Europe's 750 billion euro bazooka

[Cees Binkhorst]

REPLY TO: D66 at nic.surfnet.nl

Is Griekenland de Lehman Brothers van de EU?

Als de USA Senaat het onderzoek naar Goldman Sachs en de rating agencies
laat verwateren, kan het EU-parlement dat toch zelf doen?

Bij die laatsten lijkt me een onderzoek van het EU-parlement naar de
paar laatste ratings, binnen een paar dagen, van Moody's op zijn plaats!

Groet / Cees

Europe's 750 billion euro bazooka
http://www.economist.com/blogs/charlemagne/2010/05/euro_crisis_2
May 10th 2010, 12:26 by Charlemagne

AT two in the morning on May 10th, European Union finance ministers
agreed a huge increase in their political will to defend Europe's single
currency, backed by a stunning €750 billion in aid for weak links in the
16 member eurozone. Simultaneously, the European Central Bank took a
revolutionary shift away from its inflation-fighting mission, announcing
a scheme to buy up government bonds on the financial markets.

That new sense of resolve is good news. The more troubling news is that
it took 11 hours of bitter wrangling to get the ministers to that point,
and—thanks to continued German anxiety about undermining eurozone
discipline by bailing out the profligate—there will be three separate
mechanisms to deliver that €750 billion, of such fiendish complexity
that EU officials are still not quite sure how it will all work. In a
nice irony, the ministers—who have spent weeks denouncing financial
markets as wicked speculators—only stopped arguing and agreed a plan in
the early hours of this morning because they knew markets were about to
open in Asia, well-informed sources say.

Does the good news trump the troubling news? Yes: as long as lingering
disagreements and uncertainties do not hold up the rescue plan. Europe
is building its own financial bazooka to warn off the markets, to borrow
Hank Paulson's image. If it is ready to fire when needed, then
complexity probably does not matter for now.

What has been agreed?

First off, a €60 billion rapid reaction stabilisation fund, controlled
by the European Commission, and able to send ready money to eurozone
countries that are in a financing crunch. The mechanism is modelled on
an existing scheme for non-euro economies, the "balance of payments
facility". The money is borrowed by the commission on the markets, using
the EU budget as collateral. Because the EU budget cannot legally go
into the red, that means that all 27 EU members are on the hook if money
from this €60 billion pot is disbursed and not paid back: to simplify,
all members would have to pay extra into the budget to top it up.
Britain, for instance, would be on the hook for 12% of any losses:
Alistair Darling, still the British chancellor of the exchequer,
approved this after consulting his Tory counterpart, George Osborne, by
telephone.

Secondly, a "special purpose vehicle" (don't call it a fund or
Eurobonds, or the Germans will be very cross), which will be created in
the next few days by an intergovernmental agreement among eurozone
members, and which will raise up to €440 billion euro on the markets
using a blend of loans and loan guarantees from the 16 members of the
single currency club. The European Commission wanted formal control of
this warchest, using a clause of the Lisbon Treaty, Article 122 that
allows the commission to rush emergency aid to countries hit by natural
disasters or exceptional crises beyond their control (Article 122 will
be used for the €60 billion pot).

The Germans, Dutch, Finns, Austrians and others, backed by the British,
said no, and in the end won this argument: the commission may be invited
to manage the warchest, which is also described as a temporary three
year creation. The Germans were also insistent that the fund should work
in the same way as the €110 billion rescue package just agreed for
Greece: meaning it should involve money and budget discipline measures
from the International Monetary Fund, and meaning that it should be a
package of bilateral loans from each of the 16, rather than open-ended
loan guarantees. The French, in particular, dreamed of open-ended loan
guarantees and an EU-only structure: ie, something very close to a
permanent Eurobond bailout instrument. Germany said no, but that may or
may not look in the future like a victory on process, not on the substance.

Thirdly, the finance ministers demanded that Spain and Portugal should
work harder on consolidating their budgets this year and next: that was
politically very hard for the Spanish (who were nominally chairing the
meeting). The Spanish have asked to come back with a plan next week.

