Merkel’s complacency turns to panic, as the eurozone catches fire

Merkel’s complacency turns to panic, as the eurozone catches fire – S&P downgrades Spain, as the crisis dramatically spreads through southern Europe; Strauss-Kahn and Trichet try to persuade Merkel that the situation is serious; speaking to German MPs, Strauss-Kahn says rescue package will have to be $120bn for three years, no rescheduling/restructuring, no super seniority; German opposition says it will vote against legislation, and accuses Merkel of lying to the German public; Spanish banks find their access to market funding curtailed; southern European banks are subject to a quiet bank run, as depositors lose confidence in government guarantees; FT Deutschland editorial argues that Merkel’s procrastination has increased the cost of crisis resolution; the Lex column says EU committed the mistake of turning a manageable peripheral crisis into an uncontrolled crisis of confidence in the eurozone; Jurgen Stark says there is no way the ECB is going to buy Greek bonds; the Greek labour minister rejects calls by the European negotiators to eliminate the 13th and 14th salary; Portugal is stepping up debt reduction measures; the European Parliament, meanwhile, is postponing legislation to force banks to raise their capital ratios.

 Already Holding Junk, Germany Hesitates – Germany’s financial institutions hold some 28 billion euros, or $37 billion, in Greek bonds, according to estimates by Barclays Capital, extrapolating from International Monetary Fund data. Germany’s regulators and many of its banks do not disclose precise figures, but an informal survey on Wednesday of the largest banks indicates that about half of that debt — rated as junk by Standard & Poor’s since Tuesday — appears on the balance sheets of institutions that are owned or controlled by the German government. And so Germany’s exposure to Greek debt already exceeds, by far, the $11 billion the country would lend to Greece as part of an initial European Union plan to help the country avoid default on its debt — though not the $32 billion that may eventually be needed from Germany.

 Feldstein Says Greece Will Default and Portugal May Be Next (Bloomberg) — Harvard University Professor Martin Feldstein said Greece will eventually default on its bonds and other euro-area nations may follow, most probably Portugal.“Greece is going to default despite all the talk, despite the liquidity package,” Feldstein, who warned almost two decades ago that the euro would prove an “economic liability,” said in an interview with Tom Keene on Bloomberg Radio today. Greek officials are hammering out the terms of a three-year rescue package with European Union and International Monetary Fund officials that will probably give the country a loan of 45 billion euros ($59 billion) for 2010 alone. Greek bonds have plunged on concern about the country’s ability to pay its debt despite denials from officials that a default is in prospect.
 Greece Turning Viral Sparks Search for EU Solutions  (Bloomberg) — European policy makers may need to stump up as much as 600 billion euros ($794 billion) in aid or buy government bonds if they are to stamp out the region’s spreading fiscal crisis, said economists at JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc. With Greece’s budget turmoil infecting markets from Rome to Madrid, economists are urging German Chancellor Angela Merkel, European Central Bank President Jean-Claude Trichet and other officials to come up with unprecedented measures. Other steps could see governments guaranteeing bonds and the ECB abandoning collateral rules or reviving unlimited lending to banks, the economists said.
Market Manipulation, Systemic Risk and Fraud, Pure and Simple, And It Continues Today – This article by the Financial Times should remove any doubt in anyone’s mind that Goldman Sachs was willfully selling fraudulent financial instruments. It appears that they were working in conjunction with Ratings Agencies, Mortgage Origination Firms, and Hedge Funds to cheat investors. "Cheat" means to circumvent or distort the normal price discovery process through misrepresentation, price manipulation, and omissions and distortion of key data.Carl Levin summarized the situation in his opening statement this morning in tying together various Congressional hearings and investigations into aspects of the recent financial crisis and the underlying frauds. It sounds remarkably like the frauds that Enron had so recently inflicted on the American public. In particular, Congressman Levin gave a good description of the key role that derivatives played in this control fraud.

 Drilling And Spilling For All The Oil That’s Left – America’s dream of greater energy independence is rapidly turning into an ecological nightmare. Instead of filling empty gas tanks, BP’s Deepwater Horizon well miles offshore is oozing thousands of barrels a day of oil, already covering an area over 1,900 square miles in the food-rich waters of the Gulf of Mexico. With no way of shutting off the valve, which is now buried 1,900 metres below the sea, a $2-billion seafood industry is threatened, not to mention the billions more in damage to coastal real estate values and the potential devastation to wetlands and the wildlife they contain if the growing slick washes ashore.  Most forms of unconventional oil and gas (including, by the way, shale gas) are invariably very hard on the environment. Although tar sands production draws most of the world’s criticism, we are quickly discovering that deep-water wells and the pressure surges they engender run the risk of wreaking even greater ecological and environmental devastation.   If this week has shown us the pressure surge of wells a mile below the ocean floor, what are the prospects of our standing up to those we’ll encounter in newly discovered Gulf of Mexico fields like BP’s Tiber one, six miles below the ocean floor?

Peak Everything? When you really need something, it’s natural to worry about running out of it. Peak oil has been a global preoccupation since the 1970s, and the warnings get louder with each passing year. Environmentalists emphasize the importance of placing limits on consumption of fossil fuels, but haven’t been successful in encouraging people to consume less energy—even with the force of law at their backs. The debate over peak oil is heavily politicized, so let’s set it aside and test the idea of imminent resource peaks and their consequences for economic growth on three other non-renewable resources: lithium, neodymium, and phosphorus.

