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A brief little update on the Portuguese "bail-out". I said on Thursday that Portugal had applied for a loan until payday, rather than a bailout, simply because the current caretaker prime minister jose Socrates did not have the authority to negotiate the terms & conditions that would be linked to a bailout.
Well, it looks as if the interim loan was kicked straight out of the park by the EU's finance ministers, perhaps aware that there was virtually no chance that they could sell this at home. But this left a problem. As per usual, the EU has solved this by saying that something is going to happen, without actually specifying boring things like details.
The EC seems to have headed into a new stratosphere of delusion in the past 48 hours, with Commissioner Ollie Rehn leading the pack. Since Socrates does not have the authority to negotiate a Portuguese bailout, and since a general election is pending, Rehn has said that there will need to be "cross-party agreement". Even more hilariously, he has said that the "starting point" would be the austerity measures proposed by Socrates.
These would be the self-same austerity measures that were voted down in the Portuguese parliament and which led to the resignation of the government. How he imagines that there will be cross-party agreement on even tougher measures, all agreed within about five weeks, defies the imagination.
But, of course, he doesn't believe that. The EU is becoming a bit like the peripherals in its "putting things off until later". The timeframe is getting shorter and shorter. When the Greece rescue was announced, and when the plans for the full European Stability Fund were announced, deadline day was a conveniently vague "sometime next year". Now Rehn is reduced to putting off the fateful day for just a few weeks.
Asking Portugal to achieve cross-party agreement on a major austerity package within five weeks is FantasyLand. For a decade now Portugal has frequently been told by the EU that its deficit needed a bit of reining back. The Portuguese said "yes, absolutely, we'll get onto it", and did bugger all about it. That is the Portuguese way, and performing to tight deadlines is not its style.
So, what will happen when the cross-party agreement is not reached? Another kind of unrealistic fudge, I suspect, then an election, then six months of uncertainty, and finally the cataclysm.
I said in a reply to a post yesterday that I was taking a different slant on this crisis from now on, although it's only really a clarification of what I have been writing before.
All the talk is of "rescues" for the peripherals, in return for strict austerity measures. But the fact is that the "rescues" are for the lending banks and for pension funds, not for the peripherals. And the lending banks most frantic are, for the main part, in Germany (although the UK also has an interest here). The EU knows this and Merkel certainly knows this, but you can't tell a resistant German public that the main reason you are shoving money into the peripherals is because, if you don't, the entire banking system could collapse.
The more I hunt for clues as to how this pans out, the more I head towards Latin America and its debt crises of recent years. In many cases (e.g., Argentina) there was an effective "dollar zone", although not with the same insane problems of unwinding that we will see with the euro (some of the people who set this up really ought to go to jail for there logic of 'if we don't provide for an escape route, that will make it less likely that an escape route will be needed'). Argentina defaulted on its bonds. About a decade earlier, so did Mexico. Neither country has collapsed.
The plans currently being put together to rescue Portugal, even if by some miracle they are implemented, are based on a lie -- that lie being that Ireland, Portugal and Greece will suddenly become mini-Germanys. It's a lie not just because that ain't gonna happen, but because there isn't room in the EU for more than one Germany. It's this fundamental fact that seems the Germans' great blind spot. Germany's capital surplus has depended on the profligacy of the other eurozone countries over the past decade. Where does Germany think the buyers will appear for all the goods produced by these new "mini-Germanys"? China? At least Spain has the right idea here in spotting that the Chinese might not be great goods consumers, but they could become great tourist consumers.
The EU continues its denial, but the cracks in the "solution" put forward last year for Greece are already plain to see. Jean-Claude Juncker, who chairs meetings of eurozone finance ministers, "warned" Greece to control its spending, after Thursday's news that Greece's budget deficit last year had overshot forecasts.
The EU's solution for Greece appears to be that of a country where no-one produces anything or eats anything - thus achieving a budget deficit of zero, except for those irritating debts from the past.
And there lies the problem. This idea that these debts can be paid off, a theory that needs to be sustained, not in the interests of the peripherals, but in the interests of the financial systems of the central countries, is obviously a myth. Money is still being counted twice. Those who are owed it are counting it at 100%, while those who owe it are still trying to put it off "until another day".
