Portugal's Debt Will Be Restructured; 3-Year Government Bond Yield Tops 25%; CDS at Record High, Implies 72% Chance of Default

Inquiring minds are watching Portuguese government bonds soar into the stratosphere, with record-high bond yields across the entire yield curve.

In all the images below, the numbers are accurate but the charts reflect yesterday. I have mentioned this to Bloomberg a number of times to no avail.

Portugal 2-year Government Bonds



Portugal 3-year Government Bonds



Portugal 5-year Government Bonds



Portugal 10-year Government Bonds



Notice the opens and the lows in the charts above.

Bloomberg reports "The Frankfurt-based ECB bought Portuguese government bonds today, according to three people with knowledge of the transactions, who declined to be identified because the deals are confidential. A spokesman for the ECB declined to comment when contacted by phone."

My take is the ECB foolishly attempted to manipulate Portugal's bond market at the open, then was blown out of the water in the process. The ECB recklessly bought Greek bond and learned nothing from it.

Portugal's Debt Will Be Restructured

Adrian Miller, a fixed-income strategist at GMP Securities LLC, talks about the outlook for the European debt crisis. He speaks on Bloomberg Television's "InBusiness with Margaret Brennan."



Link if video does not play: Portugal's Debt Will Be Restructured

CDS at Record High, 72% Chance of Default

Bloomberg reports Credit default swaps implied a 72 percent chance Portugal will default within five years.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Brussels Hit by First Coordinated Strike in Nearly Two Decades; Spain to Miss Deficit Reduction Goals; France Halved 2012 Growth Forecast to 0.5 Percent; Ten Things to Expect in Europe

The Financial Times reports Brussels hit by strike as EU leaders meet.

A general strike brought widespread disruption to Belgium on Monday, as European Union leaders arrived for a summit in Brussels with a focus on boosting employment across the region. Trains, shipping, air travel and public transport were all hit by the trade union action, called in response to reforms enacted hastily by the new government of Elio Di Rupo.

It is the first time in nearly two decades that unions from all sectors of the economy have co-ordinated a strike. As well as schools, the postal service and other branches of the public sector, some private enterprises were affected as unions flexed their muscles.

The strikes in the EU’s capital are a reflection of union discontent across the continent, worried that austerity measures will jeopardise the recovery. A Europe-wide “day of action”, bringing together unions from across the continent, is planned for February 29.

Voter distress and open dissent is no where close to peaking.

Spain to Miss Deficit Reduction Goals

Courtesy of Google Translate, please consider Spain deficit to Hit 6.8% in 2012 and 6.3% in 2013, according to IMF

6.8% is far from the 4.4% that the European Commission has imposed
IMF predicts two years of recession, with declines of 1.7 and 0.3% in 2012 and 2013

Spain will not meet deficit reduction goals of the European Commission in 2012 and 2013. Specifically, the IMF projects that the deficit will be within 6.8% of GDP in 2012 and 6.3% in 2013, when Brussels requires, at most, a deficit of 4.4% this year and 3% next.

The agency, predicts a recession of two years for the Spanish economy, ending the last three months of this year with a contraction of 2.1%. This indicates the organization in the latest update to its Global Growth Outlook, published today in Washington.

France Halved 2012 Growth Forecast to 0.5 Percent

Yahoo! Finance reports EU leaders struggle to reconcile austerity, growth

European leaders struggled to reconcile austerity with growth on Monday at a summit that approved a permanent rescue fund for the euro zone and was trying to put finishing touches to a German-driven pact for stricter budget discipline.

Officially, the half-day 27-nation summit was meant to focus on ways to revive growth and create jobs at a time when governments across Europe are having to cut public spending and raise taxes to tackle mountains of debt.

But disputes over the limits of austerity, and Greece's unfinished debt restructuring negotiations with private bondholders, hampered efforts to send a more optimistic message that Europe is getting on top of its debt crisis.

Spain's economy contracted in the last quarter of 2011 for the first time in two years and looks set to slip into a long recession.

