(The following column by George Soros first appeared in the New York Review of Books and on Reuters.com. The opinions expressed are his own)
By George Soros
REUTERS – The euro crisis is a direct consequence of the crash of 2008. When Lehman Brothers failed, the entire financial system started to collapse and had to be put on artificial life support. This took the form of substituting the sovereign credit of governments for the bank and other credit that had collapsed. At a memorable meeting of European finance ministers in November 2008, they guaranteed that no other financial institutions that are important to the workings of the financial system would be allowed to fail, and their example was followed by the United States.
Angela Merkel then declared that the guarantee should be exercised by each European state individually, not by the European Union or the eurozone acting as a whole. This sowed the seeds of the euro crisis because it revealed and activated a hidden weakness in the construction of the euro: the lack of a common treasury. The crisis itself erupted more than a year later, in 2010.
There is some similarity between the euro crisis and the subprime crisis that caused the crash of 2008. In each case a supposedly riskless asset – collateralized debt obligations (CDOs), based largely on mortgages, in 2008, and European government bonds now – lost some or all of their value.
Unfortunately the euro crisis is more intractable. In 2008 the US financial authorities that were needed to respond to the crisis were in place; at present in the eurozone one of these authorities, the common treasury, has yet to be brought into existence. This requires a political process involving a number of sovereign states. That is what has made the problem so severe. The political will to create a common European treasury was absent in the first place; and since the time when the euro was created the political cohesion of the European Union has greatly deteriorated. As a result there is no clearly visible solution to the euro crisis. In its absence the authorities have been trying to buy time.
In an ordinary financial crisis this tactic works: with the passage of time the panic subsides and confidence returns. But in this case time has been working against the authorities. Since the political will is missing, the problems continue to grow larger while the politics are also becoming more poisonous.
It takes a crisis to make the politically impossible possible. Under the pressure of a financial crisis the authorities take whatever steps are necessary to hold the system together, but they only do the minimum and that is soon perceived by the financial markets as inadequate. That is how one crisis leads to another. So Europe is condemned to a seemingly unending series of crises. Measures that would have worked if they had they been adopted earlier turn out to be inadequate by the time they become politically possible. This is the key to understanding the euro crisis.
Where are we now in this process? The outlines of the missing ingredient, namely a common treasury, are beginning to emerge. They are to be found in the European Financial Stability Facility (EFSF)-agreed on by twenty-seven member states of the EU in May 2010-and its successor, after 2013, the European Stability Mechanism (ESM). But the EFSF is not adequately capitalized and its functions are not adequately defined. It is supposed to provide a safety net for the eurozone as a whole, but in practice it has been tailored to finance the rescue packages for three small countries: Greece, Portugal, and Ireland; it is not large enough to support bigger countries like Spain or Italy. Nor was it originally meant to deal with the problems of the banking system, although its scope has subsequently been extended to include banks as well as sovereign states. Its biggest shortcoming is that it is purely a fund-raising mechanism; the authority to spend the money is left with the governments of the member countries. This renders the EFSF useless in responding to a crisis; it has to await instructions from the member countries.
The situation has been further aggravated by the recent decision of the German Constitutional Court. While the court found that the EFSF is constitutional, it prohibited any future guarantees benefiting additional states without the prior approval of the budget committee of the Bundestag. This will greatly constrain the discretionary powers of the German government in confronting future crises.
The seeds of the next crisis have already been sown by the way the authorities responded to the last crisis. They accepted the principle that countries receiving assistance should not have to pay punitive interest rates and they set up the EFSF as a fund-raising mechanism for this purpose. Had this principle been accepted in the first place, the Greek crisis would not have grown so severe. As it is, the contagion-in the form of increasing inability to pay sovereign and other debt-has spread to Spain and Italy, but those countries are not allowed to borrow at the lower, concessional rates extended to Greece. This has set them on a course that will eventually land them in the same predicament as Greece. In the case of Greece, the debt burden has clearly become unsustainable. Bondholders have been offered a "voluntary" restructuring by which they would accept lower interest rates and delayed or decreased repayments; but no other arrangements have been made for a possible default or for defection from the eurozone.
