Draghi and friends just want your money

By Bill Gross, Financial Times

Psst! Investors – do you wanna know a secret? Do you wanna know what Angela Merkel, François Hollande, Christine Lagarde and Mario Draghi all share in common? They want your money!

They’ve wanted it for years now but you are resisting by holding on to it or investing it at negative interest rates in Switzerland, Germany and a growing number of other countries considered to be European Union havens. They want you to be less frugal and more risk-seeking. They want your money as a substitute for theirs in Spain, Italy and, of course, Greece, but they don’t mention that any more. The example would be too off-putting. “Investors,” they plead, “show us your money!”

The ultimate goal of monetary and fiscal policy in the EU is to re-engage the private sector. The EU needs the private sector as a willing (but not necessarily equal) partner in funding its economy. This often gets lost in the noisy details of all too frequent promises such as the one to defend the euro made by Mr Draghi, European Central Bank president.

Investors get distracted by the hundreds of billions of euros in sovereign policy checks, promises and IOUs that make for media headlines but forget it’s their trillions that are the real objective. Even Mr Hollande in left-leaning France recognises that the private sector is critical for future growth in the EU. He knows that, without its partnership, a one-sided funding via state-controlled banks and central banks will inevitably lead to high debt-to-GDP ratios, rating service downgrades and a downhill vicious cycle of recession.

But private investors are balking – and for what it seems are good reasons – because policy makers’ efforts have been, until now, a day late and a euro short, or more accurately, years late and a trillion euros short. Let’s look at some examples of this.

First, Greek bailouts that included private sector involvement but no official sector involvement, resulting in the inevitable investor conclusion that future programmes for Spain and Italy might resemble the same.

Second, an initial tightening and then a reluctant lowering of ECB policy rates.

Third, a bond purchase programme (securities markets programme or SMP) by the ECB that was too small and prematurely abandoned.

Fourth, fiscal austerity packages for individual countries that accelerated recessionary/depressionary growth paths.

Fifth, public fights among northern and southern EU countries that highlighted the seemingly perpetual dysfunctionality of the eurozone 17 and the EU 27.

Finally, Mr Draghi’s reversal last Thursday. Someone must have got to him between London and Frankfurt.

Policy makers now face an unprecedented expansion of risk spreads and credit agency downgrades which almost guarantee that sickbed countries can never be discharged from intensive care.

Interest rates over and above each country’s nominal GDP growth rate will inevitably add to a country’s debt as a percentage of GDP, even if budgets are in primary balance.Investors misguidedly focus on 7 per cent yields in Spanish and Italian bond markets as some sort of high watermark – below which swimmers can safely touch bottom. But even at 7 per cent deep, the toes cannot stretch. Maybe even 4 per cent is not shallow enough.

At current yields, growth rates, and deficits, the spread may incrementally add 2-3 per cent to Spain and Italy’s tenuous debt ratios every year. While it is true that both countries can shorten maturity offerings and even accept the benefit of prior terming of their debt stock, eventual drowning will occur even at 4 per cent or higher 10-year yields as long as nominal GDP growth is anywhere close to flat.

Policy makers will solicit the private market’s participation in an effort to get there, by attempting to lead via co-ordinated monetary/fiscal efforts involving the SMP from the ECB and hundreds of billions of euros from bailout funds – the European Financial Stability Facility and ultimately the European Stability Mechanism. But without the private sector’s co-operation, the effort may be futile.

The dirty little secret that sovereign debt issuing nations need to remember most of all is that credit and maturity extension is based upon trust. After all, “credere” is a Latin word meaning just that. After trust has been lost due to half-baked policy measures; after credit agencies belatedly have recognised embedded costs of debt that can no longer insure solvency; after marginal investors have been flushed from the system to what appear to be safer return of principal havens; and after policy makers finally appreciate the fragility of their rigged fiscal and monetary system; after all of that – there is no coming home, there is no going back in the water.

Psst investors: Stay dry my friends!

