I don't really know why it is, but as much as I see pundits and experts and everyone in between address the euro mudbath lately, nobody seems to have caught on to the two main events (inflexion points?!) that shape the latest reincarnation of said bath. So here's for them, and you, and anyone who's not yet tired of the story:
Event no. 1: it’s not so much that it's an entirely new notion, it's the realization that it has come to pass that is new. And even then it will take a while for most pundits and experts to understand the significance.
I'm talking about the fact that the EC/ECB/IMF troika's southern European austerity measures don't do anything to push existing deficits and debt loads lower; they are, instead, not even sufficient to offset the deteriorating economies they’re applied to. They just slow down the downfall a little. Moreover, of course there's the massive snake-eat-tail cross-pollination of austerity measures destroying the very economies they're allegedly purported to save.
I would venture that Brussels and Berlin et all must have by now clued in, but they make sure – in what seems to be their main objective in all this – that everyone's fed reality in bite-size chunks. Which is understandable, since if the Greeks and Spaniards on the one hand, and German and Dutch people on the other, would have been fed the whole thing in one go, they'd have gone apeshit. So would the markets.
It makes little difference from what angle you look at the issue: it completely negates the legal (if perhaps not the political) foundation for the entire set of bailout and austerity schemes that have been negotiated and executed over the past few years on the premise that they would make recipient economies whole in the short to medium term. In other words, the reasons provided for implementing the schemes no longer have any validity at all, legal, political or moral. And that, naturally, will have dramatic consequences.
Time and again, Europe's inner rescue missions have been overtaken by developments. Which, frankly, were – and still are – always quite easy to foresee, and, I would think, have been foreseen by Merkel and Lagarde and Monti etc. Thus far, Europe has been able to replace its failed policy measures with subsequent bigger and harsher rounds of measures. This time, that won't be nearly as easy to do. The article from Der Spiegel I quoted on Sunday (more below) makes it very clear: This much is already certain: the government in Athens will not be able to bring down its debt load to about 120% of GDP by 2020.".
That's all we need to know, really. That tells the whole story of why Greece will be let go. No future bailouts, other than perhaps a few fake ones. Still, we can add this: Just recently, the Greek central bank projected a 4.5% shrinkage in the economy for 2012. Today PM Samaras estimated it will be 7%.
Trick question: on what numbers do you think the bailouts and austerity schemes agreed to in the past were based? Here's a quote from Ambrose Evans-Pritchard (more on that below as well):
The Troika originally said that Greece' economy would contract by 2.6% in 2010 under the austerity regime, before recovering with growth of 1.1% in 2011, and 2.1% in 2012.
Time for new emergency meetings once more?! Round 826?! In light of the Spiegel quote, Samaras' suggestion this morning that Greece may return to growth by 2014 is the boldest lie of the day, and friend Antonios faces some stiff competition for that prize any day of the week.
Samaras has been in office for what, 6 weeks? I wouldn't put any money on him staying on for much longer. Either the people, the troika or the Germans will force him out, whoever comes first. The Greek people will soon become aware that the promise of an improving economy in exchange for their austerity is and always was empty. Sure, there'll be voices advocating even – much – more austerity, but I'd say the Greeks are about done with that by now. So is the IMF, according to that Spiegel article, albeit for different reasons. Moreover, the troika members have a few issues of their own.
In a nice sidenote, Gareth Jones for Reuters reports on a suggested alternative route for Athens:
Greece should start paying half of its pensions and state salaries in drachmas as part of a gradual exit from the euro zone, a leading German conservative was quoted on Monday as saying.
Alexander Dobrindt, general secretary of the Christian Social Union (CSU), the Bavaria-based sister party of Chancellor Angela Merkel's Christian Democrats (CDU), has long argued that Greece would be better off outside the euro zone.
"With Greece we have reached the end of the road. There must not be any further aid. A country which does not have the will to fulfil the conditions, or is not able to do so, must get a chance outside the euro," Dobrindt told the daily Die Welt.
The CSU has often been more critical of EU bailouts than Merkel's party, but his comments underline the degree of German frustration with Athens over its continued failure to meet reform targets under its 130 billion euro aid programs.
"Greece should start to pay half of its civil service wages, pensions and other expenditures in drachmas now," Dobrint added. "A soft return to the old currency is better for Greece than a drastic move. Having the drachma as a parallel currency would allow the chance for economic growth to develop."
Dobrindt did not explain how Greece could manage a partial return to its old currency without triggering turmoil in financial markets and a likely run on its banks.
Oh boy! Where to start? Why would the Greeks want to go back to the drachma at this point in time, where's their advantage in that? And who's going to make them? Why wouldn't they just print euros instead? And not "Greek euros", but German ones (German euro bills have a series of numbers preceded by an "X" printed on them, other countries have a different letter)! Who's giong to stop them from doing that? Germany? Really? What's Greek for "bite me"?
