Finland prepares for break-up of eurozone

Finland is preparing for the break-up of the eurozone, the country’s foreign minister warned today.

By Ambrose Evans-Pritchard, in Helsinki

The Nordic state is battening down the hatches for a full-blown currency crisis as tensions in the eurozone mount and has said it will not tolerate further bail-out creep or fiscal union by stealth.

“We have to face openly the possibility of a euro-break up,” said Erkki Tuomioja, the country’s veteran foreign minister and a member of the Social Democratic Party, one of six that make up the country’s coalition government.

“It is not something that anybody — even the True Finns [eurosceptic party] — are advocating in Finland, let alone the government. But we have to be prepared,” he told The Daily Telegraph.

“Our officials, like everybody else and like every general staff, have some sort of operational plan for any eventuality.”

Mr Tuomioja’s intervention is the bluntest warning to date by a senior eurozone minister. As he discussed the crisis, the minister had a copy of the Economist on his desk. It had a picture of Angela Merkel, the German Chancellor, reading a fictitious report entitled “How to break up the euro”, with a caption: “Tempted, Angela?”

“This is what people are thinking about everywhere,” said Mr Tuomioja. “But there is a consensus that a eurozone break-up would cost more in the short-run or medium-run than managing the crisis.

“But let me add that the break-up of the euro does not mean the end of the European Union. It could make the EU function better,” he said, describing the dash for monetary union in the 1990s as a vaulting political leap in defiance of economic gravity. Finland has emerged as the toughest member of the eurozone’s creditor bloc as it tries to hold together a motley coalition. It has insisted on collateral from both Greece and Spain in exchange for rescue loans.

The coalition government is on thin ice as voters peel away to eurosceptic parties. The True Finns shattered the political order in last year’s election with 19pc support. “Taxpayers here are extremely angry,” said Timo Soini, the True Finn leader.

“There are no rules on how to leave the euro but it is only a matter of time. Either the south or the north will break away because this currency straitjacket is causing misery for millions and destroying Europe’s future.

“It is a total catastrophe. We are going to run out of money the way we are going. But nobody in Europe wants to be first to get out of the euro and take all the blame,” he said.

Like other member states, Finland has a veto that could be used to block any new bail-out measures. However, unlike some states, its parliament would have to approve each future measure of the eurozone rescue, including a full bail-out of Spain.

The issue of euro break-up may come to a head in October as EU-IMF Troika inspectors report back on Greek bail-out compliance. Pleas from Athens for two extra years to stretch out its austerity regime have run into fierce resistance from creditor powers.

“It is up to Greeks whether they want to stay in the euro,” said Mr Tuomioja. “We cannot force Greece out. We can cut off lending and that would lead to a default. Then we could speculate whether that would entail getting out of the euro. Nobody knows if it could be contained,” he said. Mr Tuomioja said Finland would block attempts to strip the European Stability Mechanism (ESM) or bail-out fund of its senior status at the top of the credit ladder, a move that could greatly complicate efforts to lure investors back into Spanish and Italian bonds. “The ESM loans have priority. That is a red line for us. We are very concerned that the rules of the ESM seem to be changing.”

He voiced deep suspicion of plans by a “gang of four” EU insiders — including the European Central Bank’s Mario Draghi — to ensnare member states into some form of fiscal union. “I don’t trust these people,” he said.

Mr Draghi said two weeks ago that the issue of seniority would be “addressed” as part of his twin-pronged plan for the ECB and ESM to buy bonds in concert. A number of EU leaders and officials claimed there had been a deal on the ESM’s seniority status at an EU summit in late June. Finland, Holland, and Germany all deny this.

The warnings on the ESM were echoed by Miapetra Kumpula-Natri, chairman of the Finnish parliament’s Grand Committee on Europe, who said bail-out fatigue is nearing its limit.

“Our law passed this summer says the ESM has the same priority as the IMF. There was a clear understanding on this. Any change would require a new law passed by the whole parliament, and this would be very difficult because the risks would be much higher.”