France halved its 2012 growth forecast to a mere 0.5 percent in another potentially ominous sign for President Nicolas Sarkozy's troubled bid for re-election in May. Prime Minister Francois Fillon said the cut would not entail further budget saving measures.

Conservative Spanish Prime Minister Mariano Rajoy, attending his first EU summit, said Madrid was clearly not going to meet its target of 2.3 percent growth this year. That has raised big doubts about whether it can cut its budget deficit from around 8 percent of economic output in 2011 to 4.4 percent by the end of this year as promised.

European Commission President Jose Manuel Barroso hinted Brussels may ease Spain's near-unattainable 2012 deficit target after it updates EU growth forecasts on February 23.

Bickering Continues

It is quite rare, if not unprecedented, for the head of the European Parliament to criticize what Merkel and Sarkozy hailed as "progress", yet that is exactly what happened.

European Parliament President Martin Schulz told the leaders the new fiscal treaty was unnecessary and unbalanced, because it failed to combine budget rigor with necessary investment in public works to create jobs.

"To write into law a Germanic view of how one should run an economy and that essentially makes Keynesianism illegal is not something we would do," a British official said.

Merkel has said she will not discuss the issue of the ESM/EFSF's ceiling until the next EU summit in March. Meanwhile, financial markets will continue to worry that there may not be sufficient rescue funds available to help the likes of Italy and Spain if they run into renewed debt funding problems.

The sticking point is German public opinion which is tired of bailing out the euro zone's financially less prudent.

Ten Things to Expect in Europe

1. More bickering
2. More strikes
3. More emergency meetings
4. More trade wars, especially between Spain and France
5. Tobin Tax will backfire in France
6. Missed budget estimates across the board
7. Missed growth estimates across the board
8. Deep and lengthy recession will affect entire global economy
9. Recession will include France and Germany contrary to popular belief
10. End of Sarkozy's political career

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Greek Bond Math (Assuming the Deal Goes Through) ; Merkel Faces Backlash Over Deal; Political Zugzwang

Rumors that a deal will be reached "soon" have gone on for weeks. Indeed announcements of an expected agreement today have already hit new snags.

For the sake of argument, let's assume a deal does go through, then crunch the latest numbers to see what the situation looks like from the point of view of Greece (and the lenders as well) before and after the deal.

The place to start is the current projection for the size of the next needed bailout.

Please consider Greece Needs EU145 Billion in Second Aid Package

Greece requires 145 billion euros ($192 billion) as part of a second aid package for the cash- strapped country, 15 billion euros more than was agreed in October 2011, Der Spiegel reported, citing an unidentified official from the so-called troika of European Commission, European Central Bank and International Monetary Fund.

Greece needs more money because the country’s economic situation is worsening, the German magazine cited the official as saying. The gap can’t be filled by contributions from private creditors alone, it said.

Bigger Bailout Needed

So, presuming a deal goes through, Greece is going to take on another 145 billion euros of debt, up from 130 billion last week.

Let's now turn our attention to the latest deal rumors.

Private Investors Near Deal on Greek Debt

Bloomberg reports Private Investors Near Deal on Greek Debt

Let's assume for the moment that "near" really means "near" and not five weeks from now when undoubtedly Greek conditions will have deteriorated further, requiring of course a bigger bailout. Here are the pertinent ideas from the article to consider.

• Investors holding euro206 billion in Greek bonds would exchange them for new bonds worth 60 percent less
• The new bonds' face value is half of the existing bonds. They would have a longer maturity and pay an average interest rate of slightly less than 4 percent.
• The deal would reduce Greece's annual interest expense on the bonds from about euro10 billion to about euro4 billion.
• When the bonds mature, instead of paying bondholders euro206 billion, Greece will have to pay only euro103 billion.
• The deal would reduce Greece's debt load by at least euro120 billion
• Greece faces a euro14.5 billion bond repayment on March 20, which it cannot afford without additional help

Three Essential Facts 

1. The new deal will reduce existing debt by 120 billion
2. The new bailout funds will take the debt load up by 145 billion
3. The net result is an increase in Greek debt of 25 billion

[Note: That math is incorrect - See Addendum]

This is supposed to work? The reduced interest rate to 3.6% will of course help Greece. But what is the interest rate on new debt?

