The Economic Crisis in Europe

[Kobi]

WASHINGTON/MEXICO CITY (Reuters) - The International Monetary Fund is seeking to more than double its war chest by raising $600 billion in new resources to help countries deal with the fallout of the euro zone debt crisis, but the United States and other countries are throwing up roadblocks.

The United States and Canada said on Wednesday Europe must put up more of its own money to solve its sovereign debt crisis, clouding prospects that G20 talks in Mexico this week can lay the ground for a deal on bolstering IMF resources.

"We continue to believe that the IMF can play an important role in Europe, but only as a supplement to Europe's own efforts," a U.S. Treasury spokesperson said. "The IMF cannot substitute for a robust euro area firewall."

Group of 20 deputy officials are set to discuss boosting IMF resources, which will need leaders' signoff, at a meeting in Mexico City on Thursday and Friday ahead of a late February finance ministers' meeting of advanced and development nations.

The IMF currently has a lending capacity of about $380 billion and estimates there are about $1 trillion in "uncovered" financing needs over the next two years.

"Based on staff's estimate of global potential financing needs of about $1 trillion in the coming years, the fund would aim to raise up to $500 billion in additional lending resources. This total includes the recent European commitment of about $200 billion in increased fund resources," an IMF spokesman said.

"At this preliminary stage, we are exploring options on funding and will have no further comment until the necessary consultations," he added.

IMF sources who were present at an IMF board meeting on the issue on Tuesday told Reuters the IMF was seeking to raise up to$600 billion, with $100 billion needed as a "protection buffer."

There would be a $1 trillion global financing gap over the next two years if global economic conditions worsened considerably, the sources added.

The U.S. repeated that it would not contribute more resources to the IMF.

"We have told our international partners that we have no intention to seek additional resources for the IMF," a Treasury spokeswoman said.

With a strained budget at home, some U.S. congressional Republicans have threatened to yank $100 billion in U.S. money to the IMF if the funds are used to bail out euro zone countries. The White House is unlikely to want to take on the issue as President Barack Obama seeks reelection this year.

On foreign exchange markets, the reports of plans for increased IMF lending capacity helped boost the euro.

Euro zone nations have already promised to inject an extra 150 billion euros ($200 billion) into the IMF, which is included in the total estimate. G20 officials in Mexico for the meeting of deputy finance ministers and central bank officials said there was still resistance in some quarters to increase funding.

"Many countries want the Europeans to move ahead with tougher and clearer measures, which at this moment translates to more resources to its stability fund," said a senior Brazilian government source attending the meeting.

Bank of Canada Governor Mark Carney said it was not clear European governments had done everything necessary to make sure they could fund themselves at sustainable interest rates over the next few years.

"If it makes sense to enhance the resources of the IMF, the principal focus, it would seem, should be on dealing with fallout of the European crisis for innocent bystanders," he told a news briefing in Ottawa.

Another source connected to the process said that as well as Canada and the United States, Japan and Korea were also pressing for discussions first about Europe's contribution to the crisis and for it to agree on additional measures. European nations were arguing that they have done enough and were calling for more IMF resources now.

"If, with the parallel discussion, we can achieve extra measures from the Europeans and afterwards agree on promises of additional resources for the IMF from non-European countries in the G20, I think it would be a good result," the source said.

RESOURCES STRETCHED

The IMF currently has a lending capacity of about $380 billion and estimates demand could be about $ 1 trillion in the medium-term.

"Based on staff's estimate of global potential financing needs of about $1 trillion in the coming years, the fund would aim to raise up to $500 billion in additional lending resources. This total includes the recent European commitment of about $200 billion in increased fund resources," an IMF spokesman said.

"At this preliminary stage, we are exploring options on funding and will have no further comment until the necessary consultations," he added.

Emerging market countries such as China and Brazil have said they are willing to contribute new resources to the Washington-based global lender in exchange for greater voting power. Emerging market powers have repeatedly argued in recent times that their power at the IMF should be increased to reflect their growing clout in the world economy.

The IMF's managing director, Christine Lagarde, said on Tuesday she met with the IMF board to assess whether the global lender needs additional funds to respond effectively to the euro zone crisis. She said IMF management would explore options for increasing the fund's firepower.