These two deficiencies – no concessional rates for Italy or Spain and no preparation for a possible default and defection from the eurozone by Greece – have cast a heavy shadow of doubt both on the government bonds of other deficit countries and on the banking system of the eurozone, which is loaded with those bonds. As a stopgap measure the European Central Bank (ECB) stepped into the breach by buying Spanish and Italian bonds in the market. But that is not a viable solution. The ECB had done the same thing for Greece, but that did not stop the Greek debt from becoming unsustainable. If Italy, with its debt at 108 percent of GDP and growth of less than 1 percent, had to pay risk premiums of 3 percent or more to borrow money, its debt would also become unsustainable.
The ECB's earlier decision to buy Greek bonds had been highly controversial; Axel Weber, the ECB's German board member, resigned from the board in protest. The intervention did blur the line between monetary and fiscal policy, but a central bank is supposed to do whatever is necessary to preserve the financial system. That is particularly true in the absence of a fiscal authority. Subsequently, the controversy led the ECB to adamantly oppose a restructuring of Greek debt-by which, among other measures, the time for repayment would be extended-turning the ECB from a savior of the system into an obstructionist force. The ECB has prevailed: the EFSF took over the risk of possible insolvency of the Greek bonds from the ECB.
WORTH READING :
The most scathing report describing in exquisite detail the coming financial apocalypse in Europe comes not from some fringe blogger or soundbite striving politician, but from perpetual bulge bracket wannabe, Jefferies and specifically its chief market strategist David Zervos. "The bottom line is that it looks like a Lehman like event is about to be unleashed on Europe WITHOUT an effective TARP like structure fully in place. Now maybe, just maybe, they can do what the US did and build one on the fly – wiping out a few institutions and then using an expanded EFSF/Eurobond structure to prevent systemic collapse. But politically that is increasingly feeling like a long shot. Rather it looks like we will get 17 TARPs – one for each country. That is going to require a US style socialization of each banking system – with many WAMUs, Wachovias, AIGs and IndyMacs along the way. The road map for Europe is still 2008 in the US, with the end game a country by country socialization of their commercial banks. The fact is that the Germans are NOT going to pay for pan European structure to recap French and Italian banks – even though it is probably a more cost effective solution for both the German banks and taxpayers….Expect a massive policy response in Europe and a move towards financial market nationlaization that will make the US experience look like a walk in the park. " Must read for anyone who wants a glimpse of the endgame. Oh, good luck China. You'll need it.
Full Report:
In most ways the excess borrowing by, and lending to, European sovereign nations was no different than it was to US sub prime households. In both cases loans were made to folks that never had the means to pay them back. And these loans were made in the first place because regulatory arbitrage allowed stealth leverage of the lending on the balance sheets of financial institutions for many years. This levered lending generated short term spikes in both bank profits and most importantly executive compensation – however, the days of excess spread collection and big commercial bank bonuses are now long gone. We are only left with the long term social costs associated with this malevolent behavior. While there are obvious similarities in the two debtors, there is one VERY important difference – that is concentration. What do I mean by that? Well specifically, there are only a handful of insolvent sovereign European borrowers, while there are millions of bankrupt subprime households. This has been THE key factor in understanding how the differing policy responses to the two debt crisis have evolved.
In the case of US mortgage borrowers, there was no easy way to construct a government bailout for millions of individual households – there was too much dispersion and heterogeneity. Instead the defaults ran quickly through the system in 2008 – forcing insolvency, deleveraging and eventually a systemic shutdown of the financial system. As the regulators FINALLY woke up to the gravity of the situation in October, they reacted with a wholesale socialization of the commercial banking system – TLGP wrapped bank debt and TARP injected equity capital. From then on it has been a long hard road to recovery, and the scars from this excessive lending are still firmly entrenched in both household and banking sector balance sheets. Even three years later, we are trying to construct some form of household debt service burden relief (ie refi.gov) in order to find a way to put the economy on a sustainable track to recovery. And of course Dodd-Frank and the FHFA are trying to make sure the money center commercial banks both pay for their past sins and are never allowed to sin this way again! More on that below, but first let's contrast this with the European debt crisis evolution.