Regardless, given Greece's deteriorating financial condition, exactly how long will it take before the EU and IMF realize once again that Greece cannot possibly pay back the new 145 billion?

In whose best interest is this deal? I fail to see how it benefits anyone.

Merkel Faces Backlash Over Deal

The Financial Times reports Merkel faces backlash over EU pact

Angela Merkel, the German chancellor, is facing growing political pressure at home to demand stricter fiscal discipline from her eurozone partners at an extraordinary European Union summit in Brussels on Monday.

She also faces a potential revolt by conservative members of the German parliament over any call for more taxpayers’ money to bail out the ailing Greek economy.

“If the Greeks don’t put the reform programme into effect, there can be no more help,” said Horst Seehofer, leader of the Bavaria-based Christian Social Union, in an interview with Spiegel magazine.

Philipp Rösler, economy minister and leader of the liberal Free Democratic party, junior partners in Ms Merkel’s government, threw his weight behind the call for stricter control over the Greek programme. “If the Greeks cannot do it themselves, there must be stronger leadership and supervision from outside, for example from the EU,” he said.

On the eve of the EU summit, which is supposed to finalise a formal treaty on budget discipline, Ms Merkel’s supporters in the German Bundestag are also calling for those rules to be made tougher.

“As it stands, the draft treaty does not go far enough,” a senior official of the Christian Democratic Union in the parliament said on Sunday. He said the centre-right group wanted sanctions to be imposed more automatically for excess debt and deficits, and a tighter timetable for all 17 eurozone members to introduce a binding commitment to balanced budgets in their national constitutions.

Political Zugzwang

Zugzwang is a term in chess. A player has to make a move but every move weakens the position. Pass is not an option.

Merkel is in such a no-win position. Everything she does will put her under attack by someone. Doing nothing, is an option in politics but not chess. However, doing nothing also exposes Merkel to attack.

Attacks Fly

Check out this nonsense from former European Commission chief Jacques Delors who says Resistance to eurozone bailout boost 'scandalous'

Former European Commission chief Jacques Delors on Sunday blasted the reluctance of eurozone countries like Germany to boost the size of the Greek bailout and create a system of eurobonds to facilitate lending.

"It is scandalous. You cannot be a member of the euro cooperation and at the same time say no to elementary demands for solidarity with other members within the framework of existing agreements," the prominent European federalist said in an interview with Dagens Nyheter, Sweden's daily of reference.

"We have to save Greece together. What has been done so far is too little, too late," he added.

Delors, who was commission chief between 1985-95 and a key player in creating the framework for the euro's 1999 launch, said it was "out of the question" to push Greece out of the eurozone and insisted the solution was for "Greece to privatise more of its economy."

"The euro countries also must together introduce common eurobonds, ... not to finance the current debt but to create greater efficiency and connectivity in the financial and monetary system," the 86-year-old Frenchman said.

The creation of such a "eurobond," which would pool the debt of the entire monetary bloc in a bid to reassure markets and facilitate lending, has long been a contentious issue among top policymakers, with the European Commission and France being in favour of such an instrument but Germany strictly opposed for now.

"It is a mistake of German Chancellor Angela Merkel to refuse to go along with such bonds," Delors said.

Delors' Self-Serving Pomp

What's scandalous if for political hacks like Delors to assume the Eurozone is worth saving, then tell everyone else how to go about it without taking into consideration any restraints others may have.

I suggest the euro is not worth saving. For the sake of argument, however, let's assume the eurozone is worth saving, and start with a look at Merkel's options.


