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peterbirksI was beginning to think that there was no more point in posting about Greece. After all, we all know that default is coming eventually; we all know that the ECB and the German government and others are trying to put it off as long as possible just so that Spain can be saved. So, what's the point in writing about it?
But others are writing so MUCH about it that this in itself becomes interesting. Wolfgang Münchau, our very own "Federalism Tomorrow" candidate, was spitting feathers in yesterday's Financial Times He was, indeed, like a baby whose toys had been taken away, because his belief that the only 'solution' was for more federalism in Europe looked to be vanishing over the horizon.
He called the current 'solution' a "toxic collateralized debt obligation" with the important qualifier (for the issuers) that
The plan at the moment is to come up with a deal so complicated that no-one can understand what is going on, which might mean that the rating agencies will accept it.
As Münchau observed,
Without going too far into detail on it, the great hole in the plan (which involves turning five-year debt into "guaranteed" 30-year debt) is that The interest rate on offer for 'safe' investments is some 500 basis points below the interest rate which Greece would have to pay on the debt. As Münchau comments, this deal basically subordinates other bondholders, which makes it a default. Wrapping the whole shebang up in obscure complexities, each of which contains "assumptions" that are very likely not to turn out to be true, and you have a rescue that is nothing more than desperate smole and mirrors. For Münchau this appears to be a revelation; and one to boot which prevents his beloved federalism coming to the fore. The rest of us just shrug and say "more of the same".
The headline in today's FT indicated that at least two of the rating agencies were not prepared to play ball. The ECB responded that it would continue to accept downgraded Greek debt at 100%, provided there was at least one rating agency (including, amazingly, Canada's DBRS) that didn't downgrade Greek debt to default. Even the FT said that the rollover plan was "a rather impenetrable proposal". S&P, working in an area where people are keen to steal my already-used metaphors, observed that "a flat rectangular steel blade attached to a long wooden handle is, in fact and in deed, called a spade".
But for me the most interesting comments came in two separate reports. Marius Daheim, a fixed-income strategist at Bayerische Landesbank, said that
Meanwhile, Finland's new finance minister Jutta Urpilainen said in a separate report that
This is not hard to decipher, although it is hard to resolve. The private sector (i.e., the lending banks) want the taxpayer (any taxpayer that can afford it, Greek, German, British, Finnish, banks aren't prejudiced) to bail out the banks, while the Finnish finance minister wants the banks to pay for their own mistakes. (remember, when we talk about a "bailout" here, we are not talking about a bailout of Greece -- that's nonsense. This is a bailout of the lenders TO Greece.)
The banks' game plan is that politicians will agree to paying up for the banks' own mistakes because banking is such an important lynchpin of modern economies (remember how the Thatcher government took away our right to be paid in cash? So much for freedom of the individual) that a Europe-wide banking collapse would result in political instability of an unknown quality. So, the banks think, politicians will adopt a "better the devil you know" stance and push all of the losses onto other European taxpayers.
The flaw in this line of thought is that European taxpayers might not stand for it. This is a game of chicken, not between the banks and the ECB and the rating agencies and the IMF. It's a game of chicken between the banks and the taxpayer. When you look at it this way, it becomes a lot simpler. The banks think they are systemically so vital that no government will allow them to go under. The 'people' may eventually be pushed too far and say "fuck it, let's give it a go anyway and see what happens".
Or, as Ms Urpilainen told Finnish TV broadcaster MTV3 this morning.
At the moment, I suspect that she is right.
But others are writing so MUCH about it that this in itself becomes interesting. Wolfgang Münchau, our very own "Federalism Tomorrow" candidate, was spitting feathers in yesterday's Financial Times He was, indeed, like a baby whose toys had been taken away, because his belief that the only 'solution' was for more federalism in Europe looked to be vanishing over the horizon.
He called the current 'solution' a "toxic collateralized debt obligation" with the important qualifier (for the issuers) that
"the accounting rules allow you to pretend that you are not making losses at all".This indeed is the key paragraph (although not the most enjoyable one; for that, see below). What the ECB and the German government and the EU and the French government and the German banks and the French banks are desperately trying to do is put together a package which allows them to carry on pretending that the money they are owed by Greece can be counted as 'good' on their books.
The plan at the moment is to come up with a deal so complicated that no-one can understand what is going on, which might mean that the rating agencies will accept it.
As Münchau observed,
"if this was any other field of human activity, you would go to jail if you accepted, let alone made, such an indecent offer".
Without going too far into detail on it, the great hole in the plan (which involves turning five-year debt into "guaranteed" 30-year debt) is that The interest rate on offer for 'safe' investments is some 500 basis points below the interest rate which Greece would have to pay on the debt. As Münchau comments, this deal basically subordinates other bondholders, which makes it a default. Wrapping the whole shebang up in obscure complexities, each of which contains "assumptions" that are very likely not to turn out to be true, and you have a rescue that is nothing more than desperate smole and mirrors. For Münchau this appears to be a revelation; and one to boot which prevents his beloved federalism coming to the fore. The rest of us just shrug and say "more of the same".
The headline in today's FT indicated that at least two of the rating agencies were not prepared to play ball. The ECB responded that it would continue to accept downgraded Greek debt at 100%, provided there was at least one rating agency (including, amazingly, Canada's DBRS) that didn't downgrade Greek debt to default. Even the FT said that the rollover plan was "a rather impenetrable proposal". S&P, working in an area where people are keen to steal my already-used metaphors, observed that "a flat rectangular steel blade attached to a long wooden handle is, in fact and in deed, called a spade".