In Europe, the subprime borrowers were sovereign nations. As the markets came to grips with this reality, countries were continuously shut out from the private sector capital markets. The regulators and politicians of course never fully understood the gravity of the situation and continuously fought market repricing through liquidity adds and then piecemeal bailouts. In many ways the US regulators dragged their feet as well, but they were forced into "getting it" when the uncontrolled default ripped the banks apart. Thus far the Europeans have been able to stave off default because there were only 3 borrowers to prop up – Portugal, Ireland and Greece. The Europeans were able to do something the Americans were not – that is "buy time" for their banking system. And why could they do this – because of the concentrated nature of the lending. In Europe, there were only 3 large subprime borrowers (at least so far), so it was easy to front them their unsustainable payments – for a while. But time is running out. Of couse, the lenders (ie the banks) have always been dead men walking!
At the moment, the European policy makers – after much market prodding – have finally come to grips with the gravity of their situation. And having seen the US bailout movie, they know all too well what happens when a default of this caliber rips through the financial system. The reason the EFSF was created in the first place was so that there could be some form of a European TARP when the piper finally had to be paid and the defaults were let loose. Certainly many had hoped the EFSF could be set up as a US style TARPing mechanism (like our friend Chrissy Lagarde suggests). The problem of course is that there are 17 Nancy Pelosis and 17 Hank Paulsons in the negotiation process. And while the Germans are likely to approve an expanded TARP like structure on 29-Sep, it increasingly looks like it may be too little too late. The departure of Stark, the German court ruling on future bailouts/Eurobonds, the statements by the German economy minister and the latest German political polls all suggest that Germany is NOT interested a full scale TARPing and TLPGing process across Europe. They somehow think they will be better off with each country going at it alone.
The bottom line is that it looks like a Lehman like event is about to be unleashed on Europe WITHOUT an effective TARP like structure fully in place. Now maybe, just maybe, they can do what the US did and build one on the fly – wiping out a few institutions and then using an expanded EFSF/Eurobond structure to prevent systemic collapse. But politically that is increasingly feeling like a long shot. Rather it looks like we will get 17 TARPs – one for each country. That is going to require a US style socialization of each banking system – with many WAMUs, Wachovias, AIGs and IndyMacs along the way. The road map for Europe is still 2008 in the US, with the end game a country by country socialization of their commercial banks. The fact is that the Germans are NOT going to pay for pan European structure to recap French and Italian banks - even though it is probably a more cost effective solution for both the German banks and taxpayers.
Where the losses WILL occur is at the ECB, where the Germans are on the hook for the largest percentage of the damage. And these will not just be SMP losses and portfolio losses. It will also be repo losses associated with failed NON-GERMAN banks. Of course in the PIG nations, the ability to create a TARP is a non-starter – they cannot raise any euro funding. The most likely scenario for these countries is full bank nationalization followed by exit and currency reintroduction. Bring on the Drachma TARP!! The losses to the remaining union members from repo and sovereign debt write downs at the ECB will be massive (this is likely the primary reason why Stark left). It will require significant increases in public sector debt and tax collection for remaining members. And for the Germans this will probably be a more costly path. Nonetheless, politics are the driver not economics. There is a reason why German CDS is 90bps and USA CDS is 50bps – Bunds are not a safe haven in this world – and there is no place in Europe that will be immune from this dislocation. Expect a massive policy response in Europe and a move towards financial market nationlaization that will make the US experience look like a walk in the park. Picking winners and losers will be VERY HARD but let's look at a few weak spots –SocGen 12b in market cap (-70% this year) with assets of 1.13 trillion BNP 31b in market cap (-55% this year) with assets of 2 trillion Unicredito 13b in market cap (-70% this year) with assets of 1 trillion Intesa 14b in market cap (-70% this year) with assets of 700b Compare this with the USA where we have – JPM 125b in market cap with assets of 2.1 trillion BAC 70b in market cap with assets of 2.2 trillion
Importantly, France GDP is only 2 trillion and in bank balance sheets are some 400% of that number. The banks are dead men walking with massive leverage to both home country income as well as assets. The governments are about to take charge and Europe as a whole is about to embark on a sloppy financial market socialization process that has been held back for nearly 2 years by 3 bailouts. The weak links will not be able to raise enough Euros/wipe out enough private sector equity to get this done, so there will be EMU members that need to exit and use a reintroduced currency for this process. We put a Greek drachma on the front cover of our Global Fixed Income Monthly 20 months ago for a reason.