Merkel's Predicament

1. If Merkel proposed Eurobonds, her coalition would collapse and she would be ousted. Moreover, the German supreme court would certainly demand a referendum which would fail. The irony then, is if Merkel did what Delores asked, the eurozone would fly apart right here right now.
2. If Merkel proposed significantly more bailout money, her coalition would also collapse and once again the proposal would be at risk of a challenge from the German supreme court.
3. If Merkel does nothing, she takes heat from political dimwits like Delors and an entire gamut of other nanny-zone supporters. She also takes heat from her coalition.
4. If Merkel steps up the pressure on Greece she hears it from her political opposition, from Delors, and from a whole host of parties representing a myriad of political views.

That my friends is political zugzwang and that is precisely why she called for Greece to Cede Sovereignty to Eurozone "Budget Commissioner".

Her proposal elevated the ire of Greeks as well as the likes of political hacks like Delors. Yet, that option is the one that made the most sense.  It was her least-worst option, that also bought her and the eurozone the most time.

It is the only option that has any chance of working.

By making those demands, she has a chance of keeping her coalition together. Indeed, if her demand are met or if Greece exits the eurozone in response, she might even be viewed as a hero!

Simply put, she is doing everything she can to keep the eurozone together. For doing the best she possibly can under the circumstances, she gets nothing but grief.

I think the best thing for the Eurozone would be for Germany to exit. The irony is that would likely happen if Merkel embarked down the path demanded by eurofools like Jacques Delors.

Addendum:

I received an email from a credit analyst at Barclays who prefers to remain anonymous. Here are his personal thoughts ...

The majority of the 145bn is for paying down existing debt, it is not additional debt

Current debt ~330bn split 120bn/210bn public/private
Post restructuring ~220bn split 120bn/100bn public/private

The 145bn then pays off ~80bn of the publicly held debt that matures + government deficit over 8 years + recapping the Greek banks (45bn)
So the net the government debt would end up at ~285bn (220+145-80)

Your basic point stands (debt is unsustainable), but worth getting the numbers right.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Why the Tobin Tax is a Bad Idea; Sweden's Experience With the Tax; Details of Sarkozy's Proposed Tax; Sarkozy Wants to "Provoke a Shock"

There is massive theoretical as well as actual real life evidence that financial transaction taxes will backfire, but that never stops politicians hell-bent on plowing ahead with "it's different this time" horrendous ideas.

Via Google Translate from Les Echos, please consider Sarkozy's stock exchange tax as of August 1

The 0.1% tax on financial transactions will apply from 1 August. In addition to equities, derivatives and high frequency trading are also covered.

Drawn up in haste, the tax on financial transactions is still the subject of intense discussions with the banking sector. A meeting has yet to take place on Monday to clarify the exact scope of covered products.

Many things are acquired, however: the tax will be paid by the people who buy a financial product, not by those who sell it. As reported Sunday, by the head of state, it will amount to 0.1% regardless of the nature of the product purchased (equities, derivatives) and will apply from 1 August, leaving a few months to Germany to eventually join the movement.

Three types of products involved

The law affects three different types of products: stocks, derivatives (including the famous' credit default swaps ", CDS) and high frequency trading-that is to say execution in microseconds of financial transactions by the only way of computing. This activity represents a huge chunk of transactions (about one-third). But most of the computers being located in London, the government will struggle to reach this activity. Still: he wants to show that tackles the most speculative operations.

Sarkozy Wants to "Provoke a Shock"

Bloomberg provides more details in Sarkozy Says France to Tax Financial Transactions From August

France plans to unilaterally impose a 0.1 percent tax on financial transactions starting in August, President Nicolas Sarkozy said, brushing aside opposition from the nation’s banks.

“What we want to do is provoke a shock, to set an example,” Sarkozy said late yesterday on French television from Paris. “There’s no reason why deregulated finance, which brought us to the current situation, can’t participate in the restoration of our accounts.”

“CDSs, which are speculative instruments against sovereign debt, will be taxed and online speculative purchases will be taxed,” he said.

