Interesting Videoclips of the Week (June 25 – June 29, 2012)

Roubini on the European Redemption Fund proposal: 

• “It is a limited proposal for e-bonds that will only be temporary for 20 years with all sorts of caveats. The Germans and Merkel have said no. Why? They worry about three things. one is about moral hazard. They say if we could agree on these things there will not be enough effort by Italy and Spain. Secondly is a time consistency problem. If you agree on that stuff and then they don’t deliver, then Germany is going to take a lot of risk. Three, there is a huge amount of credit risk the Germans will take by backstopping both the debt on one side and the deposits. The Germans say moral hazard, time inconsistency and credit risk—I don’t want to do it.  They say, ‘you lost your virginity. Now you sign a contract; you say, ‘I’m a born-again virgin.’ Be abstinent for the next two years. Show me your soul and two years from now, we’re going to get married. But today, I commit to marriage today? Forget it.’ The Germans don’t believe and they don’t trust the periphery.”

Roubini on how to get decisive action in the euro zone: 

• “The European leaders already had 18 summits of the leaders in the past two years. The last summit, the headline newspaper was the leaders decided to postpone key decisions. Now there are 19 summits. Now they’re supposed to come up in one summit with a political union, with a banking union, with a fiscal union, with a transfer union, with a growth compact and resolve the problems that haven’t been resolved for years.  Chances are the Germans want to say no to European-wide deposit insurance.” 

Bremmer’s view on global problems: 

• “First of all, I see that irrespective of whether you are a Democrat or a Republican in the United States, you are basically telling the Germans, “come on guys, you have to do something.”  But we’re not going to play a role in that. I look at the Chinese government despite that they are awash in liquidity right now.  They’re not prepared to actually provide any concrete support for the Europeans, so the Europeans must do this themselves.  We’re not going to act as the lender of last resort for the euro zone.  At the same time, I see plenty of other global problems banging along where everyone is kicking the can down the road.  The willingness to kick the can right now for the United States, Japan, Europeans, the Chinese, has been an elite motif really since 2008.”

Roubini on the persistency of real economy slowdown:

• “It’s not just a slowdown…The recession will become a depression. Output has fallen from the peak 15% in Greece.  The same thing in Spain…This could become like Japan, but worse. Japan did not have a sovereign debt crisis because it was a net creditor country. But all of these countries are net debtors. They would be lucky to end up in stagnation like Japan. It’s getting worse, there’s already a sovereign debt crisis, a banking crisis, a balance of payment crisis, an economic crisis and all of those things together are getting worse.”

Roubini on German leadership:

• “There is this gap between them saying we don’t want to take all this credit risk of backstopping of $3 trillion of Spanish and Italian debt.  We don’t want to take all the credit risk of backstopping all the deposits of the euro zone.  But then the other side says, unless you do something about it, in spite of our fiscal effort, the spreads are so high, the disintegration fragmentation of the banking system is becoming worse, and therefore we’re going to end up in a complete cliff. The German one side the one guarantees that these guys do enough reform and austerity, the other side says we’re doing it, but spreads are so high that it’s become unsustainable.”

Bremmer on whether Germany is removing itself from the conversation in Eur
ope: 

• “I would not go that far. I do think they are engaged in a very difficult negotiation…The fact that the Germans at this point are not yet prepared to accept the kind of economic fixes that are required does not tell as much about their ultimate predisposition. They have their own domestic constituencies they have to play with.  They also have very strong political constituencies across the euro zone that are acting in a very intractable way. We’ve seen some forms of German capitulation over the course of the past months…Who is to say that there will not be dramatically more capitulation when they’re actually forced to do it.”

Roubini on what matters most right now politically: 

• “All of it matters in the sense that we’re kicking the can down the road. The Europeans do not want to make the decisions and there will be political elections in Germany, Italy and other parts of Europe. We have the U.S. presidential election and until then, we’re not going to do anything about our fiscal problem.  In China, there is a stall right now because of the leadership transition that happens once in a decade and important decisions about their growth model has to be done. The problem is that every part of the world is kicking down the road to 2013. At this time we’re reaching a point in which by next year, you could be in a scenario in which we hit a brick wall, and then euro zone breaks up, in the U.S. you have a fiscal cliff, in China the landing could be hard and in the Middle East you could have a war. That is a perfect storm.”

Roubini on the complexity of the central banks response: 

• “Everyone is going to do more monetary easing…We live in a world in which the problems of the advanced economies are not problems of liquidity. Banks have plenty of liquidity. The problems are fundamental solvency. So just throwing money at it implies that the loss will continue to collapse and banks will hold extra money in the form of excess reserves. The credit mechanism is broken and there is no creation of growth in most advanced economies. So it doesn’t affect real economic activity.”

Roubini on Merkel saying euro bonds are “the wrong way” and whether she was speaking to European leaders or voters in Germany:

• “She was talking to both of them. The trouble is if there is not going to be an agreement on some point on having e-bonds I think the situation in Europe is going to become disorderly. Italy and Spain were are doing massive fiscal adjustment, but their spreads are still very high…At some point the Germans will decide, do I take the credit risk of backstopping Spanish and Italian debt in exchange for some loss of national fiscal sovereignty by Italy and Spain in which case the euro zone has a chance to survive. Otherwise, this will become disorderly in the next few months.”

Soros on Europe’s crisis:

• “Basically there is an interrelated problem of the banking system and the excessive risk premium on sovereign debt – they are Siamese twins, tied together and you have to tackle both. It’s recognized that you have to do that and there is no widespread agreement on what to do on the banking side. It’s the beginning of a banking union and there is a disagreement on the fiscal side and unless that is resolved in the next 3 days then I am afraid that the summit could turn out to be a fiasco, and that could be fatal, because you are facing the possibility of Greece leaving the euro a
  nd perhaps the European Union and you need to strengthen the remaining euro structure to withstand that shock.”

