Tuesday, May 29, 2012 - Dithering About Europe - by Sinclair Noe

DOW + 125 = 12,580
SPX + 14 = 1332
NAS + 33 = 2870
10 YR YLD -.01 = 1.73%
OIL +.08 = 90.84
GOLD – 18.90 = 1555.80
SILV -.55 = 27.98
PLAT – 9.00 = 1432.00

The reason du jour for today's market gains: positive news regarding Greece. Really? I'm not buying it. Make up your own reason for today's gains because we are just as likely to see declines tomorrow. Still, Europe is important.

Philadelphia Federal Reserve Bank President Charles Plosser said Monday that people in the United States have no need “to get all in a dither” over Europe’s debt crisis. Plosser feels that Europe’s economic problems could even benefit the US in the short term. It is “not an unreasonable argument,” he said, that low US interest rates and gas prices in response to the uncertainty in Europe’s financial situation could offset any potential difficulties for the American economy. Plosser said Europe “is just throwing a lot of noise into the system right now. It makes reading the tea leaves particularly difficult right now.” He noted, however, that a “flood of liquidity” into the US seems much more likely than investors running from US financial institutions. But, he added, the Fed will be able to deal with any fallout from Europe’s economic troubles. He believes the Fed has the necessary tools to deal with the situation, no matter what the situation.

So, how is the Euro situation likely to be resolved? Well, the Greek election is June 16, so the Euro probably won't implode before the election, however there will be significant posturing. Most Greeks want to stay in the euro-union; by a wide majority of over 80%. The last election was an opportunity to express anger with the mainstream centrist parties that had made such a mess. The reality is that most Greeks don't like the extreme right wing and left wing parties. Look for a return to the center, maybe the center-left.

Once Greece actually has a government, the most likely solution is for Germany and France to reset interest on Greek debt to zero, and possibly some partial defaults on debt. The Greeks are not likely to accept more austerity without seeing the banksters take a haircut. And this might be the only way for the Greeks to get out of debt, depending on the terms. And there's the rub. The terms of any deal will likely be punitive; in which case, the deal never gets done, or the deal goes sour within a year or so.

The latest plan is actually a plan floated last year by Germany’s opposition parties that involves joint European liability for nations’ sovereign debt. It’s called the European Redemption Pact (PDF). Since fresh thinking on the European debt crisis is badly needed, it’s worth taking a look. Here’s the plan in a nutshell: The debt of the 17 countries belonging to the single-currency euro zone is split into two parts. The portion up to 60 percent of each nation’s gross domestic product stays on the books, unchanged.

The portion of nations’ debt exceeding 60 percent of GDP is transferred into something called the European Redemption Fund. The 17 countries are still liable for the portion of their debt that’s transferred in the fund. They have 20 or 25 years to pay it off.

Legally, however, all 17 nations are jointly liable for the debt placed in the fund. This is a way for low-debt nations such as Germany to backstop high-debt nations like Greece, giving peace of mind to their creditors and lowering interest rates. To make sure countries pay off their debt in the European Redemption Fund, some of their national tax revenue would be earmarked for repayments. They would also have to commit to fixing national finances to free up money for debt service. Having gotten the rest of their debt down to 60 percent of GDP, countries wouldn’t be allowed to run it back up. There would be automatic “debt brakes”.

If this is the best tool to deal with the Euro-debt problem then there is reason to get your dither up; there is reason for the Greeks to spit on such a deal; there is no way they could repay the Redemption Fund while containing debt to GDP ratios.

If the Germans really want redemption, the solution is really quite simple, eliminate usury against the Greeks; cut interest rates to zero; wipe out some of the existing debt; take the hit now and make the future better; give them a fighting chance; treat them with some dignity and stop treating them as lazy thugs.

And this brings us back to the comments from Philly Fed Prez Plosser; he claims there is no reason to get all in a dither over the euro-debt crisis. He may be right but it would require more compassion and more common sense than the ECB, the IMF, and the euro-banksters have demonstrated to date.

Meanwhile, here is another example of why the Greeks voted for the extreme fringe. The Greeks don't have a governmetn, they don't have bandages in their hospitals, and the bailout money from the Euro-union, well that goes to the banks; $22.6 billion for Greeks four biggest banks — via bonds from the EFSF, the European Fubar Slush Fund. The Hellenic Financial Stability Facility was set up to funnel funds from Greece’s bailout program to recapitalize its banks. As long as this is the priority, it is understandable why the Greeks are voting angry.

Of course, the euro-crisis is no longer contained in Greece. Spain is standing on the edge of the financial cliff. Last week, Spain nationalized their fourth largest bank, Bankia. Late today, we learned the European Central Bank has rejected Spain's proposed plan to recapitalize Bankia with government bonds. Spain had proposed putting $24 billion in sovereign bonds into Bankia's parent company, which would then get swapped out for cash at the ECB's three-month refinancing window. The ECB reportedly rejected the plan on the grounds it violated EU rules against central bank funding of governments. Apparently, consistency is not one of the tools in the central bankers' tool belt.

In the latest symptom of Europe’s financial turmoil, the region’s riskier companies are bypassing banks and investors at home and turning to the US for loans. European companies borrowed about $18 billion in the US leveraged-loan market this year, more than double the amount for all of 2011

The S&P/Case-Shiller home price index was unchanged in March; the good news is that it didn't go down; the bad news is that it remains at post-crash lows. Phoenix continues to lead the recovery, up 2.2% in the first quarter. San Diego was up 0.4% for the quarter. LA gained 0.1%. The worst performers in the first quarter: Detroit and Chicago.

The Conference Boards, consumer-confidence index declined to 64.9 in May, the lowest level since January and the third monthly decline. Consumers were less positive about current business and labor-market conditions, and they were more pessimistic about the short-term outlook. To assess how consumers view the employment environment, economists follow a labor-market statistic derived from the Conference Board’s report. The labor differential subtracts the percentage of respondents who said jobs are “hard to get” from the percentage who said jobs are “plentiful.” The labor differential hasn’t been positive since January 2008, near the beginning of the Great Recession. In May the labor differential reached negative 33.1% — the lowest since January — compared with negative 29.7% in April.

On Friday, the Labor Department will report on employment for May, and nonfarm payrolls are generally guesstimated to rise to 168,000, compared with 115,000 in April. Hundreds of thousands of out-of-work Americans are receiving their final unemployment checks sooner than they expected, even though Congress renewed extended benefits until the end of the year.

In February, when the program was set to expire, Congress renewed it, but also phased in a reduction of the number of weeks of extended aid and effectively made it more difficult for states to qualify for the maximum aid. Since then, the jobless in 23 states have lost up to five months’ worth of benefits.

Next month, an additional 70,000 people will lose benefits earlier than they presumed, bringing the number of people cut off prematurely this year to close to half a million.

Some states are making it harder to qualify for the first few months of benefits, which are covered by taxes on employers. Florida, where the jobless rate is 8.7 percent, has cut the number of weeks it will pay and changed its application procedures, with more than half of all applicants now being denied.

Most states offer 26 weeks of unemployment benefits, plus the federal extensions that kicked in after the financial crash. The number of extra weeks available by state is determined by several factors, including the state’s unemployment rate and whether it is higher than three years earlier. So states like California have had benefits cut even though the unemployment rate there is still almost 11 percent. Benefits have ended not because economic conditions have improved, but because they have not significantly deteriorated in the past three years. In May, an estimated 95,000 people lost benefits in California.