Bill Gross is founder and co-chief investment officer of Pimco

Merkel: Just Say Nein to Eurobonds

By MATTHEW WILL, WSJ

The European financial crisis has created an unusual mix of allies. Politicians, hedge fund managers, liberal pundits and the financial press are determined to convince German Chancellor Angela Merkel that economic salvation requires the European Central Bank to issue eurobonds.

Prior to last week's European Union summit in Brussels, the Organization for Economic Cooperation and Development endorsed French President Francois Hollande's plan to do just that and insisted Mrs. Merkel agree. She wouldn't, but at the summit she was all but held captive until relenting to some other bailout.

Meanwhile, money managers have waged their own campaign to get Mrs. Merkel on board. Financier George Soros has predicted dire consequences for Europe if Germany does not acquiesce. Harvard historian Niall Ferguson accused Mrs. Merkel of repeating the mistakes of Weimar Germany that led to the collapse of democracy. He did not use the "N word," but we all know an appeal to German guilt when we see one.

Each faction has its own reason for pressuring Germany but all share a common characteristic: They are wrong.

Historically, nations tax, borrow and spend until there is nothing left to tax and borrow. Because of the risk of riot, insurrection or removal from office, politicians refuse to directly cut spending. Instead, they print money. Unfortunately, the citizenry does not realize printing money and the ensuing inflation amount to a cut in benefits. Then politicians lay the blame for inflation on greedy capitalists who raise prices.

Europe's bad boys have played this trick repeatedly, undermining the value of their currency and reducing their citizens' standard of living. From 1980 to the launch of the euro in January 1999, the Italian lira and Portuguese escudo lost 108% and 244% of their value against the U.S. dollar, respectively. Greece devalued the drachma 583% against the dollar from 1981 until its euro entry in January 2001. Meanwhile, the deutsche mark remained remarkably stable against the dollar, gaining a mere 1.74% over 20 years.

Now the people borrowing and spending the money, such as Greece, Italy and Portugal, are not the same people controlling the money supply. This is handled by the European Central Bank, whose policies Germany monitors closely. When spendaholics reach their tax and borrow limits they can no longer print money. Thus the violent convulsions reverberating through countries that must face the music.

Until now, investors saw socialist calls for more borrowing and more spending as ridiculous, since no one will loan them money. The only reason private investors now care is because they were recently forced to take a 70% loss on Greek government bonds.

Then came the stroke of genius that united the forces of socialism and capitalism: Allow the profligate nations such as Greece, Italy, Portugal, etc., to borrow and spend, but require Germany to pay back the loans.

In its November 2011 Green Paper, the European Commission proposed that each eurozone member be fully liable for the entire issuance of eurobonds. Germany, with the highest GDP and good credit, has the most to lose from such an approach.

Therein lies the common ground between investors looking to save their own portfolios and politicians looking to spend their way into office. Who cares what happens to Germany and the other responsible nations?

Unfortunately, the long-term consequence of this approach will be global economic chaos. In the past, patterns of taxing, borrowing, spending and the printing of money destroyed local economies. These collapses occurred over time, and the impact was isolated. If Germany assumes the ultimate obligation of paying the debt of other nations, the bubble grows. When Europe gets to the point of collapse, who will guarantee that debt?

Eventually, money will be printed and the standard of living will fall for citizens of irresponsible nations. This is a historical reality. The only real question is, do we prefer that the entire European bubble burst at once, or mitigate the risk by allowing local bubbles to burst periodically over time? The best possible answer is for Angela Merkel to just say nein to more eurobonds.

Mr. Will is professor of finance at the University of Indianapolis.

Os alemães devem ser idiotas

Carlos Alberto Sardenberg, O GLOBO

Você precisa reduzir o colesterol e entrar em forma. Um médico recomenda restrição alimentar - tipo peixe levemente grelhado com legumes no vapor, água com gás e o requinte máximo de uma rodela de limão - mais uma carga pesada de exercícios físicos. Diários. O outro diz que você pode chegar ao mesmo resultado comendo o que gosta, talvez reduzindo os doces, e jogando umas partidas de bocha.

