Mish's Global Economic Trend Analysis

Bailout Marches On, Decision Makers Ignore IMF; Schäuble Puts Grexit Back on Table; Banks to Open, With a Catch

Posted: 16 Jul 2015 04:02 PM PDT

As the Greek bailout marches on, no one that matters dares ask the pertinent question: How can Greece pay back over €400 billion, when they could not pay back either of the last two bailouts?

Paul Pays Peter to Pay Paul

Supposedly we have progress. After all, Greece will be able to make its required July 20 ECB repayment.

How?

Thanks to another €86 billion bailout, Greece will be handed the money and will hand it right back. The first installment will magically be just enough for Greece to repay the ECB.

Draghi Affirms Faith

In this faith-based, can-kicking exercise, Draghi Affirms Faith in Greece's Place in Euro.

Mario Draghi, head of the European Central Bank, affirmed his faith in Greece remaining in the euro as the central bank raised its limit on emergency loans to Greek banks by €900m over one week.

"The ECB continues to act on the assumption that Greece is and will remain a member of the euro area," Mr Draghi said.

Banks to Open, With a Catch

Greek banks purportedly will open on Monday after having been shut for about two weeks.

Is there a catch? You bet.

Banks will be open for "all services which do not give rise to capital flight" and capital controls will remain in place."

Want to make a deposit? Sure, that will be allowed. Want your money back? Well, you are going to have a problem getting it.

How big a problem? We find out Monday.

To give appearance to the idea that things are improving, I suspect customers will find they can take out another €10 euros or so, per day, perhaps €70 euros, up from the current €60.

If my guess is correct (and you are foolish enough to have €25,550 in the bank), it will take you a year to get your money, even if you religiously take out the maximum every day.

Of course, that assumes everyone else does not do the same. If they do, the ECB will put a halt to it.

Schäuble Says Grexit a Better Idea

Reuters reports Schäuble Casts Doubt on Chance of Greek Bailout Success.

German Finance Minister Wolfgang Schaeuble questioned whether Greece will ever get a third bailout programme on Thursday, a day after the Greek parliament passed a package of stringent measures required to open negotiations on financial aid.

Schaeuble has submitted a request to parliament to agree to opening talks, but he has said it would be hard to make Greece's debt sustainable without writing some of it off - an idea Berlin considers to be illegal as long as Greece remains within the euro zone.

Schaeuble, who has raised the idea that Greece take a "time-out" from the euro zone, said a haircut would be incompatible with the currency union's rules. "But this would perhaps be the better way for Greece," he said.

The proposal for a temporary 'Grexit' has already caused ructions in Merkel's ruling coalition, upsetting some senior Social Democrats.

Question of Haircuts

Schäuble's position, and that of the German constitution, is there can be no haircuts within the eurozone.

No one of any importance really cares about the German constitution or logical assumptions on debt sustainability.

Merkel will ram through the bailout package, oblivious to Schäuble's objections, and also oblivious to the IMF position that Greek debt is not remotely sustainable and haircuts are needed.

For details on the IMF's position, please see White Knight Irony: IMF Threatens to Walk Away From Bailout Deal Citing Unsustainable Debt.

Will the IMF do what they threaten?

Good question, but so far no one but Germany has done what they threatened.

Addendum: Grexit Back on Table

Shortly after I typed the above, the Financial Times provided more details in Germany's Wolfgang Schäuble Puts Grexit Back on the Agenda.

Days after Greece appeared to escape crashing out of the euro, hawkish German finance minister Wolfgang Schäuble has put Grexit back on the political agenda, raising tensions in Berlin and across the EU.

Speaking before a key Bundestag vote on Friday, Mr Schäuble said voluntary departure from the eurozone "could perhaps be a better way" for Greece than a proposed €86bn bailout package, which was painfully assembled at a marathon eurozone summit in Brussels over the weekend.

It is uncertain how much leeway he has been given by chancellor Angela Merkel to advance a historic rupture of the eurozone that he believes would ultimately strengthen both Greece and the single currency.

Mr Schäuble said in a radio interview there was widespread concern — including at the International Monetary Fund — that Greece needed a debt cut for the rescue to work. But, he noted, a "debt cut is incompatible with membership of the currency union".

Some EU officials believe Mr Schäuble's repeated insistence that the IMF, which has partnered the EU in previous rescues, be included in a new bailout may be intended to engineer an eventual Grexit.

Another Hour Another Twist

If Germany approves the bailout package, which seems overwhelmingly likely, then Merkel has a huge problem if the IMF insists on haircuts.

Clearly that is Schäuble's fear, and quite a reasonable one.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

"Too Soon to Fret" Says ECRI, No Recession on Horizon: Another Blown ECRI Call?

Posted: 16 Jul 2015 12:49 PM PDT

After insisting for over a year that the US was on verge of recession if not in one (I made the same mistake), The ECRI now maintains Recoveries Remain Resilient.

