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A genuine economist WTF? moment
May. 19th, 2010 01:53 pmIt's not often that a government makes a decision so out of left field that you wonder if it's a hoax. It's less often that you do it when the government in question is the German government.
But it managed it yesterday evening when it banned naked short-selling in eurozone government debt traded on German exchanges, uncovered credit default swaps on eurozone government debt, and Germany's 10 most important financial sector stocks, including its insurers.
Robert Peston reported that the German regulator, BaFin, was phoning round other regulators yesterday trying to get them on board. Presumably the answer was "er, isn't the EU actually doing something about this already. Isn't there a meeting scheduled this week?"
So what was it all about? Clearly it's Merkel trying to get through parliament this €123bn of the €750bn rescue package. And clearly she thinks there's a chance that she might fail. The implications of that are, well, I guess Aardvark would be right -- the euro would be dead.
So, to get it through parliament, she has to persuade parliament what a dreadful situation Europe is in. An urgent Europe-wide regulation banning naked short-selling would be a powerful propaganda blow in favour of this, giving a flavour of "desparate times". And so the word went out to BaFin, where the senior executives must have choked on their tea and toast, or whatever it is that German regulators have for an early afternoon snack.
Manfully, BaFin tried, and failed, to get other countries on board. But it was not to be. Thus we had the farcical situation of Germany banning trades which normally take place off-exchange (or "over-the-counter" as it's known, with no middle market-maker) and outside Germany (usually in London or New York).
As observers commented. "Good luck with that one".
Merkel has a problem. She has to persuade the German parliament that we are on the brink of Armageddon, but the result of this is that she persuades the markets that we are on the brink of Armageddon -- hardly conducive to the confidence in the eurobond market that the ECB, Germany and France is trying to promote.
Meanwhile, the world's markets and politicians for once were dumbfounded. "Merkel Goes Insane" would have been my chosen headline. It takes a lot of skill to upset politicians, spook the markets, and fail to achieve your objective all at the same time.
Not least irritated was Michel Barnier, EU commissioner for internal markets and financial regulation. He said that
"Oops" is perhaps a rather mild term to apply to how much Germany got it wrong last night. "A gigantic fuck-up fuck-up of ginormous proportions" might catch a little more of the flavour, but still, I feel, doesn't do it justice. For that you would need Malcolm Tucker in unmitigated full flow.
++++++
This euro-currency/Greece/Spain problem is a bit like a very complicated chess problem; one where you aren't sure how many pieces are on the board, how many players there are, what the rules are about how the pieces can move and capture, and where the move of a single piece will affect an unknown number of the other pieces on the board, and in an unknown way.
But I was thinking about it last night, and it struck me that we have had sovereign defaults before. Argentina, Russia, Mexico, to name but three. And the financial world did not face Armageddon. Argentina, indeed, is actually heading back into the bond market (or, rather is hoping to) after years as a pariah. Sovereign debt default, indeed, has a long and noble history going back to the 1400s at least.
So, what's the big deal about Greece defaulting? Clearly there is one big difference. Greece is part of the eurozone. But even that is not the end of the financial world. As anyone who has moved money between European banks in different countries will know, the single currency has a remarkable number of riders attached to it. If Greece defaulted, the investors would take a haircut, and the world would go on.
So, there must be something else. Well, the first one is contagion. I'm not sure how bailing out Greece will stop Spain going down the tubes, but there appears to be a naive belief in the domino effect and the reverse domino effect. While the first may be true (pushing over one domino could cause a lot of other dominos to fall) this does not make the reverse true (keeping the first domino stable will guarantee that all of the other dominos will, by some kind of quantum physics miracle, become more stable as well). OK, so that theory is obviously bollocks, but politicians believe it, so that could explain some of their panic.
But, secondly, and I think more importantly, I don't think this is a sovereign debt crisis. The real crisis is the crisis we have been in for the past three years. It's a banking crisis. Banks are up to the eyeballs in Greek bonds, Spanish bonds, Italian bonds. And you don't need a default for banks to get into trouble. All that you need is for the belief in sovereign debt generally to be severely weakened. But at the moment banks are counting at 100% debt that, to be honest, has no real hope of ever being repaid (remember our Greek poker player yesterday?). The money only exists in the banks' imagination. The "real" wealth to back it up is yet to be produced. If you adjust banks' balance sheets so that they reflect the wealth that is really out there in the world, rather than the wealth which the world hopes will sometime be available, that so fucks up banks' capital requirements that your only choice would be to tear up the rulebooks. Forget the proposed Basel III. Bring back "Who Gives A Shit III".
But if there were a real systemic collapse in sovereign debt -- if the defaults came thick and fast, then much of the western banking system would find itself insolvent. Hell, no wonder the price of gold is going up.
And if banks are on the verge of going bust (see RBS in October 2008) because the money owed to them by governments has become junk debt, one solution no longer available to you is the government stepping in to bail you out.
In essence, if no debt, even government debt, is trustworthy, whither the banking system? Whither the current economic system?
These are the fears that Merkel holds as she tries to persuade a parliament which steadfastly (like the general public) refuses to accept that this is more than a little local difficulty, so why should it stump up €123bn?
Hard times, my friends, hard times.
