May 17, 2012 7:50 pm

The last chance to rescue the euro

Daniel Pudles illustration©Daniel Pudles




Europe’s leaders should step out of the playground. The euro debate has become an infantile shouting match about a series of specious choices: fiscal austerity versus growth; spending cuts against jobs; market reforms or social inclusion. This way lies madness – and the certain disintegration of the single currency.



The clock is now showing one minute to midnight. Greece is probably beyond saving. The early signs of bank runs in Spain and other peripheral economies suggest the virus of contagion is taking hold even before Athens makes up its mind in a second general election. Policy makers have less time than they thought only a few days ago.




In pursuit of clarity governments should start by publicly agreeing on what they can agree on. Everyone presumably can sign up to the idea that deficits and debts must be brought down to sustainable levels. All should be able to admit that restoring competitiveness in the peripheral economies will require wrenching structural reforms. It is also self-evident that, without economic growth, debts and deficits will remain high and political consent will evaporate.


.
You do not have to be a Keynesian to recognise debt traps. Finally, improvement in the trade positions of eurozone weaklings requires smaller surpluses in the strong economies.



Germany’s Angela Merkel is right when she says Europe’s nations cannot borrow their way out of trouble. Mr Hollande cannot be gains-aid when he says growth is essential to restore fiscal sustainability. Mario Monti, the other member of the pivotal troika of European leaders, is on track when he says that there must be a pan-European dimension both to growth-stimulating investment and to market-based structural reforms. Germany could start by opening its services sector to continent-wide competition.



Politicians have to face up to one other simple truth. For a couple of centuries, Europe set the terms of its engagement with most of the rest of the world. Its economic and social structures were framed accordingly. The rise of the rest has upended this assumption. This need not mean scrapping the European social model. But it does demand a radical redesign.



The central pointblindingly obvious but lost to the cacophony – is that what matters is the mix and sequencing of policy choices. Deficit-reduction depends on growth, but growth is sustainable only in the context of preprogrammed fiscal discipline. Thinking in terms of binary choices is self-defeating: when the discussion turns to Keynes versus Hayek, the game is lost.



So how to get the policy mix right? This is where credibility comes in. The beginning of wisdom here is to recognise that credibility is a moving target. A year or two ago, all seemed straightforward: the financial crash had left huge government debts and deficits and created a lethal feedback loop between the solvency of the banks and the creditworthiness of sovereign borrowers. The only way to restore confidence was by slashing public spending, raising taxes and bringing down deficits.

.
So it seemed. It is worth saying this was not some German plot to seize control of the eurozone. Sitting outside the single currency, Britain had no need to take lectures from Berlin. Yet the first decision taken by David Cameron’s coalition was to accelerate plans to eliminate Britain’s structural deficit.

.
Without such a pledge, it declared, credibility would evaporate and interest rates would soar. As I recall, the approach was applauded by the Organisation for Economic Co-operation and Development and the International Monetary Fund.



This week saw confirmation that much of the eurozone is mired in recession. Britain is in the same boat. Spending cuts and tax increases have not brought the expected falls in deficits. As a result, the markets have been having second thoughts about what constitutes a credible strategy.


.
So, too, incidentally have the experts at the IMF and OECD. Even in Berlin there has been a subtle change of tone. Inexplicably, Mr Cameron alone seems determined to nail himself to the cross of austerity-come-what-may.



The implosion of the mainstream parties in Greece has added political risk to the confidence equation. Fiscal retrenchment can be credible only if it retains the consent of electorates. In the absence of economic growth, how long will Spanish, Portuguese, Irish and Italian voters bear the fiscal pain?



Austerity policies designed to sustain credibility have now begun to have precisely the opposite effect.


.
There will be nothing easy about finding a mix that will reclaim the confidence of investors. European leaders would make it less hard by offering some counter-intuitive policy commitments. Mr Hollande could say that efforts to underpin the European economy will be accompanied in France by serious structural reform. Ms Merkel could promise that ironclad commitments to fiscal discipline will be accompanied by German leadership in promoting growth.



That would still leave plenty of arguments to be had: about the size and scope of firewalls, the expanded role of the European Central Bank, the shape of fiscal union, debt mutualisation and the rest. But what is needed first is a clarity that begets credibility. Without these ingredients, all the rest is academic.


.
Copyright The Financial Times Limited 2012.

.
05/18/2012 05:57 PM
.
Crisis of Confidence
.
Fears of Bank Runs Mount in Southern Europe
.
By Stefan Kaiser
.