As we have seen in the past in India, China and in many other such financial crises, this paradox of "double counting" only blows up (and when it blows up, as in China with the dodgy bank loans of the 1990s to Communist Party officials, it does so in a spectacular fashion), not when the debt fails to be repaid, but when the interest on the debt fails to be repaid.
And even then you can see the myth being maintained in some of the more relaxed financial systems. "Non-functioning loans" have been kept on the books of some Indian banks for far longer than they should have been. When do you accept that you aren't going to get your money back? Well, in the case of those people who fall victim of the Nigerian 419 scams, it's when you have no more money to give.
That's what will happen here. The "crisis" will truly explode not when countries default and the euro collapse. It will be slightly later than that, after the peripherals have decoupled from the euro. With default or partial default ("haircut") the interest on the debts will not be repaid to the lending institutions. Soon after that happens, some of those institutions will not have enough cash (or capital) to continue. Now, you can change the rules on capital (accountants just tick a couple of boxes and pretend that something is a 'real' asset when it is nothing of the kind) but you can't change the rules on cash. That's why it's nearly always a cash shortage that sends companies under. So, when all of this genuinely bows up, we will get the real banking crisis.
This won't be the baby banking crisis coming later this year to an institution near you (but only if you live in Spain) when it becomes clear how bad some of those residential loans really are. This will be the Central European banking crisis caused when major banks realize how bad their peripheral sovereign debt holdings really are. As you may know, all of the 'stress tests' that have been undertaken in the past couple of years have specifically banned the stress test that matters -- what happens when a eurozone country defaults on its debt? This follows the plan of "the results would be so horrible that we have to assume it won't happen'. But it will happen, and, because no stress tests have allowed for it, we can't know the exact consequences.
In a sense, it should be possible to work this out (and I hope to fuck that there are some analysts out there who are doing just that). Go through the annual reports, add up the sovereign debt numbers, try to piece together how much of these are in 'dodgy' countries, recalculate that at 50%, and then see what impact it has on Tier One Capital and cashflow.
This is not trivial stuff, and it would probably take a day to do it for just one medium-sized financial institution. There's also the risk, of course, that if you published it, you would get into trouble with the bank concerned. So, even if the work is being done, people are keeping very quiet about it. And, in other cases (the Landesbanken) the numbers aren't even published in sufficient detail.
Next deadline -- the Portuguese failure to reach an agreement pre-election, and a new EU finance minister fudge.
___________
Well, it looks as if the interim loan was kicked straight out of the park by the EU's finance ministers, perhaps aware that there was virtually no chance that they could sell this at home. But this left a problem. As per usual, the EU has solved this by saying that something is going to happen, without actually specifying boring things like details.
The EC seems to have headed into a new stratosphere of delusion in the past 48 hours, with Commissioner Ollie Rehn leading the pack. Since Socrates does not have the authority to negotiate a Portuguese bailout, and since a general election is pending, Rehn has said that there will need to be "cross-party agreement". Even more hilariously, he has said that the "starting point" would be the austerity measures proposed by Socrates.
These would be the self-same austerity measures that were voted down in the Portuguese parliament and which led to the resignation of the government. How he imagines that there will be cross-party agreement on even tougher measures, all agreed within about five weeks, defies the imagination.
But, of course, he doesn't believe that. The EU is becoming a bit like the peripherals in its "putting things off until later". The timeframe is getting shorter and shorter. When the Greece rescue was announced, and when the plans for the full European Stability Fund were announced, deadline day was a conveniently vague "sometime next year". Now Rehn is reduced to putting off the fateful day for just a few weeks.
Asking Portugal to achieve cross-party agreement on a major austerity package within five weeks is FantasyLand. For a decade now Portugal has frequently been told by the EU that its deficit needed a bit of reining back. The Portuguese said "yes, absolutely, we'll get onto it", and did bugger all about it. That is the Portuguese way, and performing to tight deadlines is not its style.
So, what will happen when the cross-party agreement is not reached? Another kind of unrealistic fudge, I suspect, then an election, then six months of uncertainty, and finally the cataclysm.
I said in a reply to a post yesterday that I was taking a different slant on this crisis from now on, although it's only really a clarification of what I have been writing before.
All the talk is of "rescues" for the peripherals, in return for strict austerity measures. But the fact is that the "rescues" are for the lending banks and for pension funds, not for the peripherals. And the lending banks most frantic are, for the main part, in Germany (although the UK also has an interest here). The EU knows this and Merkel certainly knows this, but you can't tell a resistant German public that the main reason you are shoving money into the peripherals is because, if you don't, the entire banking system could collapse.
