Posts Tagged ‘corruption’

George Soros on European Fiscal & Banking Crisis and EU Summit on June 28-29, 2012

Monday, June 25th, 2012

Here I present key take-aways from George Soros’ in depth Bloomberg interview on the current European fiscal and banking crisis, Angela Merkel, the Spanish bailout, and Greece leaving the Eurozone.

The video is also below:

Banking & Fiscal Issues

  • “There is an interrelated problem of the banking system and the excessive risk premium on sovereign debt – they are Siamese twins, tied together and you have to tackle both.”
  • Soros summarizes the forthcoming Eurozone Summit ‘fiasco’ as fatal if the fiscal disagreements are not resolved in 3 days.
  • There is no union without a transfer.
  • Europe needs banking union.
    • Germany will only succumb if Italy and Spain really push it to the edge (Germany can live in the present situation; the others cannot)
    • Europe needs a fiscal means of strengthening growth through Treasury type entity
      • What is needed is a European fiscal authority that will be composed of the finance ministers, but would be in charge of the various rescue mechanisms, the European Stability Mechanism, and would combine issuing treasury bills.
        • Those treasury bills would yield 1% or less and that would be the relief that those countries need in order to finance their debt.
        • Bill would be sold on a competitive basis.
        • Right now there are something like over €700bn euros are kept on deposit at the European Central Bank earning a 0.25% because the interbank market has broken down, so then you have €700bn of capital that would be very happy to earn 0.75% instead of 0.25%, and the treasury bills by being truly riskless and guaranteed by the entire community, would yield in current conditions less than 1%.
        • Governments should start a European unemployment scheme, paid on a European level instead of national level.
        • Soros’ solutions, however, are unlikely to prove tenable in the short-term as he notes “Merkel has emerged as a strong leader”, but “unfortunately, she has been leading Europe in the wrong direction”.
          • “Euro bonds are not possible because Germany would not consider euro bonds until there is a political union, and it should come at the end of the process not at the beginning.
          • This would be a temporary measure, limited both in time and in size, and thereby it could be authorized according to the German constitution as long as the Bundestag approves it, so it could be legal under the German constitution and under the existing treaties.
          • The political will by Germany to put it into effect and that would create a level playing field so that Italy and Spain could actually refinance debt on reasonable terms.

Scenario Discussion

  • LTRO would be less effective now
  • At 6%, 7% of Italy’s GDP goes towards paying interest, which is completely unsustainable
  • Spain may need a full bailout if summit is not successful
    • Financial markets have the ability to push countries into default
    • Because Spain cannot print money itself
    • Even if we manage to avoid, let’s say an ‘accident’ similar to what you had in 2008 with the bankruptcy of Lehman Brothers, the euro system that would emerge would actually perpetuate the divergence between creditors and debtors and would create a Europe which is very different from open society.
    • It would transform it into a hierarchical system where the division between creditors and debtors would become permanent…It would lead to Germany being in permanent domination.
      • It would become like a German empire, and the periphery would become permanently depressed areas.

On Greece

  • Greece will leave the Eurozone
    • It’s very hard to see how Greece can actually meet the conditions that have been set for Greece, and the Germans are determined not to modify those conditions seriously, so medium term risk
    • Greece leaving the euro zone is now a real expectation, and this is what is necessary to strengthen the rest of the euro zone, since Greece can’t print money
    • By printing money, a country can devalue the currency and people can lose money by buying devalued debt, but there is no danger of default.
      • The fact that the individual members don’t now control the right to print money has created this situation.
      • A European country that could actually default. and that is the risk that the financial markets price into the market and that is why say Italian ten-year bonds yield 6% whereas British 10-year bonds yield only 1.25%.
  • That difference is due to the fact that these countries have surrendered their right to print their own money and they can be pushed into default by speculation in the financial markets.

On Angela Merkel

  • Angela Merkel has been leading Europe in the wrong direction. I think she is acting in good faith and that is what makes the whole situation so tragic and that is a big problem that we have in financial markets generally – she is supporting a false idea, a false ideology, a false interpretation which is reinforced by reality.
  • In other words, Merkel’s method works for a while until it stops working, and that is what is called a financial bubble
    • Financial bubbles look very good while they are being formed and everyone believes in it and then it turns out to be unsustainable…
    • The European Union could turn out to have been a bubble of this kind unless we realize there is this problem and we solve it and the solution is there.
    • I think everybody can see it, all we need to do is act on it, and put on a united front, and I think that if the rest of  Europe is united, I think that Germany will actually recognize it and adjust to it.

On Investing

  • Stay in cash
  • German yields are too low
  • If summit turns out well, purchase industrial shares, but avoid everything else (consumer, banks)

Conclusion: We are facing conditions reminiscent to the 1930s because of policy mistakes, forgetting what we should have learned from John Maynard Keynes.

Providence Superintendent Sends Dismissal Notices to All 1,926 Teachers; Providence is Officially Bankrupt

Thursday, February 24th, 2011

California, Michigan, and Illinois are not the only states with multiple towns heading for bankruptcy.  Rhode Island was recently added to the list, as the school district had a budget shortfall of $40 million dollars this year.   So, it is laying off all of its 1,926 teachers.  How did this happen?  Poor planning and a worsening local economy:

“Providence Rhode Island school district has a huge budget shortfall of $40 million. It does not know how many teachers it will need to layoff so instead, the city plans to fire all of them.

