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Inventive EU Accounting
Jan. 31st, 2011 01:16 pmThe discussions going on at the moment about the relaunch of the €440bn rescue package announced last year by the EU are entertainng in their own right.
The cliff notes are, basically, that last May this HUGE number of €440bn was mentioned, comprising a range of financial sources, in the hope that the mere mention that this was the amount available would be enough to make sure that it wouldn't ever be needed.
(Part The First)
Come last November the collapse of the Irish economy (also, in its own way, begun by a similar such guarantee issued by the Irish government a couple of years earlier) brought it home to the EU and IMF chappies and chappesses that this €440bn might be needed. Indeed, it might not be enough. But, one step at a time. First to make sure that it is clear that, if needed, the €440bn is there.
This is problematic, because, at the moment, it isn't there, not if the whole caboodle wants to stay at triple-A rating level. How can the extra cash be found to make it possible to placate the markets? This, it appears, is one of the major problems in announcing the relaunch.
At Davos last week Christine Lagarde and Bob Diamond, representing respectively the political and big business arms of the EU financial fuck-up, disagreed publicly on how things were progressing. Lagarde said that things were progressing, while Diamond said that things were getting worse. Politicians are past masters at saying that black is white, but perhaps Lagarde really does believe that the Euro is getting through the crisis. For her it is a broad-brush kind of thing. Diamond, looking at the nitty-gritty, just sees the problems getting more and more intractable just as each minor issue is "solved".
For Lagarde, an announcement such as (I am making this one up as an example) "the EU member countries will move towards an agreement on the funding of any emergency situation that might arise" as "progress". Bob Diamond, meanwhile, would say "well what the fuck does THAT mean?" and would view it as a political fudge. For a politician, a fudged agreement is progress. For a businessman, it's a step backwards.
(Part The Second)
But one of the agreements that might come out of this relaunch is genuinely interesting, because it offers the opportunity of a default without a default.
How so? Well, it's an EU version of Quantitative Easing, but as applied to bonds. Part of the solution would be to allow the Rescue Fund to buy the bonds of Greece, Portugal, Ireland and others as and if needed. Or, even more interestingly, it would allow the fund to lend the money to countries so that they could buy their own bonds. That, as you can see, is a debt restructuring by any other name. Greece would exchange one debt for another, at no cost to itself. The worry here is that it would eliminate the incentive for Greece (and Portugal to come) to get its house in order. But I think that the governments have got the message on this one. The only problem is that the people might not have.
That bit applies to already-issued bonds. For future releases, there's a hidden subsidy proposal which would try to bypass the market rates for loans and to lend the money at artificially low rates. Once again the worry (frequently propounded on the German side) that this would create moral hazard. But I think that anyone who does not have the solution of "you must be more like Germany" (part of which group includes a sizeable contingent of the IMF, unfortunately) now accepts that for most governments the idea of a bailout has such horrible political consequences (see Ireland) that a slightly lower interest rate won't make much difference in their desire to avoid it.
As you have probably already seen, all of this adds up to a political fudge of the first order that might, in its own accidental way, provide something of a solution. Not a solution that Bob Diamond would see as a solution, but one that keeps Greece, Ireland, Portugal and, eventually Spain, going under a hodge-podge of hidden subsidies that just about enable the countries to keep on paying interest on their borrowings. After all, if they can swap one set of bonds for cheaper borrowing, even though the market would charge a higher amount, you definitely make it easier for countries to balance the books. The only worry (one that consumes all Germans in this game) is that the money saved from the cheaper borrowing would move straight through to extra spending.
A quick word on the IMF. The history of this august operation is littered with its one-size-fits-all austerity package solutions. What the IMF does not seem to have worked out is that this solution cannot work on a global scale. Indeed, if it were applied on a global scale, it would simply create the mother of all economic depressions, whereby the IMF's solution would, to paraphrase an ardent Keynesian, "result in us all reaching prosperity through the simple expediency of consuming nothing and as a result producing nothing".
I heard a banker interviewed at Davos who said, with breathtaking self-belief, that the banks would not accept a haircut on Greek or Irish debt because "such a move would be bad for the banking system and thus bad for the economy" (as if the two were now inextricably synonymous). The IMF similarly sings the bankers' tune in that John Lipsky, the leading US official at the IMF, said that people should not talk about debt restructuring as if it were a costless option.
The general trend of this line of argument is that "someone has to suffer, but it mustn't be the banks/pension funds". Their argument is that this would indirectly impact the general public because it is "their" money. Well, if you call the CEOs of leading banks and all of the executives with share options in those banks "members of the general public", I suppose that is fair enough. But what the IMF and bankers argument basically boils down to is that they want the "pain" of the current situation to fall directly on the public and the taxpayer rather than indirectly. A major reason they want this is that the direct/taxpayer route causes much less pain to those who have a financial interest in the profitability of the banking and investment industries. The "we are protecting the public" argument is nonsense, because the public is going to have to pay, one way or another. All that is up for debate is how much each of us should pay. Just as the left-wing belief that all of the money can be obtained just by confiscating all of Philip Green's wealth (but who should get it? the UK? France?) just doesn't add up, so the banking and investment communities' argument that they should not suffer a haircut because it would be the public that suffered is equal nonsense.
Lipsky is right; a debt restructuring and/or a default by Ireland and/or Greece and/or Portugal would not be a costless solution. What he fails to mention is that it would be a good way for making the right people suffer. Sure everyone else would take an (indirect) hit, but at the moment we are going to take that hit anyway, while the banks whistle their way to another year of record margins.
