From the Archive – Sovereign Default and the Death of Euro

European voter anger shows little signs of diminishing as the continuing meltdown sparked by Mafiosi financiers who collapsed the global banking system in 2007/8, leads inexorably to sovereign defaults and Euro monetary doom.

Euro symbol design
Designed for Europe! – Doomed to failure?

(From the French News Online 2011 Archive: A report on the then (and still) ongoing fallout of Europe’s sovereign debt crisis and its impact on the Euro)

Dithering Euroland governments have held meeting after meeting in a desperate effort to stave off a general sovereign default (a repudiation of debt service or restructuring which is effectively bankruptcy), among leading industrialised Western nations, directly linked to a crisis concocted by negligent regulators, complicit and complacent politicians and their greed-driven banker friends.

As the cost of high unemployment, austerity measures, job insecurity, pension grabs, real estate collapse, misery and discontent, wrack Europeans, a public groundswell against the Euro and the Eurozone appears to be kicking off.

2 euros
Could the Euro collapse?

Might the groundswell of anger extend to the EU project itself and could the Euro really collapse? Probably not is the answer to the last question, but the membership of this currency union could be dramatically changed to include just Germany, Austria, the Netherlands and Denmark, leaving the remaining 13-member states to revert to their former currencies – the French franc in our part of the world – or some other option (see sidebar below for an article by Rudo de Ruijter)

Jean-Jacques Rosa, a liberal economist, university professor, microeconomics and strategy consultant, who leads the Master of Business Administration department at Paris Sciences Po, notes in the video below:

“the end of the single currency is the best solution and Greece only has one strategy left, that is to exit the euro and default on its debt”.

View video here:

La France doit sortir de l’euro / Jean-Jacques…par Khalemvideo

Meanwhile opinion polls suggest popular support for the Euro is shrinking. The polls reflect rising popular discontent over the currency due mainly to the harsh and socially disruptive remedies imposed since the credit bubble burst.Between 29% and 39% of French respondents, according to polls, want to leave the Euro. Between 42% and 50% of French employees and 38% and 48% of French employers hold the same view. In June 2010, a survey conducted in Europe by a US polling institute reported that in response to the question:

“Is the Euro a good thing for the economy?”

The answer “no” was shared by 67% of respondents in France, 60% in Portugal, 56% in Spain, 55% in Germany and 53% in Italy.

French Francs
Return to the French Franc?

Jacques Sapir, a French economist and supporter of a return to the Franc, recently shocked a France 3 TV audience when, citing figures released by European monetary authorities, he said that it will cost a further 1000 billion euros to recapitalise all the banks in the European system, an amount that had to be raised by the end of 2011. This he said, comes on top of the trillions of taxpayer cash already spent by governments – which to all intents and purposes have been captured by the bankers – to keep the system afloat. In so doing governments have effectively privatised profits and socialised losses, a win-win for the bankers but a huge burden for us and several generations of our children.

Watch the shock video here:

Jacques Sapir also reminded his audience that the origins of the current banking and sovereign debt crisis were not financial. It all started, he said, when a credit bubble stoked by US bankers saw US homeowners unable to meet mortgage obligations mainly because the loans initially advanced to them were sub-prime and knowingly unredeemable. Sapir contends the planned recapitalisation of European banks is unsustainable and predicts that a final financial crash will occur in the winter of 2011/2012. He does not however explain what might then happen but others have noted that no-one is head-scratching over HOW banks became undercapitalised, they just seem to accept, as a religious article of faith, especially in Europe, that banks have a right to be recapitalised.

French digital media and print magazines are increasingly churning out ‘what if’ articles about the survival chances of the Euro and how and when France might leave the currency union. The main political protagonist campaigning hard for France to quit the Euro is the Front National party , which under its new leader Marine le Pen, is in the ascendancy and causing serious wobbles to the ruling UMP rightwing alliance. Others include smaller splinter parties and pressure groups such as Debout La République, led by the fiercely anti-Euro politician, Laurent Pinsolle.

In mid February Rudo de Ruijter of le Blog Économique et Social writing on the Marianne website described this as one possible alternative – (see sidebar story below)

In a gloomy January 19 note Willem Buiter, Chief Economist at Citibank, analysed the deterioration in public finances of the world’s major advanced economies, arguing conditions suggest

“… there are no absolutely safe sovereigns.”

