Friday 22 July 2011

Germany, Greece & Interpreting the Bailout

Some great threads here this week, reminds me of 2008 ...

There are a couple of important additional points to make. Firstly, with adroit financial engineering - and access to some AAA muscle - it is always possible to defer a problem. Enron did it many times (AAA provided by banks); British Energy in 2002 (HMG); and now the PIIGS (Germany). The term in vogue is 'kicking the can down the road', but a better one is that used by Enron: it's a snowball, getting bigger and bigger, going downhill at an ever-increasing rate but, for the time being, gathering up all the snow in its path. And its principle tool is 'blend & extend' - in this case, averaging down the PIIGS' interest rates and extending repayment to infinity and beyond. Simples, when you know how. Sometimes it works, sometimes ...

For the second point we start with the bailout document itself + a little interpretation. Of course, it's a blend-&-extend snowball alright:

"We have decided to lengthen the maturity of future EFSF loans to Greece to the maximum extent possible from the current 7.5 years to a minimum of 15 years and up to 30 years with a grace period of 10 years … We also decided to extend substantially the maturities of the existing Greek facility … The EFSF lending rates and maturities we agreed upon for Greece will be applied also for Portugal and Ireland"

It's also a chest-beating exercise to warn off the wicked speculators with the usual battle-cry: our pockets are deeper than yours

"to do whatever is needed to ensure the financial stability of the euro area as a whole and its Member States … we will provide adequate resources to recapitalise Greek banks if needed … Member States and the Commission will immediately mobilize all resources necessary … We are determined to continue to provide support to countries under programmes"

There is also a warning-shot across the bows of the rating agencies. Of course, Soros et al have heard this all before. They - and some altogether nastier people, more in a later post - are rolling out their strategies for all this even as we write. But fair enough, Germany is a pretty ugly gorilla in its own right.

Then there are the pieties:

"All other euro countries solemnly reaffirm their inflexible determination to honour fully their own individual sovereign signature and all their commitments to sustainable fiscal conditions and structural reforms ... All euro area Member States will adhere strictly to the agreed fiscal targets"

Yeah, yeah. This, of course, is the classic formula of blend + extend + pretend: readily more available to governments than to businesses, who must observe less forgiving disciplines. But then we come to a really important bit, & my second point.

"We call for a comprehensive strategy for growth and investment in Greece … We will mobilise EU funds and institutions such as the EIB towards this goal and relaunch the Greek economy. Member States and the Commission will immediately mobilize all resources necessary in order to provide exceptional technical assistance to help Greece"

This, dear readers, is the thing we don't really grasp on this side of the Channel: Euro-solidarity. And this is where the German takeover comes in, albeit with a slightly (only slightly) different perspective to the 'they couldn't do it by force so they're doing it by stealth' line. Because we (they) have been here before, most notably the re-unification project. The Deutsche Einheit is a lesson in what Germany will do, when mobilised under the banner of solidarity
(if you don't believe it, read this): and Greece is a commensurate task.

Solidarity comes with sticks as well as carrots. So the document also contains a warning-shot across Ireland's bows on the subject of Corporation Tax rates (paying attention, Salmond ?). Which leads us neatly to the sinister stuff.

"To improve the effectiveness of the EFSF and of the ESM and address contagion, we agree to increase their flexibility linked to appropriate conditionality, allowing them to act on the basis of a precautionary programme, finance recapitalisation of financial institutions through loans to governments including in non programme countries (and) intervene in the secondary markets: ... to improve working methods and enhance crisis management in the euro area ... our determination to reinforce convergence, competitiveness and governance"

Increase flexibility ... precautionary programme ... intervene ... convergence ... governance ... the sound of Emergency Powers being devised. They ain't gonna brook much opposition within the wider EU.

It's going to get ugly for Cameron.



Budgie said...

"It's going to get ugly for Cameron."

Well, yes and no, ND. We know that Cameron will kow-tow to the EU anyway; that's what he does. He will have no personal compunction about selling us down the river. And we have little hope of stopping him. So the only question is: how will it be dressed up in the MSM for consumption by the public?

Anonymous said...

New style Euro coin can be seen here

Sean said...

I thought I might give the German embassy a ring and ask if I can put in a early tender to shift the gold out of the bank of Italy vaults.

Old BE said...

Was anyone ever under any illusion that the Euro would result in eventual "closer union"? If so, they should be sent to the stupid house.

Old BE said...
This comment has been removed by the author.
Old BE said...

Likewise those in Britain who voted YES in 1975.

Anonymous said...

Governance, why didn't they do that in the first place, a put right any problems, it is no good making rules if they are not stuck to, or could it be the good old bankers telling the financial honchos that they did not want any regulation, and be free to loan to anyone they wanted to even though it would be considered by a careful banker to be totally unviable.

Ian R Thorpe said...

You're right. Any nurse would tell them if you keep taking bigger and bigger doses of parcetamol it may mask the fact that the pain is getting worse but sooner or later your liver will fail.

Same with bailout cash.

Nick Drew said...

Budgie - hmm, that may be his first instinct but I'm thinking (hoping) he badly needs all the populist headlines he can get between now and his date with t'electorate

like it, Lakers !

Sean - yes, the Mediterranean Gold is an interesting one

BE - gimme a break, I was only young !

Ian - good analogy, I may use it myself ... (the analogy, not the paracetemol)

Budgie said...

ND, I try not to call people names, it is a failure of thinking, but I believe I might make an exception for Cameron.

We would have been better off with a Labour/LibDem coalition than with Cameron. L/L would have ditched Brown (that was a LibDem pre-condition) and the cuts would have been similar under Darling - or actually more efficient. They could hardly have been worse.

Would Labour have dared to increase DfID's rakeoff? Or spend money we don't have propping up the euro (temporarily only - that is: good money after bad)? Or scrap the aircraft carriers?

Labour would have been properly held to account for its failures, and Cameron would have been ditched. Bliss.

Old BE said...

Budgie, you are probably right. At least a coalition including Labour would have meant the party would have got some of the blame for its catastrophic mistakes. People were saying that 2010 was a good election to lose. Unfortunately nobody lost it properly!

Weekend Yachtsman said...

Ugly for Cameron?


He's all in favour of this stuff, isn't he?

Ugly for the mugs who voted for him, possibly, but they should have known better.