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Generational Dynamics Web Log for 27-Nov-2010
27-Nov-10 News -- Europe is torn apart as financial crisis hits Spain

Web Log - November, 2010

27-Nov-10 News -- Europe is torn apart as financial crisis hits Spain

North Korea threatens imminent war with South Korea

Europe is torn apart as Spain's bond become target of panic selling

There was one bit of dark humor going around on Friday, as Europe's financial situation measurably worsened.

Portugal's finance minister Fernando Teixeira dos Santos said that Portugal doesn't need a bailout, and the European Union can't force Portugal to take one, according to Bloomberg.

Dos Santos said, "There are those who think that the best way to preserve the stability of the euro is to push and force the countries that at this moment have been more under the floodlight to that aid. But that is not the vision or the political option of the countries that are involved."

The reason that his statement is very, very funny is because it was just a week ago that dos Santos was saying that Ireland HAD to accept bailout money, for the good of everyone. "I want to believe they will decide to do what is most appropriate together for Ireland and the euro. I want to believe they have the vision to take the right decision," he said, according to Reuters.

So, this week the worm has turned, the shoe is on the other foot. Now it's Portugal that appears to be headed for certain default, and many analysts are calling a quick bailout of Portugal to calm the markets.

But we're beginning to see how the game is played. When a country is going to be bailed out by the European Union (EU), the European Central Bank (ECB) and the International Monetary Fund (IMF), this troika has the right to demand certain things in return, usually an extremely harsh austerity budget to reduce the country's debt. So Ireland held off asking for aid as long as possible, in order to retain its negotiating leverage, and now Portugal is doing the same.

Even with all that going on, Portugal really isn't the big story today. The big story is Spain.

The following graphs show the bond yields for each of the PIIGS countries, excluding Italy:

10-year bond yields for Spain, Portugal, Ireland and Greece -- year preceding November 26, 2010 (Bloomberg)

10-year bond yields for Spain, Portugal, Ireland and Greece -- year preceding November 26, 2010 (Bloomberg)

The above graph shows the yields (interest rates) on 10-year bonds sold by each of the four countries. The yield is highest if investors believe that the country is so far in debt that it might not be able to purchase the bond back after ten years.

Last spring, we were writing about what appeared to be an all-out panic over Greek bonds, as yields reached over 12%. When the $1 trillion super bailout was announced in May, yields fell in all four countries, as investors accepted the claim that their bond investments were safe.

Now Ireland's bond yields are above 9% and Portugal's are around 7%. These figures are extremely high, when you consider that the yields on Germany's bonds are around 2.3%.

But what's capturing everyone's attention now is Spain. Bond yields are around 5.2%, but they appear to be going parabolic, as you can see from the graph. A bailout of Spain would cost more than the other three bailouts combined.

The European Union is increasingly in disarray, with the most angry differences focused on Germany, the largest economy, and the one weathering the crisis best. Last week, Chancellor Angela Merkel expressed the opinion that countries should be allowed to default, rather than be bailed out. According to an analysis by the Irish Times:

"The bailing out of Ireland was, among other things, designed to contain the euro zone financial crisis. It has failed to do that. ...
The ratchet of ever-rising yields has broken Ireland and Greece. It is very difficult now to see how Portugal can avoid the same fate. If – or much more likely when – that fate befalls the smaller of the Iberian states, there is little reason to believe that its bailing out will do anything more to calm the crisis than did the rescues of Ireland and Greece.
Europe’s economic strains are causing political strains, which in turn make containing the economic crisis more difficult. At times they have exacerbated it.
Vicious cycles are becoming visible. Frustrations are boiling over and openly critical statements by political leaders are being made of their counterparts.
Germany has been the subject of most opprobrium. Interventions by its leaders and central bankers since the start of the financial crisis have often been as damaging as they have been inexplicable.
No intervention has been as damaging or as inexplicable as Chancellor Angela Merkel’s call earlier this month to create a framework to impose losses on holders of government bonds. The statement poured petrol on the fire in the bond market.
There can be little doubt now the correct-but-appallingly-timed call triggered the panic that did it for Ireland.
If it weren’t for Germany’s demonstrated commitment to European integration over decades, one would suspect that it was working to ensure it has an exit option from the euro if its elite or public decide they can no longer bail others out.
In Ireland, there is plenty of finger-pointing and blame-apportioning. In the Department of Finance, there is fury with the Germans for fanning the flames in the bond market.
Anger at Germany is matched by that towards the European Central Bank. Two weeks ago it pulled the trigger that led to the bailing out of Ireland.
“The ECB f--ked us,” said one official matter-of-factly yesterday.
And this fury is not confined to the Government and its officials. Fine Gael’s finance spokesman, Michael Noonan, suggested that Germany was benefiting from the crisis and that the EU institutions may be imposing too great a burden on Ireland. He said, too, that he wanted to tell the European Commission that “Ireland was not a colony”.
For a member of a political party that has been as committed to the integration project as any in Europe to speak in this way is surely of some considerable significance. ...
Deepening divisions and rising political tensions in Europe weaken the prospects of addressing the growing financial crisis with a co-ordinated and proportionate response.
The situation is beginning to feel like the weeks after the collapse of Lehman Brothers in September 2008. Things are on the slide. Policymakers may need some dramatic action early next week if the slide is to be halted."