On Angela Merkel:

• “Well actually Angela Merkel has emerged as a strong leader. Unfortunately she has been leading Europe in the wrong direction. I think she is acting in good faith and that is what makes the whole situation so tragic and that is a big problem that we have in financial markets generally – that you could have a false idea, a false ideology, a false interpretation which is reinforced by reality. In other words it works for a while until it stops working and that is what is called a financial bubble – which, you know, looks very good while it is being formed and everyone believes in it and then it turns out to be unsustainable…The European Union could turn out to have been a bubble of this kind unless we realize there is this problem and we solve it and the solution is there. I think everybody can see it, all we need to do is act on it, and put on a united front, and I think that if the rest of  Europe is united, I think that Germany will actually recognize it and adjust to it.”

On whether yields there’s a risk of contagion continuing if a strong proposal doesn’t come out of the EU summit:

• “That is right, and there is then a serious threat of the euro breaking down and that is not to be neglected because it’s quite serious. But even if you manage to avoid, let’s say an ‘accident’ similar to what you had in 2008 with the bankruptcy of Lehman Brothers, the euro system that would emerge would actually perpetuate the divergence between creditors and debtors and would create a Europe which is very different from the Europe as an open society that fired people’s imaginations and led to the creation of the European Union. It would transform it into a hierarchical system where the division between creditors and debtors would become permanent…It would lead to Germany being in permanent domination. It would become like a German empire, and the periphery would become permanently depressed areas.”

On what Europe needs:

• “What you need is a European fiscal authority that will be composed of the finance ministers but would be in charge of the various rescue mechanisms, the European Stability Mechanism, and the one that preceded it and it would be empowered to issue treasury bills, to set up a debt reduction fund and actually buy up the excess stock of that that has accumulated in the hands of particularly Italy and Spain and finally combine issuing treasury bills. Those treasury bills would yield 1% or less and that would be the relief that those countries need in order to finance their debt.”
• “Euro bonds are not possible because Germany would not consider euro bonds until you have a political union, and I think it’s actually quite justified, it should come at the end of the process not at the beginning. This would be a temporary measure, limited both in time and in size, and thereby it could be authorized according to the German constitution as long as the Bundestag approves it, so it could be legal under the German constitution and under the existing treaties. What it means is the political will by Germany to put it into effect and that would create a level playing field so that Italy and Spain could actually refinance its debt on reasonable terms.”

On whether he believes Germany would be content with a smaller euro zone:

• “I think Greece leaving the euro zone or being pushed out is now a real expectation and this is what is necessary to strengthen the rest of the euro zone because the way the financial markets work they can actually push a country like Italy into default – see this is what the weakness of the euro as it is currently structured because a developed country has no reason to default because it can always print money. By printing money it can devalue the currency and people can lose money by buying debt but there is no danger of default, but the fact that the individual members don’t now control the right to print money – they have given that right over to the central bank you see, and that has created this situation with a European country that could actually default and that is the risk that the financial markets price into the market and that is why say ten-year bonds yield 6% whereas British 10-year bonds yield only 1.25%. That difference is due to the fact that these countries have abandoned the, surrendered their right to print their own money and they can be pushed into default by speculation in the financial markets.”

On the chances today of Greece leaving the euro:

• “It’s very hard to see how Greece can actually meet the conditions that have been set for Greece, and I think the Germans are determined not to modify those conditions seriously so I think one has to now calculate on Greece being forced out of the euro – that’s what we have to prepare for.”

On how the treasury bill would be priced:

• “It would be sold on a competitive basis but right now there are something like over 700 billion euros are kept on deposit at the European Central Bank earning a quarter of one percent because the interbank market has broken down so then right then you have got 700 billion that would be very happy to earn let’s say three-quarters of a percent instead of one-quarter, and the treasury bills by being truly riskless and guaranteed by the entire community would yield current conditions less than one percent.”

On whether he believes Greece will exit the euro forever:

• “No, actually it’s quite possible that it could actually, depending on how it is arranged and whether it’s orderly or disorderly, it’s possible that Greece could re-enter but what I am really afraid of and really most disturbed about is that the euro would hold together but it would create a Europe that actually nobody wanted. It would put Germany at the center of an empire which would actually be very beneficial in many ways to Germany but politically I think it would be unaccep
  table and it’s not something that the majority of Germans want.”

On whether German bunds are in a bubble:

• “Yes…Certainly they have benefited and they are far too low-yielding if you had no world conditions, in other words the high price or low yield of the German bonds is a fever chart measuring the distress in the financial markets.”

On the chances of Spain, then Italy, needing a full-blown bailout:

• “If you have this thing, then the Spanish banks would be recapitalized which would add to the debt of the Spanish debt, but if the Spanish, the excess debt is financed at 1% then it’s no problem then this will help that also and if you resume growth then the decline in the housing market would not be as severe as it would be if you have a folding economy so Spain would be also in a position to come out of the recession.”

On Mario Monti:

• “Monti is a caretaker, he is a technocrat so he has no political base but I think that he would have to say that he cannot serve as a technocrat if there is no support from Germany and what would Europe do without Monti, so Monti can push Merkel but and this is in a strong position to do that because he has done his best in structural reforms and he could do more if actually this was something that didn’t come out in the discussion, that, Germany is worried that if you provide this kind of support then countries like Italy would stop pursuing structural reforms and that is not the case because by having a great benefit from it and losing the benefit if you abandon the structural reforms is I think a stronger guarantee that they will not abandon it than anything else.”