Tag: EU

Green shoots redux

The IMF’s Lagarde announces “economic spring is in the air“:

A couple of weeks ago, I sat on the speakers’ podium during the opening panel of the Euromoney Bond Investors’ Congress in London. Together with leading industry experts, including senior ratings agencies’ officials, we engaged in a detailed discussion of the contentious aspects of the Greek debt debacle and the fate of the eurozone.

The audience was “top drawer; the room packed with 500 of the world’s biggest bond market participants; the combined assets under management measured in the trillions of dollars.

“Who thinks the upcoming Greek bail-out will be the last, drawing a line under the eurozone’s sovereign debt crisis?” asked the senior Euromoney staffer chairing the panel. “Put your hands up”.

Delivered with a serious demeanour, this was exactly the right question. So deadly was the inquiry, and so germane, that the mood in the room grew uneasy, barely camouflaged by an outbreak of coughing. Scanning this ultra-influential audience, I saw rows of delegates cowed, keeping their eyes locked forwards but staring down slightly, not daring to look elsewhere.

Not a single hand was raised. Not a single hand among hundreds of the world’s leading bond market practitioners was stirred to support a debt swap now presented as the key to the world economy shaking off the post sub-prime torpor and taking us into the sun-lit uplands of sustainable global growth.

On Friday, Greece pressed ahead with the largest sovereign debt restructuring in history. By “securing adequate participation” from the private sector, Athens avoided a big, disorderly default in late March. Holders of €172bn (£143bn) of the €206bn of eligible bonds agreed to take part in the write-down, or 83.5pc. Participation has since risen to 95.7pc after the Greek government triggered retrospective “collective action clauses”, forcing objecting investors to play ball.

This deal was “voluntary”, in the words of one market wag, “in the same way confessions were voluntary during the Spanish Inquisition”. In other words, unless this deal was agreed, bond-holders faced ending-up with nothing at all. Under the current terms, investors swap their bonds for new ones worth 53.5pc less and with easier repayment terms for Greece.

So, Greece has defaulted, despite all of the assurances to the contrary. So, the next question is, who is next? And, of course, how long until Germany pulls the plug on the EU project. Also, there is this to consider: “With the addition of the new IMF/EU loans of $172 billion and the revelation of the guaranteed debt at $107 billion Greece now has $279 billion of new and hidden debts.”

The Eurebellion begins

At long last, the politicians are turning against the Euro and the European Union:

“The euro is not in the interests of the Dutch people,” said Geert Wilders, the leader of the right-wing populist party with a sixth of the seats in the Dutch parliament. “We want to be the master of our own house and our own country, so we say yes to the guilder. Bring it on.”

Mr Wilders made his decision after receiving a report by London-based Lombard Street Research concluding that the Netherlands is badly handicapped by euro membership, and that it could cost EMU’s creditor core more than €2.4 trillion to hold monetary union together over the next four years. “If the politicians in The Hague disagree with our report, let them show the guts to hold a referendum. Let the Dutch people decide,” he said.

The Dutch aren’t the only ones. The open challenge from the new Spanish premier is arguably even more serious:

The Spanish rebellion has begun, sooner and more dramatically than I expected.
As many readers will already have seen, Premier Mariano Rajoy has refused point blank to comply with the austerity demands of the European Commission and the European Council (hijacked by Merkozy).

Taking what he called a “sovereign decision”, he simply announced that he intends to ignore the EU deficit target of 4.4pc of GDP for this year, setting his own target of 5.8pc instead (down from 8.5pc in 2011).

In the twenty years or so that I have been following EU affairs closely, I cannot remember such a bold and open act of defiance by any state.

There is no real left-right divide in Europe anymore, as the Europhile-Euroskeptic one is much more significant. While the mainstream parties have long succeeded in their game of taking Europhile positions of varying degrees of enthusiasm – Eurofast vs Euroslow – the parliamentary systems have permitted the development of a continent-wide anti-EU political movement of the sort that the two-party system in the USA tends to preclude.

And eventually, the anti-EU side will win because the iron laws of economics are on their side.

The scheduled default

Amidst all the sound and fury in the media signifying nothing, the banks are calmly going about planning for the scheduled Greek sovereign default:

Senior bankers on Wall Street have been given detailed documentation setting out a timetable to Greek default, including firm dates and technical ‘orders’ about last use of the euro as a currency there. The revelation arrived at Slogger’s Roost last Monday, since when I have been trying to obtain corroboration. This arrived in the early hours of today (Thursday). One of the banks is Barclays Capital (Barcap) run by controversial figure Bob Diamond. The other must remain anonymous for the time being, in order to protect sources. The document asserts that Greece will officially be declared in default by all the ratings agencies after the close of business on Friday march 23rd .