The school district plans to send out dismissal notices to every one of its 1,926 teachers, an unprecedented move that has union leaders up in arms.

In a letter sent to all teachers Tuesday, Supt. Tom Brady wrote that the Providence School Board on Thursday will vote on a resolution to dismiss every teacher, effective the last day of school.

In an e-mail sent to all teachers and School Department staff, Brady said, “We are forced to take this precautionary action by the March 1 deadline given the dire budget outline for the 2011-2012 school year in which we are projecting a near $40 million deficit for the district,” Brady wrote. “Since the full extent of the potential cuts to the school budget have yet to be determined, issuing a dismissal letter to all teachers was necessary to give the mayor, the School Board and the district maximum flexibility to consider every cost savings option, including reductions in staff.” State law requires that teachers be notified about potential changes to their employment status by March 1.

“To be clear about what this means,” Brady wrote, “this action gives the School Board the right to dismiss teachers as necessary, but not all teachers will actually be dismissed at the end of the school year.”

“This is beyond insane,” Providence Teachers Union President Steve Smith said Tuesday night. “Let’s create the most chaos and the highest level of anxiety in a district where teachers are already under unbelievable stress. Now I know how the United States State Department felt on Dec. 7 , 1941.” That was the day the Japanese government bombed Pearl Harbor.

Smith, who has forged a groundbreaking collaboration with Brady that has received national recognition, said he believes this move comes directly from Mayor Angel Taveras, not the School Department. In a conversation with Taveras earlier Tuesday, Smith said the mayor also hinted at school closings but didn’t elaborate.

Providence is facing a daunting budget crisis. The city had a $57-million deficit last year and expects a higher figure for the year ending June 30. In addition, the city, under then-Mayor David N. Cicilline, nearly depleted its reserves to cover day-to-day expenses. Taveras is currently awaiting completion of a report by an independent panel, which he commissioned to get a better handle on the city’s financial situation.

Commendable Action

Sending out notices to all teachers is exactly the correct approach. Until contracts are negotiated, no one knows the exact number.

In reality, no teachers have to be let go. All the teachers have to do is agree to wage and benefit concessions that will save every job. They will not do that, so the mayor has no choice.

Hopefully the mayor will play similar hardball with police and fire unions as well. However, the best approach is for the city to declare bankruptcy and get it done with. Then the city could set, not negotiate, haircuts on benefits and salaries.

The problem is Rhode Island does not have a statute authorizing towns to use federal bankruptcy court.

Central Falls

Central Falls is another Rhode Island bankrupt city.  The city’s financial problems are so profound that the only way to solve them is through a merger with Pawtucket or a regionalization of city services, the state-appointed receiver said in a report Thursday to the Carcieri administration.

“Central Falls, in my judgment, cannot remain a stand-alone community as it presently is, unless the state wants to subsidize this into the future,” said retired Superior Court judge Mark A. Pfeiffer, the man appointed by the state Department of Administration in July to run the city, with elected government officials in advisory roles, after those officials had earlier declared the city insolvent. …

At Central Falls high school, since the school year started Sept. 1, there has not been a single day when all of the 88 teachers at Central Falls High School have shown up for work.

On that first day, two teachers called in sick and a third took a personal day.

And there have been only five days — all in September — when administrators were able to replace all the missing teachers with substitutes.

Last week alone, there were at least 19 teachers out every day, 10 to 13 of whom called in sick each day.

The severity of the problem came to light last week when The Journal reported that more than half of the high school’s 840 students didn’t receive a grade in one or more classes for the first quarter.

The school’s leaders, Deputy Supt. Victor Capellan and co-principals Evelyn Cosme-Jones and Sonn Sam, said 453 students did not receive solid instruction in several classes, and therefore no grade could be given.

Since Nov. 12, there have been at least 20 teachers missing or absent at the high school each Friday. Starting Oct. 21, there were 14 to 19 teachers absent daily for seven straight days. And 453 of the 840 students at Central Falls High School didn’t receive enough instruction this fall to earn a grade in at least one class.

A former Rhode Island Supreme Court judge has been named as receiver for the tiny, financially distressed city of Central Falls, Rhode Island.  Robert Flanders will replace Mark Pfeiffer, who has served as receiver since the city was taken under state government control last July. The exact date of the transition has not yet been decided, a Chafee spokesman said.

Central Falls, a city of 1.5 square miles with a population of 19,000 and an annual budget of $16.8 million, has an unfunded liability for its pension plans and retiree health care benefits totaling $80 million, Pfeiffer said in a report last month.

He warned the city might need to turn to a rarely used Chapter 9 municipal bankruptcy if major fiscal reforms are not implemented. Notwithstanding this comment, it is not clear whether the city is eligible to file for Chapter 9 as Rhode Island is one of about 25 states that do not have a statute authorizing its towns to use federal bankruptcy court.

In California, which has such a statute, several entities have filed for bankruptcy in the past two decades, including the city of Vallejo in 2008 and Orange County in 1994.

The first step in fixing any problem is admitting what the problem is. This problem is plain to see whether anyone admits it or not. Providence and Central Fall are bankrupt.

Wages and pension benefits have been promised that cannot be met. The only way out for those cities is bankruptcy.

For a second time I make my plea for governor Lincoln D. Chaffee, an independent, to ask the legislature to allow bankruptcies. It is the only hope for Central Falls and more importantly, Providence.”

Mike “Mish” Shedlock

http://globaleconomicanalysis.blogspot.com