By Simon Kennedy and Thomas R. Keene
Jan. 27 (Bloomberg) -- New York University Professor Nouriel Roubini said he’s never been more pessimistic about the future of European monetary union, saying Spain poses a looming threat to the euro region holding together.
"Down the line, not this year or two years from now, we could have a breakup of the monetary union," Roubini said in a Bloomberg Radio interview from the World Economic Forum’s annual meeting in Davos, Switzerland. "It’s a rising risk."
Roubini’s concern contrasts with the view of European Central Bank President Jean-Claude Trichet who said it’s "absurd" to imagine that the 16-nation euro area could splinter. Speculation of a breakup has mounted in financial markets as Greece struggles to cut the continent’s biggest budget deficit and countries from Spain to Ireland face rising debt burdens.
"The euro zone could drift essentially with a bifurcation, with a strong center and a weaker periphery and eventually some countries might exit the monetary union," said Roubini, who predicted the recent financial crisis a year before it began.
"This is the very first test" of the single currency bloc.
Economies including Spain and Greece are threatened by fiscal imbalances and declining competitiveness, Roubini said.
Membership in the euro means they can no longer devalue the currency to export their way out of recession, he said.

Commission Deadline

The Greek budget deficit ran more than four times the European Union limit of 3 percent of gross domestic product last year and Greece is one of 13 nations facing deadlines from the European Commission to cut its shortfall. The country’s debt is set to top 120 percent of GDP this year, the highest in the euro region and twice the limit for adopting the single currency.
Trichet on Jan. 14 dismissed as an "absurd hypothesis"
the argument that Greece could be forced to exit the euro area.
The country should remain in the union where its problems "will be unequivocally easier to solve," central bank governor George Provopoulos said in the Financial Times on Jan. 22.
Roubini said for all the focus on Greece, Spain may eventually pose a bigger threat to the euro zone because it’s the region’s fourth-largest economy and has higher unemployment and weaker banks. Spain’s jobless rate is more than 19 percent, almost twice the EU average.
"If Greece goes under that’s a problem for the euro zone," he said. "If Spain goes under it’s a disaster."

Bond Vigilantes

Roubini described rising sovereign risk as a "new phenomenon" for advanced economies that will complicate their recoveries from the worst global recession since World War II.
So-called bond vigilantes, or investors who punish governments by dumping their debt, "have been asleep at the wheel," outside of Europe, Roubini said. The risk premium investors demand to buy 10-year Greek debt over comparable German bonds rose to an 11-year high of 312 basis points on Jan.
22.
"Eventually they could wake up" in Japan and the U.S. and sell off their bonds as they did with Greece.
"We have a massive fiscal problems in most of the advanced economies, and we’re not really dealing with it," he said.
After Standard & Poor’s yesterday lowered its sovereign credit rating outlook on Japan, Roubini said he was "worried"
about the world’s second-largest economy as its debt mounts, deflation returns and population ages. While it can currently finance itself thanks to domestic savers, at some point they may "flee the yen," pushing up borrowing costs and crippling the economy, he said.

