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The eurozone crisis: we need more than prayers now
In normal circumstances, European leaders are happy to wait until the day of a Brussels summit to meet one another, leaving any preparations in the hands of their officials. But there is nothing remotely normal about the meeting that is to take place next Friday. It comes at a time of mounting catastrophe in the international markets, as the eurozone faces potential collapse. And if European leaders make a mistake, it will not just be the eurozone countries that face upheaval and devastation.
All of Europe, including Britain, will be plunged into a banking crisis which can only lead to financial catastrophe. Already the contagion is spreading across the globe. Credit markets are even tightening in China, which has so far been immune from any jitters. And this week the United States was panicked into leading a huge intervention into international money markets to rescue the tottering global banking system, amidst rumours that a major European bank was on the edge of insolvency.
This is why David Cameron chose not to delay meeting French President Nicolas Sarkozy until their formal encounter next week. The leaders met yesterday, and the Prime Minister has been told by officials that he can leave nothing to chance.
Furthermore, I can reveal that Mr Cameron is facing overwhelming behind the scenes pressure from President Obama (who is panicking that a world economic collapse will ruin his re-election chances) and his Treasury Secretary Timothy Geithner to throw Britain’s weight behind the rescue package being hammered together by France and Germany to pull Europe back from the abyss.
At home, Sir Mervyn King, the Bank of England’s governor, is reinforcing this presidential edict. Sir Mervyn has warned that the euro collapse could plunge Britain (and much of the world) into a bigger depression than we suffered in the 1930s. The Bank’s governor always chooses his words carefully, which is why his warning carries so much weight. It is nothing short of terrifying, as anyone with even the slightest knowledge of 20th-century history will realise.
The 1930s saw mass unemployment and financial calamity, with stock markets losing 90 per cent of their value. More ominously still, 1930-39 was the decade when mainstream politicians lost control of events, when the Nazis rose to power and the far Right took charge in Europe. By the end of the decade the world was at war, and the Holocaust – the greatest crime in human history – was about to begin in earnest.
So yesterday’s meeting between Mr Cameron and Mr Sarkozy could not have been more fraught with consequence. Many of the issues they discussed – financial regulation, obscure treaty changes, bail-out mechanisms – may have seemed almost comically small considering the magnitude of events. But underlying their discussion, one great question hung in the air. Would Britain smile on France and Germany entering into what Brussels officials are calling a “Grand Bargain” to save the euro?
The details of this so-called bargain have gradually been emerging over the past few days and are as follows: France will – very reluctantly – cave into German demands for total oversight, enforced by draconian penalties, over the national budgets of eurozone countries.
European voters were given a glimpse of how such a system would work two weeks ago when Enda Kenny, the Irish Taoiseach, visited Berlin. Only then was it discovered that members of the Bundestag were already studying details of the Irish national budget, which is not due to be announced till next month and had certainly not been shown to Irish legislators. This could scarcely have been more embarrassing for the hapless Mr Kenny, who said that he had “no idea” of how such a breach could have occurred.
Mr Kenny was either being disingenuous or deeply naïve. For the truth is brutally clear. The Germans are insisting on this kind of detailed, advance oversight as a precondition of keeping their side of next week’s Grand Bargain – which requires them to throw the weight of German finances behind the battle to save the euro.
Thus far the Chancellor, Angela Merkel, has steadfastly refused to jeopardise Germany’s famously strong credit rating by authorising a massive bail-out of profligate countries such as Spain and Greece. Her reluctance is hardly surprising because such a move would be hugely unpopular among ordinary German voters, and almost certainly deemed illegal in the German constitutional court. But without such a bail-out, the eurozone will most certainly collapse as member countries find themselves unable to meet their obligations in the international debt markets.
Hence the need for the Grand Bargain. Detailed and unbreakable fiscal rules across Europe might just give Germany the comfort it needs to unlock the national chequebook. And the moment that Germany agrees to pay up, the eurozone will be thrown a lifeline. Traders will no longer concentrate on the solvency of embattled individual states such as Greece and Italy. They will start to concentrate instead on the solvency of the eurozone as a whole. Greek or Italian debt will be worth the same as German debt, as all eurozone states would take an equal and joint responsibility for each other’s obligations.
Such a change would mark a revolutionary moment in the development of the European Union. It was the original vision of Europe’s founder, Jean Monnet, who dreamt of the extinction of nation states and their replacement by a single United States of Europe. It was exactly what Jacques Delors had in mind when he pushed through the Maastricht Treaty, with its commitment to European Monetary Union, at the start of the 1990s. And it is precisely what Margaret Thatcher warned against when she made her famous Bruges speech, defending British national sovereignty, in 1988.
Admittedly, next week’s Brussels summit will not set up all of the institutional architecture necessary for a United States of Europe, nor will it merge France and Germany into what amounts to a single country. Common eurobonds – backed by the security of Europe as a whole rather than single states – are still a little way off.
But next week, President Sarkozy and Chancellor Merkel believe they will signal that the European Union is set on a new course. They hope to agree to the European Central Bank playing a massively enhanced role, licensed to spend hundreds of billions of euros to enable weaker states such as Italy and Spain to pay their debts. The money being put at risk in this way is effectively common eurozone capital, and thus paves the way to true fiscal, as well as monetary, union.
Next week’s summit could be the most momentous since the signing of the Treaty of Rome in 1957, which led to the creation of the European Economic Community. Depending on the outcome, Europe could either start to crumble back into a collection of individual nation states or advance into a supranational union with the 17 eurozone countries converted into provinces governed from Brussels (and ordered around by Berlin).