The IMF has warned it will cut global growth projections for 2012 when it updates its forecast on January 24. Weakening global growth prospects raise fears that more countries will need to be rescued by the IMF, especially if capital markets freeze up completely.

The World Bank warned in its annual growth outlook late on Tuesday that Europe appears to already be in recession and developing countries should brace for a slowdown in their economies, especially Brazil and India, and to a lesser extent Russia, South Africa and Turkey.

With credit downgrades in nine euro zone countries by Standard & Poor's last week, including France, and uncertainty over Greek debt talks that risk pushing the country into default, the IMF board has urged euro zone leaders to take steps to contain the crisis.

The board called for policies that would address the European crisis and for euro zone policymakers to make sure there is enough money available to tackle the bloc's debt problems effectively.

http://news.yahoo.com/imf-seeks-more...000810904.html

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I see another house of cards with a really shakey foundation. Hope whomever makes the right decisions or it will get very ugly, very quickly.

[Cin]

Originally Posted by Kobi

I see another house of cards with a really shakey foundation. Hope whomever makes the right decisions or it will get very ugly, very quickly.

See I might be missing something here, but I think that is precisely the point. The uglier the better. Quicker not so much. No rush. The more time, the more money can be squeezed out of these crises.

Hedge funds and credit default swaps seem to be holding the world hostage.

Let's look at how this is playing out in Greece (and in time will play out everywhere.)

Hedge funds are minimally regulated and privately managed investment funds arranged so the rate of return is ridiculously high, easily far in excess of 10%. To accomplish these kinds of returns, hedge funds walk dangerously close to the edge.

So the thing is Greece can't pay off its loans. The EU and the IMF offer them a bailout package in exchange for enormous cuts in government spending and painful sacrifices by the Greek people. Hedge funds, which by the way must involve real people and real corporations, and there are about 8000 in the world, but in my research they are always referred to as simply hedge funds as though this financial terrorism is being conducted by inanimate objects, anyway, hedge funds have been buying up Greek debt. (Sound familiar? It should. Think housing debt.)

The EU wants to recall old bonds and replace them with new ones at lower interest. Now that would cost these bond holders money and they don't like to sacrifice anything, no matter how small, to help pay for the financial problems they create. So hedge funds are refusing the offer of the EU. Now you might ask why would they do that? If Greece defaults on the very bonds the hedge funds own won't that be like biting your nose to spite your face? Nope. Not at all. Actually quite the opposite. Why is that you might ask? And I hope you do.

Well, first off the financial elite that make up these hedge funds that have been buying up Greek bonds are in no hurry for the party to end and they want to get their hands on as much of the bailout money as possible, the suffering of the Greek people is as inconsequential and moving to them as the suffering of insects are to us. But, you may say, if Greece defaults won’t the holders of these bonds end up with nothing at all. Wrong again. Because, and this is the beautiful part of all this, the fact is that hedge funds have covered their bets with CREDIT DEFAULT SWAPS (these might also sound a little familiar, once again think US housing crisis then remember the derivatives involved, called weapons of mass destruction by Buffet, same game, still happening, the masters of the universe won't be happy till they destroy the world). Credit default swaps are financial insurance that would pay them the full value of the bonds (so why would they accept a deal where the bonds are discounted so Greece can afford to pay off its debt).

The problem with all this is that the entire financial system might collapse if Greece defaults. It’s like using a nuclear weapon in a way. If one bank fails to deliver it could set off a chain reaction of financial defaults around the globe.

Credit default swaps have been likened to nuclear weapons in that you can have them but you best not use them.

Before Wall Street and the financial world lost it's fucking mind, it used to be that bankers didn’t bet against their clients. If a client was successful the banker was successful. If the credit risk was bad you didn’t extend the loan or secured the loan with a lot of collateral, you didn’t give the person the loan and buy a credit default swap. This crap is ridiculous, toxic and financially destabilizing.

So what you see going on in Greece is financial blackmail by the hedge fund who holds the bonds. It’s like a game of chicken. And they get away with it because a large part of the word’s financial system has, of lately, been built with magic, voodoo, imaginary money and toxic economic practices and everyone knows it won’t take much for it all to come crashing down.