Buiter said the risk of sovereign default is “manifest” in Western Europe, particularly Greece, Ireland, Portugal and Spain, and sovereign credit issues will weigh on many countries, including the United States and Japan, as well as their banks …. Buiter identified countries outside the Euro area – United Kingdom, Japan, Hungary and the United States – as also vulnerable, facing higher cost of capital if they fail to address their public debt burdens.

He wrote: “It is in our view only a matter of time before the US sovereign will only be able to fund itself through debt issuance at significantly higher interest rates, reflecting either inflation risk from eventual monetization of public debt and deficits, or sovereign default risk, or both.”

When even the giant US economy is described as a “sovereign default risk” i.e. a possible bankrupt, how much worse can things get?

In May 2010 the well-known Swedish economist Dr. Stefan de Vylder, responding to a question as to whether Greece was the main culprit in the Euro crisis, said: “Greece has until now been the ideal scapegoat, with a huge fiscal deficit which the previous governments tried to cover up with creative bookkeeping and outright cheating. But it was the membership in the currency union that made it possible for Greece to benefit from low interest rates, a rising Euro and easy access to cheap credit. Without the Euro, no such tremendous bubble would have developed in Greece (or in Ireland or Spain). And the ECB and other EU authorities failed completely to warn against the danger of the twin deficits – fiscal and current account balances – which characterise most of the EMU countries. It is definitely not fair to single out Greece as the big culprit. The crisis we are witnessing is a crisis for the entire EMU project, which from the very beginning was based more on political prestige than on a sound economic analysis.”

Europe’s politicians, led vigorously by French President Nicolas Sarkozy and more reluctantly by German Chancellor Angela Merkel, have reiterated several times now that the Euro will not disappear; the single currency and the Eurozone are integral to the EU project; and both, they insist, will be protected ” to the death”.

Sceptics wonder how close the two leaders really want to come to a death experience before they find themselves swept aside by the enormous tsunami the financial markets are now stoking up.

Story: Ken Pottinger

Worth a Read:
1. Reasons why we ought to be wary about figures governments produce when assessing the true extent of the mess we are in. The 91 banks stress-tested in the European system in 2010 were reported to require only € 3.5bn in recap funds, by central banking authority’s CEBS, ECB and EC. As the Wasatchecon report points out, the maths was up the spout.

2. Try this for an analysis of the latest EU decisions regarding bailout for the EU’s sovereign debt problems.

Sidebar: France to Quit the Euro?

Some political protagonists and economic commentators, are campaigning hard for France to ditch the Euro and return to the Franc.  In mid February Rudo de Ruijter of the le Blog Économique et Social writing on the Marianne website described this as one possible alternative: “In the view of some, the homogeneity of the Eurozone prevents troubled member states from ever repaying their national debt. Europe is a far too a heterogeneous geographical and economic entity for each country to be in the same monetary straitjacket…

The euro is very practical, but it has created millions of victims. Far better would be if Europe were to move towards a system of state-produced currency. The Euro has an insoluble problem. Even if presently heavily indebted countries do manage, by dint of severe austerity, to cut public sector spending, their debts will very predictably recur again (rather like a yo-yo dieter). This is because these countries are victims of a fundamental flaw in the Euro.

Even before it started economists warned that a single currency could work only if all participating countries were economically homogenous… the founding countries that signed up to Euro agreed to cut their public debt to 60% of gross national product (GNP) and their fiscal deficit to below 3% of GNP on the basis that exceeding these limits represented a threat to Euro stability. (Note: since the banking crisis broke neither target has been observed by anyone in the Eurozone).

Today 20 of the 27 EU member states cannot meet these budgetary criteria … Understanding that the Euro will fail is one thing. But advocating we all simply return to our previous currencies is, in my view, a very bad solution. Certainly we will need new national currencies, but if we are to avoid past mistakes, we need that new hard currency to be issued by each State.

