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Who's in trouble now?
May. 24th, 2010 02:16 pmAs I wrote around the middle of last week, I'm moving towards the view that this is less a sovereign debt crisis than it is a run-on from the 2007-08 banking crisis. After all, we have had sovereign debt defaults before and we will, no doubt, have them again. If Greece, Portugal and Spain default, well, the banks and other lenders swallow the loss and carry on, just as with Argentina and Mexico (to name a couple of recent examples).
But if we look at it as a continuation of the 2007-08 banking crisis, things are less rosy. As Wolfgang Münchau points out in the FT this morning, the credit boom that arose in Spain, Portugal, Greece and Ireland after they entered the euro was not dissimilar to the slicing and dicing that caused a large number of crap loans in the US to become part of triple-A rated collateralised debt obligations (CDOs). Once the drachma became the euro, the Greek government could borrow money at a far lower interest rate, and far more of it, than they could before, because Greece was now part of the eurozone, and the euro was, de facto, the triple-A rated Gold-Standard Blue-Chip Deutschmark.
As Münchau observed:
The IMF reckons that the eurozone is way behind the US in admitting the extent that a number of their debts aren't worth jackshit. How much should German banks, including the landesbanken, write off? Well, we don't know and we can't know. We don't know because the underlying state of the landesbanken loan books is not public. And we can't know because, well, even if those loan books were public, we don't know precisely how worthless those dodgy loans will turn out to be. At AIG, for example, things are getting better, in that the latest estimate by the US Treasury of the write-off has moved to $42.9bn from $45.8bn.
Worst-case guesses are putting the German required write-off at a massive €800bn, compared with an annual GDP of €2.4trn. Or, as Münchau puts it, "you might jump to the conclusion that it should be Greece that should be bailing out Germany".
And Germany remains, remember, the de facto euro. Even if Germany ends up having to write off "only" €400bn, that makes the €123bn it had to put into the recent rescue package look like small beer. It makes the special purpose vehicle (SPV) bailout from the European Central Bank look less rock solid than it did. After all, what is backing up the ECB? Oh yes, it's mainly Germany.
There appears to remain some kind of fiction that these PIIGS countries can be "bailed out" by an all-encompassing eurozone that has infinite sums of cash available. But when you try to look at the hard detail, it's difficult to see what they are being bailed out with. I'm reminded of the Lloyd's spiral of the early 1990s, where money went round and round at an ever-increasing rate until eventually the whole thing collapsed, because the total amount of money just wasn't enough to cover the amount of money required. Increasing the volatility of that money just papers over the cracks. If you need 24 chairs and there are 27 people, you have a problem when everyone wants to sit down at once.
Because, when you look at it, the money being put in to bail out troubled institutions/countries is, after travelling through several conduits, being guaranteed by the debts of those self-same insolvent operations. More money is being lent on the back of the money that can't be paid back.
This spiral can go on for quite a while, and I can only assume that the ECB and the German economists and anyone else who thinks this can work are hoping that the Greeks and Spanish (and others) will suffere some kind of Damascene conversion, and will happily live in poverty for a decade or two while they pay off their debts to Germany. Germany, meanwhile, will either turn into a country of rabid consumers, or will suddenly discover the Far East as an export market for its well-engineered "luxury" white goods.
It's all a nice idea, but it really is clutching at straws.
The inevitable but very worrying conclusion I am coming to is that the European banking system (and possibly the global banking system) is insolvent, and that, this time around, there aren't governments ready to stop the rot. CajaSur of Cordoba was seized at the weekend; it will be recapitalised with €500m from the Fund For Orderly Bank Restructuring (FROB). CajaSur represents about 0.6% of the Spanish banking system. FROB has €99bn to play with. Cajas, which are unlisted, have an unclear ownership structure, theoretically have a charitable purpose (CajaSur was controlled by the Church) and are frequentlly really controlled by regional politicians, account for 50% of the entire assets of the Spanish banking system.