The issue of EU senior status has become an extremely sensitive one for markets after the ECB and EU creditors refused to share losses from Greece’s debt restructuring, in which pension funds, insurers, and banks lost 75pc.

Critics say the Greek deal set a fatal precedent, triggering further capital flight from Spain and Italy.

Mrs Kumpula-Natri said Finland can be pushed only so far. “There is a feeling on the street that there has to be a limit. I can’t say whether it is 10pc of GDP, or what. It’s not written. But it is obvious that a small country can’t help big countries eternally.”

Developing nations should prepare for 'Lehmans moment', says World Bank chief Robert Zoellick

Developing nations must be ready for a severe global financial crisis should the eurozone fail to cope with its current problems and suffer a "Lehmans moment", outgoing World Bank chief Robert Zoellick has said.

By Reuters

Policymakers and investors are nervously awaiting the outcome of this weekend's Greek election, which could empower radical leftists threatening to tear up the terms of a bailout deal and send shockwaves through financial markets.

Developing countries needed to "prepare for the uncertainty coming out of the eurozone and the wider financial markets", Zoellick told the Observer.

"It will be better if they can avoid piling up short-term debts that can come due in volatile periods and look to the fundamentals of future growth - infrastructure and human capital," he said.

The World Bank had been increasing its lending to support Bulgaria's banking system - one of the most exposed to Greece - and acting to prevent a credit crunch in southeast Europe, the paper reported Zoellick as saying.

The bank was also taking unspecified measures to protect countries in north Africa that were vulnerable to Europe's debt crisis and trade finance facilities were being strengthened for francophone west Africa, the newspaper added.

"Uncertainty in markets is now starting to increase costs for developing countries," Zoellick said. "The ripple effects are making everybody's life harder."

In a reference to tensions in the eurozone over Greece's future, Zoellick said: "Europe may be able to muddle through but the risk is rising. There could be a Lehmans moment if things are not properly handled."

The bankruptcy of US bank Lehman Brothers in September 2008 triggered a global financial slump that indebted Western nations are still struggling to recover from.

EU planning for worst-case scenario in case of Greek eurozone exit

By Luke Baker, Reuters

BRUSSELS – European finance officials have discussed as a worst-case scenario limiting the size of withdrawals from ATM machines, imposing border checks and introducing capital controls in at least Greece should Athens decide to leave the euro.

EU officials have told Reuters the ideas are part of a range of contingency plans. They emphasized that the discussions were merely about being prepared for any eventuality rather than planning for something they expect to happen — no one Reuters has spoken to expects Greece to leave the single currency area.

Belgium’s finance minister, Steve Vanackere, said at the end of May that it was a basic function of each eurozone member state to be prepared for problems. These discussions appear to be in that vein.s

But with increased political uncertainty in Greece following the inconclusive election on May 6 and ahead of a second election on June 17, there is now an increased need to have contingencies in place, the EU sources said.

The discussions have taken place in conference calls over the past six weeks, as concerns have grown that a radical-left coalition, SYRIZA, may win the second election, increasing the risk that Greece could renege on its EU/IMF bailout and therefore move closer to abandoning the currency.

No decisions have been taken on the calls, but members of the Eurogroup Working Group, which consists of eurozone deputy finance ministers and heads of treasury departments, have discussed the options in some detail, the sources said.

As well as limiting cash withdrawals and imposing capital controls, they have discussed the possibility of suspending the Schengen agreement, which allows for visa-free travel among 26 countries, including most of the European Union.

“Contingency planning is underway for a scenario under which Greece leaves,” one of the sources, who has been involved in the conference calls, said. “Limited cash withdrawals from ATMs and limited movement of capital have been considered and analyzed.”

Another source confirmed the discussions, including that the suspension of Schengen was among the options raised.

“These are not political discussions, these are discussions among finance experts who need to be prepared for any eventuality,” the second source said. “It is sensible planning, that is all, planning for the worst-case scenario.”