Following the downgrade of 16 Spanish banks by Moody's, the focus in the euro crisis is back on the banking sector. Greeks are withdrawing hundreds of millions from their accounts, with reports that the same is happening in Spain. Experts are calling on the European Central Bank to step in and prevent full-scale bank runs.



.

The final wake-up call came from Moody's. On Thursday evening, the US rating agency downgraded 16 Spanish banks in one fell swoop, some of them by three notches. On Monday, the agency had already downgraded 26 Italian banks -- including major institutions such as UniCredit and Intesa Sanpaolo. The outlook for all the institutions involved is negative, Moody's said.


.
.
These are drastic steps, but they are hardly excessive. The European sovereign debt crisis long ago also became a banking crisis. The fate of the affected countries can not be separated from that of their financial institutions: If a state goes bankrupt, its banks too will struggle to survive. On the other hand, the examples of Ireland and Spain show that a shaky banking system can quickly overwhelm national budgets.



.

Moody's justified its downgrades of Spanish banks with the argument that the ability of the government to support individual banks has worsened. On Friday, the Spanish central bank was also forced to admit that the proportion of bad loans on the books of Spanish banks has risen to an 18-year high. According to the central bank, the share of bad loans rose in March to 8.36 percent, compared to 8.15 percent in the previous month.




Clearing Out Accounts



.

Reports began trickling in earlier this week that savers in Greece were withdrawing hundreds of millions of euros from their bank accounts -- the German news agency DPA reported that almost €900 million was withdrawn just on Monday alone. Since then Europe has been seized by the fear of a worst-case scenario in Greek's banking system: a so-called bank run, as customers who have lost confidence in their banks rush to take out their savings.



.

Such a run would be the final stage in the loss of confidence in the banks. For months now, wealthy individuals in crisis-hit countries have already been moving billions of euros abroad out of fears about the stability of the financial systems in their own countries. Until recently, however, there had been few signs of abnormal behavior in terms of ordinary savers withdrawing cash.



.

The reason a bank run is so feared is because it could land every bank in the world in trouble -- even the healthiest ones. The banking system depends on the fact that banks only hold a small portion of customer deposits in cash that is ready to pay out. The rest is invested or passed on to other customers as loans.



.

Now, rumors are circulating that in Spain, too, people have begun to clear out their accounts at certain banks. The newspaper El Mundo reported that customers had withdrawn over €1 billion from the beleaguered major savings bank Bankia last week. The government in Madrid has denied the report, but the situation remains tense. On Friday, the Spanish newspaper Expansion reported that the US investment bank Goldman Sachs has now been tasked with providing an independent assessment of the problem bank.

 
 
..'Very Hard to Stop'



.

Some financial experts are now calling for rapid intervention by the European Central Bank (ECB) in order to prevent mass panic. "Once a bank run begins, it is very hard to stop without a credible deposit guarantee," Tristan Cooper, sovereign debt analyst at Fidelity Worldwide Investment, told the news agency Dow Jones. "Given the fragile fiscal position of Spain, the European Central Bank is under increasing pressure to step in to calm depositors' nerves."



.

.
But the ECB's options are limited. It has already provided Europe's banks with extremely cheap money in the form of three-year loans within the scope of its Long Term Refinancing Operations (LTROs). At that time, the banks borrowed a total of around €1 trillion in two auctions in December 2011 and February 2012. The ECB could provide another cash injection now. But some banks in crisis-hit countries are clearly running out of assets to give to the ECB as collateral for the loans. Eligible assets mainly include government bonds, though under certain conditions corporate loans can also be submitted.



.

On Wednesday, the ECB confirmed that a number of Greek banks have now been cut off from its refinancing operations. They apparently lack sufficient capital to use as collateral. Now those institutions will have to be kept alive through emergency loans from the Greek central bank in Athens.



.

Not all experts regard cheap money from ECB as a good solution. Hans-Werner Sinn, head of Germany's influential Ifo Institute for Economic Research, says that the ECB's actions have intensified the capital flight from the crisis-hit countries. "The cheap loans have downright put private capital to flight," he wrote in a recent opinion piece for financial daily Handelsblatt. "The purpose of the ECB measures was to build trust again and restore the inter-bank market. In that respect, they obviously weren't particularly successful."


Rival versions of capitalism
.
The endangered public company
.
The rise and fall of a great invention, and why it matters
.
May 19th 2012                  




AS THIS newspaper went to press, Facebook was about to become a public company. It will be one of the biggest stockmarket flotations ever: the social-networking giant expects investors to value it at $100 billion or so. The news raises several questions, from “Is it worth that much?” to “What will it do next?” But the most intriguing question is what Facebook’s flotation tells us about the state of the public company itself.



