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peterbirksA couple of interesting snippets haven't been covered by most of the news reporters looking at the Portuguese debt crisis.
The first was the general headline that Portugal had applied for a bail-out. This was sometimes qualified in the body text, but "bailout", like "mull", is a conveniently short portmanteau and thus beloved by sub-editors for headlines.
In fact the interim prime minister Jose Socrates hasn't applied for a bailout, simply because, as head of a caretaker government, he does not have the authority to negotiate the terms of such a bailout. What he has applied for is the less headline friendly "financial assistance" or, in a short word, a "loan".
What's the difference between a loan and a bailout? Well, actually, quite a lot. A bailout covers a long period of time, and has reams and reams of terms and conditions attached. This is what the new Portuguese government post-June will negotiate. A loan (the thing which Mr Socrates is requesting) is in effect one of those "No cash until payday? Apply to EuroEasyLoan now! No collateral required!" kind of things.
Does this matter? Well, yes. Although the German government is keen enough to put through these rescue packages (the German people are less keen) it's not so clear-cut whether it wants to get into "lend him €30bn until payday" kind of thing, which is basically an unconditional handing-over of cash. For a start, once that money has been handed over it inevitably strengthens the hand of the recipients.
The second factor here is the European Stability Mechanism, that €700bn fund scheduled for implementation in 2013. You may recall that the announcement of this fund last year was almost enough to convince even me that the euro could survive. The pro-Europe spin guys have been pushing the fact that:
This is disingenuous to say the least. What the EU leaders decided at that Brussels meeting (referred to here a couple of weeks ago) was, in effect, that it would be nice to establish such a fund, but the nitty-gritty of how to do it could wait. The difference is the same as John Kennedy saying that the US would go to the moon (1960) and the US actually getting there (1969).
In fact, a decision on increasing the bailout guarantees of the temporary European Financial Stability Facility (EFSF) has been postponed until after the Finnish Parliamentary elections, coming soon to a Scandinavian town near you.
The EU leaders' statement also papered over the cracks as only the EU can do. You may recall that on the debit side of the equation the new Irish PM seemed to imagine that after conducting stress tests on Irish banks, the EU would magically cut the interest rate it charges on its loan to Ireland. I haven't heard much more about that since it became clear that something approaching another €50bn would eventually have to be pumped into the Irish banking system (€24bn of it fairly sharpish).
But there's a credit side to this as well. Incredibly, Finnish PM Mari Kiviniemi said that at the EU leaders meeting "increasing the guarantees under the ESM did not come up". Kivinniemi also claimed that there were "still alternatives to the additional guarantees". This is denial on the other side of the coin. Because I can't see how you can conjure up €700m on a wing and a prayer.
Now, it gets a little technical here, and I find myself writing about Eurostat, the European Statistical Office, something I never imagined would happen. But, as I understand it, Eurostat decided in January that the guarantees provided by euro zone countries would be added to their public debt. So, when Greece, or Ireland, or Portugal, borrows EFSF money, the principal is listed as debt on the part of the countries that guaranteed the loans. That debt is proportional to the size of the country's share in the ESF.
Let's stick with Finland for the moment. That means that its share of the €17.7bn Fund loan to Ireland is €333m. Let's assume Portugal needs a slightly larger amount. That would increase its funding costs to about €700m. If the fund was increased to €700bn (which all the EU leaders said a couple of weekends ago would be a jolly good wheeze) that would increase to approaching €2bn. There are 5.4m people in Finland, so I make that about €371 for every man, woman and child and about €700 for every economic producer. Whether that's a price worth paying is a matter for debate. It's certainly less than the Irish are being asked to pay, but that is, in a way, an academic question.
If we move to Germany, the numbers are exponentially larger. It would be contributing about €235bn to the enlarged fund, or about €5,000 in guarantees (and €500 in hard cash) for every economic producer in Germany.
This is a high price for the Germans to pay to save German financial institutions, because, to be blunt, this is what it's all about. France's business paper La Tribune indicated the schism that is beginning to appear between those who have a vested interest in maintaining the fiction that all of that money lent by German institutions to the peripherals will get repaid (leading members, Angela Merkel, all of the German banks) and those who think that shovelling all of this "rescue" money to the peripherals is an expensive way to help the German finance system continue to fool itself (leading members, nearly anyine in the EU who is not a bank).
