Political Solutions for a Financial Crisis
Automatic Earth
More talks, more broken promises, more half-baked policies, more outright lunacy and most of all more crisis.
The picture that emerges from the reports on all of the emergency meetings goes something like this: The idea now is to make Greece an exception, in the sense that bondholders will be forced to accept a 50% loss (instead of the 21% agreed on in July) on their Greek debt holdings, but they will then be given the assurance that no other Eurozone country will be allowed to restructure its debt.
If you were in Portugal, you would do well to protest any such clause, since it could squeeze you into a spot where you can forced to sit back with your hands tied behind your back and watch yourself be bled dry.
If you were a citizen of any other Eurozone country, you’d also want to raise your voice, because if Portugal, Ireland, Italy, Spain, Belgium, the list is familiar by now, cannot restructure their debt, they're going to need money from the EU and ECB. There are renewed calls to pump more money into the IMF as well, so the rest of the world (USA) can be made to pay for the euro crisis. Not surprisingly, the US has said: no way.
Italy has €1.59 trillion ($ 2.21 trillion) in government bonds outstanding. The hope is that bondholders will accept a 50% cut on Greek debt in exchange for a guarantee that any and all losses on Italian debt will be covered by the EU and ECB. Let's don't forget that those bondholders are to a large extent European banks. Which under new proposals will be forced to increase their capital ratios, leading to demand for some €250 billion in new capital.
Who's going to lend it to them? US money market funds withdrew 44% of their loans to French banks in September; guess they're not going to play the white knight part. And seeing that just about every single bank in Europe has now been downgraded or soon will be, they will need to pay a lot more in interest, provided they even can get loans in the first place.
Individual countries can try to recapitalize their banks, but that only shifts the downgrade threat to them. Spain got another 'kick in the head' this week from S&P, and you'd have trouble finding anyone who doesn't think more countries will follow. And banks. Ratings agencies seem to be going through a wake-up phase, finally doing what they should have long ago.
All in all, there doesn't look to be any source of capital for the banks other than the EU, in the shape of the European Financial Stability Facility. But we've seen what a fight it was to lift it from €220 billion to €440 billion. Still, that will by no means be sufficient to guarantee Italian and/or Spanish debt, so even after all the fighting, which included the fall of the Slovakian government, nothing has been resolved. €440 billion is so passé; just like that 21% July haircut.
Talking about resolve, it took Angela Merkel less than a week to -at least seemingly- renege on her joint promise with Nicolas Sarkozy that they would "resolve" the euro crisis before the end of this month. The Deutsche Presse Agentur reports:
Merkel warns not to expect big change at October 23 EU summit
German Chancellor Angela Merkel warned Friday there would be no dramatic course-changing decisions at an October 23 EU summit on the eurozone crisis. 'There isn't some clap of thunder and then it's all right,' she said Friday in a speech to a trade union conference.
Her remarks appeared to contrast with her joint statement this month with French President Nicolas Sarkozy that a package solution to the crisis was on the way and would be made public by the end of the month. She told members of the IG Metall labour group near the southern city of Karlsruhe that every step would have to be weighed carefully and only undertaken if it yielded more benefits than disadvantages.
Whatever we may think of this, weighing every step carefully no longer is possible if you have only two weeks left to make good on your promise. The idea then is probably that what can't be weighed carefully must be made whole with double or nothing bets involving taxpayer funds.
In that regard, here's a line that bears some contemplation; it comes from Philip Aldrick at the Telegraph:
G20 has three weeks to solve eurozone debt crisis
Hopes that Europe is edging towards a political solution helped lift markets.
Apparently, there still is an unquestioned assumption that the Eurozone crisis, or make that the entire global financial crisis, can be countered with political solutions. Another assumption closely linked to it is that this solution will and must involve handing out additional trillions of euros and dollars to states and financial institutions on the verge of default and bankruptcy.
In other words, more of the same. More of what has achieved absolutely nothing but an illusionary recovery that leaves increasing numbers of people destitute whose governments pledge money that could alleviate their misery to keeping banks standing whose real debts they have no knowledge of.
If these debts are many times higher than generally and officially presumed, and the very fact that mark-to-market is not even considered strongly suggests they are, present recapitalization policies will be not just moot, but giant money dumps into black holes. And bordering on criminal behavior to boot, since governments do have the means and the power to perform stress tests on banks that can actually figure out how deep in the hole they are, before handing them dozens or hundreds of billions each.
But no, nowhere in the news about the EU and G20 and other emergency meetings do we find the suggestion to mark assets to market across the board. Which would still be a viable political measure, if not a solution.
No, what we get is renegotiating a deal that is just three months old, the underlying notion being that no-one could have seen in July how much worse the Greek situation would get. To top off the nonsensical argumentation, this is all presented as a way to "restore confidence in the markets" (still a favorite among "leaders"). You restore confidence by throwing out deals before their ink is even dry?
I've said it before: this is what the Occupy movement, in my view, should focus on. Force governments to open bank books and vaults before another single penny in aid is handed out. And don’t be mistaken: if Europe agrees on a 50% Greek haircut, US banks, too, will be awfully close to needing another bailout. And as far as we know, they may be way too far gone to survive, no matter how much or our money they receive.
Obama can call on people like Bill Black and Elizabeth Warren to assemble a team to conduct investigations of Wall Street banks, and give them all the legal powers required.
Yes, he can.
But what are the chances he will? Right now, they are below zero. And it will take a lot of pressure to change that.
Thinking about that, the -apparent- endorsements of Occupy Wall Street by Obama, Nancy Pelosi, The New York Times, Mohamed El-Erian and other "leaders" make me cringe. These are the people you should be fighting, not get comfy with. That's just a way to make sure nothing changes.
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