Headlines as crisis deepens

The crisis has deepened over the last day or so, with losses on stock markets across the world;  the S&P 500  in New York dropped 6.6 per cent.; the yield in bonds declined 1 % as the ECB intervened to buy up Italian and Spanish bonds.


There is no way that the EU can act on its words and bail out the third largest economy in the Union; meanwhile questions are starting to be asked about France.


There was a third night of civil unrest with vehicles and buildings on fire.  No doubt we will see more of this as rage escalates as living standards plummet


Meanwhile its anyone's guess where things will go with China who is becoming more outspoken, if not belligerent.

China media say U.S. debt woes show military overreach

BEIJING | Mon Aug 8, 2011 5:46am EDT

(Reuters) - Chinese state media on Monday blamed Washington's huge military spending and global footprint for the crisis that led to the U.S. debt rating downgrade, calling for an end to the foreign "domineering" dragging down its economy.

Sharpening their rhetoric over the economic crisis that has sent markets into a tailspin, the Chinese state-run media lambasted both Europe and the United States for the dysfunctions of their democracies and their unsustainable appetite for spending.

For article GO HERE

Former PBOC Member: "The Situation Is Unsustainable. The Longer It Continues, The More Violent And Destructive The Final Adjustment Will Be."

Zero Hedge

8 August, 2011

Yesterday it was an editorial piece in the main Chinese media outlet Xinhua. Today, China brings its message of helpless (for now) fury to the FT, where Yu Yongding, a former member of the Monetary Policy committee of the Chinese Central Bank has just said what everyone who realizes that mean reversions after 30 years worth of a "great moderation" can and will be a nasty, nasty thing, thinks. Namely: "the situation is ultimately unsustainable. The longer it continues, the more violent and destructive the final adjustment will be. " 

He is referring to the relentless recycling of Chinese trade surplus in the form of US paper which is increasingly looking like it will never get repaid. His chief rhetorical question is key: "The question is: what losses is China willing to bear in its foreign exchange reserves in order to slow the pace of the renminbi appreciation?" 

And that's the ballgame. 

Just like in Europe the question is what amount of gross economic loss is Germany willing to sustain in order to backstop Europe's insolvent countries (and with an imminent French downgrade looming, it will be the only country doing so in the form of sole EFSF funding) simply to keep the euro up and running, and its export sector humming courtesy of no return to a DEM, so in China the question now is how much risk is the country willing to take with its US-based paper holdings in order to keep its own export sector moving along courtesy of a weak CNY. 

Ironically, the longer Germany and China pretend all is good, the greater the impairment of their natural import partners. And in a globalized economy, even having the cheapest (no matter how artificially contrived) currency does nothing if the global economy tanks and import level implode. 

Alas, it will be too late for Germany and China to do anything about their flawed mercantilist policies at that point, as the third and final depression will be here. And what is the right move? The former PBOC member spells it out: "The danger for China is that it does not learn the right lesson – namely, that now is the time to end its dependency on the US dollar." 

And therein lies the rub.

Trichet Draws ECB ’Bazooka’ in Bond Purchases

Bloomberg

Aug 9, 2011 1:14 AM GMT+1200

European Central Bank President Jean- Claude Trichet started buying Italian and Spanish assets today in his riskiest attempt yet to tame the sovereign debt crisis.

Italian and Spanish bonds surged as the ECB entered the market, sending yields down the most since the euro began in 1999. The single currency, which initially climbed on the news, gave up its gains and fell to $1.4172 at 3 p.m. in Frankfurt from $1.4277 at the close of European trading on Friday.

With governments failing to act swiftly enough to stop contagion from Greece’s fiscal meltdown, it has fallen to the ECB to battle a crisis that’s now threatening the survival of the euro. Buying Italian and Spanish debt may require the ECB to massively expand its balance sheet and open it to accusations of bailing out profligate nations, breaching a key principle in the euro’s founding treaty and undermining its credibility. Germany’s Bundesbank opposes the move.

“The ECB’s credibility unfortunately has taken a real battering and it is now at the mercy of governments,” said Tobias Blattner, a former ECB economist now at Daiwa Capital Markets Europe in London. He estimates the central bank will have to buy about 200 billion euros ($287 billion) of Italian bonds and 60 billion euros of Spanish securities to make an impact.

Yields Plunge

Italy has 1.8 trillion euros ($2.6 trillion) in outstanding debt. The ECB bought Italian and Spanish bonds this morning, according to five people with knowledge of the transactions, driving their 10-year yields down to 5.39 percent and 5.30 percent respectively from above 6 percent on Friday. Both reached euro-era records last week.

European stocks declined, with the benchmark Stoxx Europe 600 Index falling 2 percent. U.S. futures on the Standard & Poor’s 500 Index retreated 2.4 percent.

ECB policy makers were forced to step up their response to the debt crisis after a failure to enter the Italian and Spanish bond markets last week helped fuel a global rout.

“It looks like the ECB has decided to bring out the bazooka,” said Douglas Borthwick, head of foreign-exchange trading at Stamford, Connecticut-based Faros Trading.

Fears of a further slump when markets opened this week were compounded by Standard & Poor’s decision on Friday to strip the U.S. of its AAA credit rating for the first time.

Asian stocks dropped today, extending the worst global slump since the bull market began in 2009.

For article GO HERE

Highlights From G-7 Statement Which Basically Says That The Plunge Protection Team Just Went Global

Zero Hedge

The Finance Ministers and Central Bank Governors of the G7 on Monday made the following statement ahead of the opening of trade in Asian markets and following the downgrade of U.S. debt on Friday:

In the face of renewed strains on financial markets, we, the Finance Ministers and Central Bank Governors of the G-7, affirm our commitment to take all necessary measures to support financial stability and growth in a spirit of close cooperation and confidence...

Zero Hedge writes... "As the G7 commences the biggest market intervention in history to prevent the final Ponzi unwind..."The G7 statement says..."In the face of renewed strains on financial markets, we, the Finance Ministers and Central Bank Governors of the G-7, affirm our commitment to take all necessary measures to support financial stability and growth in a spirit of close cooperation and confidence."

For Zero Hedge article GO HERE

And Now All The Whispers, Unfortunately, Are About France

Business Insider

When S&P came to Treasury on Friday and told them of its intent to downgrade the US, the immediate response was, according to POLITICO was: But what about France?

France has a AAA rating, but its debt metrics are just as ugly, and it potentially has to shoulder the burdens of the rest of the Eurozone, AND it can't print its own money.

Well the French AAA rating might not last for long.

FT Alphaville cites Gary Jenkins of Evolution Securities who speculates that it's only a matter of time before the AAA-rated sovereigns of Europe find themselves on the chopping block.

Any expansion of the European Financial Stability Fund (which for now is not the plan) would certainly put a huge burden on Europe's "core" -- France and Germany.

Via Bloomberg, UBS' Paul Donovan also thinks France may be the next to lose it.

For article GO HERE