Ernst & Young, an accounting company, has said in a report that while an EU transaction tax itself may raise as much as 37 billion euros, its net effect could be negative by between 2 billion euros and 116 billion euros by decreasing economic activity and reducing revenue from other taxes.

Socialist candidate Francois Hollande leads in the French presidential election polls. He has the support of 31 percent of voters in the first round, 6 points more than Sarkozy, and his second-round lead has risen to 20 points at 60 percent, according to a CSA poll published last week. Hollande, too, has pledged to impose a tax of financial transactions, if he’s elected.

Sweden’s Experience with the Tobin Tax

The Peterson Institute for International Economics presents Sweden’s Experience with the Tobin Tax

The Swedish Social Democratic government enacted a transaction tax on stocks, bonds, options, and some other securities in 1983. The tax, named after the economist James Tobin, was abolished by the new nonsocialist government in 1991.

The tax rates varied from 0.1 percent on ordinary stock trade to 0.15 percent on treasuries and 1 percent on options.

The Tobin tax in Sweden was a devastating failure that nobody would like to revive.

1. The expectation had been that the tax revenues would be 1.5 billion Swedish krona (SEK), but they stopped at SEK80 million.

2. Most Swedish trade in securities disappeared and went abroad, mainly to Oslo and London, and never returned. Soon after, the previously tiny Oslo stock exchange overtook the Stockholm stock exchange, and it is still the larger of the two stock exchanges.

There is no way that the current non-socialist Swedish government would accept a Tobin tax, as they know the security trade would leave the European Union.

In general, the Nordic and Baltic governments are amazed by what they view as a combination of arrogance, incompetence, madness, and slowness in Brussels, Paris, Berlin, and London. These sentiments are rather stronger in this region than in Washington. These countries are run by people who know how to handle crises, but they are effectively excluded from EU decision making.

Sarkozy's Pledge of Going it Alone

That discussion is all one should need to read to determine France would be acting very foolishly to implement such a tax.

Sarkozy thinks Germany would "soon" follow. As we have seen in the Eurozone, political decisions seldom if ever happen soon. Moreover, why would Germany act instead of watching France for a while?

Ironically, as soon as Germany saw the results in France (which likely would be soon), there is little chance they would implement such a foolish thing ever.

But what if all the European countries agreed to do it? We already know the UK opted out, but for the sake of argument, let's assume even the UK agreed.

The first that that would happen would be a mad scramble to execute transactions in the US, Switzerland, or Hong Kong. Nonetheless, let's assume the long arm of the law still managed to tax those transactions. What then?

Expect Increased Volatility, Decreased Trading Volumes, Lower Share Prices

The Adam Smith Institute offers a Comparative Study of the Potential Effects of a UK Tobin Tax. Here are some snips.

Sweden’s Experience with the Tobin tax

The rise and fall of the only case of a “pure” Tobin tax began in Sweden, when a 0.5% tax on the purchase of all equity securities (and stock options) was introduced on 1st January 1984. The tax applied to both domestic and foreign customers, and was levied directly on registered Swedish brokerage services.

Until 1987, inter-broker trades were considered intermediate (and hence exempt). ‘Round trip’ taxation effectively made the net taxation 1%, or 100 basis points. This was doubled in 1986, and later to include fixed income. Furthermore, a tax on stock options of 2% was introduced (1% relating to the premium, 1% upon exercise).

Understandably, investors devalued their assets to reflect the present value of future tax payments on the marginal share. The 2.2% average decrease in share prices on the announcement day added to the -5.35% index return over the 30 day period including the announcement. A further 1% share price reduction was seen in 1988 in reaction to the rate doubling.

Decreased Trading Volumes

Decreasing trading volumes led to secondary effects such as a reduction in capital gains taxes, almost entirely netting the (exceptionally low) tax revenue being generated.

Despite the tax being higher on equities, it was the fixed income market that suffered most. Despite the ‘low’ 0.003% tax levied on 5-year bonds, trading volumes dropped by 85% alone in the first week after implementation. Futures trading fell by 98%, and the options market was virtually non-existent.

