The sirens are calling EU leaders towards the rocks
Have you ever wondered what happens when the mad get into bed with the depraved? Well now’s your chance to find out….if the news seeping out of the eurozone is anything to go by.
It looks to me like a fatal combination of selfish bankers, greedy bondholders, national self-interest and global delusion may be about to deliver us unto temptation, and thereby disaster.
Still resisting any idea of a Greek debt haircut, the banks have however swiftly managed to cobble together a deal between them, whereby some of them will survive – but the EU economy will be starved of funds into the foreseeable future. This is because their ‘solution’ to the recap issue is to sell assets….selling being much cheaper than buying/borrowing. The Sprouts and the europols seem to think they’ll have to settle for this. (Asset to liquidity ratios rule, OK…but who’s going to buy all these assets? And how will those banks lend any money when business needs it?)
Even worse, the wily, slippery Schauble Thing is gradually working on his CDU colleagues to persuade them that the leveraged 2trillionplus EFSF super-bazooka will be just fine, because ‘all’ it involves is the EFSF becoming an insurer of debt. I’m beginning to realise that Wolfie Schauble may well be the German Gordon Brown: on October 4th, he stated emphatically that the Luxembourg Finance Ministers’ meeting “did not discuss EFSF leveraging because it was not on the agenda”. Now he’s sleazing around the corridors of the Bundestag talking to them about a trillion……while to the Franco-American axis, he is talking about 2.5 times that amount.
Given that your average Bundestager discerns bollocks with roughly the same efficacy as the average UK MP or French Deputy, Germany’s multi-mouth Finance Minister may yet get away with it: no wonder the Frankfurter Allgemeiner Zeitung accused him last week of ‘going rogue’. What we don’t know, as yet – as always – is what Geli the Ostie thinks about all this. But what I can tell you is that the markets very rapidly sussed where this leaves the Bundesrepublik, and gave German bonds a bit of a hammering this afternoon.
The entire construct currently being fashioned from clouds, snow and other ephemeral materials is clearly clinically insane as a ‘solution’. Banks in France, the U.K., Ireland, Germany and Spain have announced plans to shrink by about 775 billion euros ($1.06 trillion) in the next two years to reduce short-term funding needs and comply with tougher regulatory capital requirements. But as Simon Maughan, head of sales and distribution at London-based MF Global UK said this morning, “Asset sales are impractical in the current environment. Every bank is selling, and no bank is buying. It just won’t work.” But what gets me is that the banking fraternity is very happy to see Europe’s economy reversing into a cul de sac of slump – rather than them having to tell the shareholders there won’t be a dividend.
However, I’m glad to see that at least part of the commentariat knows exactly where the EFSF bazooka drivel will end. The big idea is to inflate the EFSF to offer first-loss guarantees of 20% to bondholders. In this way, it is hoped, the fund’s €440bn of guarantees can be inflated into firepower of €2trillion or more. But The Slog’s Bankfurt Maulwurf puts the idiocy of this firmly into perspective:
“You will only see insurance on new bond issues,” he points out, “And so the enormous pre-existing stock of bonds will not be covered. It is just more heavy make-up allowing Wolfgang Schauble to float crazy ideas – as if they add up to responsibility. The real responsible voices in Germany will reject this. If this was an entirely risk-free idea, why would one need such a ridiculous boost to the EFSF? It is simply a repackaging of what the Americans and the French want”.
Ultimately, I have no idea if Bankfurt Mole reflects mass opinion in Germany – although I suspect he does. What I do know is that he is in accord with both German central bank and ECB thinking – viz, anything that involves further borrowing or bailouts involving citizens’ money is a bad idea. This remains Merkel’s instinct too: but she is a politician, and like every politician, she’d rather her legacy was one of saving the EU, than keeping Germany’s triple A safe. However, being a politician dependent on the popular vote, she will almost certainly grasp that there’s little advantage in writing insurance policies for, say, Spain and Italy, to attract investors to their bonds…..if the effect is to push up borrowing costs for France. If that were to happen, an EFSF insurance vehicle could end up spreading, rather than containing, contagion.
Angela Merkel – and most Germans – have reached a level of frustration with France of late whereby they might almost enjoy the demise of possibly the most arrogant nation on Earth. But reality is reality: France is a massive customer for Germany, and as the country’s leader, Frau Doktor Merkel has a duty to remember this. What she also needs to remember is that buying into a scheme to help banks survive (while destroying the EU economy, and Germany’s AAA rating) is not the best way forward.
The ideas on the table now are almost guaranteed to produce the worst possible outcome. They will not stop contagion, and in many ways they will encourage bondholders to buy still further into this anarchic mess. Above all, the ‘insurance’ angle is nothing more than Can Kickathon. But they will sound good; and in the age of denialist spin, this seems to be all that matters.
Footnote: The European Commission today raided banks throughout Europe – including Deutsche Bank – in a probe into suspected fixing of interbank lending benchmark Euribo. We always know where we are with the bankers: in an ethical No Man’s Land, they are always in the lead. My own view is that the Libor scam (in which the Diamond Geezer is up to his brass neck) is more immediate evidence of an enormous fraud. But as they say, Every Lidl Helps.