This is a pretty good analysis of some of the strains that Europe is facing.

If you look once more at the bond yield graphs above, you'll see one more thing: Bond yields have been rising steadily for a year, and show no signs of stopping. It wouldn't be far from the truth to say that investors are panic-selling all of Europe's financial system.

The Irish Times analysis concludes, "Policymakers may need some dramatic action early next week if the slide is to be halted."

Well, policymakers have already taken dramatic action -- several times in fact. The most dramatic was in May, with the $1 trillion bailout.

There's a good reason why I keep referring back to my 2008 article, "One, Two, Three ... Infinity." The point of that article is that each bailout would fail, and the next one would have to be larger, and would achieve a smaller effect.

The point that I've been making on this web site for years is that there's NO SOLUTION to this situation. You have politicians and analysts who say that if Merkel had only said or not said something, or if the EU had only done or not done something, then the problem would be solved. But the problem is never solved, because there's NO SOLUTION. This crisis is generational. It was caused by the debased and debauched use of debt by the Boomers and Generation-Xers, after the Great Depression survivors had retired or died. Now a price has to be paid for that debauchery, and there is nothing that any politician can do to stop it.

EU officials are working this weekend to negotiate the final details of the bailout of Ireland. They want the plan to be completed by Sunday evening, before the markets open in Asia. The hope is that the plan will reassure the markets once and for all, and that bond yields will start to fall again. We'll see.

North Korea threatens imminent war with South Korea

The London Independent is reporting from Moscow that a Russian news agency is reporting that thousands of North Koreans working in eastern Russia have apparently been recalled to North Korea. The recall apparently was issued after Tuesday, when North Korea bombed the South Korean island of Yeonpyeong. If this report is true, then it indicates that North Korea is preparing for imminent war.

The following photo, also from the Independent, shows the damage done to the homes on Yeonpyeong island:

Destroyed houses on the once calm Yeonpyeong Island (Independent)

Destroyed houses on the once calm Yeonpyeong Island (Independent)

North Korea fired artillery shells into the sea on Friday, but did not strike any South Korean targets. Still, the firing unnerved a lot of people, who fear that they will be targeted again.

North Korea also said that the planned joint U.S.-South Korea military exercises in the Yellow Sea next week threatens the Korean Peninsula with imminent war.

Here's an Al-Jazeera video on Friday's news from South Korea:

Like the situation in Europe, the situation in Korea has no solution. The tension has been growing for a long time, and North Korea has been increasingly belligerent. Pundits who are saying, "Oh, this is just a kerfuffle over a succession crisis in North Korea, and it will all pass quickly" are dreaming. North Korea is a starving nation, and there's a clear generational change going on to younger people who see a war with South Korea as the solution to North Korea's problems.

Additional links

In another example of black humor, Russian Prime Minister Vladimir Putin said on Friday that he was very confident that the euro would survive the debt crisis, and he added that Russia might join euroland -- meaning that Russia would drop the ruble as currency and switch to the euro. In his speech in Berlin, he criticized the US dollar monopoly. Associated Press

With thousands of people sick from Cholera in Haiti, "body collectors" are collecting the bodies of people dead in the streets or at home, and burying them in mass graves. NY Times

The Saudi Arabia interior ministry announced the arrests of 149 terror suspects resulting from an 8-month sting. Most of the terrorists were targeting Saudi military and government buildings. One analyst said that the sting pointed to successful recruiting by Al-Qaeda on the Arabian Peninsula (AQAP). VOA

India is commemorating the massive 11/26 terrorist attack on Mumbai on November 26, 2008. The attack raised tensions with Pakistan, since Pakistan-based terrorists have been blamed for the attack. Indians are still blaming the Pakistan government for failing to bring to justice all the people involved in the attack. Times of India

(Comments: For reader comments, questions and discussion, see the 27-Nov-10 News -- Europe is torn apart as financial crisis hits Spain thread of the Generational Dynamics forum. Comments may be posted anonymously.) (27-Nov-2010) Permanent Link
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Generational Dynamics Web Log for 27-Nov-2010 27-Nov-10 News -- Europe is torn apart as financial crisis hits Spain

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Generational Dynamics Web Log for 27-Nov-2010
27-Nov-10 News -- Europe is torn apart as financial crisis hits Spain