2 August 2011

Euro Déjà Vu

That strange feeling that we been here before...


The latest unique final historical agreement (the one on July 21) on a 'new' plan for Greece and new rules for the European Financial Stability Facility (EFSF) silenced the markets for a few days. Here are the headline details, which I have deliberately put in small print.
  1. New 109bn Euro EFSF/IMF loans until mid-2014.
  2. 37bn Euro Private sector (banks) participation.
  3. 12.6bn Euro from bond repurchases at below 100%.
  4. An extension of all EFSF loans to 15-30 years at an interest rate cut to 3.5% (also applies Portugal and Ireland).
  5. EFSF to have flexible credit lines, to purchase of bonds in secondary market and recapitalize banks.
  6. A “Marshall Plan” for Greece (with increased investments by EU).
The agreement conceded the crisis is not just a Greek but an European one and therefore required an European solution. So which part of this is the European solution?

Not 4). Although, it provides debt relief to allow Greece, Portugal and Ireland to live a bit longer and maintains their bondage to their debts, it fails to do two things. It will not reduced their debts. The latest IMF study still sees the debt-to-GDP increasing to 172% in 2012. Secondly, it does not make provisions for other Eurozone economies. If it is accepted that the euro has a fault, then it is the Euro trading imbalances that define a default-line which can also shake the Spanish and Italian economies. If Italy and Spain edge towards crisis, affecting their ability to support bipartisan loans to Greece, the deal falls apart and with it rest of the Eurozone. 

(Japan's sovereign debt to GDP is expected to be 228%, has suffered enormous damage from a Tsunami and nuclear meltdown, and yet Italy, which has debt to GDP of 120% and a surplus budget deficit (before interest payments), is at more risk to a financial meltdown. One country has flexible exchange rates; the other has the euro and a trading deficit with its euro members.)

Not (5). The EFSF, needing to buy existing risky bonds and recapitalize banks, is too small to cover for any Spanish and Italian difficulties. It can obtain funds by selling bond backed by the euro governments but the third and fourth largest guarantors are Italy (18%) and Spain (12%) with Greece, Portugal and Italy guaranteeing 7%. So, in a crisis, the flow of funds is supposed to work like ..... 
In practise, they are just lining up their dominoes.  EC policy will again be overtaken by events, sending back  Eurocrats for yet more another rounds of coordination, emergency meetings, unique historical agreements, and the 'funny' farm. Euro Déjà Vu.

Nevertheless, there is something very European about the EFSF. It is a private bank registered in Luxembourg which has no democratic or tax payer control over it.

Not 6). The EU Council statement points out that the bail-out for Greece is exceptional and a unique situation (because of garlic consumption or something?).  A Marshall plan only in the sense that Greece is having its policies marshalled by EC/ECB/IMF. Investment would be nice and there lots of Greek assets being forcibly sold on the cheap.

Here's a reminder of what the actual Marshall Plan looked like. Note how it involved more than one country and provided a base to for the EC.


So what is left of this European solution?  Oh.... its another bail-out for the banking system.

1), 2) and 3) is a default. Call it a selective, restrictive, green, pink, blue with yellow stars, a default is a default.  Some lenders will lose, possibly 21% (of their Net Present Value) by swapping existing debt for new debt.  There is also voluntary ..... when does voluntary not mean profitable in the banking industry?

Its a game of winners and losers.  The key card is the blackmail card.  This card was introduced in 2008. Banking bail-outs resulted in gains that were kept and losses that were paid for by the taxpayer and which has perverted the market economies (Money, after all, unlike a Greek politician, is a good that appears in all markets).  Repeated bail-outs of banks throughout the world have encouraged reckless lending backed by the threats of the disastrous consequences of not bailing out lenders. Moral hazard lives in the banking system. There are two important consequences to this.

