In Between Days: Bad Haircut

by CC October 28, 2011 12:19 am • Commentary

Pragmatic Capitalism

Let’s not sugarcoat tonight’s “resolution” – this is merely a temporary measure that will buy them more time to resolve the true cause of the currency crisis.  Let’s take a brief look at some of the key points of tonight’s statement (read it in full here):

“All Member States of the euro area are fully determined to continue their policy of fiscal consolidation and structural reforms. A particular effort will be required of those Member States who are experiencing tensions in sovereign debt markets.”

Translation: Austerity will continue.  This is more of the same.  Trade deficit nations undergoing a balance sheet recession will be forced into further budget consolidation which will continue to put downward pressure on growth and ultimately worsen the fiscal picture. 

Credit Writedowns

Are these haircuts on Greek debt really such a good idea? Or are they really just a stopgap that will make things all the worse in the long-run?

Sure, Mr. Market seems to think they’re fantastic. But then, Mr. Market has always been about as easy to please as a rather stupid dog: give him a car to chase and he’ll be happy – until his nose inevitably meets the bumper, of course. After all, these are the same markets that rally every time the Fed or the Bank of England announces more monetary voodoo ala QE.

As many of us have been saying time and again, the situation is simply not sustainable until the ECB takes up its proper role and backstops all the wayward debt. Until then, the whole thing will continue to resemble a man trying to lift a bucket by the handle while he stands on it. He might make a lot of noise and attract a lot of attention, but he’s not going to get anywhere.

There are any number of reasons that these haircuts will not work.

First up, there is still the implicit assumption that once the haircut is taken the Greek deficit can be brought under control. The recently leaked document from within the Eurostructure was sceptical of this, but even that document was overly optimistic as far as we can see. With the levels of unemployment that Greece continues to suffer – levels that will probably rise in the near future – those deficits are here to stay.

Then there’s the issue whether or not haircuts of 50% will be considered sufficiently voluntary. Not to mention the assumption that private sector funds will recapitalize the banks that lost capital on the write downs.

But the real elephant in the room – nay, it’s more like a mammoth – is the assumption that these haircuts will not cause other Eurozone countries bond yields to rise, thus requiring further intervention by the EFSF and, most likely, the ECB.


Now the next game begins. Even before the ink is dry on a deal to cut Greece’s debt and put up a firewall against financial contagion in Europe, leading economists fear the rescue package may be too little too late to keep Italy out of the crosshairs of financial markets and open the next battle in the struggle to save the euro. (See more reactions to the deal here and here)

“If the market perceives Italy to be a big problem, I’m not sure that the EFSF will be able to solve that problem,” said Rym Ayadi, a senior research fellow and head of the financial institutions and prudential policy unit of the Centre for European Policy Studies in Brussels.

European leaders, meeting into the early-morning hours in Brussels, thrashed out a plan to cut Greece’s notional debt by 50% with private creditors accepting a “voluntary” haircut. At the same time, the European Union’s leaders are requiring Europe’s biggest banks to boost their capital to 9% to shield them against the default of a country like Greece. The leaders also agreed to bolster the 440-billion-euro euro-zone bailout fund, the European Financial Stability Facility, to allow it to leverage its assets almost three-fold, making it the first line of defense against spreading contagion.

Economists welcomed the strengthening of the bailout fund, but now worry that the package of measures agreed on by EU leaders in Brussels isn’t sufficient to stem financial contagion and warn that euro-bloc members such as Italy could be next in line.

“The EFSF’s volume is only one aspect in a complete package, and if politicians think the mere increase in size should be enough, they are never going to win that race,” said Commerzbank Chief Economist Joerg Kraemer. “Sufficient firepower can only be effective if a country also reforms itself in a credible manner. That’s because markets don’t believe that donor countries will permanently stick to the commitments that they gave to the recipient countries without structural reforms in the recipient countries.”

Italy has come under fire for lacking structural reforms and not tackling its 1.9 trillion euro debt.


Hewlett-Packard Co ditched a plan to spin off its personal computers unit, a month after the ouster of CEO Leo Apotheker whose idea would have cost billions of dollars in expenses and lost business.

New Chief Executive Meg Whitman, who replaced Apotheker, had vowed a quick decision on an issue that was beginning to alienate its PC partners, investors and customers.

Whitman still has one unresolved item before her — the future of WebOS software. Apotheker put the WebOS division in jeopardy after he killed the WebOS-based TouchPad tablet following poor sales.

HP is still mulling the software’s future, including if it should build a new WebOS-based tablet, Whitman said in an interview.

“The question now before us is what do we do with WebOS software and do we come back to market with WebOS devices,” Whitman said. “It obviously will not be the same device but it will be version 2.0.”


Top Chinese search engine Baidu Inc forecast strong sales that topped Wall Street estimates, after reporting robust quarterly earnings, shrugging off concerns that a weak economy could hit advertisers.

Baidu said spending by large customers was significantly better than it expected in the third quarter and its 80 percent rise in quarterly net profit was driven by spending by online retailers.

Tomorrow’s Tape (WSJ)


At 8:30 a.m. ET, the Commerce Department releases personal income and spending data for September. Economists think income rose 0.3%, bouncing back from a 0.1% decline in August. They think spending, the life-blood of the economy, rose 0.6% after rising 0.2% in August. You’ll notice the spending numbers in both cases are bigger than the income numbers.

At 9:55 a.m., we find out how consumers are feeling (arguably less important than what they’re doing), with the University of Michigan’s final consumer sentiment number for October. Economists think it fell to 58.5 from an initial reading of 59.4. I’d guess that’s wrong, given the rebound in stocks this month, but we’ll see.


Before the bell we get reports from:

  • Constellation Energy
  • Coventry Health Care
  • Interpublic Group
  • Weyerhaeuser
  • Newell Rubbermaid
  • NiSource
  • Newmont Mining
  • Merck
  • Goodyear Tire
  • Chevron
  • Biogen Idec
  • Aon
  • Apartment Investment & Management
  • Whirlpool
  • Rockwell Collins
  • ITT

Later we hear from:

  • Cablevision