Liquidity

All market participants would be subject to the tax; a Tobin tax is unable to discriminate between de-stabilising trades and those which provide liquidity, information and tradefinancing. With short-term trading providing invaluable liquidity to the market, an incapability to segregate individual trader motivations will therefore lead to a reduction in both liquidity and welfare-enhancing trade, in addition to increasing market susceptibility to individual shocks.

Robin Hood

Whilst the Tobin tax’s roots lie in economic theory, its current appeal is evidently political. The Robin Hood imagery drives the tax’s public support. It is its ‘stealing from the rich to give to the poor’ appeal that attracts many of its advocates, not the belief in its realistic economic capability. Understandably, some people are more-easily influenced by a well publicised, celebrity-endorsed Robin Hood Tax marketing campaign than by econometrical analysis or time series data.

Capital Flight

The experience of Sweden is one of capital flight. Odds are it would happen again.

The ATM Effect

The Adam Smith article contained an interesting analogy regarding ATM usage. When fees were zero, people would think nothing of doing an ATM transaction for $20. With fees of $2, you have to be pretty desperate to do an ATM transaction for $20. Instead, you would do one for your maximum limit. Some only use an ATM in an emergency and keep a pile of cash in their house instead.

In a falling market short-term traders provide liquidity (so do those shorting). Yet, Robin Hood proponents will drive those short-term traders away.

"In thinner markets, each trade would have a larger impact on price; resulting in less fluidity within the currency inventories of broker-dealers, the ‘liquidity providers’ of the market."

I fail to see how reduced liquidity and increased volatility will not be the result.

Four Reasons Tobin Tax is a Bad Idea

1. It would encourage capital flight (I know hedge funds that have contingency plans to move their entire operations to the Caribbean if such a tax is passed)
2. It would drive out short-term traders who provide much needed liquidity
3. Reduced liquidity would lead to increased volatility at the worst times
4. Pension plans  and mutual funds would bear much of the brunt of the tax. Rest assured market makers will find a way to pass their costs on.   

The results in Sweden are conclusive. A ‘low’ 0.003% tax levied on 5-year bonds caused trading volumes dropped by 85% in the first week after implementation.

Five-year US treasuries now yield .74%. Three-month treasuries yield .05%. Corporate bond yields are pathetic. How much of that do you want to take away?

Excluding bonds is not the answer. Liquidity and capital flight arguments suggests this idea should never get off the ground for any transactions.

By the way, buyers of CDS are often hedgers. Tax them heavily and there will be less interest in the underlying bonds. I would also point out that the speculators Sarkozy want to drive out of the market just happen to provide liquidity. Short sellers eventually cover, and provide fuel for rallies. Day traders will step into falling markets when others won't.

Sarkozy will "provoke a shock" alright, and it may crash the markets when he does.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Hollande Vows to Tax the Rich, Take Pay Cut; Sarkozy Promises German-Style Reforms; Merkel Cannot Save Sarkozy, But She Can Hurt Herself Trying

Politics are heating up in France and Germany as French president Nicolas Sarkozy clings to his political life and German chancellor Angela Merkel is under increasing pressure over more bailouts.

The Financial Times reports Merkel to join Sarkozy on campaign trail

German chancellor Angela Merkel promised to join Nicolas Sarkozy on the campaign trail as the French president took to the airwaves on Sunday to launch a set of German-style structural reforms aimed at seizing the initiative in his uphill re-election attempt.

Ms Merkel’s Christian Democrat party said she would “actively support Nicolas Sarkozy with joint appearances in the election campaign in the spring”. The announcement caused surprise in Paris as Mr Sarkozy, also of the centre-right, has yet officially to declare his candidacy for the election, which will take place over two rounds on April 22 and May 6.

