From Paul Krugman: The trajectory of Europe’s real GDP per capita today vs. its real GDP per capita back during The Great Depression. No commentary necessary.
Europe should be really happy that March is over. It was a disastrous month.
There were three main stories; all of them bad.
Italy can’t form a government. Italy’s parliamentary election took place at the end of February, and it was immediately clear that no single party won enough seats in both houses of Parliament to be able to form a government. Center-left candidate Pier Luigi Bersani had the best shot of establishing a coalition, but he was unable to come to any deals with Berlusconi’s party, and he was unable to pick away any support from Beppe Grillo’s Five-Star party, and bring them over to his side.
That all came to a head at the end of this past week. The ball has now been thrown into the court of Italian President Napolitano (a separate position than PM, who serves a seven-year term, and whose job it is to facilitate the establishment of a government). Another election this year looks very likely.
Since the February election, there have been polls in Italy showing strength for Berlusconi and Beppe Grillo, so if there were another election there’s a good shot that the winner would be someone who doesn’t have the same inclination to play nice with the rest of the Eurozone.
Cyprus. This was a fiasco on so many levels.
The EU/IMF raiding bank accounts in Cyprus to bail out the country’s financial system sets a dangerous precedent and investors should “run for the hills” said investor Jim Rogers, chairman of Rogers Holdings, on “Squawk on the Street”Thursday.
Rogers said that with Cyprus, politicians are saying that this is a special case and urging people not to worry, but that is exactly why investors should be concerned.
“What more do you need to know? Please, you better hurry, you better run for the hills. I’m doing it anyway,” Rogers said. “I want to make sure that I don’t get trapped. Think of all the poor souls that just thought they had a simple bank account. Now they find out that they are making a ‘contribution’ to the stability of Cyprus. The gall of these politicians.”
A key part of Lucke’s argument is that the euro must be sacrificed to save the greater European project (the European Union), as the status quo is tearing apart the continent.
This line from Lucke is critical:
We think that the euro currently splits the European Union into two parts – a segment of an economically unsuccessful southern part, and a more northern, or more central, European part, which currently seems to benefit from the misery of the southern European countries, because all of the capital flows back from southern Europe to Germany, and the Netherlands, and other stable countries, where it helps us to do cheap investment, but which is at the expense of those southern European countries, and which certainly is the cause for envious sentiment and angry sentiment in the southern European countries, so that the political tensions within the European Union actually rise.
Recall that Bankia is the large Spanish bank that was partially nationalized’ in 2012, and that received 18 billion euros in new equity funds at the end of 2012. At that time Bankia shares fell by 25% to 41 euro cents (41/100 of one euro). At that same time Bankia said it expected to report a 19 billion euro loss for 2012. See my January 3 commentary titled Spain: Bankia and its parent! where I said “My assumption with respect to Bankia and other large Spanish banks is that ‘we have yet to hear the worst of it”.
On Monday, following a ‘forced revaluation’ by Regulators to 1 euro cent (1/100th of one euro) announced after the financial markets closed on March 22, Bankia shares closed at just under 15 euro cents (15/100 of one euro), down over 40% on the day. That ‘forced revaluation’ is said to have been a ‘condition’ of Bankia receiving a further capital injection of 10.7 billion euros from European rescue funds in circumstances where in February Bankia reported a 19.2 billion euro loss (as had been expected) for 2012. Standard & Poor’s is reported as having lowered Bankia’s rating by one notch to BB-.
In February Bankia reported that it expected a quick return to profitability following a ‘clean-up’ of its balance sheet.
Bankia strikes me as needing to be on every trader and investors radar screen going forward, given its size and what I think has to be its possible impact (positive or negative) on Spain, the eurozone, and perhaps the banks and banking systems of both Spain and other countries – the latter pursuant to possible contagion issues.
In other Spanish bank news, yesterday afternoon Banco CEISS, BMN and Caja 3, three comparatively small Spanish banks reported 2.5 billion euros, 3.7 billion euros, and 1.0 billion euros losses respectively for their latest fiscal years. These losses were all driven by previously unrecognized real estate exposure losses, or in the case of BMN writedowns on property holdings.
The punishment regime imposed on Cyprus is a trick against everybody involved in this squalid saga, against the Cypriot people and the German people, against savers and creditors. All are being deceived.
It is not a bail-out. There is no debt relief for the state of Cyprus. The Diktat will push the island’s debt ratio to 120pc in short order, with a high risk of an economic death spiral, a la Grecque.
Capital controls have shattered the monetary unity of EMU. A Cypriot euro is no longer a core euro. We wait to hear the first stories of shops across Europe refusing to accept euro notes issued by Cyprus, with a G in the serial number.
The curbs are draconian. There will be a forced rollover of debt. Cheques may not be cashed. Basic cross-border trade is severely curtailed. Credit card use abroad will be limited to €5,000 (£4,200) a month. “We wonder how such capital controls could eventually be lifted with no obvious cure of the underlying problem,” said Credit Suisse….
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