UNCHANGED: STILL NO REALITY

Calling the IIF’s bluff over Greek debt is a bold move – but the fundamentals remain the same.

Wolfgang Schauble having stated clearly last Friday that there would be no doubling of the eventual ESM (the final post-July EU rescue fund) Chancellor Merkel reiterated this today in the German media. She would “listen to what other countries bring to the table”, and then act accordingly…by ignoring them.

Mario Monti will thus not be best pleased, but personally, I’m incandescent with rage. Not about the ESM – which is at best a fart trying to counterbalance a typhoon – but at the continuing way in which Berlin and Paris (with input from the Italian in Frankfurt) continue quite brazenly now to treat the EU as their own little creation – a club with which they can do as they please.

There are 27 States in the EU, and they all have an equal vote. As long as that continues, of course, nothing will ever get done. But if you’re asking me to choose between a uselessly indecisive Superstate and a fascist authority run by a German and a banker, my vote goes for ‘neither of the above’. What it boils down to – and it always has – is that for all those Brits with enough brainpower to prefer keeping their freedoms and savings intact, the EU is and always was a non-starter. Once the Ezone came into being, its self-immolation became a certainty: but while we are doing the hokey-cokey here in the UK, somebody needs to tell the Westminster clique that the rest of us would prefer to depart the dance-floor and go home.

For example, if the Germans say ‘no dice’ on a doubled ESM, that snuffs any remaining, remote chance that Washington will give Frufru Lagarde any more ammo for her IMF bazooka. Frau Merkel’s morality play continues, but that’s all it is: a show that bears no connection to the real world.

Lagarde herself told a Berlin audience within the last hour that there should be “a temporary flexibility of monetary policy by the European Central Bank (ECB) to help the euro countries with poor access to financial markets” (flatly opposed by Merkel, and publicly discouraged by Mario Draghi) that “all EU countries must try harder to find funds to help their neighbours” (most of them can’t afford their own problem, let alone someone else’s) and that the ESM “must secure substantial additional resources” (see opening para above). As she and Merkel spent four hours talking to each other yesterday it’s pretty obvious there was little in the way of a meeting of minds….which is quite likely if one of you hasn’t got one at all.

Back in the real world, Spain is rapidly turning into Greece: it faces a contraction of 1.5% during 2012 according to its central bank, so given the normal 100% margin of error, we can expect 3% to be nearer the mark. This announcement will immediately increase its borrowing costs, and over the year these two factors will mean the country sinking deeper into the quicksand.

Le Monde this morning reports on the latest business survey, which unsurprisingly shows opinion becoming ‘increasingly morose’ on the subject of the economic outlook. Intriguingly, it has also just broken a sourced story saying that the IIF has said to the Troika, re Greek debt, ‘70% haircut plus 4% coupon – final offer’. My own information is that they’d take 3.8%, but nobody really knows any more: if the bondholders call the Troika’s hand, however, things will get interesting in the Chinese sense.

Returning to the case of Greece, the economy has shrunk far more than experts had projected: it fell nearly 4% last year, and in 2012 is expected to contract by more than the 3% originally suggested by international observers. The country’s debt burden continues to climb – it’s now above 142%. So the Troika’s gamble begins to make more and more sense: it either wins this battle with the lenders, or…or what? Kicks Greece out of the euro? No. Leaves the euro? Quite possibly. Somewhere in New York and Athens, there are folks working round the clock to decide whether they’d rather give in on the haircut/coupon thing – and still take a very fat profit now; or push the Troika to the edge…and wait for an obscene profit if the triplets lose their nerve. I know what I’d do – but Hedge Funds don’t think like the rest of us.

In Portugal, every single bank lost money last year, but the Central Bank is rushing to reassure customers there is nothing to worry about, because the EU recapitalisation target of 9% has been met by all of them. And Lisbon’s Metro fares just went up 5% as part of the desperate search to empty the nation’s pockets in every conceivable way.

The above news is just a skimmed cross-section of EU-based newspapers I looked at this morning: all is muddle, disaster and disagreement.

Tell me, do you think anyone in Camerlot actually reads these papers at all?