Lenders can take on higher risks at higher interest rates, knowing that borrowers and tax payers will not only pick the costs but argue with each other. This gives a subsidy to gambling. Gamblers are no longer entirely responsible for their gambling losses.  Without the new deal, banks would had faced large loses on their bonds holdings. They were receiving very high premiums on potential risky holding which they can now convert at small cost (haircut) to something safer.  If the voluntary exchange of debts works, it is because it allows banks to realise their profits. The deal secures, at low cost, the banking system without jeopardising the flow of interest payments from their debtors.

Second, instead of a central bank controlling the banking system, we have a banking system that controls the central banks.  Money supply is now virtually privatise. Euro surplus countries place deposits in the banking system that are used to create debts or money that permanently tie EC deficit countries to servicing their debts.  It is highly profitable and very risky to maintain this imbalance but the populations in the deficit (via austerity measures) and the surplus economies (by tax payments) pay to keep this risk low.

EC leaders have uttered sound bites on investments and economic growth. They have even acknowledged that the Euro is an unfinished project, admitting that there was nothing to replace interest and exchange rates as policy instruments to stem the continuous build up of surpluses and deficits between members.  Read the small print, ignore the sound bites.  There is no change in diagnosis; only more powers to carry through existing prescriptions. Paragraph 8 in the EU Council statement even reaffirms that Maastricht with budget deficits being asked to be below 3% by 2013 the latest (with exceptions of course).

So what does this reveal about the Euro project?

The transfer of power away from elected governments, by the elimination of their power to conduct monetary, exchange and fiscal policy, is taking place at a faster pace. This transfer is not to something that can be elected but to unaccountable Euro institutions and agencies dominated by the banking sector and ran by unelected officials maintaining the banking perspective.  The crisis, with each country's electorate  blaming each other, provides the opportunity to do this.  The choice presented, accept financial discipline and order or face financial terror and chaos, are terms of surrender.

Macroeconomics has been reduced to the study of Banking and Finance; traditional macroeconomic targets replaced by banking targets, growth and unemployment policies replaced by balanced book dictatorships and austerity measures. European leaders announce banking solutions under the title of 'European solutions'.

The result is a dogmatic fixation on austerity.  A logic based on repressing economies to make them more competitive to restore trading imbalances.  This will make each country more competitive than the other (!).

Here's a rap song that doesn't meet EuroVision song contest standards:


Keynes vs. Hayek Round Two can be found here:

I end by re-cycling a quote used in my first post:  There is no example in history of a lasting monetary union that was not linked to one state.'  Otmar Issuing, Chief Economist of the German Bundesbank Council,1991

A democratic unified Europe state might be a wonderful dream. An unelected centralised Europe is a nightmare with a dark bloody history

*********************************

An Eurocrat, after a difficult day convincing the government to sell off its state assets in return for a roll-over of its debts, saw a boy sitting on edge of Syntagma Square with sign saying “dog for sale”

The Eurocrat was intrigued to see someone in the country, even if it was a little boy, taking such an initiative.

The Eurocrat felt that, although the boy understood the need to sell unprofitable assets, he should know how the value what he sold.  He explained that everything ought to produce more income than it consumed and so the dog should be priced accordingly. He suggested 10 euros might be paid by someone only wanting a pet. Convinced the boy had learnt a good lesson, the Eurocrat return to his expensive hotel room.

A few days later, the Eurocrat, feeling very pleased with himself over a debt rollover that few could understand, saw the small boy again. This time he was without his dog.


"I see you took my advise and sold the dog for ten euros." said the Eurocrat

"No, but I was watching something on TV about a new EC deal"

"You can understand that?' said a very disappointed Eurocrat

Yes ... it helped. I got 100,000 euros for my dog"

The Eurocrat was stunned. "How did you ever get 100,000 euros for that dog" he asked.

"It was easy," said the boy. "I swapped him for two 50,000 euro cats.

"But.."

"They are cheaper to feed, you know" interrupted the boy

“Yes, but.. what is the true value of... I mean what can two 50,000 euro cats do?" Ask the shocked Eurocrat

"They roll over when tickled"
 

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