Draper Osborne….getting ready to recut his cloth?

Further crisis for UK Coalition as Brussels signals bailout fund boosts

Thanks to intransigent eurobankers and squabbling EU leaders, it is now odds-on that the UK will face much bigger payments into what is set to become not a bailout fund, but a default management fund. Messrs Cameron and Osborne need this problem like they need another Andy Coulson.

Watching the syntax from Brussels is like Kremlin-watching in the old days of the USSR. Yesterday, the big boys (all of them unelected, lest we forget) seem to have told the EU’s Finance Ministers (all of them elected, and all of them powerless) that Greek default ‘should be avoided if at all possible’. This might seem like nothing, but in authoritarian States, nothing is everything. This represents a seismic shift from ‘default is unthinkable’. Now, the unthinkable has been thought about. It’s a start – or more exactly, the beginning of the end. The only thing we all need to figure out now is what it’s the end of. And spells trouble with a capital T for Osborne and Cameron.

My friendly sprout in Brussels ( and let’s face it, this person was on the money last time) insists that one big new policy shift is the acceptance by ALL EU governments  not only of Greek default, but also the idea that the eurozone’s €440bn euro bailout fund “will have to be reconfigured” in order to buy back Greek debt.

The truth behind the verbiage is that the taxpayer is being dragged in again, because the banks are dragging their feet. The FT at least is in no doubt about this, observing that, ‘…a consortium of large European banks with holdings of Greek bonds has demanded that the European Union commit itself to a buy-back of the debt, possibly with billions in government money.’ (We might well ask, as usual, who are they to demand? But asking such things is, I’ve found, pointless.)

The further truth is that Germany and Trichet’s European Central Bank can’t agree about the size of debt losses that private creditors (aka, the banks) should take on. So once again, it’s a fudge….adding further fuel to the somewhat deranged ideas of Herfried Munkler about powerful new controls from the centre of the EU.

But the most devastating truth behind even this fudge is that, as my sprout predicted weeks ago, in the end Britain will be hit for more bailout monies. And the reason is that the goalposts have moved, the shape of the ball has changed, and it’s no longer Rugby Sevens we’re playing. The funds required for default management are going to be much bigger than those for another bailout. Note that word ‘reconfigured’ three paragraphs ago.

To understand this, we need to go back to the dizzying array of initials involved in EU financial cock-up injections. Britain doesn’t contribute to the €440bn bailout fund (European financial stability facility) because it isn’t in the euro. But the smaller €60bn (European financial stability mechanism) can force ALL 27 member States to contribute.

When Greece defaults, its liabilities will be around €350bn….and counting. There’s no way the EU can handle all the ClubMed problems on what that will leave in the EFSF…it will have to increase the size of the funds in it….and/or of those in the EFSM. Britain IS liable under this mechanism. And all bets are now off about how big this fund might get.

The word on the ground is that Merkel will push for all 27 States to fork out….and keep pushing on the banking intransigence. Sarkozy will support her in the former, but not the latter: Napoleon doesn’t want all his banks going bust just in time for next year’s Presidential elections.

Stand by for more flappy bottoms in Camerlot. Stand by for instant Downing Street denials once observers catch on to the obvious likelihood of Britain being forced to pay more. Stand by for madness as the likes of Ireland, Spain, Portugal and Italy are asked (despite their parlous situations) to cough up too. Stand by for the end of the eurozone and the EU as we know it…..in the end.

But the bottom line, as always, is you and me getting poorer still – thanks to the mad folks in the banks, and the EU. It certainly focuses the mind on who our enemies are.

PS Watch out for Timothy Geithner going puce when he hears the news today….Greek default will not play well among Wall Street’s insurers.