Euro Crisis Be Afraid, Be Very Afraid

The cry has gone up in the financial heartlands of Lisbon, Madrid and Dublin, the bears among the bond traders are salivating over the woes of the common currency, that means of course the euro in the pockets of the French resident readers of this newspaper and everyone else in the zone.

Irish PM Brian Cowen accepting he has led his country to bankruptcy.

Be afraid we are told, for events are moving fast into uncharted territory. EU Treasuries have stacked up enough coin to stave off debt collapse in Greece, Ireland, and Portugal but when the bears begin to savage Spain, the EU ATM cashpoint might have to be turned off, given the size of the rescue needed to stave off a sovereign debt default in that seriously damaged economy. The figure is staggering – €350bn euros or around half the EU’s current commitment to an emergency €750bn bailout fund known as the European Emergency Fund. The bond trader beasts are heavyweight destroyers and all of us who use the euro to live travel and trade could soon find our currency a crushed victim of banking greed.

There were some early signs of a fight back when activists picked up on a call for a concerted bank run to punish bankers. But as it turned out, the December 7 bank run failed to generate much in the way of queues outside banks or ATMs.

Insolvent Ireland has called in eurozone blood-letters in a desperate search for pain relief, while un-pitying markets are moving onto fresh prey — Portugal and Spain are being lined up to follow Greece and Ireland down the euro-pan.

And then what? Well may you and many others ask, for, as the latest Ipsos opinion poll published in France on November 22 shows, 70% of the French believe the worst of the four-year-old global crisis is yet to come while the G20 (grouping of countries representing 90% of the world’s economy) over which France presently presides, has no solutions to offer.

French football star and actor Éric Cantona took the lead on October 8, when in a newspaper interview with Presse Océan released on YouTube, he fired up a storm in the cyber world by calling for a coordinated withdrawal of deposits from banks. The cry was enthusiastically taken up by Twitterati, Facebookers and Internet activists and clearly rattled the authorities, including French Finance Minister Christine Lagarde, who came out forcefully against Catrona’s “financial advice”. (See “The Organised Bank Run” sidebar). In the event the December 7 international bank run turned out to be far less effective than the protagonists hoped for. In France relieved banks reported little or no disruption to business.

Ironically Cantona and the social web supporting him fomented a viral campaign that went global, using almost the same channels the traders and electronic barrow-boy-bankers had employed earlier to dump subprime mortgage derivatives on trusting counterparties in summer 2007, and precipitate the desperate ongoing Western recession and Eurozone fight for survival. So it would have been poetic justice if the former footballing champ had succeeded in enthusing depositors to dry up banking ATMs across the world. (In reality as European Banking Regulators noted, restrictions in France and most elsewhere in the EU on how much you can withdraw daily from your own account via an ATM, were likely to dampen the impact. Also of course banks operate on trust and don’t actually have cash in the branch vault sufficient simultaneously to pay you and every other customer out in banknotes, plotters seeking to bring the system down will first have to place their orders for the cash, in advance!)

Public Anger
Nevertheless the patent anger the public still feels about unrepentant bankers remains unquenched and indeed politicians certainly fear the backlash. Newspapers too are guaranteed a sales surge with banker bashing stories, every time another obscene bonus is announced for executives at what are now mainly taxpayer owned institutions.

Writing in the London Evening Standard recently Anthony Hilton said:
“So badly have the banks played their hand in showing absolutely no contrition for their mistakes, nor displaying any willingness to share the pain they have inflicted on the rest of the economy, that they have made it impossible for politicians to cut them any slack. The bankers don’t seem to get this, nor to understand why their pleas to be able to put the past behind them fall on deaf ears. They fail to realise that our leaders fear they would be strung up from the lamp posts by an enraged public if they were seen to be going soft on them. In some ways it is like a grieving process. There needs to be something to bring closure if the public is to move on. In the case of banking, closure requires that the average voter sees convincing evidence either that bankers are suffering too, or that they are making genuine, unselfish attempts to repair the system.”