The more I hunt for clues as to how this pans out, the more I head towards Latin America and its debt crises of recent years. In many cases (e.g., Argentina) there was an effective "dollar zone", although not with the same insane problems of unwinding that we will see with the euro (some of the people who set this up really ought to go to jail for there logic of 'if we don't provide for an escape route, that will make it less likely that an escape route will be needed'). Argentina defaulted on its bonds. About a decade earlier, so did Mexico. Neither country has collapsed.
The plans currently being put together to rescue Portugal, even if by some miracle they are implemented, are based on a lie -- that lie being that Ireland, Portugal and Greece will suddenly become mini-Germanys. It's a lie not just because that ain't gonna happen, but because there isn't room in the EU for more than one Germany. It's this fundamental fact that seems the Germans' great blind spot. Germany's capital surplus has depended on the profligacy of the other eurozone countries over the past decade. Where does Germany think the buyers will appear for all the goods produced by these new "mini-Germanys"? China? At least Spain has the right idea here in spotting that the Chinese might not be great goods consumers, but they could become great tourist consumers.
The EU continues its denial, but the cracks in the "solution" put forward last year for Greece are already plain to see. Jean-Claude Juncker, who chairs meetings of eurozone finance ministers, "warned" Greece to control its spending, after Thursday's news that Greece's budget deficit last year had overshot forecasts.
The EU's solution for Greece appears to be that of a country where no-one produces anything or eats anything - thus achieving a budget deficit of zero, except for those irritating debts from the past.
And there lies the problem. This idea that these debts can be paid off, a theory that needs to be sustained, not in the interests of the peripherals, but in the interests of the financial systems of the central countries, is obviously a myth. Money is still being counted twice. Those who are owed it are counting it at 100%, while those who owe it are still trying to put it off "until another day".
As we have seen in the past in India, China and in many other such financial crises, this paradox of "double counting" only blows up (and when it blows up, as in China with the dodgy bank loans of the 1990s to Communist Party officials, it does so in a spectacular fashion), not when the debt fails to be repaid, but when the interest on the debt fails to be repaid.
And even then you can see the myth being maintained in some of the more relaxed financial systems. "Non-functioning loans" have been kept on the books of some Indian banks for far longer than they should have been. When do you accept that you aren't going to get your money back? Well, in the case of those people who fall victim of the Nigerian 419 scams, it's when you have no more money to give.
That's what will happen here. The "crisis" will truly explode not when countries default and the euro collapse. It will be slightly later than that, after the peripherals have decoupled from the euro. With default or partial default ("haircut") the interest on the debts will not be repaid to the lending institutions. Soon after that happens, some of those institutions will not have enough cash (or capital) to continue. Now, you can change the rules on capital (accountants just tick a couple of boxes and pretend that something is a 'real' asset when it is nothing of the kind) but you can't change the rules on cash. That's why it's nearly always a cash shortage that sends companies under. So, when all of this genuinely bows up, we will get the real banking crisis.
This won't be the baby banking crisis coming later this year to an institution near you (but only if you live in Spain) when it becomes clear how bad some of those residential loans really are. This will be the Central European banking crisis caused when major banks realize how bad their peripheral sovereign debt holdings really are. As you may know, all of the 'stress tests' that have been undertaken in the past couple of years have specifically banned the stress test that matters -- what happens when a eurozone country defaults on its debt? This follows the plan of "the results would be so horrible that we have to assume it won't happen'. But it will happen, and, because no stress tests have allowed for it, we can't know the exact consequences.
In a sense, it should be possible to work this out (and I hope to fuck that there are some analysts out there who are doing just that). Go through the annual reports, add up the sovereign debt numbers, try to piece together how much of these are in 'dodgy' countries, recalculate that at 50%, and then see what impact it has on Tier One Capital and cashflow.
This is not trivial stuff, and it would probably take a day to do it for just one medium-sized financial institution. There's also the risk, of course, that if you published it, you would get into trouble with the bank concerned. So, even if the work is being done, people are keeping very quiet about it. And, in other cases (the Landesbanken) the numbers aren't even published in sufficient detail.
Next deadline -- the Portuguese failure to reach an agreement pre-election, and a new EU finance minister fudge.
___________
