Eurozone At Death’s Door – OpEd
By Mike Whitney
“After almost two years of fighting to contain the region’s debt crisis and providing the biggest share of three European bailouts, Chancellor Angela Merkel is laying the ground for what markets say is almost a sure thing: a Greek default.” – Bloomberg News
Greece is hurtling towards default and the doomsday scenario is beginning to unfold. The IMF, the G-7, and the ECB have all swung into full-crisis mode and are prepared to do whatever they can to minimize the collateral damage. But the shock to the financial system and the fragile recovery is bound to be substantial. A default would have dire knock-on effects for banks in Germany, France and the UK that are presently holding billions in Greek debt. Many of them will face excruciating restructuring or, perhaps, bankruptcy. And the banks and financial institutions in the US aren’t off the hook either, not by a long shot. Take a look at this excerpt from an article in the Wall Street Journal:
“……a European failure is bound to have huge ramifications for U.S. and global financial markets. If there is any doubt on this score, all one need do is consider the U.S. financial system’s massive exposure to European banks. In a recent survey, Fitch Ratings Inc. found that, as of the end of July, the U.S. money-market industry still had over a trillion dollars of direct exposure to European banks—or roughly 45% of money markets’ overall assets. The Bank for International Settlement reports that American banks have loan exposure to German and French banks of more than $1.2 trillion.
“This overexposure to the European banking system should be keeping Mr. Obama awake at night. That’s because those European banks, in turn, are all too exposed to the $2 trillion sovereign-debt market for Greece, Ireland, Portugal and Spain—and they have yet to recognize the large loan losses that they are bound to experience on their holdings of sovereign debt.” (“The Euro Threat to Obama”, Desmond Lachman, Wall Street Journal)
A trillion here, a trillion there; pretty soon you’re talking real money.
Both the EU and US banking systems are gravely undercapitalized, so when a roadside bomb like Greece goes off, whatever capital is left in the coffers is quickly sucked down the plughole, triggering a deflationary spiral. So whether Greece turns out to be another Lehman Brothers or not, really doesn’t matter, because the expectation of disaster will send jittery investors back into their bunkers regardless. (Expect the markets to fall hard on Monday.)
The G-7 issued a statement on Friday announcing that it would do whatever it could to protect the financial system and the markets. Here’s an excerpt from the transcript:
“We meet at a time of new challenges to global economic recovery, with significant challenges to growth, fiscal deficits and sovereign debt, stemming from past accumulated imbalances. This is reflected in heightened tensions in financial markets…..We are committed to a strong and coordinated international response to these challenges.
“We are taking strong actions to maintain financial stability, restore confidence and support growth…. Central Banks stand ready to provide liquidity to banks as required. We will take all necessary actions to ensure the resilience of banking systems and financial markets.”
Like the IMF, the G-7 is late to the fray, much like the fireman that grabs a hose after the house has burned to the ground. It’s the same here. Where was the G-7 when the geniuses at the ECB were applying leeches to the patient (“austerity measures”) making it impossible for Greece to narrow its deficits by boosting growth? AWOL, that’s where. But now they’re crawling all over the place, fluttering their hands while offering their bank buddies blank checks (“Central Banks stand ready to provide liquidity to banks as required”) to make sure they don’t lose money on their dodgy investments.
The same goes for the IMF; it’s always “Too little, too late”. That’s why they’re planning to re-activate a $580 billion emergency fund, when they could have just ponied up half of that amount in fiscal stimulus and (possibly) pushed Greek GDP into positive territory. Here’s the story from the Wall Street Journal:
“The International Monetary Fund will likely re-activate a $580 billion resource pool in coming weeks to ensure it has funds to help cover Europe’s worsening sovereign-debt crisis, according to several people close to the matter….
“The crisis is entering a dangerous new phase as the risk of Greece defaulting rises and Italy and Spain’s sovereign debt has come under attack. (“IMF Likely To Re-Activate $580B Resource Pool Amid Europe Crisis-Sources”, Wall Street Journal)
“Man the hoses. Greece is in flames!”
Right. These organiszations thrive on crisis, and Greece probably won’t disappoint. If the contagion spreads to Portugal, Ireland, Spain and Italy; the eurozone will hit the bricks like a downer cow in a glue factory. Meanwhile the rest of the global economy will slip into a long-term slump.
On Friday, Bloomberg News delivered a bombshell that put shares into a nosedive. Here’s an excerpt:
“Chancellor Angela Merkel’s government is preparing plans to shore up German banks in the event that Greece fails to meet the terms of its aid package and defaults, three coalition officials said.