The first official said it was still being examined whether there was a legal basis for such extreme measures.

“The Bank of Greece is not aware of any such plans,” a central bank spokesman in Athens told Reuters when asked about the sources’ comments.

The vast majority of Greeks — some surveys have indicated 75 to 80% — like the euro and want to retain the currency, something Greek politicians are aware of and which may dissuade them from pushing the country too close to the brink.

However, SYRIZA is expected to win or come a strong second on June 17. Alexis Tsipras, the party’s 37-year-old leader, has said he plans to tear up or heavily renegotiate the 130-billion-euro bailout agreed with the EU and IMF. The EU and IMF have said they are not prepared to renegotiate.

If those differences cannot be resolved, the threat of the country leaving or being forced out of the euro will remain, and hence the need for contingencies to be in place.

Switzerland said last month it was considering introducing capital controls if the euro falls apart.
In a conference call on May 21, the Eurogroup Working Group told eurozone member states that they should each have a plan in place if Greece were to leave the currency.

Belgium’s Vanackere said two days after that call that it was a basic function of each euro zone member state to be prepared for any eventuality.

“All the contingency plans (for Greece) come back to the same thing: to be responsible as a government is to foresee even what you hope to avoid,” he told reporters.

“We must insist on efforts to avoid an exit scenario but that doesn’t mean we are not preparing for eventualities.”

Three Months to Save the Euro: George Soros

By Catherine Boyle / CNBC

Euro-zone governments have around three months to ensure the survival of the single currency, billionaire investor George Soros said in a speech on Saturday.

“We are at an inflection point. After the expiration of the three months’ window, the markets will continue to demand more but the authorities will not be able to meet their demands,” he warned in a speech at the Festival of Economics in Trento, Italy. (Read the text of his speech.) 

The European Union is “like a bubble” – not a financial bubble but a political bubble -- that could pop as a result of the euro -zone crisis, Soros said.

“In the boom phase, the EU was what the psychoanalyst David Tuckett calls a ‘fantastic object’ – unreal but immensely attractive,” he said.

“In retrospect, it is now clear that the main source of trouble is that the member states of the euro have surrendered to the European Central Bank (ECB)  their rights to create fiat money. They did not realize what that entails – and neither did the European authorities,” he said.

The euro zone needs a European deposit insurance scheme for banks, Soros said, as well as direct financing by the European Stability Mechanism (ESM) for banks, which “must go hand-in-hand with euro-zone-wide supervision and regulation.”

The “blockage” at the moment is coming from the Bundesbank and the German government, he said. German Chancellor Angela Merkel has been cautious about increasing Germany’s support for the rest of the euro zone.

Soros believes Germany will eventually do what it takes to keep the euro zone going because of the large losses German banks would suffer if it broke up and the damage to exports which could be caused by a return to the Deutschmark, which would likely be substantially stronger than the euro.
“A German empire with the periphery as the hinterland,” could be the result of the current predicament, he warned.

The ECB has been instrumental throughout the crisis and its liquidity injection via a long-term refinancing operation helped boost European markets earlier this year, giving policy makers some much-needed breathing space.

Soros said that too much blame had been placed on peripheral euro-zone countries such as heavily indebted Greece and Spain, and that creditors like Germany had to share responsibility.

“The “center” is responsible for designing a flawed system, enacting flawed treaties, pursuing flawed policies and always doing too little too late.

“In the 1980s, Latin America suffered a lost decade -- a similar fate now awaits Europe,” he said. “That is the responsibility that Germany and the other creditor countries need to acknowledge.”
Soros argued that the focus on austerity instead of growth had been a mistake by the European authorities.

“The authorities didn’t understand the nature of the euro crisis; they thought it was a fiscal problem, while it is more of a banking problem and a problem of competitiveness. And they applied the wrong remedy: You cannot reduce the debt burden by shrinking the economy -- only by growing your way out of it,” he said.