The pledge by the German leader underscored the close ties she and Mr Sarkozy – together now habitually dubbed “Merkozy” – have built during the eurozone crisis, despite clear tensions between them at times. Ms Merkel pointedly avoided overt backing for David Cameron, the British Conservative party leader, in the 2010 UK general election.

Her intervention represented a clear rebuke to Mr Hollande. He has promised to renegotiate the new “fiscal compact” for the eurozone forged by Ms Merkel and Mr Sarkozy, due to be signed at a European Union summit in Brussels on Monday. He criticised it in his manifesto for lacking any growth stimulus and called for eurobonds and a revised pro-growth role for the European Central Bank, both strongly opposed by Berlin.

Sarkozy Proposes German-Style Reforms

Hoping to give a lift to his faltering campaign, Sarkozy to bring in German-style reforms

French president Nicolas Sarkozy unveiled German-style labour market reforms on Sunday as part of a package of measures aimed at reinvigorating the economy and his re-election prospects, hours after German chancellor Angela Merkel promised to join him on the campaign trail in an unusual show of cross-border support.

He announced a €13bn cut in France’s labour costs, which are among the highest in Europe, by reducing social charges on employers. The cut would be funded by an increase from October – well after the election – in value added tax to 21.2 per cent from the current level of 19.6 per cent, plus an extra tax on financial income.

Citing reforms made under former German chancellor Gerhard Schröder, who recently visited Mr Sarkozy, the president also proposed allowing companies more freedom to negotiate flexible working hours and pay levels with local unions – further eroding the significance of France’s statutory 35-hour working week. Similar moves in Germany had “created job, jobs and more jobs”, Mr Sarkozy said.

He announced the introduction of a long-promised financial transaction tax from August, saying the 0.1 per cent levy would include credit default swaps and “speculative computer trades”. France is determined to pioneer a full-blown FTT in the eurozone. “What we want to do is provoke a shock, to show an example,” he said.

Mr Sarkozy’s determination to push ahead with the shift of some welfare funding to VAT – known in France as “social VAT” – just months before the election was described by one parliamentary deputy from his UMP party as “political suicide”.

It has been flatly rejected by Mr Hollande and the president himself specifically ruled out an increase in the general VAT rate as recently as last October.

Will Sarkozy Please Make Up His Mind?

With today's announcement it appears the financial transaction tax is once again on the table. Sarkozy announced it, even to the point of "France Going Alone" if the EU would not approve. Then Sarkozy Dumps Financial Transaction Tax After Pressure From Banks. Now the proposal albeit in a modified form is back on the table.

In my opinion a financial transaction tax is economic insanity. It will reduce liquidity and perhaps cause a market crash.

Indeed all these taxes are economic insanity. Europe is headed into a huge recession. Increasing the VAT is the last thing one should want to do.

Hollande Vows to Raise Taxes for Rich and Banks

Meanwhile socialist challenger François Hollande sings a populous tune and vows to raise taxes for rich and banks.

François Hollande has outlined plans to raise taxes from the country’s banks, big companies and higher earners to close the country’s budget deficit and fund job creation in his bid to defeat Nicolas Sarkozy in France’s presidential election.

In a 60-point manifesto, the opposition Socialist party candidate also pledged to reopen the issue of pension reform, challenging one of the key achievements of Mr Sarkozy’s term of office.

The manifesto included a call to renegotiate the new eurozone “fiscal compact”, saying its emphasis on austerity aggravated the economic situation. He said the pact and the role of the European Central Bank should be re-shaped to favour growth, and he called for the creation of eurobonds to overcome the sovereign debt crisis.

Mr Hollande proposed finding all of the €29bn additional savings he said had to be made by 2013 through taxes. These would be raised by increasing levies on higher earning individuals, upping taxes on banks and removing a series of tax breaks for big corporations.

“If there are sacrifices to be made, and there will be, then it will be for the wealthiest to make them,” Mr Hollande said.

He insisted, however, that although the overall burden of taxes on the French economy would grow to almost 47 per cent of GDP by 2017 from 45 per cent this year, this was exactly in line with the current government’s own proposals.

