Does the Euro Crisis Threaten the Global Economy in 2011? PIMCO’s Answer is Yes

Here is a cautiously optimistic perspective on the coming year’s economic outlook from PIMCO’s Saumil Parikh .  He forecasts a cyclical bounce in U.S. economic growth as a result of recent monetary and fiscal policy measures, mostly QE2 and tax policies.  On the other hand,  risks lurk in unsolved structural problems, including persistently high unemployment and excessive debt levels.

PIMCO agrees with Econgirl that the euro crisis poses a huge risk to global financial stability :

Policy coordination failure, coupled with political failure, is a non-trivial risk in Europe over our cyclical horizon. It is conceivable that one or more sovereign defaults in Europe give rise to a banking crisis with potentially deleterious consequences for “animal spirits” around the world. (our bold for emphasis)

This assessment refers to the architecture of cross border finance and the vulnerability of  20 large, complex financial institutions (LCFIs) with assets totaling about $56 trillion. Cross-border interconnections in a handful of countries (8 ‘nodes’ to be exact) in which the LCFIs are based pose significant systemic risk to global financial networks.  Spain is one of these 8 nodes. Together  they provided 2/3 of the on-balance sheet financial claims vis-a-vis the rest of the world at the end of 2009, according to BIS international banking statistics on foreign exposure. These claims break down as follows: 65% of advanced economies, 77% of emerging markets, and 81% of offshore centers. Spain holds 5% of all foreign claims — same as Switzerland.

Spain can set off a lot of dominos fast.

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Irish crisis redux


This man seems to have understood the Irish crisis perfectly. Watch his unedited views on this YouTube video. 

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What’s next for Portugal, Spain and Italy?

Rapid deleveraging by the northern European banks since December 2009 may make their governments less amenable to negotiation, and more inclined to demand tough austerity programs in return for bailouts.  Here is a very good analysis of the implications for Portugal, Spain, Italy, and the EU.

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What is the Irish Rescue Package?

Full text of the Government statement on its application for financial aid from the EU and IMF: 

The Government today agreed to request financial support from the European Union and the Euro Area Members States. The IMF will also be requested to assist in the provision of support.

The Government welcomes the agreement reached at the Eurogroup meeting today that providing assistance to Ireland is warranted to safeguard financial stability in the EU and in the Euro Area.

In the context of a joint programme EU/IMF, the financial assistance package to the Irish state should be financed from the European financial stabilisation mechanism (EFSM) and the European financial stability facility (EFSF), possibly supplemented by bilateral loans to be negotiated by EU Member States.

EU and euro-area financial support will be provided under a strong policy programme which will be negotiated with the Irish authorities by the Commission and the IMF, in liaison with the ECB.

The programme will address the budgetary challenges of the Irish economy in a decisive manner on the basis of the ambitious budgetary adjustment and comprehensive structural reforms that will be contained in the Government’s Four Year Budgetary Strategy. Given the underlying strengths of the Irish economy, decisive implementation of the programme should allow a return to a robust and sustainable growth, safeguarding the economic and social position of the people of Ireland.

A central element of the programme will also be to support further deep restructuring and the restoration of the long-term viability and financial health of the Irish banking system. It will build on the extensive measures taken by Ireland to strengthen its banking sector, via guarantees, recapitalisation and asset segregation. These measures have helped to maintain financial stability of the Irish banking sector at a time the both the banking system and the Irish economy have confronted significant challenges reflecting both domestic and international factors.

The programme will address the potential future capital needs of the banking sector. By building on the measures already taken by Ireland to address stress in its banking sector, a comprehensive range of measures – including deleveraging and restructuring of the banking sector – will contribute to ensuring that the banking system performs its role in the functioning of the economy.

Since the last Eurogroup meeting on the 16th November there has been very constructive and positive engagement and dialogue between the Irish authorities and the Commission, the ECB and the IMF in order to determine the best way to provide necessary support to address continuing market risks, especially as regard the banking system, in the context of the four-year budgetary plan and the upcoming budget.

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How bad are Ireland’s economic troubles?

An excellent article (appropriately titled) Threadbare from  The Economist  reports that Ireland’s banks have been unable to access wholesale capital markets, while corporate deposits have been fleeing abroad at an alarming rate in the past few weeks.

This has left the banks increasingly reliant on short-term loans from the European Central Bank (ECB), funding a sizeable fraction of their assets this way. For now they, like all euro-zone banks, have access to the central bank’s funds at its main interest rate (1% at present) for up to three months. But the ECB’s rate-setting council would like to tighten the terms soon. The ECB is said to have pressed Ireland to avail itself of aid from the euro zone’s rescue fund, created earlier this year, to reopen market financing for its banks. Investors fret that Ireland’s banks might need yet more support if a weak economy spurs a wave of further defaults on property loans.

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Bond Yields for Ireland and the Peripheral EU Countries

The yields of the peripheral EU countries (formerly known as the PIIGS) have been rallying for the past month.  Click on the link for each country’s chart on Bloomberg:






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What’s at Stake for Foreign Banks in Ireland

According to the Bank for International Settlements, (BIS) foreign lenders still have $170bn invested in Irish banks.

Of this total, $46bn has come from German banks, $42bn from British banks, $25bn from US banks, and $21bn from French banks.

But as John McHale writes in the Irish Economy, it’s not all about the banks.

The government has pushed the line in recent days that the flair up in the crisis is all about the banks.  There is little doubt that the trigger was ECB concern about their large and rising exposure to the Irish banking system.   But the idea that the banks are the problem and the state is fine – happily pre-funded as it is through the middle of next year – is nonsense.   As it stands, the Irish state is not creditworthy

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