Sunday, June 10, 2012

Europe: Embrace the (financial) suck!

Those who've served in the military in recent years will be familiar with the term "embrace the suck".  (It wasn't in general use when I wore uniform, but we had other [less printable] expressions meaning much the same thing.) It looks as if the European Union is experiencing a daily dose of that metaphor right now as the economic dominoes continue to tumble.

Yesterday Spain was granted an EU bailout of its banks totaling almost 100 billion Euros.  Significantly, Spain (being one of the largest EU economies) was able to wield enough clout that it avoided strict EU controls as part of the deal.  The Telegraph reports:

[Spanish Prime Minister] Mr Rajoy said of the loan deal: “Yesterday, the credibility of the euro won, yesterday the future won, yesterday, the European Union won,” he said.

The Prime Minister said he was not pressured into requesting aid, saying he was the one who had pressed for this line of credit, insisting it was different than bailouts taken by Greece, Ireland and Portugal because their lifelines include strict outside control over public finances - and Spain's does not.

There's more at the link.  Bold print is my emphasis.

Mr. Rajoy is quite right.  Greece, Ireland and Portugal were humiliated by the terms and conditions attached to their financial bailouts by the EU . . . and in the light of the Spanish deal, they intend to change that.  Ireland was first out of the gate.  France24 reports:

Ireland wants to renegotiate its rescue plan to benefit from the same treatment as Spain, which looks set to win a bailout for its banks without any broader economic reforms in return, European sources said on Saturday.

"Ireland raised two issues: one is the need to ensure parity of the deal with Spain retroactively on its bailout from EFSF," one European government source told AFP, referring to the temporary rescue fund, the European Financial Stability Facility.

. . .

Ireland secured an 85-billion-euro ($112 billion) rescue deal from the European Union and the International Monetary Fund in November 2010, but only after agreeing to draconian austerity measures.

Unlike Ireland, Spain's economy minister said a deal on financing for the country's troubled banks would not impose any conditions on the wider economy.

Again, more at the link.

You can bet with absolute confidence that Greece and Portugal are already planning to make similar demands.  After all, they can legitimately point out that all EU member nations are supposedly equal partners, receiving equal treatment, without favoritism.  If that's so, why wasn't Spain subjected to the same humiliating terms and conditions that they were?  And if Spain gets a sweetheart deal instead, why shouldn't they?

The honest answer, of course (although it's anything but politically correct) is that Spain's GDP (US $1.41 trillion in 2010) is twice the size of Greece's ($301.08 billion), Portugal's ($228.87 billion) and Ireland's ($211.39 billion) GDP's put together (a total of $741.34 billion in 2010).  Economic size matters in terms of the influence it confers.  Nevertheless, if the EU doesn't make significant concessions to Greece, Ireland and Portugal, you can expect one or more of them to tear up their deal with the EU and throw it back in the faces of the bureaucrats in Brussels.  After all, what have they got to lose?

This issue can only intensify the already heavy pressure on the Euro and the countries of the Eurozone (the latter can't be far from collapse now).  Reality is catching up fast with the blissninny bureaucratic bloviation emanating from Brussels . . . and when (not if, when) it does, we're all going to suffer.

Many (most?) of Europe's banks are in similarly dire straits to those in Spain.  Liam Halligan laid it out very clearly yesterday, even as the Spanish deal was announced.

The biggest financial problem the West needs to solve isn’t low growth, or unemployment. Economic torpor, and the human tragedy of joblessness, are symptoms, not causes. The issue isn’t, as some would have it, that governments are “cutting spending too far and too fast”. Western governments are barely cutting, if at all.

The most significant financial problem we face, in the UK and Europe, is that our banking systems remain gridlocked, with banks doing everything possible to conceal tens of billions of sterling and euro losses.

All those non-performing loans, and toxic debts, many of them property-related, haven’t gone away. We don’t know their precise scale because the banks still won’t publish full sets of accounts, including their “off balance sheet vehicles”. And, disgracefully, governments and regulators have been too scared to force them.

A lack of knowledge about each others’ solvency makes banks reluctant to lend to each other. Investors, too, fret about recapitalising banks, or holding bank shares, as they don’t know what they’re buying. So interbank lending — the wholesale market for loans — remains extremely sluggish, causing a finance drought among solvent households and firms.