Legitimate? We’ll find out soon enough. It’s certainly a lot more credible than the multiple announcements of a deal that has miraculously saved Greece, the Euro, the EU, and the global economy. How many of them have we seen generate short-term EU/USD spikes in the last six months, ten or eleven?

I think it’s fairly obvious that the Eurobankers and their pet politicians knew from the start that they weren’t going to do any more than the initial “bailout”. But this way, they can pretend that the process is under control and business should proceed as before.

The end of the Euro

I’ve been predicting this since it was forced upon the people of Europe. Now, the first material signs of its demise have appeared:

Are quasi-drachmas being issued?

These financial instruments are bonds, and have all the characteristics of Hellenic Republic Bonds: they bear international securities identification numbers (ISINs); they are negotiable on the Athens Exchange and they rank pari passu with other Greek debt. The government, in one of its press releases, notes that “bondholders who choose to discount these bonds at the banks will crystallise a 19% discount versus their original claim.”

We would argue, however, that they are more than just another bond issued by the Greek government. To be specific, they seem to us very akin to what economists call quasi-monies. These quasi-monies have appeared in a number of cases, usually put in place by government to find an escape valve out of nominal fiscal rigidities in the face of a financing issue. This especially happens in a case of a government of a monetary union that cannot print money to fund its deficit….

If a country issues a bond as repayment, even temporarily, for a supplier, then there is no withdrawal of money from the private sector as no-one purchases the bond with cash. It is a form of barter in which the vendor provides a good to the administration and receives a financial instrument created ex nihilo from the same government.

There have already been possibly apocryphal reports of Italians using lira and Spaniards using pesetas. But this is the first time that an EU government is printing a new monetary instrument that can be used in exchange for goods and services.

The short life of the Fourth Reich

Have you ever noticed that those who say failure is not an option and refuse to consider any backup plans almost inevitably end up failing? Applying that principle, what can one now conclude about the Euro?

The reason is that in Europe, the mere admission that Plan B is a possibility, apparently set off a chain of events that makes Plan B an inevitability: “…officials there feared that releasing the information could fuel further doubts and instability in the euro zone.”

And so Europe is left to fend on its own, with the mere mention of the possibility of failure being completely ignored, as the mere contemplation of failure is not only no longer an option, but apparently an outright admission of defeat. Needless to say, the fact that European banks have no way to hedge anything any more, CDS trading having been killed, thank you ISDA, and now supervisory bodies themselves telling banks to not even consider Plan B, is enough reason why the LTRO will be an abysmal failure.

Because one does not need to be a rocket scientist to realize that when everyone is telling you that even Plan B is improper, then it is all too clear there is absolutely no Plan Whatever.

Game Over for the Euro would appear to be fast approaching, even faster than I had expected. The Fourth Reich looks to be even shorter-lived than the Third One.

David Cameron finds his spine

It’s not enough. He still needs to give the British people their promised referendum on the Fourth Reich. But it is a start:

After a marathon meeting that started at dinner time on Thursday evening and finished at 6am on Friday, eurozone member states agreed to create an intergovernmental treaty to forge stricter budgetary controls for the group’s member states. Britain has opted to remain out of the treaty.

“I said before coming to Brussels, that if I could not get adequate safeguards for Britain in a new European treaty, then I would not agree to it,” David Cameron said.

“What is on offer is not in Britain’s interest, so I didn’t agree to it. Let me explain why this matters, of course we want the eurozone countries to come together and to solve their problems, but we should only allow that to open inside the European Union treaties, if there are proper protections for the single market and for other British key interests. Without those safeguards it is better not to have a treaty, but to have those countries make their arrangements separately. That is now what is going to happen.”

Frankly, I am astonished. I assumed Cameron was going to sell Britain out, as Thatcher, Major, Blair, and Brown all did before him. It doesn’t mean he won’t eventually do so, but then again, Britain has always been extraordinarily tardy about recognizing continental threats to its existence. This is a good sign, as it represents the first material cracks that will eventually break apart the third great attempt to subjugate Europe under an unaccountable and authoritarian regime.

Britain has no more to fear from being out of the European Union than it had from its refusal to join Napoleon’s Greater France or Hitler’s Greater Germany. David Cameron would do well to reflect upon which historical British leaders are revered today, the Wellingtons and Churchills or the Chamberlains and Blairs.