Hence the scale of Mr Cameron’s dilemma. It has long been the settled policy of his party to oppose greater European integration at all costs. Many Tories point out that ever since the time of Elizabeth I, the aim of British foreign policy has been the avoidance of a single European monolith – whether the Spanish Habsburgs, the French Bourbons or the 20th-century Nazis.
Many Tory MPs believe that Mr Cameron is asking the wrong question. Tory MEP Roger Helmer remarked yesterday that the question “Can the euro be saved?” is rather like asking a cancer patient how we save the tumour. “The euro is the disease, not the patient.” Mr Helmer probably expresses the views of the majority of the Conservative Party. Mr Cameron is certain to be accused of a historic betrayal by his own MPs if he comes to the rescue of the euro at Brussels next week. On the other hand, if he fails to act, Mr Cameron believes that he will shoulder the blame for precipitating the greatest financial disaster in living memory.
http://www.telegraph.co.uk/news/worl...ayers-now.html
The dash for cash
Europe’s troubled banks are running out of money
USUALLY it is banks that put customers under a microscope before lending them a penny. But in Europe banks are the ones now facing scrutiny before investors, companies and savers will lend them any cash. Faced with an investor strike, banks are putting a halt to new loans and selling or pawning all they can. Unless the investor strike lifts soon, Europe risks a credit crunch. At worst, there may even be bank runs and failures.
In one sense, a slow bank run is already taking place in the market for bank bonds, which in happier times provide the long-term and stable funding that allows bank regulators to sleep peacefully at night. Since July these markets have frozen up almost completely for European banks. Bond issuance has plunged (see chart) and has shifted towards secured bonds, which are backed by assets that investors can grab if the bank defaults.
David Lyon of Barclays Capital, an investment bank, reckons that just €17 billion ($24 billion) in unsecured European bank bonds have been sold since the end of June, compared with €120 billion in the same period a year earlier. “In the context of the requirement, this is a paltry amount of funding,” he says.
The run on European bank-funding markets in some respects mirrors the one taking place in some government-bond markets. This is to be expected given the links between banks and governments. During the 2008 crisis, governments propped up their banks. Now, governments are leaning on banks to keep buying their bonds. As a result even the strongest banks from peripheral euro-area countries such as Spain or Italy (where yields on an auction of three-year government bonds surged to an unsustainable 7.9% on November 29th) are finding it hard to borrow from investors.
Yet the bond-buyers’ strike afflicting banks is more worrying than the sovereign one. No banks are regarded as havens in the way that British and German government bonds provide a refuge for investors. Even strong banks in “core” euro-area countries are being frozen out of markets.
A second vital source of funding is borrowing through short-term interbank markets or tapping money markets. Both of these are also drying up. American money-market funds, which were a big source of dollars for the European banking system, have reduced loans by more than 40% over the past six months.
Banks are reluctant to lend to one another except for the shortest possible time, usually overnight. “Every night for the past few months [chief financial officers of big banks] have been getting reports saying they are short of a few billion,” says one banker. “They take the phones and start calling all the other banks to ask if they can borrow €100m here and some there.”
For now, this is keeping the system ticking over, partly because a bank lending money overnight knows it may have to ask for the favour to be returned next week. Euro-area central banks are also leaning heavily on their biggest banks to keep supporting the smallest with interbank loans.
An area of particular vulnerability, the “nightmare scenario” in the words of one banker, is that the trickle of deposits leaking from banks in peripheral countries turns into a full-flood bank run. The risk that savers will lose faith in banks seems remote for now. Yet it is not unthinkable. Greek depositors have been shifting their money for the past year. Savers in Italy and Spain now appear to be starting to do the same. And large corporations, which are able to shift deposits easily, are seeking relative safety, either with large banks in core countries or further afield.
Tighten belts and brace yourself
Max Warburton, an analyst at BernsteinResearch, notes that German carmakers are now buying German government bunds or are quietly moving their money directly to the European Central Bank (many of them already have banking licences because they provide car loans). “We don’t believe they are at the stage of buying gold…but perhaps it’s not far off,” he wrote in a recent report.
Banks are responding by desperately hoarding the cash they have, selling assets and slowing new lending. The most recent survey of credit conditions in the euro area shows a sharp tightening in September. The effects are being felt far more widely than in the euro area. In central and eastern Europe borrowers fret about regulatory changes that are encouraging banks in Sweden and Austria to cut their cross-border exposures. In Asia, too, the withdrawal of European banks is likely to drive up borrowing costs and restrict the availability of credit, according to analysts at Morgan Stanley, an investment bank.
Yet unless funding markets reopen, even aggressive deleveraging by banks will probably not allow them to shrink their balance sheets quickly enough.
This suggests a need for more action by central banks. On November 30th a group of central banks introduced new measures to ease a shortage of dollars in the banking system (see article). That will ease the pressure, but banks also need help raising longer-term debt. The ECB currently offers one-year loans, but these give little comfort to banks, which generally lend to their clients for longer periods and are reluctant to write new loans unless they can find matching funding. Another option could be for governments to guarantee bank debt, but strained national accounts probably rule this out.
Inaction could be disastrous. The longer banks are unable to raise funding, the greater the chance that one may fail. As one banker ominously puts it: “you are getting further along the train tracks towards the buffers.”
http://www.economist.com/node/21541019
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Get ready
Originally Posted by Siberyak
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