance the momentum towards selling off the Euro.

Euro Panic Stage Sets In

I see that the "panic stage" that I warned of only two days ago has already set in.

However, it is not the markets that panicked first, but the politicians (whose panic has in turn spooked the markets).

Germany hit the panic button and "declared war" on speculators, including a ban on "naked" short-selling.

German Chancellor Angela Merkel warned of "incalculable" consequences if the Euro fails.

Needless to say the action of banning shorting, and warning of dire consequences if the Euro fails scared the hell out of the markets.

For why?

1 It is clear that the EU intends to curb free market activities, thus attacking the profits of the financial companies that operate in Europe.

2 Predicting dire consequences focused world markets' attention on the perilous state of the eurozone.

Quote:

"This challenge is existential. And we have to rise to it. The euro is in danger. If we don't deal with this danger, then the consequences for us in Europe are incalculable."

This is a remarkably foolish own goal by the Germans, which has kick started a market panic and sell off of the Euro.

Greece Receives Euro20BN

Greece has received Euro20BN, being the first tranche of the IMF/EU Euro110BN bailout package.

This temporarily may relieve pressure on the Euro and on Greece. However, it is merely buying time and delaying the inevitable exit by Greece from the Euro.

Euro Hit by Austerity and Debt Worries

The Euro is continuing to fall, as markets fret over debt and austerity issues within the Eurozone.

The Euro750BN EU/IMF rescue package has, as I noted last week, produced nothing more than a dead cat bounce.

Once the cats have firmly returned to earth, the next stage in market adjustment will be the "panic" stage (ie a sustained sell off of the Euro).

Like it or not, in order for the Eurozone to succeed in the long term, the 16 members' economies have to be in sync. Aside from the idiocy of Greece fraudulently fixing the numbers in order to gain entry, the "happy coincidence" of 16 such widely diverse economies ever being in true sync simply is never going to happen.

One centrally fixed interest rate/monetary policy will not fit all 16 members. The result of the economic imbalance between member states will be social and political meltdown, as already seen in Greece, in the weaker members of the Eurozone.

Der Spiegel have published an interview with Jean-Claude Trichet, the European Central Bank president, in which he says that Europe's economy "is in its most difficult situation since World War II or perhaps even since World War I."

One by one the weaker members (PIGS) will be forced out of the Euro.

Quite frankly, from their perspective and indeed from the perspective of the "core members" of the Eurozone (France and Germany), that will be the best possible thing that could happen for everyone.

Greece Permanently In Debt

The chief executive of Deutsche Bank, Josef Ackermann, said it would require "incredible efforts" by Greece for it to repay its debt in full. He told ZDF TV:

"I would doubt that Greece over time will be in a position to come up with the economic potential."

Meanwhile it has emerged that the catalyst, that pushed Germany to finally agreeing to help bailout Greece, was the threat from Nicolas Sarkozy (President fo France) last Friday to pull France out of the Euro.

As to whether he really would have done it, had the Germans called his bluff, is another matter.

There Are Bad Times Just Around The Corner

The Council of Mortgage Lenders (CML) has warned that approximately 53,000 homes will be repossessed this year (a 15 year high).

Add in the public sector cuts, rises in taxes (both direct and indirect) and we are going to have a tough time. The smiles and bonhomie of Clegg and Cameron will not be enough to ease the financial pain that will be visited on every household in the UK in the coming months.

Crisis Far From Over

Now that the UK finally has a government which, for the short term, may well be stable it can be hoped that the ongoing local financial chaos can be abated.

However, as Mervyn King (Governor of The Bank of England) points out, the crisis is "far from over".

The Bank of England's quarterly inflation report predicts an increase in growth. However, it notes that conditions remain uncertain and that the pace of recovery will be dampened by the need for "substantial fiscal tightening" and a further strengthening of banks' balance sheets.

Mr King has been briefed on the fiscal plans of the new government, and has expressed satisfaction that there is a binding commitment to accelerating deficit reduction.

It should be remembered that Mr King has been reported as saying privately, before the election result, that whoever won the election would be so unpopular due to the spending cuts and tax rises to come that they would be out of power for a generation.

As Noel Coward once sang:

"There are dark days just around the corner..."

Dead Cats Fall Back To Earth

As expected, yesterday's European wide dead cat bounce has come to an end as the moggies have come crashing back to earth.

The markets have concerns over the details of the EU/IMF rescue fund to prevent the Greek debt crisis spreading across Europe. Aside from the doubt as to whether the package will be enough to allow smaller eurozone countries to ease their debts, there is also the rather large elephant in the room:

"Where exactly is the money coming from if countries have to be rescued?"

To add to the gloomy mood, Moody's stated that it is considering downgrading Greece by another notch and cutting Portugal's rating.

Oh, and in case anyone has forgotten, the UK has yet to form a government.

Dead Cats Bouncing

The member states of the Eurozone finally realised that they had to do something over the weekend, to prevent a financial tsunami engulfing Euroland.

Finance ministers have now unveiled a package that pledges to guarantee the debt of any of the countries that use the Euro. They include:

- Euro440bn in loans or guarantees from Eurozone countries
- Euro60bn from the European Union's Budget
- Up to Euro250bn from the IMF.

As a result, dead cats are bouncing throughout Euroland (ie markets are rising).

This of course is only a temporary relief, the PIGS will have to get their houses in order if the Eurozone is to maintain its credibility/existence.

Greece Dying

For heaven's sake will someone in the EU/Greece remove this financially destitute country from the Eurozone?

Its continued presence is not only destroying the fabric of its own economy and social structure, but destroying the Eurozone.

Greek Tragedy

As predicted this will all end in tears!