________________
But it managed it yesterday evening when it banned naked short-selling in eurozone government debt traded on German exchanges, uncovered credit default swaps on eurozone government debt, and Germany's 10 most important financial sector stocks, including its insurers.
Robert Peston reported that the German regulator, BaFin, was phoning round other regulators yesterday trying to get them on board. Presumably the answer was "er, isn't the EU actually doing something about this already. Isn't there a meeting scheduled this week?"
So what was it all about? Clearly it's Merkel trying to get through parliament this €123bn of the €750bn rescue package. And clearly she thinks there's a chance that she might fail. The implications of that are, well, I guess Aardvark would be right -- the euro would be dead.
So, to get it through parliament, she has to persuade parliament what a dreadful situation Europe is in. An urgent Europe-wide regulation banning naked short-selling would be a powerful propaganda blow in favour of this, giving a flavour of "desparate times". And so the word went out to BaFin, where the senior executives must have choked on their tea and toast, or whatever it is that German regulators have for an early afternoon snack.
Manfully, BaFin tried, and failed, to get other countries on board. But it was not to be. Thus we had the farcical situation of Germany banning trades which normally take place off-exchange (or "over-the-counter" as it's known, with no middle market-maker) and outside Germany (usually in London or New York).
As observers commented. "Good luck with that one".
Merkel has a problem. She has to persuade the German parliament that we are on the brink of Armageddon, but the result of this is that she persuades the markets that we are on the brink of Armageddon -- hardly conducive to the confidence in the eurobond market that the ECB, Germany and France is trying to promote.
Meanwhile, the world's markets and politicians for once were dumbfounded. "Merkel Goes Insane" would have been my chosen headline. It takes a lot of skill to upset politicians, spook the markets, and fail to achieve your objective all at the same time.
Not least irritated was Michel Barnier, EU commissioner for internal markets and financial regulation. He said that
"it is important that member states act together and that we design a European regime to avoid regulatory arbitrage and fragmentation, both with the EU and globally".Just in case you didn't get the coded message in that one, he added that
"Germany's actions would be more efficient if they are coordinated at European level. It would make sense for this to be addressed when European finance ministers met on Friday".
"Oops" is perhaps a rather mild term to apply to how much Germany got it wrong last night. "A gigantic fuck-up fuck-up of ginormous proportions" might catch a little more of the flavour, but still, I feel, doesn't do it justice. For that you would need Malcolm Tucker in unmitigated full flow.
++++++
This euro-currency/Greece/Spain problem is a bit like a very complicated chess problem; one where you aren't sure how many pieces are on the board, how many players there are, what the rules are about how the pieces can move and capture, and where the move of a single piece will affect an unknown number of the other pieces on the board, and in an unknown way.
But I was thinking about it last night, and it struck me that we have had sovereign defaults before. Argentina, Russia, Mexico, to name but three. And the financial world did not face Armageddon. Argentina, indeed, is actually heading back into the bond market (or, rather is hoping to) after years as a pariah. Sovereign debt default, indeed, has a long and noble history going back to the 1400s at least.
So, what's the big deal about Greece defaulting? Clearly there is one big difference. Greece is part of the eurozone. But even that is not the end of the financial world. As anyone who has moved money between European banks in different countries will know, the single currency has a remarkable number of riders attached to it. If Greece defaulted, the investors would take a haircut, and the world would go on.
So, there must be something else. Well, the first one is contagion. I'm not sure how bailing out Greece will stop Spain going down the tubes, but there appears to be a naive belief in the domino effect and the reverse domino effect. While the first may be true (pushing over one domino could cause a lot of other dominos to fall) this does not make the reverse true (keeping the first domino stable will guarantee that all of the other dominos will, by some kind of quantum physics miracle, become more stable as well). OK, so that theory is obviously bollocks, but politicians believe it, so that could explain some of their panic.
But, secondly, and I think more importantly, I don't think this is a sovereign debt crisis. The real crisis is the crisis we have been in for the past three years. It's a banking crisis. Banks are up to the eyeballs in Greek bonds, Spanish bonds, Italian bonds. And you don't need a default for banks to get into trouble. All that you need is for the belief in sovereign debt generally to be severely weakened. But at the moment banks are counting at 100% debt that, to be honest, has no real hope of ever being repaid (remember our Greek poker player yesterday?). The money only exists in the banks' imagination. The "real" wealth to back it up is yet to be produced. If you adjust banks' balance sheets so that they reflect the wealth that is really out there in the world, rather than the wealth which the world hopes will sometime be available, that so fucks up banks' capital requirements that your only choice would be to tear up the rulebooks. Forget the proposed Basel III. Bring back "Who Gives A Shit III".
But if there were a real systemic collapse in sovereign debt -- if the defaults came thick and fast, then much of the western banking system would find itself insolvent. Hell, no wonder the price of gold is going up.
And if banks are on the verge of going bust (see RBS in October 2008) because the money owed to them by governments has become junk debt, one solution no longer available to you is the government stepping in to bail you out.
In essence, if no debt, even government debt, is trustworthy, whither the banking system? Whither the current economic system?
These are the fears that Merkel holds as she tries to persuade a parliament which steadfastly (like the general public) refuses to accept that this is more than a little local difficulty, so why should it stump up €123bn?
Hard times, my friends, hard times.
________________