Investment then suffers, housing markets suffer and economic life stagnates. With the credit channel “blocked”, the wheels of Western finance have stopped turning, resulting in economic stasis. Forget “too far and too fast”. Forget “growth versus austerity” and all the other compartmentalised, tribal policy debates we hear being hashed-out on the airwaves. West European growth is so slow, with some countries re-entering recession, because insolvent banks, pretending they’re still viable, are hoarding cash in a desperate and cynical bid to survive when, by rights, they should crash and burn.

Legitimate demands for credit, not least from firms wanting to maintain or expand their operations, are then denied or granted only at ridiculous rates. The West isn’t recovering and unemployment is rising — and the heart of the problem is a group of opaque, moribund banks. This has long been obvious, to those with an open mind and even a modicum of economic expertise.

Attempts to keep zombie banks alive, extending the existence of commercially “dead” institutions, have seriously damaged state balance sheets. Some of the world’s “leading economies” are now keeping their debt markets afloat only by ordering central banks to issue electronic credits, then using them to buy sovereign paper.

For several decades, Western governments have borrowed and spent irresponsibly. Trying to clean up after the banks, though, has pushed otherwise still solvent nations to the brink of bankruptcy and beyond. And in western Europe, of course, this evil brew had been made even more ghastly by the policy incoherence, and conflicting incentives, imposed by the economic madness that is the euro.

. . .

The only way to smash this banking sector deadlock is by imposing the kind of “full disclosure” bank transparency that FDR’s administration employed to break America’s Great Depression in the mid-1930s, or that Sweden used to escape its early-1990s banking mess.

This involves forcing banks to recognise all their excess liabilities, pushing those beyond repair into administration, then supporting those worth saving so they can rebuild their capital levels — in large part from retained earnings and other forms of private finance.

Needless to say, Western banks don’t like the idea of “full disclosure”.

Under the Swedish model, a lot less money is available for bonus and executive pay. “Full disclosure” also makes banks face up to the implications of their deeply misguided previous investments, with some of them going bust. “Full disclosure”, moreover, could well expose some pretty serious financial fraud.

Again, more at the link.  Bold print is my emphasis.  Furthermore, although Mr. Halligan is writing about Europe, his comments can equally well be applied to US banks, many of which are in the same parlous condition as their European counterparts.  (Note, too, his comment that 'Some of the world’s “leading economies” are now keeping their debt markets afloat only by ordering central banks to issue electronic credits, then using them to buy sovereign paper'.  That most certainly applies to the USA, where the Federal Reserve is currently buying about 70% of all bonds issued by the US Treasury, thereby funding the US government's debt-financed expenditure.  The Fed currently holds some $1.668 trillion dollars in Treasuries, up from 'only' about $300 billion when President Obama took office.)

We'll let Ambrose Evans-Pritchard (one of the few commentators who's been consistently accurate and prescient in his Euroskepticism) have the last word on the Spanish bank rescue deal.

JP Morgan is expecting the final package for Spain to rise above €350bn, while RBS says the rescue will "morph" into a full-blown rescue of €370bn to €450bn over time -- by far the largest in world history.

"Where is the money going to come from?" said Simon Derrick from BNY Mellon. "Half-measures are not going to work at this stage and it is not clear that the funding is available."

In theory, the European Financial Stability Fund (EFSF) and the new European Stability Mechanism (ESM) can raise a further €500bn between them, beyond the sums already committed to Greece, Ireland, and Portugal. "There is sufficient fire-power available. In addition, the EFSF/ESM can leverage resources," said Christophe Frankel, the EFSF's chief financial officer.

It may not prove so easy to convince global investors to mop up large issues of debt. "Our clients won't touch the EFSF because nobody knows what it really is. They have cut it out of their benchmarks altogether," said one bond trader.

The Chinese issued their own verdict on Thursday. The country's sovereign wealth fund said it will not buy any more debt in Europe until the region takes radical steps to restore credibility. "The risk is too big, and the return too low," said Lou Jiwei, the chairman of the China Investment Corporation.

"Europe hasn't got the right policies in place. There is a risk that the euro zone may fall apart and that risk is rising," he told the Wall Street Journal.

The risk is rising?  I'd say the Eurozone is already well-nigh submerged in risk . . . and there are very few life-jackets still available.  When the last ones are gone (which will happen Real Soon Now), sinking will become the only option.  We may as well break out the deck-chairs, make some popcorn, sit back, and watch the show.  We won't enjoy it.


1 comment:

perlhaqr said...

I must have some sort of organ which is immune to the effects of reality, because I'm still, somehow, vaguely optimistic that we could fix all this crap if various governments would get out of the way and let business work and produce, without all of the insane regulation that so weights everything down.