Greek Government Five-Year Bonds Tumble in First Day of Trading

By Abigail Moses and Caroline Hyde

Jan. 27 (Bloomberg) -- Greece’s new 8 billion euros ($11
billion) of five-year bonds tumbled in the first day of trading,
pushing the cost of insuring the government’s debt from default
to a record.
The spread on the notes, due August 2015, widened as much
as 35 basis points to 385 over the benchmark mid-swap rate,
according to Markit Group Ltd. iBoxx prices on Bloomberg.
Credit-default swaps protecting against losses on Greece for
five years soared 48 basis points to 373, according to CMA
DataVision.
“Technically, the term is that it’s getting smacked,”
said Gary Jenkins, head of credit strategy at Evolution
Securities Ltd. in London. “Clearly what’s happening is very
negative and could lead to a vicious circle.”
Spyros Papanicolaou, head of the Greek debt agency, said
yesterday he expected the spread on the bonds to tighten because
the country has been “misjudged.” The European Commission said
today that Greece hasn’t done enough to rein in its deficit that
reached 12.7 percent of gross domestic product in 2009.
One-year credit-default swaps on Greek debt jumped 43 basis
points to 481, CMA prices show. They rose above the cost of
five-year swaps for the first time Jan. 13, inverting the so-
called yield curve and signaling investors perceive an increased
risk of default.
“Unless this bond stabilizes and general debt stabilizes,
you have to ask the question: Who’s going to lend money to them
next time and at what price?” Jenkins said.
Order Book
Greece received 25 billion euros in orders for the bonds,
after offering 0.3 percentage-point more yield than on the
nation’s existing debt with similar maturities. The government
sold almost 75 percent of the bonds to international investors,
Papanicolaou said.
U.K. investors bought more than 29 percent of the notes
sold via banks, according to Papanicolaou. French investors
purchased almost 8 percent and domestic buyers acquired more
than 26 percent.
“This may be the biggest order book ever achieved for a
single tranche deal,” said Daniel Shane, head of sovereign,
supranational and agency syndication in London at Morgan
Stanley, one of the managers on the deal. “The importance of
Greece’s transaction cannot be overstated, not only for the
issuer, but also for other European sovereigns and the credit
markets in general.”
Ratings Downgrade
Greece, which had its credit rankings cut by Standard &
Poor’s, Moody’s Investors Service and Fitch Ratings last month,
needs to raise 53 billion euros this year. The government gave
plans to the European Commission on Jan. 15. designed to reduce
the shortfall to within the EU’s 3 percent limit.
Concern that Greece will struggle fund its deficit spread
to other countries, with default swaps on Spain rising 17 basis
points to 127, Portugal climbing 18.5 to 149 and Italy up 10
basis points at 114, CMA prices show.
The Markit iTraxx SovX Western Europe Index of credit-
default swaps on 15 governments from Germany to Greece rose 9.25
basis points to a record 87.25, according to London-based CMA.
That means it costs $87,250 a year to insure against losses on
$10 million of debt for five years.
The yield on the Greek 10-year bond rose 44 basis points to
6.68 percent as of 4:35 p.m. in Athens, with the difference in
yield, or spread, against German bunds increasing by 46 basis
points to 350 basis points, the widest since December 1998.
Credit-default swaps pay the buyer face value in exchange
for the underlying securities or the cash equivalent should a
company or country fail to adhere to its debt agreements. An
increase signals deterioration in perceptions of credit quality.
A basis point on a credit-default swap contract protecting
$10 million of debt from default for five years is equivalent to
$1,000 a year.

http://krugman.blogs.nytimes.com/



A better perspective

----------


February 8, 2010, 7:41 PM
Euro perspective
Big problems in Europe, no doubt. But it’s easy to lose perspective on the size of the Greek problem. So here’s a chart showing 2008 shares of eurozone GDP:


IMF
A couple of points: first, Greece, which is making most of the headlines, is a tiny economy. So are Portugal and Ireland. The only sizable player among the countries in the news right now is Spain. (If Italy really gets caught up in the crisis, that will change).

And as I’ve tried to document, Spain’s story does not at all fit the story about sustained fiscal irresponsibility leading to inevitable crisis. The budget was in good shape until the crisis hit; the problem was rising costs in the face of huge capital inflows, and no easy way to adjust now given the common currency.

Overall, the group of stressed economies account for about 20 percent of the eurozone’s GDP. So even a sharp fiscal retrenchment wouldn’t be all that big a shock; still, it certainly wouldn’t help.http://krugman.blogs.nytimes.com/http://krugman.blogs.nytimes.com/[/color]http://krugman.blogs.nytimes.com/

Roubini brings up very good points about economic size and GDP output. However, I see this situation as more of a story about fear, panick, and confusion.

Krugman on compensation is a bit radical. 9mil is hardly anything to sneeze at, but vested over a 5 year period in all equity. It gives Blankfein more reason to manage his firms risk. Also, note that Obama's pay Czar Ken Feinberg was pleased with the compensation practices of GS and JPM saying they "fall in line with our suggestions."

I am not defending these individuals, but bonuses are earned when companies are successful. How else do you motivate employees to work hard? Meritocracy right? Not to mention Blankfein and Dimon probably work more in one week than the average Joe works in 1 month (assuming Joe is employed full time).