Ex-company secy levels charges against Kanorias.
Viom Networks, a venture between Tata Teleservices and Srei Group enterprise Quippo, has run into a cloud of controversy over charges of financial irregularities.
The company has appointed KPMG to assess the extent of the graft, if any, after a former company secretary alleged that the Kanorias of the Srei Group diverted funds to the tune of Rs 300 crore to some private institutions.
In 2009, the tower businesses of Tata Teleservices and Quippo were merged to form Tata Quippo, which was subsequently named Viom Networks. Initially, Tata had 51 per cent stake and Srei the balance. The stake of Srei has subsequently come down to about 18 per cent, but they still have management control over the company.
According to a contract between the two partners, the Srei Group will continue to have management rights till it has 12 per cent stake in the venture.
When contacted, Hemant Kanoria, chairman and managing director of Srei Infrastructure, said the company secretary was fired on
July 25, following which he made certain allegations. "Since the company has a whistle-blower policy and shareholders maintain higher standards of corporate governance, it was decided to appoint an independent auditor for a probe."
According to people close to the development, KPMG has already started looking into the issue.
In a late evening statement, Viom said the shareholders, board and management of Viom Networks were committed to the highest standards of corporate governance and the action reflected that philosophy.
Viom has more than 38,500 towers and around 95,000 tenancies. The company plans to roll out nearly 20,000-25,000 additional towers in the next two years. According to the company's website, Viom is the strongest player in neutral host shared in-building communication solutions, with installations already completed at most of the major airports.
Options traders are making the most bearish bets in a year against India, Asia's worst-performing stock market, before the central bank meets to consider extending a record series of interest-rate increases.
Prices for three-month puts to sell the S&P CNX Nifty Index have climbed 62 percent higher than calls to buy, and they reached 66 percent on Aug. 22, the highest since September 2010, according to data compiled by Bloomberg. Open interest for September 4,500 puts has jumped by 24,547 in the past week to 111,264 for the largest increase among all contracts on the benchmark index, which has slid 19 percent this year to 4,940.95, the data show.
Investor confidence is waning on concern that the Reserve Bank of India's five rate increases this year may compound the effects of a global economic slowdown on corporate profits. The highest inflation among major Asian economies may force the central bank to raise borrowing costs on Sept. 16, two days after the government releases data that may show inflation rose.
"Investors are buying puts as rising rates will continue to slow production," Arun Khurana, a Mumbai-based fund manager at UTI Asset Management Co., said in a telephone interview on Sept. 12. The mutual fund company is the nation's fourth largest, with $15 billion in assets. "Consumption isn't slowing and that is pushing inflation higher. The situation is moving out of the Reserve Bank of India's control."
Growth Slows
The central bank will lift the benchmark repurchase rate by a quarter point, according to all 11 economists in a Bloomberg survey, in an attempt to curb wholesale-price inflation that stayed above 9 percent for an eighth straight month in July. The rate has risen 1.75 percentage points this year to 8 percent. Factory production in July grew at the slowest pace in almost two years as consumer demand moderated after the rate increases, government data showed Sept. 12.
The India VIX rose 0.1 percent to 32.77 yesterday, near the two-year high of 34.88 reached on Aug. 9. The gauge of prices for Nifty options and expected share-price swings has averaged 30.75 in its almost four-year history. The Chicago Board Options Exchange Volatility Index fell 4.4 percent to 36.91 yesterday, while Europe's VStoxx volatility gauge lost 8.3 percent to 49.12.
Morgan Stanley cut its year-end estimate for the BSE India Sensitive Index, another benchmark gauge of the nation's equities, on Aug. 18 by 15 percent to 18,850. CLSA Asia-Pacific Markets lowered its forecast to 18,200 from 19,500 on Aug. 24.
'Constrained'
"It would be negative in the near term if they decide to increase rates," Seth Freeman, chief executive officer at EM Capital Management LLC in San Francisco, said about India yesterday in a phone interview. "Revenues are likely to go down because customers are constrained from higher borrowing costs."
