Category Archives: A Fistful of Euros

Worrisome if this analysis is correct!

A Simple Chart Illustrating Why Japan Style Deflation Is Now More Or Less Inevitable In Spain

Larry Summers, Paul Krugman and Edward Hugh

This longidh post by Paul Krugman ties some knots between his own, Summers’ and Edward Hugh’s ideas of the importance of demographic change. Worth pondering!

“Secular Stagnation, Coalmines, Bubbles, and Larry Summers –”

Cyprus, Slovenia and France: A mess and the potential for the EFSF-blowup

Cyprus is still a mess. Let’s seen what happens over the weekend and at the latest on Monday, when ECB emergency loans could be cut off.

Naked Capitalism makes mention of the dire straits of Slovenia and France. France has been kind of almost on the radar for a long time, at least in the connection of its banking system being burdened by the problems of Spain, Portugal and Greece. Slovenia has been more invisible, but Edward Hugh already anticipated this early Summer 2012.

The big problem in European terms is nonetheless France, in connection with the European Financial Stability Fund. Yanis Varoufakis alluded to the structural (toxic) problem of the EFSF in 2011, which is essentially that it relies on the strong countries to leverage the money in the EFSF. If France wobbles, then the whole structure starts to collapse:

But what makes EFSF bonds even worse is that the structure of these eurobonds is heavily dependent on the underlying risk. Lest we forget the lessons of 2008, financial disasters strike when bankers and authorities neglect the effect of their instruments and trades on the solvency of the underlying assets in question. It is in this sense that EFSF’s eurobonds are, clearly, part of the euro crisis rather than a solution to it. To see this, consider the destructive dynamic inbuilt within the EFSF bonds: Suppose Portugal exits the markets, as it is bound to, and runs to the EFSF for loans. The EFSF will have to issue new debts, on behalf of the remaining eurozone countries. This means that, with Portugal out of that group, a greater burden will be shared by the N-1 countries remaining as pillars of the EFSF. This means that the markets will immediately focus on the new ‘marginal’ country: the one that is currently borrowing at the highest interest rates within the EFSF in order to loan the money to Portugal. Immediately, it’s own spreads vis a vis the German bond rates will rise until that country (Spain in all probability) is also pushed out of the markets. Then there will be N-2 countries left to borrow of EFSF’s behalf and the markets will focus on the newer ‘marginal’ country. And so on, until the band of nations within the EFSF is so small that they cannot bear the burden of total debt on their shoulders (even if they wish to). At that point, led by Germany, these remaining. solvent, states they will leave the euro.

I can’t say how much the OMT-program can prevent this dynamic but the stalling of France is a really bad sign in this regard.

The Cyprus EU-bail-in/bailout Blunder Link Collection Vol. 1.

Today is the Morning After. The banks are closed in Cyprus, but elsewhere they aren’t. Here are some links on the Cyprus bailout, and why it is such a blunder. In the articles there are a lot of links as well so please read everything and then contact the European Parliament to send this Commission home. Charles Wyplosz puts it very simply like this:

The decision to tax all Cypriot bank deposits has attracted massive attention (Spiegel 2013) – and rightly so. It is a huge blunder:

• In the unlikely event that all goes well, the government will receive a bit of cash – but not enough to cover the loan generously offered by its European partners – and the Cypriot banking system will be history.

• The alternative is a massive bank crisis in many Eurozone countries – a huge blow to the euro, maybe even a fatal one.

First, Bloomberg on the current reaction of the markets:
Then, backgrounds and explanations why this is such a blunder.

Cyprus: The Next Blunder (Charles Wyplosz)

Cyprus’ Stability Levy: Another sad euphemism (updated on 18th March) (Yanis Varoufakis)

Will Cyprus Become Creditanstalt 2.0? (Naked Capitalism)

Fed Watch: The War on Common Sense Continues (Tim Duy) A small excerpt:

Peter Siegel at the FT places the blame on the Germans:

Unbeknown to the Cypriot delegation members as they entered the hulking Justus Lipsius summit building in Brussels on Friday night, their fate was already sealed: their German counterparts wanted about €7bn for the estimated €17bn bailout of their country to come from deposits in the country’s banks.“They were hand in hand with Finns, who were much more dogmatic,” said one senior eurozone official involved in the 10-hour marathon talks that stretched until 3am on Saturday morning. “Had that not happened, full bail-in,” the official added, using the terminology for wiping out nearly all Cypriot bank accounts.