To understand why State money is so important, we must understand what money is and how it works. Money is neither present in circulation, nor managed by governments. Instead almost all money existing today was put into circulation by commercial banks. In fact, you have no money to your bank account, just electronic digits. These figures are a “monetary illusion”. Your bank statement mentions how much the banker holds for you, but only a tiny fraction of that money actually exists (this is known as fractional banking) … It is this deception, run by the banking system, which allows bankers permanently to inflate the money stock, a very dangerous move as our societies have now discovered.

The bankers have corrupted all the world’s currencies with secret accounting tricks. The Euro is no exception. Today, less than 5% of all the money is real money in the form of banknotes and coins. The rest is artificially created by banks and exists only as digits in a an electronic bank ledger ….

The growing mass of money creates a situation where everything can be bought, even the state. In many countries financial groups have already purchased utilities — gas, electricity, water, public transport, posts, telecommunications – and converted them into continuous revenue streams…

This is a continuous process. Bankers and the financial elite are taking more and more investment decisions that shape our society, and pushing aside the state – which in turn is losing power and control.

The Euro is a currency owned by the European Central Bank (ECB) in Frankfurt. The ECB acts as the central bank of participating countries. Despite their names, which might suggest they are state institutions (Deutsche Bundesbank, Banque de France, etc.), these institutions are all independent of government and mostly run by private boards. Despite it position as a private institution, the ECB is an official organ of the European Union.

Through Article 7 of the European System of Central Banks (ESCB) and section 107 of the Maastricht Treaty, the ECB enjoys total independence. Note that this independence does not come from any organizational or logical necessity, it is purely a result of the belief that only independent central bankers are able to manage the money system properly. Well, if we do not question this belief today, when will we ever? …

Most people think money is issued by the State. That indeed is what should happen. Money should belong to society and not the private bankers. This is the only way to get a system of honest money and a government that does not depend on bankers….

We can end this expensive and dishonest system by creating a state bank, which will be the only bank authorized to create money in the country. It will create the money needed for loans to business and individuals and for advances to governments for national budgets. As for private bankers, they would be barred from creating assets without having a corresponding amount of hard cash reserve. If bankers wanted to, they could operate as intermediaries between the state bank and the public in offering credit. For this they would receive a fee but not earn interest. They would also manage customer accounts in the name and on behalf of the state bank …

Politicians try to scare people by claiming that it would be extremely expensive to leave the euro, it would put economic development back by years and so on.

Well, for starters, when the present EU states joined the euro and set up a new currency countries did not stop trading! And if a country opted now for state money, the costs would be primarily organisational and relatively small compared to the gains. All the money necessary for the change could be created from nothing by the state bank. All banknotes in circulation in the country could be purchased by the state bank by issuing new money. The euro could be set aside as a strategic reserve or used to pay for imports….”(end)

Sidebar: Effects of European Collapse

Cobden Centre - full story - click here
Richard Cobden
Symbol of The Cobden Centre

For additional information on the insidious effects the current economic collapse has had on ordinary citizens, read this related story written for the Cobden Centre by Gordon Kerr, a banker and founder of Cobden Partners, the commercial limb of the Cobden Centre
(The Cobden Centre was set up to make the case for sound money: “Honest money means an end to credit expansion and false booms followed by financial crises with appalling human cost. It means an end to inflation of the money supply and hence prices. Honest money is the key to social progress in the 21st century”.)

This article was written for the Cobden Centre by Gordon Kerr, a banker and founder of Cobden Partners, the commercial limb of the Cobden. Dated 17 March 2011 it is reprinted here with his kind permission:

The Banking Crisis Has Been Exacerbated by New Rules and Regulations
Imagine, for the sake of argument, that we discover a little-known, unpopulated territory within the EU, on which to establish a colony. Let’s call it “Ruritania” and allow it to use sterling.

We establish our fledgling colony on Ruritania with four people:

a depositor, Alice, who arrives with £103;
a builder called Bob;
an entrepreneur, Matilda;
and a banker (Mallory) with a colourful recent past in Iceland and Ireland
Interest rates are 0.5%.

Mallory establishes a bank. He persuades the other three inhabitants of the importance of a healthy banking system, so Ruritania’s constitution contains a limited guarantee from future taxpayers of £10 in favour of the bank. Under European Banking Authority devolved authority, Ruritania classifies this guarantee as core Tier 1 bank capital.