La Tribune wrote that:
The only solution, it said, was to
Quite.
The first was the general headline that Portugal had applied for a bail-out. This was sometimes qualified in the body text, but "bailout", like "mull", is a conveniently short portmanteau and thus beloved by sub-editors for headlines.
In fact the interim prime minister Jose Socrates hasn't applied for a bailout, simply because, as head of a caretaker government, he does not have the authority to negotiate the terms of such a bailout. What he has applied for is the less headline friendly "financial assistance" or, in a short word, a "loan".
What's the difference between a loan and a bailout? Well, actually, quite a lot. A bailout covers a long period of time, and has reams and reams of terms and conditions attached. This is what the new Portuguese government post-June will negotiate. A loan (the thing which Mr Socrates is requesting) is in effect one of those "No cash until payday? Apply to EuroEasyLoan now! No collateral required!" kind of things.
Does this matter? Well, yes. Although the German government is keen enough to put through these rescue packages (the German people are less keen) it's not so clear-cut whether it wants to get into "lend him €30bn until payday" kind of thing, which is basically an unconditional handing-over of cash. For a start, once that money has been handed over it inevitably strengthens the hand of the recipients.
The second factor here is the European Stability Mechanism, that €700bn fund scheduled for implementation in 2013. You may recall that the announcement of this fund last year was almost enough to convince even me that the euro could survive. The pro-Europe spin guys have been pushing the fact that:
"Leaders of the European Union decided at their summit which concluded in Brussels on Friday on the establishment of a permanent stability fund for the euro zone countries." (HELSINGIN SANOMAT, Finland).
This is disingenuous to say the least. What the EU leaders decided at that Brussels meeting (referred to here a couple of weeks ago) was, in effect, that it would be nice to establish such a fund, but the nitty-gritty of how to do it could wait. The difference is the same as John Kennedy saying that the US would go to the moon (1960) and the US actually getting there (1969).
In fact, a decision on increasing the bailout guarantees of the temporary European Financial Stability Facility (EFSF) has been postponed until after the Finnish Parliamentary elections, coming soon to a Scandinavian town near you.
The EU leaders' statement also papered over the cracks as only the EU can do. You may recall that on the debit side of the equation the new Irish PM seemed to imagine that after conducting stress tests on Irish banks, the EU would magically cut the interest rate it charges on its loan to Ireland. I haven't heard much more about that since it became clear that something approaching another €50bn would eventually have to be pumped into the Irish banking system (€24bn of it fairly sharpish).
But there's a credit side to this as well. Incredibly, Finnish PM Mari Kiviniemi said that at the EU leaders meeting "increasing the guarantees under the ESM did not come up". Kivinniemi also claimed that there were "still alternatives to the additional guarantees". This is denial on the other side of the coin. Because I can't see how you can conjure up €700m on a wing and a prayer.
Now, it gets a little technical here, and I find myself writing about Eurostat, the European Statistical Office, something I never imagined would happen. But, as I understand it, Eurostat decided in January that the guarantees provided by euro zone countries would be added to their public debt. So, when Greece, or Ireland, or Portugal, borrows EFSF money, the principal is listed as debt on the part of the countries that guaranteed the loans. That debt is proportional to the size of the country's share in the ESF.
Let's stick with Finland for the moment. That means that its share of the €17.7bn Fund loan to Ireland is €333m. Let's assume Portugal needs a slightly larger amount. That would increase its funding costs to about €700m. If the fund was increased to €700bn (which all the EU leaders said a couple of weekends ago would be a jolly good wheeze) that would increase to approaching €2bn. There are 5.4m people in Finland, so I make that about €371 for every man, woman and child and about €700 for every economic producer. Whether that's a price worth paying is a matter for debate. It's certainly less than the Irish are being asked to pay, but that is, in a way, an academic question.
If we move to Germany, the numbers are exponentially larger. It would be contributing about €235bn to the enlarged fund, or about €5,000 in guarantees (and €500 in hard cash) for every economic producer in Germany.