Fourthly, there was a stunning announcement that the IMF would match
every two euros of EU rescue money with one of its own. That could take
the IMF contribution up to €220 or €250 billion, depending on whether
they are matching the €60 billion too. In a slightly surreal moment, the
Spanish economy minister Elena Salgado could not decide whether that
extra €30 billion was part of the deal. Some of us are old enough (ie,
we were alive three weeks ago) to remember when the EU as a whole
thought €30 billion was enough money on its own to put on the table and
order markets to back off.

Finally, and perhaps most importantly, the European Central Bank went
off and agreed exactly the thing that banks and politicians had been
urging it to do: ie, start buying up government bonds on the financial
markets. Where does that leave ECB independence? In a tricky place, not
to mention the ECB's central mission to fight inflation, which is in
danger of being trumped by political demands from the national
governments of the eurozone.

One of the gripping stories of this crisis has been the roller-coaster
fortunes of the ECB boss, Jean-Claude Trichet. About nine months ago, Mr
Trichet was one of the undisputed winners of the meltdown, hailed for
his calm and decisive management of the banking crisis. The last few
months have been brutal for this urbane Frenchman. First he said it
would be a "humiliation" for the IMF to be involved in rescuing Greece,
only to have to eat his words. Then he said it was as clear as a
mountain stream that the ECB could not make an exception for Greece
alone, when it came to accepting Greek debt as collateral even if it was
downgraded to junk by credit rating agencies. Then he had to eat his
words on that too.

So, what does this all mean politically? Is it the birth of Eurobonds,
and a fiscal transfer union, in which the rich and strong pay for the
weak? A sneaky way out of that question is to say that we have
effectively had Eurobonds for ages, in the form of the balance of
payments mechanism (which was used only recently for Hungary and Latvia)
and that we have had transfers from rich to poor in the form of
structural and cohesion funds (ie, aid for poorer regions).

But that would be a cowardly answer. I have been saying for ages that I
did not believe that the political will was there to move to the sort of
political or economic union that some in Brussels have always said was
needed to make the euro work. Do I still think I am right?

I think that the politics have shifted dramatically in the last few
days, and that the euro is looking less German and more French, even if
Angela Merkel has won some late victories on process by insisting that
national governments should not give open-ended loan guarantees to the
European Commission to play with. I think that the EU has developed a
much stronger external narrative, telling markets that they should treat
the eurozone as a single whole, which is strong and solvent, and not try
to pick off weaker members because they will get their fingers burned.

But, and I think this is still a big but, the political narrative inside
the eurozone is still lagging way behind. If the markets outside are
being told to treat the eurozone as a single fortress, defended by
unlimited budgetary firepower from the rich members of the club, voters
in places like Germany, the Netherlands or Finland are absolutely not
being told that they now inhabit a single economic entity, in which big
chunks of the budget are pooled.

Instead, the political messages being delivered internally are heading
in quite different directions.

One, the Germans and co are still insisting that the point of
constructing a vast bazooka is to avoid ever having to fire it. In other
words, whether or not you think the leaders are stumbling backwards into
a fiscal transfer union, that is certainly not their purported
intention: the intention is for none of this money ever to be needed.

Two, the political ground is not being prepared for a fiscal union:
Angela Merkel has not gone on German television to tell German voters
that the euro is incredibly important to their way of life and their
prosperity, and that defending it may cost painful amounts of money.

Instead, the anti-market rhetoric is being stepped up to fever pitch.
Markets are wicked speculators, or "wolf packs" if you listen to the
Swedish finance minister. there is an international conspiracy to
destroy the euro, says Jean-Claude Juncker, prime minister of Luxembourg.

In concrete terms, leaders like Mrs Merkel have yet to make the positive
case for saving the euro, instead preferring to make the negative case
for punishing speculators (though, I note, those evil speculators
magically turn back into "international markets" when the EU wants to
raise €440 billion in a short space of time).

A political quid pro quo is being prepared to buy off voters furious at
the idea of sending money to weak or profligate members of the club,
involving much tougher regulation of those wicked markets. Mrs Salgado
last night talked of probing the role played by credit ratings agencies,
and much tougher regulation of derivatives. There is constant talk of
financial transaction taxes. Nobody is denying that regulation will not
need to change in the future, but the suggestions so far have much more
to do with populism than common sense.