Alice, seeking to keep her money safe, deposits it in a demand account at the bank.

Matilda, the entrepreneur, wants to start a business.

She approaches Mallory for a loan. He retains a reserve of £3 from Alice’s deposit and lends the entrepreneur, at interest, the remaining £100 of cash deposited by Alice.
The entrepreneur then employs Bob the Builder, who wants his year’s wages up front. So the entrepreneur hands over the £100 to Bob, which Bob deposits in the Bank.
Let’s set aside for the moment that the bank just doubled the money supply of Ruritania.

The banker now has two liabilities: a deposit of £103 from Alice and a deposit of £100 from Bob. Offsetting these, he has two assets: a 25-year loan of £100 paying 7%, plus cash of £103.

Mallory wants a Ferrari, today, which he can buy for £20. His compensation contract is 20% of bank profits. He needs to record an instant £100 in profit for his bank, and he knows how to optimise his profits under EU bank accounting rules.

He phones an insurer active in the credit derivatives market – let us call it ‘GIA’ – who agree to write a credit derivative known as a “Credit Default Swap” for a fee of 1% per annum.

The bank quickly establishes an off balance sheet company, an “SPV” which buys the future £275 loan cashflows. The GIA trade is executed directly with the SPV. The SPV finances its purchase of the loan from the bank by issuing two notes:

a 95% senior note rated AAA by two US rating agencies because GIA is so rated
a 5% junior or “equity” note.

The bank buys the two notes for £100 in cash. These funds then flow back from the SPV to the bank to settle the purchase contract.

The equity note is a £5 deduction from the bank’s £10 Tier 1 capital. This capital is, you will recall, a future taxpayers’ pledge rather than hard cash.

Under marking to market rules, by holding the senior note on trading book the bank records an instant but unrealised profit of £105. After replenishing Tier 1 equity with £5 the bank shows a £100 clear profit.

The profit of £100 has been recorded even though the bank has not received any income from the loan. But the banker is not too concerned about that, as he has his Ferrari.

The banker and his shareholders have taken £100 of the £103 total money supply of Ruritania, declared it as profit and spent it abroad.

Mallory seeks to grow his bank and obtains liquid funds by repo’ing the Note at its market value of £205 with his central bank.

He receives £205, and uses the fresh liquidity as collateral for further bets, derivatives with other banks and low priced Irish bank issued bonds in the hope of more very fast profits.

Unfortunately the bank becomes insolvent when Matilda misses a loan payment. The central bank take ownership of the repo’d note. Depositors ask for their funds but the bank cannot pay.

Liquidation position:

Two depositors have claims for £203.

There is only £6 in cash – all other cash had been pledged as collateral.

Nobody was aware that the senior note had been repo’d with the ECB. Under accounting rules amended in 2010 it remained on the balance sheet of the bank.

Banker is Laid Off but Enjoys His Ferrari.

The regulatory response to the 2008 collapse has not been effective. I would argue, as demonstrated above, that many of the post-2008 rules ostensibly intended to address the crisis are unfortunately exacerbating it.

The regulatory umbrella continues to encourage more exposures to be marked to market. The example above highlights the dangers.

Regulators need to be aware of the extent of these exposures in order to help avert any future threats. This requires the publication of parallel accounts with derivatives and other investments recorded at the lower of historic cost and their marked to market value. Steve Baker MP has introduced such a Bill in the UK Parliament. It should be supported. (end)

Sidebar: Is the EU Itself at Risk?

Eu flag
The EU – Frayed around the edges?

Will the pressures of meltdown extend to a collapse of the EU Project itself?
Here is an explainer of some of the issues that flow from the projections in our main report above. The points below originally came from a longer article published by the Spectator magazine in London. However the original piece is no longer available on their website:

Answering that question key politicians, France’s Sarkozy and Germany’s Merkel, say very firmly no. But the truth is the EU is not a truly democratic institution – the European Parliament is not a sovereign legislative body holding the executive to account – and with its initial post war objectives (stopping Germany from ever again waging war on its neighbours) achieved, its socialist-dominated bureaucracy has now run amok at huge cost to taxpayers and increasing irritation among national electorates.