And as Ireland called in EU and IMF teams to start a bailout programme, Andrew Clare, a professor at London’s Cass Business School, urged the country be forced to recognise its banks are bust. “Only when Allied Irish Bank is shown for the hollow shell it has become will everyone – the Irish and Brussels – be able to move on. The only way to put a stop to this sovereign contagion within the heart of the euro is to recognise the losses in the banking sector, and then to write off those losses at the expense of bank equity and bondholders. It is the investors in bank equity and the holders of bank debt that really need to feel the pain, not the relatively lowly paid workers of the eurozone,” he said.

But tough as the EU and IMF package will undoubtedly be for the Irish and the eurozone to bear, the tsunami has not yet exhausted its strength.

On the FT Alphaville blog Arturo de Frias, head of banking research at Evolution Securities is suggesting the euro is doomed. The blog notes an eventual collapse of the euro is currently being priced into the sell-off hitting European Banking stocks following the bailout of Ireland on Sunday November 21.

“That leads de Frias to conclude that investors are not only pricing-in macro disaster in Ireland, but also in Portugal and eventually in Spain.” However de Frias does add a caveat (don’t they all) “undoing the euro would likely trigger a decade-long recession in Europe … we still don’t believe the European Governments will (thus) let the euro collapse…”

“Ireland is Effectively Insolvent”
As Irish sovereign debt grades approached the junk levels of Argentina, Greece and Venezuela, forcing Dublin to agree to an EU/IMF austerity package on November 21, Morgan Kelly, Professor of Economics at University College Dublin said: “Ireland is effectively insolvent – the next crisis will be mass home mortgage default”.

Would that trigger the much feared contagion effect by which traders pick off their targets one by one with intolerable strains on eurozone cohesion? And if it did might the euro and the Europe Union itself then fail? What would that mean to expatriates of many nationalities, who under free movement of labour and capital pledges have upped sticks and settled all round the EU? It is natural that the citizens of this wounded would-be union are worried. For the 10-year-old currency that has made life simpler for EU nationals choosing to live outside their home country — and thousands set up home, life and business in France as a result — is turmoil-riven and wreaking absolute havoc on ordinary people’s lives.

Barrow Boy Bankers
Unfortunately there are no simple or easy answers. The old economic certainties died in August 2007 when Wall Street and City of London barrow-boys crashed the gravy train at full throttle into the buffers bursting an unsustainable credit bubble.

This of course had been preposterously overinflated with the help of greedy and unscrupulous politicians and their cronies and as the IMF noted at the time, precipitated “the largest financial shock since the Great Depression”. What’s more it remains directly responsible for where we are today.

What has subsequently emerged, according to Edmund Conway, writing recently on his Telegraph (of London) blog is both fascinating and terrifying: “There is a half-century cycle at play here: we move from one macro-economic system, it works well for a few decades (due less to the explicit rules at play than the assumption that central banks will enforce them if necessary). Eventually, the system’s credibility breaks down, sometimes in the face of financial crises, sometimes in the face of war, sometimes because the economic superpower dynamics have shifted. What follows is a chaotic period, and then, when everyone’s energy is spent and all the economic emotion cried out, we shift to another system and the cycle starts again. Throughout, what matters more than the institutions, be they gold or managed currencies or Bretton Woods, is the faith in them, which is far harder to ascertain. We are currently at the moment of hand-wringing and tears, which means the next few years will be both fascinating and terrifying. Eventually, we’ll come to a solution. Everyone will believe the system has been repaired, and that Bretton Woods III or whatever we’ll call it will solve our international monetary woes. And they’ll be right. Until they’re wrong.”


READ MORE on the currency crisis that is not going away any time soon and the generations of repair work required before prosperity again returns to Western economies.
Remember Japan’s lost decade?  Prepare for Europe’s lost decades.


UPDATE: Money Matters Move Fast (except of course when it come to your European bank executing an electronic interbank transfer in under three days, rather than the minutes the actual digital instructions take), and since our original Money report was published the crisis has deepened dramatically.

Here are further links to some of the latest developments:

Germany is said to be pushing Portugal to be next for EU-restructuring on the grounds of (vainly) seeking to stop the contagion spreading to Spain.

Paul Mason of the BBC writes with concern about the high and undisclosed levels of toxic rubbish masquerading as “assets” still held on global bank balance sheets since the subprime crisis broke 3 years ago “Will this toxic spillage burn through the Euro?