.

At first glance, all is well. The public company was invented in the mid-19th century to provide the giants of the industrial age with capital. That Facebook is joining Microsoft and Google on the stockmarket suggests that public listings are performing the same miracle for the internet age. Not every 19th-century invention has weathered so well.



.

The number of public companies has fallen dramatically over the past decade—by 38% in America since 1997 and 48% in Britain. The number of initial public offerings (IPOs) in America has declined from an average of 311 a year in 1980-2000 to 99 a year in 2001-11.


.
Small companies, those with annual sales of less than $50m before their IPOs—have been hardest hit. In 1980-2000 an average of 165 small companies undertook IPOs in America each year. In 2001-09 that number fell to 30.



.

Facebook will probably give the IPO market a temporary boost—several other companies are queuing up to follow its lead—but they will do little to offset the long-term decline.

.
.Companies are like jets; the elite go private


.
Mr Zuckerberg will be joining a troubled club. The burden of regulation has grown heavier for public companies since the collapse of Enron in 2001. Corporate chiefs complain that the combination of fussy regulators and demanding money managers makes it impossible to focus on long-term growth.



.

Shareholders are also angry. Their interests seldom seem to be properly aligned at public companies with those of the managers, who often waste squillions on empire-building and sumptuous perks. Shareholders are typically too dispersed to monitor the men on the spot. Attempts to solve the problem by giving managers shares have largely failed.



.

At the same time, alternative corporate forms are flourishing. Once “going public” was every CEO’s dream; now it is perfectly respectable to “go private”, like Burger King, Boots and countless other famous names. State-run enterprises have recovered from the wreck of communism and now include the world’s biggest mobile-phone company (China Mobile), its most successful port operator (Dubai World), its fastest-growing big airline (Emirates) and its 13 biggest oil companies.



.


No doubt the sluggish public equity markets have played a role in this. But these alternative corporate forms have addressed some of the structural weaknesses that once held them back. Access to capital? Private-equity firms, helped by tax breaks, and venture capitalists both have cash to spare, and there are private markets such as SecondMarket (where $1 billion-worth of shares has changed hands since 2008). Limited liability? Partners need no longer be fully liable, and firms can have as many partners as they want. Professional managers? Family firms employ them by the HBS-load and state-owned ones are no longer just sinecures for the well-connected.



Make capitalism popular again


.
Does all this matter? The increase in the number of corporate forms is a good thing: a varied ecosystem is more robust. But there are reasons to worry about the decline of an organisation that has spread prosperity for 150 years.



.

First, public companies have been central to innovation and job creation. One reason why entrepreneurs work so hard, and why venture capitalists place so many risky bets, is because they hope to make a fortune by going public. IPOs provide young firms with cash to hire new hands and disrupt established markets. The alternative is to sell themselves to established firmshardly a recipe for creative destruction. Imagine if the fledgling Apple and Google had been bought by IBM.



.

Second, public companies let in daylight. They have to publish quarterly reports, hold shareholder meetings (which have grown acrimonious of late), deal with analysts and generally conduct themselves in an open manner. By contrast, private companies and family firms operate in a fog of secrecy.



.

Third, public companies give ordinary people a chance to invest directly in capitalism’s most important wealth-creating machines. The 20th century saw shareholding broadened, as state firms were privatised and mutual funds proliferated. But today popular capitalism is in retreat. Fewer IPOs mean fewer chances for ordinary people to put their money into a future Google. The rise of private equity and the spread of private markets are returning power to a club of privileged investors.



.

All this argues for a change in thinkingespecially among the politicians who have heaped regulations onto Western public companies, blithely assuming that businessfolk have no choice but to go public in the long run. Many firms now go (or stay) private to avoid red tape. The result is that ever more business is conducted in the dark, with rich insiders playing a more powerful role.






Public companies built the railroads of the 19th century. They filled the world with cars and televisions and computers. They brought transparency to business life and opportunities to small investors. Because public companies sell shares to the unsophisticated, policymakers are right to regulate them more tightly than other forms of corporate organisation. But not so tightly that entrepreneurs start to dread the prospect of a public listing. The public company has long been the locomotive of capitalism. Governments should not derail it.

Junior resource investment in a financial meltdown - the Good, the Bad and the Ugly
.

Rick Rule's presentation at the New York Hard Assets Conference earlier this week sees some light for the informed junior resource investor despite current patterns which have mostly been Bad or Ugly!