Mr Hollande’s manifesto included €20bn of new spending measures, mostly to fund the hiring of 60,000 teachers, tens of thousands of new jobs for young people and support for small and medium-sized businesses.

A poll published yesterday by CSA put Mr Hollande on 31 per cent in the first round of voting, ahead of Mr Sarkozy on 25 per cent, with the socialist taking 60 per cent in a second round runoff against the incumbent.

Presidential Pay Hikes May Sink Sarkozy

Bear in mind that one of the first things Sarkozy did after the 2007 elections was to raise his salary from 100,000 euros to 240,000, a 140% increase. Much voter resentment lingers over that pay raise.

In contrast The Telegraph reports French front-runner pledges to cut his pay by 30 per cent as he aims to become next president

Francois Hollande, the front-runner to become France's next president pledged to cut his and his government's pay by 30 per cent on Sunday, as he hit out at the rich while seeking to dispel niggling doubts he has what it takes to become his country's next leader.

With just three months to go before elections, poll after poll suggests Socialist Mr Hollande will secure a comfortable victory over the unpopular Nicolas Sarkozy, his conservative rival and the incumbent.

Hollande's economic plan does not have to make any sense, and it does not have to be any better than Sarkozy's. Rather, Hollande's plan merely has to resonate with voters. A 20-point lead in second-round polls shows he has done just that.

I do not believe Merkel can save Sarkozy. Moreover and if she doesn't, her political stunt will hurt her own chances down the road.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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72% of Irish Want Referendum on Fiscal Treaty; Irish Prime Minister is a Disgrace

Unless it's a "sure thing" the last thing politicians want is a voter referendum. Simply put, politicians never stand for democracy.

What voters want is a different thing: 72% of Irish Want Referendum on Fiscal Treaty

The Irish government faces intense pressure to hold a referendum on the eurozone fiscal treaty after a poll that showed almost three quarters of the public want a vote on the agreement.

In an opinion poll published on Sunday, 72 per cent of people surveyed said the treaty, which would tighten budget rules for the 17 countries sharing the euro, should go to a vote.

Some 40 per cent of the 1,000 people questioned in the Sunday Business Post/Red C poll said they would support the treaty, 36 per cent were opposed and 24 per cent were undecided.

Sinn Féin has threatened to challenge in the Irish Supreme Court any decision not to hold a referendum, a move that could plunge Europe into months of legal uncertainty.

Last week several leftwing groups, including Sinn Féin, the United Left Alliance, the Workers’ party, and Eirigi launched a “Campaign Against Austerity Treaty”, demanding the government hold a referendum.

Irish Prime Minister is a Disgrace

Enda Kenny, Irish prime minister, says he will only hold a referendum if "legally required".

Here is a bit of history on Kenny.  He was swept into office in the wake of the global financial crisis. Voters were overwhelmingly opposed to bank bailouts and tossed out previous prime minister Brian Cowen in a massive landslide. It did not matter.

Kenny treated voters to more of the same. He entered agreements to bail out Eurozone banks, screwing Irish citizens in the process, just as Cowen had done.

Now, 72% of Irish citizens demand a referendum. Furthermore, every EU treaty since 1987 has been put to a vote.

Precedent alone says a referendum is "legally required". More importantly Kenny is "morally obligated" to hold a referendum. However, don't talk to politicians about morals, and don't expect any either.

Enda Kenny is a moral and ethical disgrace.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Sunday Funnies: Financially Suspicious Minds

This Sunday Funnies cartoon is courtesy of Merle Hazard who says "We Can't Go On Together with Suspicious Minds, Because Were Leveraged too Much Baby"



Concept by Merle Hazard, Art by Grey Blackwell. The cartoon also appeared on Jon Shayne's Blog.

Here is a list of Songs and videos by Merle Hazard, not to be confused with Merle Haggarg.

Inflation or Deflation? 



Link if video does not play: Inflation or Deflation

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List