Growing ranks of the great and the good are worried that the global economy, like Humpty Dumpty, will have a great fall, never to be put together again. We understand their apprehension, given our concern since the summer of 2008 about collapsing trend growth.

[Mish comment: what about the ECRI recession call made in September 2011?]

But in terms of our current assessment of global recession risk, we aren't ready to join in. This is because the major developed economies aren't yet in windows of vulnerability that our leading indexes are designed to detect.

Right now, no matter what the source of the potential shock – Greece, China or the Fed – the major developed economies are unlikely to be tipped into recession. No doubt this will change in time, and the U.S., in particular, bears close watching. But it's too soon to fret about recession just yet.

False Alarm

I was wondering if the ECRI ever admitted their mistake. I found it, on May 11, 2015, quite a few years late.

Doug Short on Advisor perspective writes ACHUTHAN: The US recession I've been warning about for years was actually a 'false alarm'

The ECRI finally admits to a bad recession call in September 2011, referring to it as a "false alarm". They describe the situation as "Greater Moderation", where the 2012-2013 downturn was the worst "non-recession" in 50 years and is unlikely to be repeated.

History of ECRI's 2011 Recession Call

ECRI's weekly leading index has become a major focus and source of controversy ever since September 30, 2011, when ECRI publicly announced that the U.S. is tipping into a recession, a call the Institute had announced to its private clients on September 21st.

Chronology of ECRI's Recession Call

September 30, 2011 : Recession Is "Inescapable"
February 24, 2012 : GDP Data Signals U.S. Recession
May 9, 2012 : Renewed U.S. Recession Call
July 10, 2012 : "We're in Recession Already"
September 13, 2012 : "U.S. Economy Is in a Recession"

Tipping Into Recession

Here's the September 30, 2011 U.S. Economy Tipping into Recession call.

Early last week, ECRI notified clients that the U.S. economy is indeed tipping into a new recession. And there's nothing that policy makers can do to head it off.

ECRI's recession call isn't based on just one or two leading indexes, but on dozens of specialized leading indexes, including the U.S. Long Leading Index, which was the first to turn down – before the Arab Spring and Japanese earthquake – to be followed by downturns in the Weekly Leading Index and other shorter-leading indexes. In fact, the most reliable forward-looking indicators are now collectively behaving as they did on the cusp of full-blown recessions, not "soft landings."

Why should ECRI's recession call be heeded? Perhaps because, as The Economist has noted, we've correctly called three recessions without any false alarms in-between.

Repeated Lies

Quite frankly that last statement is a lie as I have pointed out before. The ECRI called the 2007 recession way late.

In March of 2008, and when they finally did, they called it a "recession of choice".

I don't mind blown calls. I certainly have had a number of them. What I do mind is repeated lies about them.

A Look at ECRI's Recession Predicting Track Record

On October 13, 2009 I penned A Look at ECRI's Recession Predicting Track Record.

I pointed to the November-December 2007 ECRI Outlook. Unfortunately, the link I had no longer works, but I did capture this image.

Window of Opportunity

On January 25, 2008, the ECRI claimed There Is A Window of Opportunity for the US Economy.

The U.S. economy is now in a clear window of vulnerability, given the plunge in ECRI's Weekly Leading Index (WLI) since last spring. Yet there is a brief window of opportunity within that window of vulnerability to avert a recession. That is why ECRI has not yet forecast a recession.

If we have a recession this year, it will be the best advertised in history. Recently, several Wall Street houses joined the 70% of Americans who have been expecting a recession for the last few months. A number of other prominent economists boosted their estimates of the probability of a recession above 50%.

Yet such probability estimates imply that a recession is a matter of chance, whereas it is still a matter of choice. This is why, having correctly predicted the last two recessions in real time without crying wolf in between, we are not forecasting one yet.

ECRI Denial

The ECRI laid it on pretty thick, openly mocking the "best advertised [recession] in history" while claiming "This is why, having correctly predicted the last two recessions in real time without crying wolf in between, we are not forecasting one yet."

The irony is the recession was about 2 months old at the time.

Recession of Choice

Finally, on Friday, March 28, 2008 the ECRI pronounced a "A Recession of Choice".

The U.S. economy is now on a recession track. Yet this is a recession that could have been averted. In January, given the plunge in the Weekly Leading Index, we declared that the economy had entered a clear window of vulnerability. Yet we emphasized the brief window of opportunity within that window of vulnerability for timely policy stimulus to head off a recession.

The bottom line is that the outcome was not pre-ordained. Policy-makers had a choice about the speed with which stimulus took effect. If they had understood this, their actions could indeed have averted this recessionary downturn.

A Choice in 2008, but No Choice in 2011?

We are supposed to believe there was a choice in 2008 (two or three months into a recession), but no choice in 2011 for a recession that never happened!

Third Blown Call Coming Up?

And the ECRI still brags about not missing calls, while attempting to sweep two blown calls under the rug.

Is a third consecutive blown call on the way?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Economy News

16.7.15

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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