Falling commodity prices and the worldwide economic slowdown may ease inflation pressures in developing nations including India, according to Geoffrey Dennis, global emerging- market strategist at Citigroup Inc. in New York.
The S&P GSCI Spot Index of raw materials has declined 13 percent from this year's high on April 8. Brazil's central bank unexpectedly cut interest rates on Aug. 31, while Turkish policy makers reduced borrowing costs to a record low after an unscheduled meeting on Aug. 4.
"The short-term inflation problem, which has been quite tough for emerging markets for the last 12 months, will ease," Dennis said during a Sept. 12 Bloomberg Radio interview. "That's going to help because it means less in the way of interest rate hikes than we thought would be the case a couple of months ago."
Implied Volatility
Nifty put options 10 percent below the index level have an implied volatility of 33.30, compared with 24.10 for calls priced 10 percent above, JPMorgan data show. Implied volatility is the key gauge of prices for options, which become more valuable as swings in the underlying stock or index increase.
September 4,700 puts have the largest open interest of all contracts on the index, with 167,619, followed by 142,526 outstanding September 4,800 contracts. The Nifty hasn't closed below 4,700 since November 2009. There are 1.76 million total puts on the index versus 1.29 million calls.
India's Nifty dropped for a third day yesterday, losing 0.1 percent to 4,940.95. Overseas investors withdrew a net $2.4 billion from Indian equities last month, the most since October 2008, data from the Securities and Exchange Board of India show. That helped send the Nifty down 8.8 percent, the biggest August drop since 1997.
Companies in the Nifty trade at 14.2 times reported profits, compared with a price-earnings ratio of 10.1 for the MSCI Emerging Markets Index.
'Not Justified'
"India's valuation premium over emerging markets is not justified with high inflation and slow growth," Saurabh Mukherjea, the Mumbai-based director of institutional equities at Ambit Capital Pvt, said in a Sept. 9 telephone interview. "Markets will continue to grind lower as the premium should narrow in line with long-term averages." The Reserve Bank may raise rates by another 50 basis points, he said.
Indian stocks are "somewhat overpriced," according to Mark Mobius, who oversees about $50 billion as executive chairman of Templeton Asset Management's emerging markets group. "Inflation at this stage is beginning to moderate but the concern going forward will be growth," he said in a Sept. 7 interview broadcast in India on Bloomberg UTV.
India's economy grew 7.7 percent in the June quarter, beating the 7.6 percent median of 26 estimates in a Bloomberg survey. Its growth was 7.8 percent in the previous three months, the second-fastest rate among the four-nation group including Brazil, Russia and China known as the BRICs.
'Stubborn'
The Reserve Bank of India said on Aug. 25 that price gains may remain "stubborn," which could limit the ability to hold or lower interest-rate levels. India's benchmark wholesale-price inflation was 9.22 percent in July, remaining at more than 9 percent for an eighth straight month. Consumer prices rose 6.5 percent or less in China, Indonesia, South Korea and Thailand for the same period.
This NEWS in FINANCIAL TIMES created last hour Buying in US Market and this is the reason ….ASIAN Markets are UP
Italy's centre-right government is turning to cash-rich China in the hope that Beijing will help rescue it from financial crisis by making "significant" purchases of Italian bonds and investments in strategic companies.
According to Italian officials, Lou Jiwei, chairman of China Investment Corp, one of the world's largest sovereign wealth funds, led a delegation to Rome last week for talks with Giulio Tremonti, finance minister, and Italy's Cassa Depositi e Prestiti, a state-controlled entity that has established an Italian Strategic Fund open to foreign investors.
Italian officials were in Beijing two weeks ago to meet CIC and China's State Administration of Foreign Exchange (Safe), which manages the bulk of China's $3,200bn foreign exchange reserves. Vittorio Grilli, head of treasury, met Chinese investors in Beijing in August. Italian officials said further negotiations were expected to take place soon.
The possibility of Chinese investment comes at a critical moment for Italy, as markets demand increasingly high yields to buy Italian public sector debt, projected to reach 120 per cent of GDP this year, a ratio second only to Greece in the eurozone.