Apparently no one can stop these people.

Financial terrorism and economic weapons of mass destruction, how come we don’t declare war on them?

[Kobi]

"Financial terrorism and economic weapons of mass destruction, how come we don’t declare war on them?"



Good point. My only question is who is the "we" you are referring to?

Is the "we" our own financial institutions who stand to make a killing here, or if they make the wrong decisions, will throw the world into a depression and utter chaos?

Is the "we" the US government who is the means to an end for those mentioned above? The government who put the taxpayers on the hook for billions and trillions without requiring any accountability or punishment for those who created this mess? The government that employes the key figures in the meltdown in strategic positions and appointments?

Is the "we" the the individual taxpayer who has tasted what it is like to reap the fortunes in high risk stakes and then watched their fantasy burst as the house of cards came tumbling down? Is it the people who are struggling just to survive and who still believe there is a magical answer that will restore their fantasy life to solvency and financial growth? Is it the people who can recite the marketing they were sold but have little clue as to how this entire game is played in totality and by what rules?

Who do you expect to wage this war?

[Cin]

Originally Posted by Kobi

"Financial terrorism and economic weapons of mass destruction, how come we don’t declare war on them?"



Good point. My only question is who is the "we" you are referring to?

Is the "we" our own financial institutions who stand to make a killing here, or if they make the wrong decisions, will throw the world into a depression and utter chaos?

Is the "we" the US government who is the means to an end for those mentioned above? The government who put the taxpayers on the hook for billions and trillions without requiring any accountability or punishment for those who created this mess? The government that employes the key figures in the meltdown in strategic positions and appointments?

Is the "we" the the individual taxpayer who has tasted what it is like to reap the fortunes in high risk stakes and then watched their fantasy burst as the house of cards came tumbling down? Is it the people who are struggling just to survive and who still believe there is a magical answer that will restore their fantasy life to solvency and financial growth? Is it the people who can recite the marketing they were sold but have little clue as to how this entire game is played in totality and by what rules?

Who do you expect to wage this war?

Actually I was just poking fun at how the US always declares war on inanimate objects like drugs, terror and poverty. I don't actually expect anyone to declare war on Wall St.

Although it would be nice...

I don't expect anything to change at all. There are no restraints being put on these people and there is no intent by our government or our elected officials to ever do so. And clearly no one in Europe is prepared to call the bluff of hedge funds. Nobody is going to put a stop to or some controls on derivatives.

The only change I can see is that, because derivative got a bad name with the people who actually understand the housing market debacle wasn't about some people getting loans they couldn't afford and some people who couldn't pay their mortgages destroying the world's financial system, we won't hear the term derivatives thrown around much anymore. But rest assured they are alive and well and pointed directly at the heart of our financial security. Credit default swaps are derivatives. Very, very dangerous derivatives. And still no restraints in sight.

[Kobi]

Originally Posted by Miss Tick

Actually I was just poking fun at how the US always declares war on inanimate objects like drugs, terror and poverty. I don't actually expect anyone to declare war on Wall St.

Although it would be nice...

I don't expect anything to change at all. There are no restraints being put on these people and there is no intent by our government or our elected officials to ever do so. And clearly no one in Europe is prepared to call the bluff of hedge funds. Nobody is going to put a stop to or some controls on derivatives.

The only change I can see is that, because derivative got a bad name with the people who actually understand the housing market debacle wasn't about some people getting loans they couldn't afford and some people who couldn't pay their mortgages destroying the world's financial system, we won't hear the term derivatives thrown around much anymore. But rest assured they are alive and well and pointed directly at the heart of our financial security. Credit default swaps are derivatives. Very, very dangerous derivatives. And still no restraints in sight.

Dang it Tick. Here I am thinking you had some clandestine plan to help people to regain control of their minds, country and economics. Instead, it was a poignant rhetorical question. Poop. Me bad. Me have doofus moment.

The interesting part of this to me, is these complex,virtually incomprehensible investment instruments were concocted by mathematicians and statisticians who redefined economic possibilities and probabilities to Las Vegas style packages for the masses.