The Irish Times reports on a move to force private bond holders take a haircut on insolvent banks and the lawyer’s bonanza that will likely ensue, a topic further elaborated on by the BBC’s Paul Mason here

and the maverick and viscerally anti-EU British MEP Nigel Farrage, slugs off against the “anti democratic” members of the European Parliament in this YouTube clip:

UPDATE: Chancellor Merkel signals an end to Germany’s patience with unrepentant bankers

Liam Halligan in the London Daily Telegraph reports on a critical development:
” ‘Have politicians got the courage to make those who earn money share in the risk as well?” Merkel boomed in Berlin on Wednesday – in a speech that was disgracefully under-reported by the Western media. Bondholders and almost all other Western governments don’t want to hear it. But Merkel is completely right. The most galling aspect of this entire sub-prime debacle is the disgraceful extent to which those who bankrolled the banks – as they took on ever more debt, “levering-up” their balance sheets 20-, 30- and 40-fold – have been protected from their consequences of their actions. Powerful vested interests have so far ensured – amid much scare-mongering of what would happen if sanity prevailed – that such losses have been shoved on to taxpayers instead.’ “

This article sets out perhaps one of the most important events in Euroland since the current dangerous game of debt dominoes began.

The outcome, given that Germany controls the purse strings and the euro has always been the former DMark under a new name, is likely to be of great significance for the eurozone.

In addition French banks face their own problems in the domino states (Greece, Ireland, Portugal and Spain) as the Bank for International Settlements (BIS) makes clear.

The BIS Quarterly Review, June 2010
said: “French and German banks were particularly exposed to the residents of Greece, Ireland, Portugal and Spain. At the end of 2009, they had $958 billion of combined exposures ($493 billion and $465 billion, respectively) to the residents of these countries. This amounted to 61% of all reported euro area banks’ exposures to those economies. French and German banks were most exposed to residents of Spain ($248 billion and $202 billion, respectively), although the sectoral compositions of their claims differed substantially. French banks were particularly exposed to the Spanish non-bank private sector ($97 billion), while more than half of German banks’ foreign claims on the country were on Spanish banks ($109 billion). German banks also had large exposures to residents of Ireland ($177 billion), more than two thirds ($126 billion) of which were to the non-bank private sector.”

Time to hunker down in a bunker?

French banks are heavily exposed in Spain say BIS

  • Here is an Australian take on European broke economies bailing out other European broke economies:

  • Meanwhile matters are also bad back in Britain. Indeed given how interwoven the UK and EU economies are, concerns such as those highlighted in this recent Channel 4 film — The Trillion Pound Horror of Britain’s Debt — must surely just further trouble waters in the eurozone.

Britain’s Trillion Pound Horror Story
“Film maker Martin Durkin explains the full extent of the financial mess we are in: an estimated £4.8 trillion of national debt and counting. It’s so big that even if every home in the UK was sold it wouldn’t raise enough cash to pay it off.

“Durkin argues that to put Britain back on track we need to radically rethink the role of the state, stop politicians spending money in our name and introduce, among other measures, flat taxes to make Britain’s economy boom again.

This polemical film presented by Martin Durkin, brings economic theory to life and makes it hit home. It includes interviews with academics, economic experts, entrepreneurs, no less than four ex-Chancellors of the Exchequer and the biggest stack of £50 notes you’ll never see.” If so inclined readers can discuss the film with others on Twitter using #Trillion hashtag.

  • Justice as banks sue banks over complex derivatives

The Financial Times (registration required) reports that Barclays Bank is being sued by Cassa di Risparmio di San Marino bank over allegedly fraudulent misrepresentation in the sale of ultra complex derivatives. Barclays denies the allegations.

  • More tales of woe:

Willem Buiter, Citigroup Inc.’s chief economist suggests November 29 in a note to clients that Greece, Ireland, Portugal and probably Spain are all insolvent, and require or will require European Financial Stability Facility medicine.

Meanwhile Umair Haque Director of the Havas Media Lab writing on the Harvard Business Review Blog November 29 reminds readers that Ireland managed well enough without banks during the strikes of 1966-1975 but admits there are some differences today!

Story: Ken Pottinger

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