This is a high price for the Germans to pay to save German financial institutions, because, to be blunt, this is what it's all about. France's business paper La Tribune indicated the schism that is beginning to appear between those who have a vested interest in maintaining the fiction that all of that money lent by German institutions to the peripherals will get repaid (leading members, Angela Merkel, all of the German banks) and those who think that shovelling all of this "rescue" money to the peripherals is an expensive way to help the German finance system continue to fool itself (leading members, nearly anyine in the EU who is not a bank).
La Tribune wrote that:
"A full 18 months after the outbreak of the Greek crisis, the 'peripheral' countries of the Eurozone…are sinking into recession and political crisis. In view of their weakness, they are condemned to face a triple punishment: a brutal course of austerity, the appreciation of the euro, which is already overvalued with regard to their competitiveness, and the mistrust of financial markets that force them to accept excessive interest rates.
The only solution, it said, was to
"reduce the burden on over-indebted member states, which means making the investors pay, or organize their exit from the Eurozone".
Quite.
no subject
Date: 2011-04-08 09:02 pm (UTC)Linked from Paul Mason's BBC blog
http://www.researchonmoneyandfinance.org/media/reports/eurocrisis/fullreport.pdf (figs 10 & 14 are some of the scaryist)
It can't end well.
Neeko (love the blog btw)
Competitiveness
Date: 2011-04-08 09:57 pm (UTC)As Flanders points out, we are in a situation where politics ("everyone in the EU must have a roughly similar standard of living") and economics ("income for countries must reflect productivity") clash.
As it seems to be generally agreed, either the EU moves closer to fiscal union (and, implicitly, to political union) or it moves further away. The current system, put together by economic illiterates, is unsustainable.
Even devaluation by the PIIGS a few years down the line won't actually solve the problem. These countries will remain uncompetitive relative to Germany, and the workers within the peripherals will not want to accept that their standard of living will have to go back to pre-eurozone levels. Can you see Portugal or Ireland wanting to go back to 1982? Hell, I was in both of those countries around that time, and it was like stepping back to the UK in the 1950s, in terms of average standards of living.
Tourism (helped by a huge devaluation) is one solution. Spain is already catering explicitly to the fast-growing Chinese tourist market, and a much cheaper currency could only do this good.
But, of course, Germany wants Spain, Portugal and Ireland to retain an uncompetitive currency. It likes the good side of this equation, but can't see the bad side. When democracy is unravelling at the seams in Portugal and Greece, the Germans might realize that they have got it wrong, and that having a currency and interest rate regime that condemns the peripherals to an economic car crash might not be the best way to ensure that German banks get back those loans which they are still, either out of misplaced optimism or accountancy necessity, booking at 100%.
And this is really the question, and the ultimate point where economics and politics collide at neutrini-warp speed. No banks in the EU are running stress tests that truly value their holdings. If the German banks had to value their loans to Greece, Portugal and Ireland at "true" risk levels, then many of them would be technically insolvent. In this sense, much of the German "wealth" is illusory. Sure, they exported a lot of stuff to Greece, and lent a lot of money to Ireland, but the Greeks haven't actually yet paid for many of those BMWs, and the Irish loans, well, the EU lends money to Ireland at 5.6% so that it can service debt to German banks that lent money to Ireland a few years ago at roughly the same rate. That circle doesn't look like getting squared any time soon. It's just an accountancy trick.
PJ
Re: Competitiveness
Date: 2011-04-09 11:41 am (UTC)I note that the rate offered to Portugal is still hovering at around 1% less than the rate offered to Ireland, which obviously makes no sense whatsoever except on your theory of "revenge."
The weird thing about all this is that there is, indeed, total "transparency" at one level in the system. Unfortunately, this transparency is at the level of political idiocy, whereas it really ought to be a few steps down at the auditing and accountability level.
Insisting that, not only are you not going to take a haircut, but you are paid back on precisely the same terms upon which you went loony and printed money in the first place is pretty depraved, isn't it? And as usual nobody in the mainstream financial press seems to have made the connection. "Well, it's so much better than they would get on the commercial bonds market" is the mirror image of the EU "it isn't a real crisis: it's all down to speculation by the hedge funds."
Elected or meritocratorious, either none of these people have a clue, or they are all hugely clever devious monsters. I am not sure which.