We must find more of these wizards. But, they must be the few with a conscience, whose focus is towards the good of the whole rather than the coffers of the few.

We need Harry Potter, invisibility cloaks, moving maps, hogwarts (Newt doesnt count), and all things magical to reverse the course and the curse.

I must ponder this further while my brain cells are still soaked in the soothing and illuminating nectar of NyQuil.

[Cin]

Originally Posted by Kobi

Dang it Tick. Here I am thinking you had some clandestine plan to help people to regain control of their minds, country and economics. Instead, it was a poignant rhetorical question. Poop. Me bad. Me have doofus moment.

The interesting part of this to me, is these complex,virtually incomprehensible investment instruments were concocted by mathematicians and statisticians who redefined economic possibilities and probabilities to Las Vegas style packages for the masses.

We must find more of these wizards. But, they must be the few with a conscience, whose focus is towards the good of the whole rather than the coffers of the few.

We need Harry Potter, invisibility cloaks, moving maps, hogwarts (Newt doesnt count), and all things magical to reverse the course and the curse.

I must ponder this further while my brain cells are still soaked in the soothing and illuminating nectar of NyQuil.

LOL. I wish I had an plan.

I read somewhere how it used to be the sciences that tried to recruit all the great minds of a generation but now it's the financial sector.

Wizards with a conscience...if only...

Ah if only these wizards would use their powers for good instead of evil.

But the thing is the minute you begin to do good your powers start to fade until eventually they disappear completely.

It really a strange new world.

[Ciaran]

Originally Posted by Miss Tick

LOL. I wish I had an plan.

I read somewhere how it used to be the sciences that tried to recruit all the great minds of a generation but now it's the financial sector.

Wizards with a conscience...if only...

Ah if only these wizards would use their powers for good instead of evil.

But the thing is the minute you begin to do good your powers start to fade until eventually they disappear completely.

It really a strange new world.

There's nothing new about financial engineering. It's been with us for many centuries via secondary markets which led to (in)famous scenarios such as the Dutch tulip crisis in the 17th century and the South Sea Bubble the following century.

The terminology, such as credit default swaps and derivatives, has got more complex and technical but the same concepts have been around throughout modern history. The may appear mystical but, intrinsically, instruments such as credit default swaps are ways to better manage risk - in other words, to ensure that the investor doesn't lose money.

The issue isn't, therefore, the instrument or the technology behind it. Rather, the issue is a much more basic one of borrowing of resources to speculate i.e. speculators will borrow significantly on positions with the result that, if their positioning is wrong, not only do they lose out but others do too. Sometimes this has significant negative consequences as we've seen recently.

On the issues you mentioned above of credit default swaps and how hedge funds are holding Greece to ransom. It's not hedge funds holding Greece to ransom. Rather, it's parts of the European Union apparatus that do not want an actual default of Greek sovereign debt for fear that this will have a domino effect sending the "house of cards" that is the Eurozone crashing down through similar defaults in other Eurozone countries, most likely Portugal & the Republic of Ireland and, more worryingly due to scale, Spain and Italy.

I have significant sympathy for the hedge fund position on this as investors are effectively being asked to agree to a default that is optically not to be called a default, with the effect that the credit default protection does not kick-in. Are there investors using this process for their short-term speculative purposes? Of course, but that doesn't take away from the fact that we're in an "emperor's clothes" scenario where the European political establishment is trying to orchestrate the inevitable Greek default through a "smoke & mirrors" approach whereby no official default is registered.

If I were an investor, who had CDS protection, I certainly wouldn't agree to that but, then again, I'm not an advocate of this European project and have a loathing of the European Union.

Furthermore, there already is significant financial regulation in place and prospective regulation that is being introduced over this coming decade. The key, from my perspective, isn't necessarily more regulation. Rather, it's about better regulation which can sometimes be less regulation as less is often more. This regulation needs to embrace a very simple and straightforward concept - that is the concept of moral hazard which, in simple terms, is you either pay back your debts or you suffer real consequences as a result.

This needs to be enshrined as regards all speculation, whether it's the large faceless fund using technical instruments in an attempt to make many $ millions or the man or woman who buys a condo with a 90%+ mortgage in the hope of capital appreciation.