Author: Lawrence Williams


Posted: Friday , 18 May 2012





NEW YORK (MINEWEB) - In a highly entertaining keynote address to the New York Hard Assets Investment Conference, Rick Rule of Global Resource Investments, now part of the Sprott Group, who professes to be a contrarian investor presented his views on resource investment in a financial meltdown - a very relevant speech in the current environment when so many resource stocks have been decimated.



He divided much of his talk into three categories - The Good, The Bad and the Ugly.



So as not to depress people too much at the start of his talk he examined The Good first and said there is much that is Good for the investor. Primarily he reckons the natural resource bull market remains intact despite the recent poor performance of the markets. There are very good fundamental reasons for this driven by a dramatic increase in living standards for the poor in the emerging market economies. As people become more free they become more rich - and the things they buy are made of ‘stuff', while in the West we are mostly buying what could be termed luxuries rather than ‘stuff'.



So as the bottom 2 billion people get more rich they buy morestuff' which in turn increases demand - and given there was a lack of investment in resources in the previous era supply has had trouble keeping up with this demand and hence prices for the metals and materials which are in demand have been rising.



However that is seen as the only Good factor affecting the current markets. The rest is Bad or downright Ugly. Take Western World debt. In the U.S. alone the debt is around $80 TRILLION. This year the US is planning to save $500 billion. Knocking nine zeros off this figure equates to household with $80,000 of debt while the household is saving $500 a year to pay it off. Clearly silly figures.



"It gets worse" said Rule. The conditions precedent have not been addressed by the administration. The excesses have not been curtailed so the whole financial imbroglio is likely to occur again. We are getting no nearer a solution.




Liquidity though is high through Quantitative Easing - or 'counterfeiting' as Rule puts it, although not much of the money generated through QE is finding its way into the real economy. Indeed he quoted a friend at a financial institution saying that banks can borrow government money at 195 basis points on the one hand and then lend it to another government backed institution - Fannie May - at 575 basis points which to Rule makes no sense whatsoever. Banks would much rather do this than lend to anything which could have any degree of risk attached so it's not surprising the government handouts to banks are not filtering through to where it is needed most. Much of what went wrong in commodities in 2008 was a lack of credit in the interbank market so short term money to the commodities market was just not available. Is this going to happen again? Perhaps not but it is something that people need to be aware of.


.
And then on to the Ugly - particularly with respect to junior mining stocks. How low can the sector go?

.
Rule gave an example: In a very, very good year, the junior sector as a whole expends $2 billion more than it generates. In a bad year it's more like $8 billion. So as a sector the junior sector is valueless. So if you buy the sector it's going to be Ugly! However within the sector there are stocks which will, on the other hand, make you a lot of money. You need to do a lot of due diligence and have some luck to make money - the performance at the top of the sector can be spectacular.



"But it gets even worse" said Rule. Once every 10 to 15 years you have a junior market clearing event - it falls by 90%. At the end of this the sector becomes cheap and money is there to be made, but in the meantime 50% of the sector will need to raise finance - and they may not be able to in this kind of market. This makes them vulnerable to going out of business altogether.



He quoted a Bay Street (Toronto's equivalent of Wall Street) saying on activity in a bull market - "When the ducks quack, feed them". But in a bear market, when the good stocks are driven down with the bad he reckoned the corollary to the saying should be "When the quacks duck, eat ‘em"!



But with good stocks being driven down with the bad there are some tremendous buying opportunities in this kind of market. Companies with strong cash positions may be selling, for example, at a market cap well below this cash position. That's like buying a dollar for 50 cents!



Rule reckons the low prices means that there is going to be a huge amount of consolidation in the market, with the new buyers being largely from the industry itself. The majors are becoming cash rich with the institutions being forced to sell and the industry being a willing and able buyer having benefited from strong commodity prices.



Overall, Rule sees this as an excellent time for selective investment. To make money you have to buy low and sell high and this could be the time to do the former. Need to look for companies with strong cash position, an IRR of 25% or more, anticipated payback within three years and preferably with an NPV higher than the enterprise value (market cap plus net debt) plus the upfront capital cost.



He sees 60 or 70 takeovers looming in the next two years and considers now is the time to sow, while 2013-2014 the time to reap!



On gold he is bullish and feels that despite the current strength in the dollar which is adversely affecting the precious metal, the latter is "the most liquid lie in the world". In his lifetime the dollar has lost 95% of its value and he reckons it will lose another 95% in the next few generations, while gold remains a better store of wealth. He also sees some of the larger resource stocks attractive at current valuations.