Europe at odds with the financial gods
…and out of Greek goats to sacrifice?
Last week we highlighted the apparent snit between Bernanke, as he called on Europe to ‘get its house in order’ and Draghi who did his best imitation of Alfred E.Neuman’s, “What me worry?” slogan. Draghi, as far as my spies can tell, actually uttered with a straight face the following line… ‘The worst for Europe is behind it.” Or some other such tomfoolery.
Anyone that allegedly ‘thinks’ Europe’s worst is behind it is just letting wishing and hoping and perhaps even praying get the better of thinking.
In the clip below after a short commercial interlude and a first interview with Jay Pelosky I join Pimm Fox on Bloomberg TV (at the 11 ½ minute mark.) to talk about the new revelations on John Corzine. After that we talk about Europe and some of its issues… I will also expand on that in the text below.
The troubles at MF Global in the US, which stem from a separate issue developing after the financial crisis, underline that the financial safety net is not fixed. The fact that Greece got money to plug a financing hole but has did not improve its dire economic circumstance nor has it mended its huge competitiveness disadvantage begs the question of what purpose that bail out served…at least for Greece. Greece is in need for much more help. All this suggests that we are still not above fooling ourselves again and again.
ECB’s ‘capital’ to become lower-case? (The ‘A’ to ‘a’ function?)
Meanwhile, back in the ‘Oh what tangled webs we weave when we practice to deceive’ Department, the ECB while claiming to be making progress is getting deeper and deeper into its own personal interbank quagmire. The ECB, looking for a solution to the unraveling sovereign debt problem found a way to stopper the contagion by herding banks to the slaughter, although that is not exactly how the ECB describes it. What it has done is to sacrifice its own balance sheet and potentially is own reputation. It extended to banks credit throwing the already troubled banks into sovereign auctions with borrowed money so they could get even more exposure to their local Tier-one capital provider. This has enabled them to ‘bulk-up’ on tier-one exposure before it spawns tears two and three through one thousand. As surely as we watch these developments today much of that Tier-one credit will prove to be another case of fancifully overrated debt, and the true debt rating will represent a cut and the next round of the Euro-debt crisis will wash over the banks taking the ECB’s reputation with it. Bon Voyage. Tsunami or Sue-not-me?
LTRO (Losers Taking Risk Onboard)
It’s all been enabled by something called LTRO. What it represents is the most stop-gap of stop-gap plans. If Larry Moe and Curley were bankers they might have tried this. Don’t YOU try this at home; it is for seasoned professionals only… The ECB has played out capital to banks because the ECB cannot buy sovereign debt directly and because some are worried about the ECB amassing debt of sovereigns with questionable credit standing. The Greek experience has had some impact on behavior. Yes some but…not much, and …not enough. So the ECB is seeking shelter (just a shot away, in some sense) by lending the money to banks (i.e. typical ECB ‘customers) who then participate in their local government’s debt auctions and buy the bonds thereby stoppering the auction deterioration that was in train and cutting the threat of contagion.
It worked! Sort of…
Well, this is good!? Hmmm. Well, this has been effective, anyway!? Hmmm. Well, it has been so far…and yes so far… and so far only. But there is NO WAY –NO WAY- that this can end well.
The deli-debt sandwich - no pickle needed!
What we have are sovereign debt problems now weighing even more heavily on the balance sheet so banks and banks owing money to the ECB that is in some sense collateralized by sovereign debt. So it is as though the ECB participated in these auctions and bought this debt it self except banks can use the funds they got for the ECB for other transactions too and except that the banks are now another layer in the sovereign debt stacked too high to fit in your mouth deli-debt sandwich. Could I have a pickle with the debt sandwich please, sir? What’s that? I don’t need a pickle? I’m already in one? Never mind.
From too-big-to-fail to too mammoth to use anything but a Cray
When the Fed got involved in its program of assisting banks in the US crisis it was financing troubled institutions through a period in which assets were trading at temporarily depressed values. The Fed judged the market valuations to be ‘wrong’ at distressed levels. So it took some of these assets as collateral for loans (after imposing haircuts). The Fed just booked $25billion in profit on one of its portfolios. Of course the Fed made its own detour to safety through hostile territory when it ‘saved’ weak banks by letting them merge with strong ones. Now we have some too-big-to-fail banks that are too big to do their accounting with anything but except with a Cray computer.
Welter of problems serving wrong master
The problem I Europe is that its sovereign debt crisis is not going to just go away. It is not a case of a market run that has oversold valuable sovereign assets. The problems of sovereigns in Europe are linked (yes) to excessively large fiscal deficits/debt, governments that are ‘too big,’ pension schemes that are unaffordable, tax revenues that collapsed and will be hard-pressed to grow back, and competitiveness losses that are ingrained and enshrined by the existence of EMU and the single currency.
Not dealing with the consequences (NDWTC) and the consequences of NDWTC
The real problem with EMU is that it is a system set up to glorify the currency. In Europe everything has been done to support the currency. In real economics the currency is there to serve the needs of the economy. In Europe they have turned it upside down. And because they did not have good fiscal backstops (Mass-Trick was a joke, but had they spelled it as I do maybe people would have seen though it sooner). Now, Europe is dealing with the consequences of not having dealt with the consequences. And what it the tact by the ECB? To not deal with the consequences but to push them off onto banks to whom its gives extended loans so that they can continue to avoid the consequences. Pushing consequences into the future usually is not a good idea. The present value of consequence not dealt with today is something that can grow exponentially when marked to 'market' tomorrow.
The causes of the consequences
In the US we may be seeing first big fish of the banking sector caught in a net. John Corzine may yet wriggle out, but for the moment he is flopping around out of water and looking vulnerable. Stanford was caught and Madoff was caught. But no prosecutor has been eager to go after real bankers, let alone banks. This reticence could leave the stink of moral hazard in the air and bring back these bad practices or others like them. It is important to deal with the causes of the consequences as well as the CAUSERS of the consequences.The need to prove 'intent' is a beard best shorn...
ECB goes to Euro Disneyland?
Europe is still in denial about the extent of its problems and the entanglement of its central bank. Maybe Draghi should have the ECB relocated to Euro Disneyland and do its mark-to-market in fantasy land? All this makes ME THINK that what is becoming more likely is that the strong countries like Germany might leave the e-Zone eventually. Some are arguing that Europe will inflate its way out of its mess. But the Germans would never acquiesce to that. This is the whole problem in speculating about the Euro’s value: no one knows if the Zone will stay together and if it does not, who will leave. The Zone and its central bank, once built to emulate the Bundesbank, is looking less and less like something the Germans could be comfortable with.
As a result there New Zone member theme song: Should I stay or should I go? A real clash, pardon the pun… Click link below