That, I think, would be a good place for the mess to start spreading Europe-wide.
__________________
But if we look at it as a continuation of the 2007-08 banking crisis, things are less rosy. As Wolfgang Münchau points out in the FT this morning, the credit boom that arose in Spain, Portugal, Greece and Ireland after they entered the euro was not dissimilar to the slicing and dicing that caused a large number of crap loans in the US to become part of triple-A rated collateralised debt obligations (CDOs). Once the drachma became the euro, the Greek government could borrow money at a far lower interest rate, and far more of it, than they could before, because Greece was now part of the eurozone, and the euro was, de facto, the triple-A rated Gold-Standard Blue-Chip Deutschmark.
As Münchau observed:
Bankers in Düsseldorf, Munich and Paris bought those Spanish mortgage obligations and Greek sovereign bonds, proudly adding them to their fine collections of subprime CDOs".
The IMF reckons that the eurozone is way behind the US in admitting the extent that a number of their debts aren't worth jackshit. How much should German banks, including the landesbanken, write off? Well, we don't know and we can't know. We don't know because the underlying state of the landesbanken loan books is not public. And we can't know because, well, even if those loan books were public, we don't know precisely how worthless those dodgy loans will turn out to be. At AIG, for example, things are getting better, in that the latest estimate by the US Treasury of the write-off has moved to $42.9bn from $45.8bn.
Worst-case guesses are putting the German required write-off at a massive €800bn, compared with an annual GDP of €2.4trn. Or, as Münchau puts it, "you might jump to the conclusion that it should be Greece that should be bailing out Germany".
And Germany remains, remember, the de facto euro. Even if Germany ends up having to write off "only" €400bn, that makes the €123bn it had to put into the recent rescue package look like small beer. It makes the special purpose vehicle (SPV) bailout from the European Central Bank look less rock solid than it did. After all, what is backing up the ECB? Oh yes, it's mainly Germany.
There appears to remain some kind of fiction that these PIIGS countries can be "bailed out" by an all-encompassing eurozone that has infinite sums of cash available. But when you try to look at the hard detail, it's difficult to see what they are being bailed out with. I'm reminded of the Lloyd's spiral of the early 1990s, where money went round and round at an ever-increasing rate until eventually the whole thing collapsed, because the total amount of money just wasn't enough to cover the amount of money required. Increasing the volatility of that money just papers over the cracks. If you need 24 chairs and there are 27 people, you have a problem when everyone wants to sit down at once.
Because, when you look at it, the money being put in to bail out troubled institutions/countries is, after travelling through several conduits, being guaranteed by the debts of those self-same insolvent operations. More money is being lent on the back of the money that can't be paid back.
This spiral can go on for quite a while, and I can only assume that the ECB and the German economists and anyone else who thinks this can work are hoping that the Greeks and Spanish (and others) will suffere some kind of Damascene conversion, and will happily live in poverty for a decade or two while they pay off their debts to Germany. Germany, meanwhile, will either turn into a country of rabid consumers, or will suddenly discover the Far East as an export market for its well-engineered "luxury" white goods.
It's all a nice idea, but it really is clutching at straws.
The inevitable but very worrying conclusion I am coming to is that the European banking system (and possibly the global banking system) is insolvent, and that, this time around, there aren't governments ready to stop the rot. CajaSur of Cordoba was seized at the weekend; it will be recapitalised with €500m from the Fund For Orderly Bank Restructuring (FROB). CajaSur represents about 0.6% of the Spanish banking system. FROB has €99bn to play with. Cajas, which are unlisted, have an unclear ownership structure, theoretically have a charitable purpose (CajaSur was controlled by the Church) and are frequentlly really controlled by regional politicians, account for 50% of the entire assets of the Spanish banking system.
That, I think, would be a good place for the mess to start spreading Europe-wide.
__________________