“The crisis is still growing because of a failure to understand the dynamics of social change; policy measures that could have worked at one point in time were no longer sufficient by the time they were applied,” he said.

These views are echoed by well-known economists including Paul Krugman. An increasing number of politicians in the euro zone are also arguing for less austerity and more promotion of growth. The debate has come to prominence during both the Greek election campaign and the Irish referendum on the EU fiscal pact for euro-zone-wide austerity measures.

Christine Lagarde attack on Greece backfires as she pays no tax

Christine Lagarde, the International Monetary Fund managing director who provoked an angry reaction from the Greek people after telling them to pay their taxes, does not pay tax on her own salary, it has emerged.

By Philip Aldrick, Economics Editor

Ms Lagarde was forced to publish an embarrassing climbdown on her Facebook page over the weekend after being bombarded by hundreds of Greek people who felt insulted by her suggestion that the country’s crisis was partly due to “all these people in Greece who are trying to escape tax”.

However, on Tuesday she had to admit that her $467,940 (£300,000) annual salary and $83,760 of additional allowances are entirely tax-free as the IMF is an international organisation.

An IMF spokesman said: “Salaries, like those in most international organizations, are paid on a lower, net of tax basis to ensure equal pay for equal work regardless of nationality.”

He added that Ms Lagarde, 56, does pay all other “taxes levied on her, including local and property taxes in the US and France”.

Ms Lagarde earns more than President Barack Obama and David Cameron, both of whom pay taxes.

Marc Faber: 100% Chance of Global Recession

By: Lee Brodie

The stock market appears to be at a critical inflection point. That’s the takeaway from widely followed economist Marc Faber, author of the Boom, Gloom & Doom newsletter.

Faber’s bearish market calls have been followed closely since 1987 when he warned his clients to cash out before Black Monday.

And in a live interview on CNBC’s Fast Money Halftime Report, Faber again warned that economies of the world may be on the brink of a serious slowdown.

Faber indicated that while investors remain focused on Greece and Europe – other issues, bigger issues are looming. And they’re more threatening.

“As an observer of markets – whenever everyone focuses on one thing – like Greece and Europe – maybe they miss issues that are far more important – such as a meaningful slowdown in India and China.”

The latest reports from Beijing would support Faber's assertion. The HSBC Flash Purchasing Managers Index, slipped to 48.7 in May from 49.3 in April. That marks the seventh straight month that the index has been below 50, a level which indicates economic activity is contracting.

Faber also cited weakness in the high-end as another key catalyst that’s very negative.

“There are more and more stocks that are breaking down – economic sensitive stocks and companies that cater to the high-end,” he said. "That suggests to me the economy is likely to weaken and the huge asset run is likely to come to an end with significant asset deflation.”

Earlier in the week Tiffanylowered forecasts citing slower sales. At that time, Fast Money trader Dan Nathan warned that results such as these were foreboding and suggested the high-end was starting to crack.

When taken in concert, Faber says all the economies of the world could take a hit from these negative developments.

“I think we could have a global recession either in Q4 or early 2013." When asked what were the odds, Faber replied, "100%."

However, in the near term Faber also sees potential for a market rally.

Faber said the bullish catalyst would be Greece exiting the EU.

“I think the market would be relieved if finally Greece exited the euro. There would be some clarity. Although it wouldn’t be good for banks and insurance (stocks) in general I think markets are oversold and with an exit – markets would rally.”

It’s worth noting that Faber is talking hypothetically; he does not think Greece exits the EU in the near future.

“What I think will happen is that Germany will show more flexibility and issue more euro bonds.”

Faber pointed to the recent decline in the euro as evidence that the currency markets share his view. “More bonds will challenge the quality of the euro. That’s why the euro has been very weak, lately."

For investors looking to navigate what could be a serious economic storm, Faber said the best thing to do is keep the portfolio in US dollars and own gold, “knowing that sentiment is negative and in the near-term it could trade down to the Dec 29 low of $1522.”