The idea of a publicly funded European Credit Rating Agency, supported
by France and Germany, is particularly asinine: if the ECRA is much more
bullish about EU sovereign debt than the commercial ratings agencies,
markets will assume it is no more than a man next to a fax machine,
taking orders from Paris and Berlin. In which case it is not obvious
what good it will do. On the other hand, if its ratings match those of
the commercial ratings agencies, it will change nothing in the markets,
and it is not obvious what good it will do.

I think this bellicose talk of fighting battles with markets and being
at war with perfidious bankers (to quote Mrs Merkel) may point to a
useful analogy for what is going on in terms of political integration
here, at least at this point. I wonder if this new intergovernmental
warchest of €440 billion, working with the intergovernmental IMF, is a
bit like the mutual defence clause, Article 5, in the NATO treaty, that
says an attack on one member of NATO is an attack on all. That is hugely
important, and commits each member government to big and serious things.
But it is not the same as those member countries agreeing to pool their
militaries.

A wise colleague makes the point that the oddity for years was that
markets gave all eurozone countries almost the same rates, ie assumed
(wrongly) that default risk had gone. In many ways the past few months
have been healthy as that assumption no longer holds. But the corollary
is indeed the discovery that heavy borrowers can lose some of their
independence. But, he points out, big borrowers often lose some
sovereignty, because markets set limits on debts. Greece has lost fiscal
independence not because it is moving towards being a part of a federal
state but because it cannot any longer raise money in the markets.


Vinny L. wrote:
May 10th 2010 4:05 GMT

Let's talk abut common sense.

Last week, Goldman Sachs was on the congressional hot seat, grilled for
fraud in its sale of complicated financial products called “synthetic
CDOs.”  This week the heat was off, as all eyes turned to the attack of
the shorts on Greek sovereign debt and the dire threat of a sovereign
Greek default.  By Thursday, Goldman’s fraud had slipped from the
headlines and Congress had been cowed into throwing in the towel on its
campaign to break up the too-big-to-fail banks.  On Friday, Goldman was
in settlement talks with the SEC.

Goldman and Wall Street reign.  Congress appears helpless to discipline
the big banks, just as the European Central Bank appears helpless to
prevent the collapse of the European Union. . . . Or are they?

The shorts circled like sharks in the Greek bond market, following a
highly suspicious downgrade of Greek debt by Moody’s on Monday.  Ratings
by private ratings agencies, long suspected of being in the pocket of
Wall Street, often seem to be timed to cause stocks or bonds to jump or
tumble, causing extreme reactions in the market.  The Greek downgrade
was suspicious and unexpected because the European Central Bank and
International Monetary Fund had just pledged 120 billion Euros to avoid
a debt default in Greece.

Markets were roiled further on Thursday, when the U.S. stock market
suddenly lost 999 points, and just as suddenly recovered two-thirds of
that loss.  It appeared to be such a clear case of tampering that Maria
Bartiromo blurted out on CNBC, “That is ridiculous.  This really sounds
like market manipulation to me.”

Manipulation by whom?  Markets can be rigged with computers using
high-frequency trading programs (HFT), which now compose 70% of market
trading; and Goldman Sachs is the undisputed leader in this new gaming
technique.  Matt Taibbi maintains that Goldman Sachs has been
“engineering every market manipulation since the Great Depression.” When
Goldman does not get its way, it is in a position to throw a tantrum and
crash the market.  It can do this with automated market making
technologies like the one invented by Max Keiser, which he claims is now
being used to turbocharge market manipulation.

Goldman was an investment firm until September 2008, when it became a
“bank holding company” overnight in order to capitalize on the bank
bailout, including borrowing virtually interest-free from the Federal
Reserve and other banks.  In January, when President Obama backed Paul
Volcker in his plan to reinstate a form of the Glass-Steagall Act that
would separate investment banking from commercial banking, the market
collapsed on cue, and the Volcker Rule faded from the headlines.

When Goldman got dragged before Congress and the SEC in April, the Greek
crisis arose as a “counterpoint,” diverting attention to that growing
conflagration.  Greece appears to be the sacrificial play in the EU just
as Lehman Brothers was in the U.S., “the hostage the kidnappers shoot to
prove they mean business.”

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