Mr Tremonti has written extensively in the past about his fears of China's "reverse colonisation" of Europe. But he has been driven to seek new alternatives as Europe prevaricates over strengthening its bail-out fund and the European Central Bank warns that its month-old bond-buying programme cannot go on indefinitely. In a reflection of Italy's refinancing problems, the treasury on Monday sold €11.5bn of short-term notes at higher yields.
European analysts were cautious over the outcome of talks. Despite Beijing's numerous expressions of confidence in the creditworthiness of countries such as Greece and Portugal analysts say Chinese purchases of peripheral European debt have been relatively small.
How much of Italy's €1,900bn of debt is already held by China is unclear, though one Italian official told the FT that Beijing held about 4 per cent.
Italy's debt crisis has forced the government to consider possible sales of strategic stakes in companies such as Enel, the Italian power utility, and Eni, the oil and gas multinational.
Cassa Depositi e Prestiti is a founding member of the informal "long-term investors club" along with similar institutions in France and Germany. In July it launched its Italian strategic fund with an investment of €4bn that it plans to expand to €7bn with participation from other sources, including foreign institutional investors.
CIC was set up in 2007 with capital of $200bn and its assets under management now total about $410bn. It says it "maintains a strict commercial orientation and is driven by purely economic and financial interests" and that it is committed to "high professional and ethical standards in corporate governance, transparency and accountability". China's embassy in Rome had no immediate comment.
Three years after launching the Nano as “the world’s cheapest car”, Ratan Tata, chairman of India’s second largest industrial group, presented what may be the world’s most-expensive automobile: the jewel encrusted GoldPlus Nano.
Covered in 80kg of 22 carat gold and 15kg of silver, and inlaid with 10,000 semi-precious stones and gems, the ‘bling’ version of the Nano is a one-off showpiece that will tour Tata-owned jewelry stores across the country.
What was originally marketed as the People’s Car, selling for about $2,500, has been transformed into a golden chariot, with an estimated value some $4.68 million higher, based on the current price of bullion.
The makeover highlights the paradoxes of one of the world’s fastest-growing economies, where billionaires live side-by-side with the severely impoverished.
The original Nano, which launched with a 100,000-customer waiting list in 2008 and was aimed at an emerging middle class, has seen sales plummet. In August the Mumbai-based group shipped just 1,202 units, down 88 percent from April’s 10,012 units.
Analysts blame the fall on safety issues, poor marketing and a misunderstanding of the Indian consumer.
“Really for the Nano project to make any sense, you need to sell between 15,000 to 20,000 cars every month … [for] a couple of years,” said Deepesh Rathore, managing director for India at IHS Automotive.
Tata made clear the new car was simply a promotion for its GoldPlus stores, but analysts said that could confuse consumers and failed to address the broader problems the People’s Car has had since its launch.
“They are not getting their brand and marketing strategy right and it’s confusing the buyers,” said Surjit Arora, auto analyst at Prabhudas Lilladher. “They need to have a better and more aggressive marketing [strategy].
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Analysts also blame the Nano’s poor safety record. Several incidents of the cars spontaneously erupting into flames were widely reported, pushing Tata to offer its existing 70,000 Nano customers a safety upgrade to its electrical system and exhaust.
However, a more fundamental issue, according to Mr Rathore is that the car has been marketed in the wrong way from the beginning. Indians, he said, generally do not want to be known as buyers of the world’s cheapest car.
The showcasing of the car comes as Tata Motors announced a new Jaguar Land Rover engine plant in the U.K. on Monday and only 11 days after Carl-Peter Forster, the chief executive of the group, stepped down for personal reasons.
After reporting deep losses during the financial crisis, JLR is now solidly profitable and the main driver of Tata’s growth. The U.K. unit reported net profit of £1.04 billion for the 2010-11 financial year.
Tata’s lower-end brands have been suffering a broader drop in sales in the small passenger vehicles segment, which has also affected its domestic competitors. India’s auto sales fell in July for the first time in nearly three years.
The Mumbai-based group has plans to combat low sales by opening exclusive Nano-only dealerships throughout rural India, the market for which the small car was originally intended. The move has worked with the more utilitarian Tata Ace mini-truck, but an analyst said operating and start-up costs would prevent many entrepreneurs from starting the dealerships.
