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Stocks have fallen 2% in early trading, but recovered off session lows and are basically even with the lower opening. The Standard and Poor’s political gambit is certainly part of the story, but the crisis in Europe has driven stock prices over the past week or so. A discussion between the world’s leading finance ministers focused more on Europe than S&P. The debt crisis there led to a Sunday night bailout (Sunday is the new Monday again, as Calculated Risk tells us) from the European Central Bank, which intervened to purchase Italian and Spanish debt to lower their yields.
Borrowing costs for Spain and Italy tumbled on Monday as the European Central Bank intervened to buy the countries’ respective bonds and try to stabilise financial markets.
Dealers reported that the ECB had started buying the debt as soon as European bond markets opened. A senior Italian official said his impression was that the ECB was buying.
Yields on 10-year Italian bonds, which move inversely to prices, fell 60 basis points to 5.49 per cent, taking them well below the 6 per cent level above which they had been trading for much of last week.
Spanish borrowing costs also dropped, the 10-year bond yield falling 79 basis points to 5.25 per cent. The euro rose against the dollar.
Bond yields are pretty much the direct near-term crisis in the larger European states, particularly Italy, which doesn’t particularly have a deficit issue. This is a panic-based crisis, based on the belief that debt problems will spread out from Greece and Portugal and Ireland to Italy and Spain. So decisive action by the ECB is desired and probably a little late.
The question is whether or not it will work. Markets lost their gains in Italy and Spain even as the bond yields fell. The truth is that we have a global unemployment problem, which goes hand in hand with a depressed economy. Governments seem far more spooked by bond markets and debts and deficits than this fundamental point. The fact that increased employment would bring in more tax revenue and reduce deficits doesn’t seem to shake this dynamic.
If anything, at least the ECB is attempting to use their power to improve the economies of their members, if only by driving down their bond yields. Fiscal policy or monetary policy aimed at full employment have not followed. And so we muddle on.
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Yves has this http://www.nakedcapitalism.com/2011/08/market-upheaval-update.html seems the banks can’t get overnight loans from one another so outside banks are unwilling as well…put them on the precipice of insolvency.
Jobs jobs jobs! We all need income to be good patriotic consumers.
Excuse my ignorance, but I have a serious question. We know that US deficits are not necessarily a bad thing if borrowed money is used to stimulate the economy by investing smartly. Is the same true for European debt, or are there other fiscal and/or monetary issues that make debt in European states more problematic?
Oh, and Italy investigates S&P while the US cowers against its powers. F’ing sorry country we’ve got.
Until the EU does something about Moody’s they will fail.
The satellite countries of Euro Zone are tied to the Euro and cannot print money or set monetary policy like USA so they get bullied into deficit reduction. Short answer
The EU has two problems. The first is the straitjacket it put itself into by creating the euro. The euro was created in a panic when the soviet regime in East Germany collapsed. Mitterand feared a united Germany, and pushed the euro (at the cost of France’s economic growth) as a way of keeping Germany and France locked in an indissoluble embrace. The economic arguments for the Euro advanced at the time were laughable. Now, the Euro ended up working somewhat better than anticipated, but when it was extended to peripheral countries whose productivity levels relative to wages were below those of Germany and France, the ultimate result had to be some kind of deflation in those countries. That is where we are now, and it is a replay of the Gold Standard crisis of the late 1920s and early 1930s.
The second problem is bank fraud, the same as in the US. The same excesses that led to inflation of property values in the US had the same effect in Spain, Ireland, and in lesser measure other European countries. The French and German banks are very heavily invested in that toxic debt, and could well be insolvent if marked to true market. Their governments are supporting them via the ECB.
The two issues are linked, since any departure from the Euro by Greece, Portugal, Ireland, and (ultimately) Spain would cause the big French and German banks to fail, which is what the French and German governments are struggling to prevent.
Except in Greece, where the banks let the government do what US banks encouraged insolvent American home-buyers to do, public deficits are not the issue. They increase when the economy shrinks, but the structural deficits are sustainable.
Long answer
http://www.nakedcapitalism.com/2011/08/market-upheaval-update.html
Seems the more central banks do, the worse the market reaction as Europe has dropped like a stone today even after the ECB bought Spanish debt. The same effect has taken place in US markets. Considering the fact that the Federal Reserve gave away 16 trillion to banks both here as well as in Europe, it would seem the desired effect has escaped the great monetary minds around the world especially in Washington.
The Fed Audit…..http://sanders.senate.gov/newsroom/news/?id=9E2A4EA8-6E73-4BE2-A753-62060DCBB3C3
July 21, 2011
The first top-to-bottom audit of the Federal Reserve uncovered eye-popping new details about how the U.S. provided a whopping $16 trillion in secret loans to bail out American and foreign banks and businesses during the worst economic crisis since the Great Depression.
