CRASH 2: It’s Staring us in the Face

Today was the day opinion leaders stopped pretending about the eurozone disaster

Everybody in the money business knows how easily media speculation, an inflection in the speech of a political leader, a piece of unusual behaviour, or persistent rumours can produce a self-fulfilling reality. But there comes a point in every historical episode – especially in economic history – when the heavy hitters, that is, the very few people whose opinion one respects, become bolder and more on the record in what they say and do. Today has been a landmark in the Crash 2 saga for that very reason.

Mohammed el-Arian of Pimco is infinitely more consistent than his partner Bill Gross. He told Bloomberg that Europe is “on the verge of a full-blown financial system crisis”.

Dutch Finance Minister Jan Kees de Jager told Dutch financial news show “RTL Z” earlier today that his ministry was “prepared or preparing for all conceivable scenarios and even the almost inconceivable scenarios.”

The staid voice of JP Morgan opined that “the EU crisis is about to reach its climax..this is the endgame for EMU”.

US Fed boss Tim Geithner abruptly cancelled all other plans yesterday and flew to Poland in readiness for an EU Finance Minister’s summit this coming Friday. Given he’d only just got back from Marseilles, it seems obvious that Geithner knows it’s now or never: he wasn’t scheduled to join the Summit. In fact, his attendance is unprecedented.

Sergio Marchionne, the CEO of Italian carmaker Fiat, told reporters in Frankfurt that the eurozone banking system was “going off the rails”.

Writing in the New York Times at the weekend, Paul Krugman observed that ‘We’re not talking about a crisis that will unfold over a year or two; this thing could come apart in a matter of days. And if it does, the whole world will suffer’.

Shortly before he was due to make a joint statement with Angela Merkel today, France’s Nicolas Sarkozy abruptly cancelled it in order to join a crisis meeting about State guarantees of French banking debt. The BBC’s Robert Peston has written a good piece about such guarantees: for once, it’s a blunt article in which he says things like, ‘Here is the problem for President Sarkozy. On the Today Programme this morning, Sir Howard Davies – the former chairman of the UK’s Financial Services Authority who is apparently now grooming the next generation of the French elite as a professor at Science Po in Paris – said that the French government would have to announce massive injections of new capital into French banks in the next few days.’

As this and many other sites have maintained since the turn of the year, once they truly get going, events in the eurozone will not just accelerate on an indexed rather than multiplying basis: they will start coming at us from every point of the compass. Spanish Cajas, German Landesbanks, a sudden upsurge in the French national debt, undeclared collateral exposures to Greek insolvency, and the realisation that Italy in particular has no kind of grip on its credibility problems.

‘We can no longer borrow dollars. U.S. money-market funds are not lending to us anymore,” an anonymous bank executive with BNP Paribas told the Wall Street Journal last week. And in that context, quietly and out of the public eye, daily transfusions from the EU Central Bank are just about keeping eurobanks going. Once the ECB hits its legal lending ceiling, that’s it: the tap is turned off. There is no way any French major can then do anything other than fall back on the mercy of the State. Hence Sarkozy’s switch of agenda today. On Monday, it was SocGen issuing reassurance about asset sales. Today, it was BNP Paribas rubbishing the WSJ report that it was short of dollar financing. You have to ask yourself why an insider source would make such stuff up – and whether the Journal would’ve run the piece without having a lot of confidence in the informant.

The final comment tonight should, however, highlight the madness of markets. Everyone is pinning their Greek hopes on the new tax they’ve just decided to levy on electricity bills. Unfortunately, tax workers and customs staff are on strike over salary and budget cuts