Friday, September 23, 2011

Dysfunctional Europe, Washington (and now G20?)

Bloomberg reported yesterday that Debt Deal Comes Back to Haunt Boehner in Disaster Aid Fight:
House Speaker John Boehner once again is facing a rebellion of rank-and-file Republicans over spending with a government shutdown looming.

This time it’s a disaster assistance bill that includes a stopgap budget measure needed to keep the government running into next month.

Tea Party-backed freshman and veteran lawmakers helped kill the measure yesterday because they said it spends too much -- a problem for Republican leaders with a bill intended to implement budget levels agreed to last month as part of a compromise to raise the debt ceiling.
This impasse shouldn't be a surprise. Back on August 15, Rex Nutting wrote that the Republicans may be tempted to use their newfound muscle to wrestle a more favorable deal by shutting down the federal government on October 1 [emphasis added]:
While the debt-ceiling agreement did produce a broad outline of how much the government would spend in the next fiscal year, it did not settle any of the details about exactly which line items would be cut, which would be held constant and which would get increases. And, contrary to what most people inside the Beltway believe, the level of spending agreed to in the debt-ceiling agreement is not binding.

Remember, House Republicans have approved a budget that calls for spending about $25 billion less than in the debt-ceiling deal. Republicans could try to extract those larger spending cuts — and more — by threatening to open the new fiscal year with a government shutdown.
They held the government hostage before and they have every incentive to do it again:
Rather than ask if the Republicans would really threaten another shutdown in October, it’d be better to ask why they wouldn’t. Their threats have worked before, and there’s no reason to believe they wouldn’t work again. Once you’ve taken the nation to the edge of default, what’s a mere government shutdown?

Top Republicans have already said that they will continue to use every opportunity to hold the government hostage. The Republicans took us to the very brink, and what they saw when they peered over the edge didn’t shock them or repel them in horror, but encouraged them to do it again.
Living in glass houses
Last weekend, Treasury Secretary Tim Geithner was in Poland lecturing the EU finance ministers on the importance of unity in the face of a financial crisis. As we approach October 1, which is the start of the US federal government's fiscal year, Congress could deadlock again and shut down the government.
How can a representative the US government have any credibility to lecture others on the importance of unity in the face of a financial crisis?
At the same time, I see that the Obama Administration is trying to avert an immiment default by the Postal Service by bailing it out one more time. The USPS is required to make a payment to fund retiree healthcare benefits, money it doesn't have.

Adding more cooks at the G20
If the different levels of the US government cannot even do something as simple as fixing the postal service, how can it hope to achieve something as complex as agreeing on multi-trillion budget cuts? Is this illustrative of the kind of political constraints that the financial markets have to operate with? In that case, what hope is there for the eurozone, which has many more actors?
Will adding more cooks, as the G20 does, help? The communique was long on rhetoric but short on specifics, according to Reuters:
A U.S. official, speaking after the G20 meeting, said the group showed a heightened sense of urgency but did not discuss a specific mechanism to leverage or expand the bailout fund.
While steps, such as an expanded EFSF, would be tremendously constructive, I see no country or countries stepping up to declare that they, in concert with others, are willing to write a big cheque to help Europe. All I see are denials, such as this one from the BRIC countries:
Earlier on Thursday, the leaders of seven big economies stressed the need to contain the euro zone crisis, and finance officials from the so-called BRICS countries, including heavyweights China, Brazil and India, said they would consider giving more funds to the International Monetary Fund to boost global stability.

But India said developing countries were not in a good position to bail out richer economies and the U.S. official said the G20 had not talked about emerging economies providing the IMF with more funds.
When I read the communique (h/t ZH), I see nothing concrete here for the eurozone crisis:

We are taking strong actions to maintain financial stability, restore confidence and support growth. In Europe, Euro area countries have taken major actions to ensure the sustainability of public finances, and are implementing the decisions taken by Euro area Leaders on 21 July 2011.
Doesn't the 21 July 2011 decision refer to forcing the Greeks to take draconian austerity measures which are becoming more and more politically difficult by the day?
Specifically, the euro area will have implemented by the time of our next meeting the necessary actions to increase the flexibility of the EFSF and to maximize its impact in order to address contagion. The US has put forward a significant package to strengthen growth and employment through public investments, tax incentives, and targeted jobs measures, combined with fiscal reforms designed to restore fiscal sustainability over the medium term.
The "euro area" is having trouble getting its member states to contribute the the EFSF (witness Slovenia). How is that stabilizing? We also saw what the EU minister reaction to the Geithner proposals were last weekend.

The last substantial paragraph of the communique sounds like the standard US Treasury Secretary line: "Our objective is a strong US Dollar":
We commit to take all necessary actions to preserve the stability of banking systems and financial markets as required. We will ensure that banks are adequately capitalized and have sufficient access to funding to deal with current risks and that they fully implement Basel III along the agreed timelines. Central Banks will continue to stand ready to provide liquidity to banks as required. Monetary policies will maintain price stability and continue to support economic recovery.

Coordinated response, indeed!

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.
None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

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