Italy shows the way it should be done. Seize the computers, e-mail and I bet there would be a clear answer to S&P’ motivations. But hey, this is America and it would expose all the dirty politicians too.
Thanks Knut and bigbrother.
Bit unrelated, but rumors now that Fitch and Moodys may be following S&P. Moodys specifically cites concern over the Bush/Obama tax cuts. If they don’t believe the tax cuts will be stopped, they will be more likely to downgrade the US credit rating.
The update on that post is alarming.
Just shoot me now – Obama is scheduled to assure the country about the economy by pushing for more austerity!:
According to the White House official, Obama will offer a reassuring assessment of the economic situation, citing reasons for confidence in the U.S. economy despite the decision last week by Standard & Poor’s to downgrade the U.S. credit rating for the first time in history.
In addition, Obama will call again on the special congressional fiscal committee to be set up under the recent debt ceiling deal to take a “balanced” approach to deficit reduction that he has been advocating, the official said.http://www.cnn.com/2011/POLITICS/08/08/obama.economy/
No we should not shoot you.
You are needed for the coming fight against Obama and the Congresscritters super duper special committee. If enough of us say “I’m mad as hell and I am not going to take it anymore…” and begin marching for an “American Spring” and I really mean marching, they will begin to fear us more than they fear their corporate masters.
I do plan to go to Washington as soon as the plans are finalized.
“Come to Chicago” was the chant in 1968, this chant should be “Come to Washington.”
Endless printing of a fiat currency is not the answer, either to the crisis in the European Community or here at home. All it does is eventually erode the value of the currency and becomes a slow default of the sovereign debt.
The problems in Europe are due to an overwhelming debt load that is clearly unsupportable by the underlying econom(ies), a huge portion of the econom(ies) based on governmant spending, and a real estate boom where the population and banks relied on the greater fool theory to enrich themselves at the expense of the last one out.
Kind of sounds like the US, doesn’t it? That’s because Europe is simply about 18 months ahead of where we stand today.
He has 2 options. Screw the poor and middle class or increase taxes on companies and the most wealthy. Given the fact he’s a fiscal conservative, he’s going to aim for the former. Since he’s afraid to come right out and push that directly, he has to rely on manipulating the process to get what he wants, which hasn’t quite worked out as well as he needs it to, hence the S&P downgrade (and likely another downgrade as well as downgrades from Moodys and Fitch).
Also brings to mind that old Airplane song:
Look who’s marching in the street
Got a revolution, got to revolution!
I always got a good chill when they sang, “We’re volunteers for America…”
And, natch, there will be no pulling of computers at S&P.
Thank you. I forgot about that one, and I love Jefferson Airplane now I guess their called “Starship.” Old age causes “sometimers” for me.
Yeah, me too! Don’t know if they were already Starship when that song was recorded. They will always be Airplane to me :)
We can expect the idiot in chief to come out any moment now and say, not to worry, we will eliminate 6 trillion in spending and surrender a another trillion in the SS trust fund. Now that is a reduction you can be proud about.
A good piece on the minefield. “The Euro Endgame” (2 pages):
http://www.weeklystandard.com/articles/euro-endgame_577311.html
http://blogs.telegraph.co.uk/news/danielhannan/100094149/the-eu-is-determined-to-postpone-the-greek-default-until-taxpayers-have-assumed-the-banks-liabilities/
EU determined to postpone Greek default until taxpayers have assumed the banks liabilities.
Why don’t you go post on a blog where people don’t know what they are talking about. You’ll be at home there. What are your creds in this material? Did you take a correspondence course from some college advertised on the back of a matchbook, or do you just get it straight from the Koch’s? Don’t waste our time.
I agree, mostly. That post was a bit over the top, but more desperate than malicious.
The link I offered above (#23) addresses an endless printing of a fiat currency. Yet it could be a clever management tool, depending. Well, maybe not endless, but certainly within some sovereign discretion.
In that article there was a suggestion that Greece would have been better off with a fiat drachma than a fiat euro. But at this late date Greece has gotten to the point where it desperately needs to devalue “its” currency by around 50% to recover from where it is now. They can’t do that with the euro, and wouldn’t have gotten into this pickle if they had shunned the eurozone a decade ago.
Maybe the same could be said of all of other softer European economies as well. We’ll find out, some of them are waiting in line.
If that’s true it would question the logic behind the euro from the gitgo, and how so many people got taken in. Were there budding thiefs back then who are about to lose their shirts now?