Monju Reactor Set To Resume Operation May 6 After 15-Year Suspension – Japan’s prototype fast-breeder Monju nuclear reactor will be restarted possibly on May 6 after a 15-year suspension as the governor of its host prefecture accepted the restart plan Wednesday. The reactor, located in the city of Tsuruga, was suspended following a sodium coolant leak and a resultant fire there in December 1995. The resumption has been postponed several times since then because of delays in repairs. However, it is unclear whether the development of a commercial fast breeder reactor will be completed by 2050 as envisaged by the government.

The Staggering Collapse of Living Standards in the US – 92% of Americans Unhappy with the Economy – A series of recent studies conducted by the Pew Research Center shed new light on the scope of the economic crisis in the US and the level of hostility the majority of the American population holds for the US government. Released in March, before the passage of the Obama administration’s health care legislation, a survey entitled “Health Care Reform—Can’t Live With It, or Without It” indicates that 92 percent of Americans give the national economy a negative rating. No fewer than 70 percent of the respondents report having suffered job-related and financial problems in the past year, an increase from 59 percent the year before. Fifty-four percent report someone in their home has been without a job and looking for work in the past year, up from 39 percent in 2009.

‘Strategic’ Mortgage Defaults Reach 12%, Morgan Stanley Says (Bloomberg) — Decisions by homeowners to walk away from mortgages they can afford are accounting for more defaults, according to Morgan Stanley. About 12 percent of all mortgage defaults in February were “strategic,” up from about 4 percent in the middle of 2007, New York-based Morgan Stanley analysts led by Vishwanath Tirupattur wrote in a report today.Borrowers with higher credit scores and larger loans are more likely to stop paying their mortgages even while staying current on other consumer debt of at least $10,000, the analysts wrote, based on analysis of data from Transunion LLC

IMF head’s economy warning for UK – There were fears that Britain could follow Greece into a financial crisis after a global finance chief warned of economic "contagion" spreading across Europe. The head of the International Monetary Fund urged politicians to finalise a bail-out for the debt-laden Mediterranean country, saying that every day lost in resolving the problems risked spreading the impact "far away". Dominique Strauss-Kahn’s comments came amid more evidence of Europe’s mounting fiscal problems after Spain’s debt was downgraded – a move recently applied to its under-pressure neighbour Portugal as well as Greece. On Wednesday, shadow chancellor George Osborne raised the spectre of the crisis affecting the public finances of the UK, which faces dealing with its own £163 billion mountain of public borrowing.

 Honeybee-Colony Losses Widened Last Winter, USDA  (Bloomberg) — Honeybees in the U.S. died at a greater rate from October to April than a year earlier, with more beekeepers attributing the cause to an illness that has devastated hives in recent years, the government said. Managed colonies lost to all causes reached 33.8 of the total, compared with 29 percent a year earlier and 35.8 percent during the winter of 2007-2008, the U.S. Department of Agriculture said today. About 28 percent of surveyed beekeepers reported losing hives without any evidence of dead bees, a sign of Colony Collapse Disorder, compared with 26 percent the previous year and 32 percent the year before that.“It’s unsustainable,” said Dennis vanEngelsdorp, a past president of the Apiary Inspectors of America, which helped conduct the USDA survey. “It’s a pretty big loss for beekeepers to absorb, and they can’t keep doing that.”

More Than a Million May Lose Jobless Aid Due to Deficit Concern (Bloomberg) — Since the U.S. recession began in December 2007, Congress has extended the duration of weekly unemployment benefits for the jobless three times. Now, the lawmakers may have reached their limit.They are quietly drawing the line at 99 weeks of aid, a mark that hundreds of thousands of Americans have already reached. In coming months, the number of those who will receive their final government check is projected to top 1 million.It’s a deadline that has rarely been mentioned in recent debates over jobless benefits, in which Republicans have delayed aid because of cost concerns.

CHART OF THE DAY: 49 Out Of 50 State Economies Are Still Underwater – 49 out of 50 U.S. states are still showing less economic activity than a year ago, based on February 2010 coincident economic indicators from the Federal Reserve of Philadelphia. The chart below is organized from top to bottom, from the most growth in economic activity to the largest declines in economic activity.

 HSBC Chief: London And New York Are ‘Yesterday’s News’ In The New World Of Finance – In a speech to the American Chamber of Commerce in Hong Kong, Mike Geoghegan, HSBC chief executive, forecast the rapid rise of Hong Kong and Shanghai as financial markets, the soaring influence of emerging market currencies, and the dominance of their economies.  "I believe the 2010s will bring about the close of the Western-centric mindset," he said. "We have now reached a point of no return. In a few years time, who’ll remember the G7? We’ll remember the E7 – China, India, Brazil, Russia, Mexico, Indonesia and Turkey. These are the ones which will matter."

The Fed at a Crossroads – Here’s the video from The Fed at a Crossroads panel discussion that I said I’d post:
Canada Sounds the Alarm – Last month the National Energy Board of Canada (NEB) issued a report entitled, “Short-Term Canadian Natural Gas Deliverability 2010-2012” which confirms my prediction about the strong likelihood of a significant and imminent decline in both Canadian natural gas production and natural gas exports to the US. In the 12 page document, the NEB provides three different price scenarios between 2010 and 2012, a high-price, mid-price and a low-price scenario. In each case, Canada’s natural gas deliverability and exports to the US decline. While I agree with many of the conclusions the NEB reaches in its report, I believe the NEB overstates Canada’s gas deliverability even in a low price scenario. Recent declines in Canadian natural gas prices and high levels of storage will result in a near shut-down of Canadian natural gas drilling activity for the balance of 2010. A dramatic fall in drilling will result in a sharp fall-off in natural gas production in the second half of 2010 and beyond.
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