I don’t know if that meant if the Finns saved some of the Cypriot depositors (metaphorically speaking) or how to parse this sentence. But I am not happy with this. My adopted home country endorses raiding banks to plug holes. Not good. Through the Financial Times (link in the Naked Capitalism piece):

Mr Schäuble was not alone. Several officials involved in the talks said he not only had backing from the Finns, Slovaks and to a lesser extent the Dutch. The International Monetary Fund, which had been urging depositor haircuts for months, had won the argument over the skittish European Commission, which had long worried that seizing depositor assets could spark a bank run in Cyprus […]

So also my home country. This article by Ed Harrison explains the ideas behind the German (and possibly Dutch and Finnish) policies on the Eurozone. Not to become happy about. Great. Here is a comprehensive overview of the whole deal-making process, courtesy of the Wall Streat Journal:

Cyprus Rescue Risks Backlash

Background and analysis:

This Crazy Cyprus Deal Could Screw Up A Lot More Than Cyprus… (Business Insider)

Cyprus bails-in depositors to reduce cost of Eurozone bailout – a turning point in the Eurozone crisis? (Open Europe Blog)

Twenty-Cent Paradigms: Is Euro-geddon Nigh?

UPDATE: Check this article on A fistful of Euros for a very comprehensive overview of the matter of the Cyprus-policy rampage itself and all kinds of political validations. I share the conclusion. New Commission now! There is a lot to say about Cyprus’ deal, and haven’t had time to digest all the aspects of the deal. But as said in this fairly comprehensive article it does not look good, in particular because again the banks are not dealt with although many of the eurocrisis’ issues originate from excesses in banks – German, French, Dutch, Irish, Spanish etc. The fact that banks become zombie banks propped up by ECB loans is apparently not bothering the EU elites. I suppose soon people will just hide money in socks again, to escape the unfair treatment deposit holders get, likely every time from now on. Oh and Moody’s or Fitch warned some time ago, in relation to SNS Reaal that it would reconsider the credit ratings all over Europe in case depositor’s money would be confiscated.

Finnish real estate bubble?

As Edward Hugh stated on his Facebook page on the 14th of February (can’t link that, so please look it up):

The depth of Finland’s recession may raise an eyebrow or two here and there. It was meant to be a very competitive economy. I have long felt, studying the evolution of the trade balance, that it had more to do with the periphery than the core. The economy has been supported by a housing boom, but now that appears to be coming to an end. Not so different from Denmark, or the Netherlands.

As I blogged, I have shown some Eurostat statistics on housing price developments, which I thought did not look like a boom. But now I found statistics from Statistics Finland on square meter prices in various regions of Finland, and they tell something I suspected but could not put in a graph, until now. Please note that the first graph is a combination of two time series (2000-2008 and 2005-2012) which use a slightly different methodology (mainly, the latter has much more indicators on which it measures price).[UPDATE: A commenter has longer range graphs on housing prices in the Nordic countries, which make the pattern even more clearer] The picture looks a lot like the Netherlands – a slow bubble, starting in the 1990s. As for the latter graph, Helsinki 1 is basically downtown, prime, Helsinki, while Helsinki 3 is more of a peripheral area, although public transport connections are very good. Vantaa is (traditionally) a more working class city next to Helsinki, where also the Finnish main airport is located.

Source: Statistics Finland

Source: Statistics Finland

And for the capital region:

Source: Statistics Finland

Source: Statistics Finland

I don’t know how to define a housing bubble, but it seems that Helsinki prices, especially in prime and other near-center Helsinki (this holds true also for 2-room appartments and bigger) have gone up quite a bit. That has to do partly with this:

Source: Tilastokeskus

Source: Tilastokeskus

Although Tampere and Oulu are also growth centers in a sense, the Helsinki region has a much greater pull. I don’t have time now to dissect the nature of those moving to Helsinki (age, gender, where they come from) but from what I know anectdotally, there is quite a shortage of appartments for people who need only a single or double-room appartment, mainly because they are so expensive (for students etc.)

I don’t know if this is part of the possible bubble-story but it seems to happen mainly in the Helsinki area, not elsewhere.

Bloomberg: ‘Finland’s Recession Deepened Last Year as Crisis Extends Reach’


I wrote some background on this last July. Maybe in the end not so correct, regarding potential housing bubbles and the persistence of domestic demand, but still.