Destroying the currency to save it

Apparently no one thought through the obvious implications of refusing to recognize an obvious credit event:

[P]erhaps the biggest sin of the lot was effectively to render all credit default swaps (a form of insurance against default) on sovereign debt essentially worthless, or void, by making the Greek default “voluntary”.

This has made it impossible to hedge against eurozone sovereign debt purchases, and thereby destroyed the market. Worse, it’s made investors believe that the euro cannot be trusted, that it’ll repeatedly find ways of reneging on contract. That’s the point of no return. This is no longer a serious currency.

It’s really astonishing that the European Union has refused to recognize that Greece has gone bankrupt. In trying to save the banks holding sovereign Greek debt, they went and destroyed the value of all the trillions in credit default swaps. It’s like declaring that corpses aren’t really dead, so therefore the insurance companies don’t have to pay out on any life insurance policies. That might save a company or two in the short term, but it destroys them all in the intermediate term for the obvious reason that no one is ever going to waste their money on life insurance again.

WND column

Democracy and Europe

Two weeks ago, I wrote about the end of Europe’s great experiment with democracy. Not only have countries across the continent been forced into a one-vote, one-time arrangement which bears a striking similarity to the National Socialist plebiscite approach, but now the unelected European Commission is utilizing the financial muscle of the International Monetary Fund and the European Central Bank to remove duly elected officials and install unelected heads of government.

In Greece, Lucas Papademos was sworn in as prime minister last week. He is not a member of Parliament, has never been elected to office and is a former Federal Reserve economist. In Italy, Silvio Berlusconi resigned under pressure and is being replaced by Mario Monti, a former European commissioner and Goldman Sachs adviser. Like Papademos, Monti is an economist who has spent his career in the employment of the international banks and has never been elected to office. He has, however, been appointed to the rather ominous sounding position of senator-for-life. Fortunately, he has yet to make any statements concerning the reliability of the railway schedules.

The fearful foundations of the Fourth Reich

I wrote that a few years ago in a column about TARP. But things are arguably even worse in Europe, where the bankers have forced two non-democratic changes in government in Greece and Italy. But don’t think things can’t go from bad to worse; the normally sane Ambrose Evans-Pritchard is freaked out to the point that he is calling for diplomatic and economic war rather than simply allowing the whole debacle to collapse under its own weight.

In Italy they have already made matters worse. I doubt that much will change with “technocratic governments” in either Greece and Italy, yet immense damage has been done to democratic accountability. The EU Project has become both dangerous and insane….

You cannot allow the biggest bankruptcy in history to run its course – with calamitous domino implications – before all options have been exhausted.

One can only guess what is happening in the great global centres of power, but it would not surprise me if US President Barack Obama and China’s Hu Jintao start to intervene very soon, in unison and with massive diplomatic force. One can imagine joint telephone calls to Chancellor Angela Merkel more or less ordering her country to face up to the implications of the monetary union that Germany itself created and ran (badly).

Yes, this means mobilizing the full-firepower of the ECB – with a pledge to change EU Treaty law and the bank’s mandate – and perhaps some form of quantum leap towards a fiscal and debt union.

In other words, because the EU is an evil financial empire on the verge of collapse, the US and China should intervene, prop it up, and help it transform itself into the literal Fourth Reich. Since Evans-Pritchard has generally been an intelligent and reasonable observer of past EU antics, the hysterical nature of this column should suffice to demonstrate the extraordinarily dangerous nature of the situation.

And he’s wrong. The bankruptcy is going to happen no matter what measures are taken. The financial media has learned nothing from 2008. Desperately delaying the necessary surgery is not going to improve the chances that the patient will survive.

L’amara vita

Italians aren’t sweating this, but the European banks certainly are:

The Italian 5-year is yielding 6.87% while the 10 year is now 6.77%. The curve-inversion is very bad and is a stark warning: Get ready. This has not yet managed to get to the 2yr (6.38%) Pundits have opined that due to the relatively long duration of the bond portfolio outstanding it’s not a “big deal.” They’re wrong.

This is a very big deal. One year ago, the Italian 2-year was at 2.010 and the 10-year was at 3.924 The Italian 2-year is now rapidly approaching where the Portuguese 10-year was one year ago. What this indicates is that the end of the Euro and the end of the EU in its present form will likely take place within one year. Greece and Ireland were sideshows. Italy is the main event.