The Irish, whose crisis has been exacerbated by intransigent German and French demands, could well be a trigger for an EU breakup. A Euro financial collapse might also have far reaching implications for the whole Berlaymont machine.

Why Are We Where We Are:
Because greedy Anglosphere bankers with tentacles wrapped around the bowels of other globally linked banks (notably in the EU), stoked an unimaginable and unmanageable credit bubble firstly in the US and later in the UK, where it was willingly and actively fuelled by Labour’s disastrous chancellor Gordon Brown.

These same banksters quantumly-worsened the situation by salami-slicing and spreading their evident risks to the whole world wrapped up in complex derivatives and CD insurance vehicles that few of those trading them understood and fewer still ever thought to question, at least in public. They capped this appalling folly by setting up counterparty deals (Goldman Sachs is a prime example) where they knowingly betted on the failure of many of these dodgy and dubious devices. In the end banks and the insurance industry effectively went bankrupt but foolish Western governments bailed them out with our hard-earned taxes. Now there is not enough money in the world to service the trillions of debt slushing around in the system.

What Happens Next?
Sovereign states in Europe in the 21st century are being forced into default, another word for bankruptcy, on a national scale. Thanks to unrepentant and unpunished bankers we all face decades of difficulty, debt and destruction perhaps permanently, of our once comfortable way of life. Watch for the ongoing impact on society, politics and your children’s future.

Anyone Offer a Solution?
The International Monetary Fund (IMF) is actively campaigning to replace the dollar, the Euro and other currencies with IMF Special Drawing Rights (SDRs), a new paper accounting currency with all the zeros lopped off. This effectively means reneging on all that debt the banksters recklessly created. Such a move would hit China and other nations that hold trillions of dollars and euros on their books. War might even result.

Defict and Debt
Politicians deliberately or otherwise continually mix up these two terms in discussing the economic challenges facing us all.

The deficit aka as borrowing, is the difference between the money a government collects or its receipts, and the amount a government spends each year.

The national debt is the accumulation of these deficits, the sum total of all borrowing that has to be paid off. It is the total value of national debt that is currently a huge headache for the US, the UK and the so-called PIIGS, Portugal, Ireland. Italy, Greece and Spain. (end)

Sidebar: Could the Euro Die?

European Central Bank
ECB Coverning Council recent Lisbon meeting

Are All Euro Notes Equal? Not if You’re a Euro-Sceptic
Newspapers and the blogosphere have joined forces to cast doubt on the soundness of euro currency notes issued by the various central banks in the system . Stark warnings have been made about accepting “just any old euro banknote” while travelling around Europe. Newspaper writers have urged travellers to examine their notes by the serial number prefixes and watch out for those bearing the letters Y (Greece) or M (Portugal), G (Cyprus), S (Italy), V ( Spain), T ( Ireland) and F (Malta). They suggest the safer notes are those marked Z (Belgium), U (France), l (Finland) and H (Slovenia), X ( Germany), P (the Netherlands) and N (Austria).

French News Online asked the European Central Bank directly about the flurry over euro banknotes. Niels Bünemann, ECB’s Principal Press Officer responded quickly to reassure readers that there was nothing to worry about. His response is printed in full below. Now you be the judge.

French News Online asked whether in a euro collapse, notes issued by Germany would be sounder than those by a potential defaulting country such as Greece.  Mr Bünemann told us:  “The country code preceding the serial number on the euro banknotes has no significance at all for the validity of the banknote. All euro banknotes are legal tender in all euro area countries.”

He went on: “These country codes only show which central bank commissioned the printing of the individual banknote. It does not, however, say anything about which central bank issued the banknote.
“For the production of banknotes, a decentralised pooling system is in operation, which means that individual national central banks are only responsible for the production of one or two specific banknote denominations. In other words, the national central banks specialise in certain denominations (5 euro, 10 euro, 20 euro and so forth). The central banks then exchange the banknotes produced between each other.
“Furthermore, when a banknote “travels” with its owner from one country to the other, it may be brought into a central bank in any of the euro area countries. The national central bank of that country can then re-issue the banknote if it is still fit for circulation. I repeat the most important message in this context: all euro banknotes are legal tender in all countries, the country code has absolutely no significance for the validity of the banknote.”(end)

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