Havendo alguma chance de que esta segunda opção funcione, você será um idiota se escolher a primeira. Ou seja, os alemães são uns idiotas. Essa é a conclusão inevitável que se tira do modo como muita gente apresenta as alternativas de política econômica em disputa na Europa.

Dizem: a chanceler Angela Merkel recomenda - mais do que isso, impõe o regime da austeridade, sacrifício e suor do rosto. François Hollande, o presidente eleito da França, admite que é preciso ter algum cuidado com a alimentação, as contas públicas, mas oferece o caminho do crescimento acelerado e, melhor, sem muito trabalho.

Por exemplo, diz que vai reduzir a idade mínima de aposentadoria de 62 para 60 anos. Na Alemanha, é de 63 anos, mas está subindo para 65 e pode chegar a 67, em alguns casos. Hollande também vai garantir a jornada semanal de 35 horas - uma bandeira de seu Partido Socialista. Na Alemanha, a jornada média chega às 41 horas, sendo a mais longa entre os europeus mais ricos. E os salários na França são mais elevados do que na Alemanha.

Como se dizia: é melhor ser rico com saúde do que pobre doente, não é mesmo? Melhor trabalhar menos, ganhar mais, e aposentar-se antes...

Tem uns probleminhas, porém. O desemprego na Alemanha está na faixa dos 5%, um dos níveis mais baixos do mundo. Na França, é o dobro. Na saída da crise, a Alemanha cresceu acima de 3,2% em 2010 e 2011. A França, metade disso.

Hollande alegou, durante a campanha, que a França cresceu pouco justamente por causa da receita de austeridade - redução do gasto público, especialmente - imposta pelo presidente Sarkozy, uma espécie de sub-Merkel.

Não faz sentido. Sarkozy não aplicou a austeridade, de cuja ideia se afastou justamente por medo de perder a eleição, nem fez qualquer reforma estrutural importante. Conseguiu, é verdade, elevar a idade de aposentadoria para 62 anos, mas essa mudança só começaria a valer mais à frente - de modo que ainda não trouxera qualquer efeito antes de ser declarada morta. Também prometera colocar a França de volta ao trabalho, eliminando a jornada de 35 horas, mas conseguiu apenas algumas exceções, caras.

Já a Alemanha fez boa parte dessas reformas estruturais no início dos anos 2000 - e isso, ironia, com um governo de esquerda, do social-democrata Gerhard Schröder. A partir daí, assentou as bases do crescimento da década seguinte e, especialmente, a capacidade de escapar da crise mais rapidamente.

De onde tiraram que a receita alemã não funciona? É um equívoco enorme apresentar a receita Merkel como a da recessão, em oposição à agenda de crescimento de Hollande.

Merkel está dizendo duas coisas: primeiro, que não é possível crescer de maneira sustentada aumentando déficits e dívidas públicas já elevadas; segundo, também não se cresce sem reformas estruturais que devolvam competitividade às economias nacionais.

Ou seja, a França cresce pouco e tem desemprego alto não por causa da austeridade - o governo gasta lá o equivalente a 56% do PIB, recorde europeu - mas pela falta de competitividade e excesso de despesa e impostos.

Como resolver a falta de crescimento? Ora, é simples, diz Hollande: crescendo mais...

E sabe o que deve acontecer? Nada, além da retórica. O governo Hollande acabará sendo muito parecido com o de Sarkozy - nada de mudanças sensíveis. Merkel vai topar algum plano de novos investimentos europeus, com um dinheirinho de algum fundo de desenvolvimento, para o pessoal dizer que se aplicou a agenda do crescimento.

Como as contas públicas francesas não estão em situação dramática, há um estímulo para continuar levando assim: crescimento baixo, desemprego alto - mas uma boa vida para quem está empregado ou aposentado. As futuras gerações que se danem.

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