“The emergency plan involves measures to help banks and insurers that face a possible 50 percent loss on their Greek bonds …
“The existence of a ‘Plan B’ underscores German concerns that Greece’s failure to stick to budget-cutting targets threatens European efforts to tame the debt crisis rattling the euro. German lawmakers stepped up their criticism of Greece this week, threatening to withhold aid unless it meets the terms of its austerity package, after an international mission to Athens suspended its report on the country’s progress.” (“Germany Said to Ready Plan to Help Banks If Greece Defaults”, Bloomberg)
German officials denied the report, but the cat is already out of the bag. Greece isn’t going to meet its targets, so it’s going to be fed to the sharks. That’s for sure. German Chancellor Angela Merkel has pleaded for more time, (“We must be patient….What hasn’t been done in years cannot be done overnight.”) But she’s swimming against the tide. The German people are sick of bailouts. According to a recent survey conducted by ZDF television channel: “More than three-quarters of Germans are opposed to widening the EU’s rescue fund for debt-wracked countries….The survey… showed 76 percent of people in Europe’s top economy were against broadening the scope and volume of the fund, as agreed by EU leaders in July to stem the eurozone debt crisis.”
So it’s off to the morgue for Greece and–what happens next–is anyone’s guess. It could be another Lehman or maybe not. No one knows for sure. Remember, the Lehman fiasco wouldn’t have been as bad as it was if the Fed and Treasury hadn’t bailed out Bear Stearns just weeks earlier. That convinced investors that they’d do the same for Lehman. So, when Paulson and Bernanke did a 180 policy-reversal and let Lehman flop, it shocked everyone and sent the markets crashing. Investors couldn’t figure out what the hell the policy was, so they cashed out and headed for the hills. Who can blame them?
Maybe things will go smoother with Greece. Maybe all that underwriting and back-stopping by the IMF, the G-7, and the ECB will help the eurozone to hobble through without too much damage. But that seems unlikely. After all, Greece is just the tip of the iceberg. The real problem is that the structure of the eurozone itself. It’s essentially a bank masquerading as a country, only now the charade has gone as far as it can. The mask was stripped off last week in a courthouse in Germany. The judge ruled that Merkel could provide money for the eurozone emergency fund, (the EFSF) but he explicitly blocked her from taking steps to create a “supra-national” fiscal union or–what some have called–a United States of Europe. That won’t happen now. Here’s an excerpt from an article that provides details about the ruling:
“The Bundestag’s budget responsibilities may not be transferred through open-ended appropriations to other actors. In particular, no financial mechanisms can lead to meaningful fiscal burdens without prior approval,” said the opinion.
“No permanent treaty mechanisms shall be established that leads to liability for the decisions of other states, especially if they entail incalculable consequences,” it said.
The ruling is “a clear rejection of eurobonds”, said Otto Fricke, finance spokesman for the Free Democrats (FDP) in the governing coalition.
Above all, the court ruled that the Bundestag’s fiscal sovereignty is the foundation of German democracy and that Article 38 of the Basic Law prohibits transfer of these prerogatives to “supra-national bodies”.
(“German court curbs future bail-outs, bans EU fiscal union”, The Telegraph)
Hurrah for Germany! They’ve stopped Merkel in her tracks and ended the corporatist dream of an EU Banktatorship. Hurrah!
The idea of a “Unified Europe” is neither good nor bad. It depends on whether the union is built on basic priciples of equality and justice. And, have those principles been manifest in the policies implemented by the ECB or the Eurogroup so far?
Hell, no! Since the onset of the crisis in 2008, the ECB and its Euroflunkies have acted exclusively in the interests of big finance, supporting every initiative to inflate the price of sovereign bonds to prevent the banks from losing money, while–at the same time–imposing the harshest punitive “belt-tightening” measures imaginable on the debt-plagued countries in the South. Not once has ECB chief Jean-Claude Trichet veered from his hardline approach or pushed stimulative remedies that would ease conditions for working people. Every policy has been tailored to save deep-pocket bondholders and high-stakes speculators from losing money on their bad bets.
Is this the type of union that ordinary working people should stand behind?
No.
Germany has done everyone a favor by putting an end to this fiasco. The ruling will likely be the death-knell for the bank-ruled distopia called the eurozone. Hurrah!
This just in: It’s even worse than I thought. Check this out from Bloomberg:
“BNP Paribas SA, Societe Generale and Credit Agricole SA (ACA), France’s largest banks by market value, are trading at levels that imply a 100 percent loss on Greek, Irish and Portuguese holdings, according to Barclays. In the case of Paris-based Societe Generale, the share price even implies full writedowns on Italian and Spanish debt, according to Barclays.” (Bloomberg)
“100 percent loss on Greek, Irish and Portuguese holdings”! Are you kidding me? Hundreds of billions in sovereign bonds were converted into toilet paper overnight, and the banks are saying that ”It’s not a problem”!?!
Bloomberg again:
“The 90 banks that underwent European stress tests would face an estimated capital shortfall of 350 billion euros ($479 billion) if Greek, Portuguese, Irish, Italian and Spanish government bonds were written down to market values, according to Nomura analysts led by Jon Peace. No “practical” amount of capital can prepare them for a large sovereign debt impairment or default, Nomura said in a note on Sept. 7.” (Bloomberg)
I assure you, EU banks do not have “350 billion euros” socked away in a “rainy day” fund. This is going to be very messy.
It’s all up to the ECB now. Trichet can be expected to make a major power grab like Bernanke did following Lehman. He’ll try to assume the role of supreme fiscal authority, so he can print as much money as he needs to bail out his crooked bankster friends.
It’ll be up to Germany to stop him.