_____________
The cliff notes are, basically, that last May this HUGE number of €440bn was mentioned, comprising a range of financial sources, in the hope that the mere mention that this was the amount available would be enough to make sure that it wouldn't ever be needed.
(Part The First)
Come last November the collapse of the Irish economy (also, in its own way, begun by a similar such guarantee issued by the Irish government a couple of years earlier) brought it home to the EU and IMF chappies and chappesses that this €440bn might be needed. Indeed, it might not be enough. But, one step at a time. First to make sure that it is clear that, if needed, the €440bn is there.
This is problematic, because, at the moment, it isn't there, not if the whole caboodle wants to stay at triple-A rating level. How can the extra cash be found to make it possible to placate the markets? This, it appears, is one of the major problems in announcing the relaunch.
At Davos last week Christine Lagarde and Bob Diamond, representing respectively the political and big business arms of the EU financial fuck-up, disagreed publicly on how things were progressing. Lagarde said that things were progressing, while Diamond said that things were getting worse. Politicians are past masters at saying that black is white, but perhaps Lagarde really does believe that the Euro is getting through the crisis. For her it is a broad-brush kind of thing. Diamond, looking at the nitty-gritty, just sees the problems getting more and more intractable just as each minor issue is "solved".
For Lagarde, an announcement such as (I am making this one up as an example) "the EU member countries will move towards an agreement on the funding of any emergency situation that might arise" as "progress". Bob Diamond, meanwhile, would say "well what the fuck does THAT mean?" and would view it as a political fudge. For a politician, a fudged agreement is progress. For a businessman, it's a step backwards.
(Part The Second)
But one of the agreements that might come out of this relaunch is genuinely interesting, because it offers the opportunity of a default without a default.
How so? Well, it's an EU version of Quantitative Easing, but as applied to bonds. Part of the solution would be to allow the Rescue Fund to buy the bonds of Greece, Portugal, Ireland and others as and if needed. Or, even more interestingly, it would allow the fund to lend the money to countries so that they could buy their own bonds. That, as you can see, is a debt restructuring by any other name. Greece would exchange one debt for another, at no cost to itself. The worry here is that it would eliminate the incentive for Greece (and Portugal to come) to get its house in order. But I think that the governments have got the message on this one. The only problem is that the people might not have.
That bit applies to already-issued bonds. For future releases, there's a hidden subsidy proposal which would try to bypass the market rates for loans and to lend the money at artificially low rates. Once again the worry (frequently propounded on the German side) that this would create moral hazard. But I think that anyone who does not have the solution of "you must be more like Germany" (part of which group includes a sizeable contingent of the IMF, unfortunately) now accepts that for most governments the idea of a bailout has such horrible political consequences (see Ireland) that a slightly lower interest rate won't make much difference in their desire to avoid it.
As you have probably already seen, all of this adds up to a political fudge of the first order that might, in its own accidental way, provide something of a solution. Not a solution that Bob Diamond would see as a solution, but one that keeps Greece, Ireland, Portugal and, eventually Spain, going under a hodge-podge of hidden subsidies that just about enable the countries to keep on paying interest on their borrowings. After all, if they can swap one set of bonds for cheaper borrowing, even though the market would charge a higher amount, you definitely make it easier for countries to balance the books. The only worry (one that consumes all Germans in this game) is that the money saved from the cheaper borrowing would move straight through to extra spending.
A quick word on the IMF. The history of this august operation is littered with its one-size-fits-all austerity package solutions. What the IMF does not seem to have worked out is that this solution cannot work on a global scale. Indeed, if it were applied on a global scale, it would simply create the mother of all economic depressions, whereby the IMF's solution would, to paraphrase an ardent Keynesian, "result in us all reaching prosperity through the simple expediency of consuming nothing and as a result producing nothing".
I heard a banker interviewed at Davos who said, with breathtaking self-belief, that the banks would not accept a haircut on Greek or Irish debt because "such a move would be bad for the banking system and thus bad for the economy" (as if the two were now inextricably synonymous). The IMF similarly sings the bankers' tune in that John Lipsky, the leading US official at the IMF, said that people should not talk about debt restructuring as if it were a costless option.
The general trend of this line of argument is that "someone has to suffer, but it mustn't be the banks/pension funds". Their argument is that this would indirectly impact the general public because it is "their" money. Well, if you call the CEOs of leading banks and all of the executives with share options in those banks "members of the general public", I suppose that is fair enough. But what the IMF and bankers argument basically boils down to is that they want the "pain" of the current situation to fall directly on the public and the taxpayer rather than indirectly. A major reason they want this is that the direct/taxpayer route causes much less pain to those who have a financial interest in the profitability of the banking and investment industries. The "we are protecting the public" argument is nonsense, because the public is going to have to pay, one way or another. All that is up for debate is how much each of us should pay. Just as the left-wing belief that all of the money can be obtained just by confiscating all of Philip Green's wealth (but who should get it? the UK? France?) just doesn't add up, so the banking and investment communities' argument that they should not suffer a haircut because it would be the public that suffered is equal nonsense.
Lipsky is right; a debt restructuring and/or a default by Ireland and/or Greece and/or Portugal would not be a costless solution. What he fails to mention is that it would be a good way for making the right people suffer. Sure everyone else would take an (indirect) hit, but at the moment we are going to take that hit anyway, while the banks whistle their way to another year of record margins.
_____________