But for me the most interesting comments came in two separate reports. Marius Daheim, a fixed-income strategist at Bayerische Landesbank, said that
"This does argue for possibly taking a step back and refraining from any kind of private-sector contribution at all. That’s the only way out if you want to avoid default then you have to keep the private sector uninvolved".
Meanwhile, Finland's new finance minister Jutta Urpilainen said in a separate report that
"We want to limit Finland's responsibilities. The new government has taken a tougher stance than the previous government regarding crisis countries' aid packages"that it will demand guarantees if it takes part in any eurozone bailouts and that it
"wants private investors to bear more of the burden".
This is not hard to decipher, although it is hard to resolve. The private sector (i.e., the lending banks) want the taxpayer (any taxpayer that can afford it, Greek, German, British, Finnish, banks aren't prejudiced) to bail out the banks, while the Finnish finance minister wants the banks to pay for their own mistakes. (remember, when we talk about a "bailout" here, we are not talking about a bailout of Greece -- that's nonsense. This is a bailout of the lenders TO Greece.)
The banks' game plan is that politicians will agree to paying up for the banks' own mistakes because banking is such an important lynchpin of modern economies (remember how the Thatcher government took away our right to be paid in cash? So much for freedom of the individual) that a Europe-wide banking collapse would result in political instability of an unknown quality. So, the banks think, politicians will adopt a "better the devil you know" stance and push all of the losses onto other European taxpayers.
The flaw in this line of thought is that European taxpayers might not stand for it. This is a game of chicken, not between the banks and the ECB and the rating agencies and the IMF. It's a game of chicken between the banks and the taxpayer. When you look at it this way, it becomes a lot simpler. The banks think they are systemically so vital that no government will allow them to go under. The 'people' may eventually be pushed too far and say "fuck it, let's give it a go anyway and see what happens".
Or, as Ms Urpilainen told Finnish TV broadcaster MTV3 this morning.
"In the end, all decisions are political".
At the moment, I suspect that she is right.
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Gordius and Knotty Problems
Date: 2011-07-09 12:00 am (UTC)Now, if Greece has any chance of pulling through (which I doubt sincerely), then something like this would make a massive difference. You could probably invent collateral for the deal -- much like the smoke and mirrors act the French have come up with -- and make it a little more palatable. And at the end of the day, Germany can afford it: it's basically a punt on keeping the Euro upright and sober. I'd also throw in a Gastarbeiten deal that essentially offers the Greek youth a sort of National Service/Apprenticeship opportunity in Stuttgart or Bayern or who knows where, even the less disreputable bits of East Germany ... no, I take that latter back, it would be an electoral loser par excellence. And if you're talking about kicking the problem down the road until Portugal and Spain and maybe even Italy sort themselves out, then this would be a magnificent and really rather cheap punt.
Of course, that assumes that Portugal and Spain and maybe even Italy will ever sort themselves out. A different problem, no matter what George "We Are Not Greece" Osborne might think.
Well, it's either that or admit that Greece and the Euro are both dead in the water. I don't care either way. But we the taxpayers (I do so hate that Magic Cloak of Righteousness) are paying these ignorant bastards to make a rational decision.
Do we really need to get the flame-throwers out?
Re: Gordius and Knotty Problems
Date: 2011-07-09 03:26 pm (UTC)The problem for Germany is three-fold.
(1) This is effectively a eurobond. Germany would be taking on the ECB debt (built up so insanely in the past year), bailing out the banks, and increasing its own deficit (probably above 3%). It's possible; it wouldn't bankrupt Germany, but it's a political and economic step in the direction of federalism which makes many people (including Merkel) uncomfortable.
(2) How do you stop the continuing Greek deterioration? If Germany borrows the money (effectively the same as guaranteeing the existing Greek bonds) do they take control of the Greek macro-economy?
(3) in practical political terms, it's a non-starter. Even if Merkel wanted to do it, this would be a step too far in Germany becoming the "bailer-out" of the lazy Greeks. The only way germany MIGHT persuade its people to support it would be if everyone else in the eurozone supported it. But I think you can see that the chances of that happening are equally slim. The basic premise amongst much of the eurozone here is a bit like that towards Germany after the First World War ("Make Them Pay!") rather than after the Second World War ("Help Them Recover!). The Marshall Plan solution might be the best, but it's not going to fly, given current publis attitudes.
PJ
Re: Gordius and Knotty Problems
Date: 2011-07-09 04:03 pm (UTC)Unfortunately, "politics" makes this impossible in real life. This wouldn't be so bad if the "politicians" (and here I include the ECB and the German constitutional court, and obviously every single French person who has ever spoken up on the matter) weren't so busy vanishing up their own arses.
Seriously. If you can't come up with a half-way decent proposal, do not obfuscate. Just face the facts and accept the immediate (cheaper) consequences.
How much is a Greek urn, these days?
Re: Gordius and Knotty Problems
Date: 2011-07-12 07:16 am (UTC)And, as we see today (Tuesday), solving the Greek problem might now be too late. The contagion has already spread. Once again, politicians' dissimulation, such a powerful tool in politics, has turned out to be a disaster in economics. By always being one step behind the curve, the European political elite has actually made things worse.
PJ