As I have written in previous articles, there is a significant amount of evidence that bankers have not altered their practices in any meaningful manner, except being less transparent than in 2007 and 2008, when they were more deceptive with a drape of transparency. In that previous article I opined that the bankers would soon attack sovereign treasure next. One only has to follow what one can related to sovereign debt and CDS activity to understand “the boys” are about to bring the hammer down on the EU.
Because of the recent actions of the banker controlled rating agencies, these beleaguered countries, Greece, Ireland, Portugal, and Spain have seen their bond rates escalate beyond any hope of recovery. Combining the dual failures of this week of the G20 basically falling apart and the strained US-China monetary relations, the situation in the EU has just gone to DEFCON3. This week we saw basically the final battle plan being brought out in the light. Consider these facts below in toto. The targets are Greece, Portugal, and Spain.
Six months after Athens received €110bn (£93bn) in emergency loans from EU nations and the International Monetary Fund to prop up its near-bankrupt economy, Eurostat revealed that Greece’s budget deficit reached 15.4% of GDP last year, substantially higher than its previous estimate of 13.6%. Greece’s poor bookkeeping was blamed for the budget black holes.
As a team of visiting inspectors from the IMF, the European commission and the European Central Bank arrived in Athens, there was widespread acceptance that the new figures would throw out the fiscal and structural reform program the socialist government has agreed to in return for the loans, the biggest bailout in history. “We will face a profound strategic issue of how to repay €70bn-€80bn when redemption of the rescue loans comes,” a senior government aide told the Guardian. “There will have to be some disguised rescheduling of the time frame in which we repay the money.”
Prime Minister George Papandreou’s administration had previously insisted it would slash the deficit to 8.1% of GDP by the end of the year before lowering it to the permissible EU level of 3% in 2013 when the rescue program expires.
In government for 13 months, the socialists have been heavily criticized by Greeks for their austerity policies. But in an interview at the weekend, Papandreou admitted for the first time that Athens may have to seek an extension of the repayment deadline. He also conceded that the revision could mean further cost-cutting.
The centre-left administration has already imposed tax hikes and wage and pension reductions that have triggered violent street protests. One well-placed insider said that, with an extra €7bn-€8bn needed by the end of the year, it was “very likely” the government would press ahead with plans to shut down parts of the bloated public sector.
Unionists backed by the Communist party have warned that further measures could prove the tipping point where popular opposition turns into explosive social unrest. Mass demonstrations and strikes are planned in the coming weeks.
Greece was compelled to accept the rescue package after it was effectively locked out of capital markets because of prohibitively high borrowing costs earlier in the year.
Since then, the country’s public finances have been closely monitored by visiting inspectors from the European Commission, ECB and IMF. So far Athens has received two installments of aid with a third expected later this month amounting to a total of €38bn. But the three organizations have made it clear that further handouts depend on the country staying the course and making fiscal progress.
In Spain and Ireland
Spain’s central bank governor, Miguel Angel Ordonez, lashed out at Dublin on Monday, calling on the Irish government to halt the panic and take the “proper decision” of activating the EU-IMF bail-out mechanism. “The situation in the markets has been very negative due to the lack of a final decision by Ireland. It is up to Ireland to take that decision, and I hope it does,” he said.
The outburst reflected suspicion at the European Central Bank that Dublin is holding the eurozone to ransom, allowing the crisis to fester until it extracts a pledge from EU officials that it will not suffer a loss of economic sovereignty or be forced to give up its 12.5pc corporate tax rate under any deal.
Simon Derrick from the Bank of New York Mellon said the negotiations over Ireland’s bail-out have been astonishing. “The creditors say please take the money, and the debtor says ‘we don’t want it’. It’s very odd.” “Still, the EU is doing the right thing to try to create a fire-wall as quickly as possible. They learned from Greece that once bond yields reach this level they have 10 trading days left to avoid a self-feeding crisis. They cannot allow this to spread to a large country because at that point contagion would become uncontainable,” he said.
Contagion has already pushed Portugal to the brink, pushing yields on 10-year bonds to the danger level above 6.5pc. Finance Minister Fernado Teixeira dos Santos said the country was at the mercy of global forces and may be forced to call for help.
“The risk is high because we are not only facing a national or country problem. It is the problems of Greece, Portugal, and Ireland. Markets look at these economies because we are all in this together in the eurozone. Suppose we were not in the eurozone, the risk of contagion could be lower,” he told the Financial Times.
Mr Teixeira made a thinly veiled attack on Germany’s Angela Merkel and France’s Nicolas Sarkozy, who precipitated the latest crisis by opening the door to sovereign defaults and bondholder “haircuts” for eurozone states in trouble. (here read Credit Derivatives and it makes a whole lot of sense huh?). “We were like the soccer player running to the goal and ready to kick for the goal, and then someone fouls us, but this time there was no penalty.”
A simultaneous bail-out for both Ireland and Portugal might run to €200bn, depleting much of the EU rescue line. The European Financial Stability Facility (EFSF) can raise up to €440bn on the bond markets but only two thirds of this would be available. The IMF is expected to loan a further €3 for every €8 from the EU under the bail-out formula.
The great concern is that the crisis could spread to Spain, which has a far bigger economy that Greece, Portugal, and Ireland combined. Foreign banks have €850bn of exposure to Spanish debt. David Schautz, credit strategist at Commerzbank, said the EU bail-out fund would come under “severe strain” if Spain needed a rescue. Yet this remains a serious risk since Spain must roll over or raise €175bn of debt next year.
Angela Merkel, the German Chancellor, raised the spectre of the euro collapsing as she warned: “If the euro fails, then Europe fails.” European finance ministers will meet in Brussels on Tuesday to begin discussions over a new European stability plan that is expected to result in billions of pounds being offered to Ireland, Portugal and possibly even Spain.
Greece’s prime minister lashed out Monday at Germany—its chief euro-zone benefactor—for tough talk on government-debt defaults, making clear the widening strains inside the 16-member euro-zone as the currency bloc wrestles with a teeming sovereign-debt crisis.
Greek Prime Minister George Papandreou said the spiral of higher interest rates could ‘force economies toward bankruptcy.’ Addressing reporters in Paris, George Papandreou said the Germans’ view—long-held, but recently reiterated—that private bondholders could suffer losses as part of a future bailout was intensifying government-debt woes.
The German position “created a spiral of higher interest rates for countries that seemed to be in a difficult position, such as Ireland or Portugal,” Mr. Papandreou said. He added that the spiral could “break backs” and “force economies toward bankruptcy.”
While the US has decided it will print its way out of the current crisis and the world be damned, and China refuses to get real about the proper market place for the Yuan, and none of those involved sovereign nations getting anywhere serious with the bankers pushing the buttons here, it is only a matter of weeks before it all unravels.
What is happening in the EU right now is a macroscopic view of the near future in the US. First there is severe austerity and further erosion of the economy which shows up with her twin sister, hyperinflation and then the civil unrest. There is little coverage in the US about this, but this is something everyone should watch very closely.