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The EU's Cunning Plan
Jun. 27th, 2011 01:49 pmA Mr Nye of Brighton came up with an interesting theory on the EU strategy in relation to Greece, one that, were it not for the fact that it is so fiendishly clever that I cannot for a moment imagine the EU being bright enough to think of it, I might actually think was true.
The kernel of the idea is not dissimilar to a situation which led me to ask a question of a reinsurance CEO about six years ago. Why, I asked him, were insurers and reinsurers dragging out asbestos liability cases when it was almost certain that they would lose in the long run, and that losing in the long run would cost them more than would losing in the short run?
He replied with another question. "What do you think all of those class action lawyers would do if we said 'ok, you win', and we settled? Do you think those lawyers would say 'Hey, great, we've won. Let's go off and live a pleasant retirement on our fees'? Or do you think that they would go in search of another class-action case?"
And, of course, his implication was correct. As soon as class action lawyers win one large case, they head off in search of another class action. As such, there will ALWAYS be a giant class action in progress against insurers, so they might as well drag out the current one for as long as possible. This, although more expensive for that individual class-action, works out a smaller cost per year against the lawyers in the class action metagame. You would rather pay out 10 x $30bn class actions a century than 30 x $20bn class actions.
Now, apply this to the current situation within the EU, the ECB and the IMF. If they let Greece default, will the markets say "Phew, that was a scare. Still, all back to normal now!" Or will they say "now that Greece has fallen, surely Portugal will be next", and thus start pressurizing Portuguese debt renewals?"
The latter, of course.
So, although dragging out the Greek default for as long as possible is a a bad idea in terms of Greek default it's possibly the best strategy in terms of saving the euro. This isn't a matter of "hoping something turns up" to rescue Greece. It won't. It's a matter of hoping that the euro can hold out long enough, dragging its heels on Greece, and then Portugal, in the hope that Spain will recover, and therefore will not need to be bailed out, and the euro will be saved (to cries of "Huzzah!!!" throughout Brussels).
Might this be the grand plan? I suspect not, but it might be what we get as a result of the mish-mash of inactivity surrounding the EU. There are a couple of things that might turn up to save Spain. The first is; it might not be a solvency crisis in Spain. Sure, there was huge overbuilding and there's a mass of surplus stock. Sure, if it's to cut unemployment the Spanish economy needs to find another outlet besides building houses that no-one wants to buy or live in. But that brings us to the second white knight -- China.
The thing about Spain is that it is not a bottomless pit of EU money-swallowing along the lines of Greece, Italy from Rome southwards, or (to a considerably lesser extent), Portugal. Spain and Ireland are property bubbles gone wrong, caused solely by asynchronous economy speeds paired with synchronous interest rates. It's a very big boom and bust, but it's not systemic insolvency.
And so, the thinking might go, if we can really drag out the Greece thing (and the EU is expert at dragging things out) and then drag out the Portugal thing, China might come in and start buying some of this unwanted property in Spain. It might start pumping money into Spain. And it might start supporting the Spanish bond market. And so, the Greece-less euro would survive (huzzah!!!).
Is this a viable game-plan, a viable scenario? Well, yes. Bundles of Chinese money heading into Spain would not dent China's BoP surplus that much, and could be defined as a decent investment (certainly better than Ping An's woeful investment in Fortis a few years ago). It permits China to diversify its assets. It gives them some solid collateral (Spanish land) and would also provide a potential holiday destination for Chinese tourists.
Will it happen? Probably not. My money would still be on some kind of sudden banking disaster within 12 months that would require Chinese help of a more EU-central kind, or the invention of a new euro that has its own euro bonds. In effect, of course, these would be German bonds, but they would be a new instrument tied to the eurozone rather than to Germany. This might be called the "greater union" solution.
The third option is the "lesser union" solution, whereby the euro fails in its current form. That, paradoxically, could lead to a "greater union" among the original six -- although Italy remains the nigger in the woodpile there -- with Belgium a worrying second.
+++++++++++++
The kernel of the idea is not dissimilar to a situation which led me to ask a question of a reinsurance CEO about six years ago. Why, I asked him, were insurers and reinsurers dragging out asbestos liability cases when it was almost certain that they would lose in the long run, and that losing in the long run would cost them more than would losing in the short run?
He replied with another question. "What do you think all of those class action lawyers would do if we said 'ok, you win', and we settled? Do you think those lawyers would say 'Hey, great, we've won. Let's go off and live a pleasant retirement on our fees'? Or do you think that they would go in search of another class-action case?"
And, of course, his implication was correct. As soon as class action lawyers win one large case, they head off in search of another class action. As such, there will ALWAYS be a giant class action in progress against insurers, so they might as well drag out the current one for as long as possible. This, although more expensive for that individual class-action, works out a smaller cost per year against the lawyers in the class action metagame. You would rather pay out 10 x $30bn class actions a century than 30 x $20bn class actions.
Now, apply this to the current situation within the EU, the ECB and the IMF. If they let Greece default, will the markets say "Phew, that was a scare. Still, all back to normal now!" Or will they say "now that Greece has fallen, surely Portugal will be next", and thus start pressurizing Portuguese debt renewals?"
The latter, of course.
So, although dragging out the Greek default for as long as possible is a a bad idea in terms of Greek default it's possibly the best strategy in terms of saving the euro. This isn't a matter of "hoping something turns up" to rescue Greece. It won't. It's a matter of hoping that the euro can hold out long enough, dragging its heels on Greece, and then Portugal, in the hope that Spain will recover, and therefore will not need to be bailed out, and the euro will be saved (to cries of "Huzzah!!!" throughout Brussels).
Might this be the grand plan? I suspect not, but it might be what we get as a result of the mish-mash of inactivity surrounding the EU. There are a couple of things that might turn up to save Spain. The first is; it might not be a solvency crisis in Spain. Sure, there was huge overbuilding and there's a mass of surplus stock. Sure, if it's to cut unemployment the Spanish economy needs to find another outlet besides building houses that no-one wants to buy or live in. But that brings us to the second white knight -- China.
The thing about Spain is that it is not a bottomless pit of EU money-swallowing along the lines of Greece, Italy from Rome southwards, or (to a considerably lesser extent), Portugal. Spain and Ireland are property bubbles gone wrong, caused solely by asynchronous economy speeds paired with synchronous interest rates. It's a very big boom and bust, but it's not systemic insolvency.
And so, the thinking might go, if we can really drag out the Greece thing (and the EU is expert at dragging things out) and then drag out the Portugal thing, China might come in and start buying some of this unwanted property in Spain. It might start pumping money into Spain. And it might start supporting the Spanish bond market. And so, the Greece-less euro would survive (huzzah!!!).
Is this a viable game-plan, a viable scenario? Well, yes. Bundles of Chinese money heading into Spain would not dent China's BoP surplus that much, and could be defined as a decent investment (certainly better than Ping An's woeful investment in Fortis a few years ago). It permits China to diversify its assets. It gives them some solid collateral (Spanish land) and would also provide a potential holiday destination for Chinese tourists.
Will it happen? Probably not. My money would still be on some kind of sudden banking disaster within 12 months that would require Chinese help of a more EU-central kind, or the invention of a new euro that has its own euro bonds. In effect, of course, these would be German bonds, but they would be a new instrument tied to the eurozone rather than to Germany. This might be called the "greater union" solution.
The third option is the "lesser union" solution, whereby the euro fails in its current form. That, paradoxically, could lead to a "greater union" among the original six -- although Italy remains the nigger in the woodpile there -- with Belgium a worrying second.
+++++++++++++