And who's going to force them out of the eurozone to begin with? There are no rules or regulations anywhere regarding the procedure for leaving. You can't leave, and you can't be forced out. If the IMF and/or the rest of the troika wants to stop payments, Greece will probably default on its debt, but it will still be in the eurozone. Sort of whether it likes it or not. Interesting matter for international and constitutional lawyers, for sure, but they don't tend to work very fast (for good reasons).
The bailouts and austerity schemes don't work (that is: not for the people; bankers are elated). The Greeks get miserable without having anything to show for it, the Germans and Dutch pay and pay and pay and never see anything improve. End of exercise. Once everyone sees the blinding light, that is. So please let it sink in: we're in the process of passing a watershed moment, slowed down as we are by the mental sloths among us.
Even without rising sovereign borrowing costs, even without the pressure applied by financial markets, austerity and bailouts would have to be much harsher and much bigger, respectively, to even significantly slow down the economic deterioration. Forget about a return to growth; it is a complete pie in the sky.
What goes for Greece also holds for Spain. Too much has been written about it already recently, perhaps, but here's some additional juicy input from Ambrose Evans-Pritchard:
Spain was battling last night (Monday night) to avert a fully-fledged sovereign rescue after borrowing costs spiralled out of control, with dangerous knock-on effects in Italy and Eastern Europe.
The yields on closely-watched two-year debt surged by 78 basis points to a modern-era high of 6.42%, leaving it unclear how long the country can continue funding itself. Italy's two-year yields vaulted to 4.6%. "We can't keep going like this for another 15 days," said Prof Miguel Angel Bernal from Madrid's Institute of Market Studies (IEB). "The European Central Bank has to bring out its heavy artillery."
Andrew Roberts, credit chief at Royal Bank of Scotland, said the dramatic spike in short-term borrowing costs marked a key inflexion point in the crisis, replicating the pattern seen in Greece, Ireland, and Portugal as they lost access to market finance. "We are fast approaching the endgame," he said.
Exchange clearer LCH Clearnet raised margin requirements on both Spanish and Italian bonds, a move that will automatically cause further selling by some funds. [..]
The Spanish newspaper El Confidencial reported sources close to premier Mariano Rajoy complaining bitterly that the crisis engulfing Spain was a "failure of the whole European Project and the incompetence of its leaders". There is deep shock in government circles that the €65 billion austerity package passed by the Spanish parliament last week amid bitter protests across the country – and imposed by the EU – has failed to make any difference.
El Confidencial said the Rajoy team was thinking of "putting on the table" a possible withdrawal from the euro, a dramatic escalation in the game of brinkmanship between the eurozone's Latin bloc and German-led creditor core. "We would have our own currency again and restore competitiveness. It would have some disastrous consequences at first, but we would regain control over our own policies and we would escape from the crisis sooner," a government source reportedly said.
Spain has enough funds to muddle through into the autumn, but it is under mounting pressure from the EU authorities to swallow its pride and accept rescue to halt contagion to Italy, where bond yields are testing danger levels.[..]
The surge in Spain's short-term yields adds another twist to the banking crisis, a cost that now falls on the state. Spanish banks borrowed €315 billion from the ECB under the long-term refinancing operation (LTRO) and "parked" a large chunk in Spanish two-year to five-year sovereign bonds until they need the money to cover their own debt rollovers.
While this so-called "carry trade" helped to stabilise the Spanish bond market for a few months during an exodus by foreign investors, it has now backfired badly. The two-year bond has shed 9pc in face value since the second LTRO in February, leaving the banks heavily under water. "This has turned into an unmitigated disaster. They will have to crystallise these losses when they sell," said Mr Roberts.
The latest Fiscal Monitor by the International Monetary Fund has pencilled in public debt to GDP of 96% in Spain by next year, up from 84% just two months ago – a sign of how quickly the situation is snowballing out of control.
Nice try, Ambrose, and a pretty good read, but you miss out on the one single thing Spain needs to do most urgently, the only thing that matters. Spain, like every country in the western world, must restructure its banking system, force defaults and bankruptcies and mansize haircuts. Which it won't under Rajoy, but then how much longer will he be around?
The ESM won't be able to operate before September 12 at the earliest, if at all, and even then it will take at least another two years before it possesses its full potential firepower of some €500 billion. And who's going to volunteer to wait for that? Not those that stand to profit from not doing so. So Madrid and Rome's answer is to ban short selling, right?!
Forget about a full troika bailout for Spain. Not in the cards. Not going to happen. There's not a party that would potentially be involved that wouldn't risk losing most if not all of its credibility. Moody's lowered its outlook for Germany and Holland already. Where do you think they would take that outlook if such a bailout would materialize? Mind you, there will be attempts at "pretend" bailouts for Spain. Which will arrive a lightyear too late and come up a mile and a half short. Just following MO here.
Ambrose covers Greece as well today:
Who will be held responsible for what has happened to Greece? Germany has clearly taken the decision to expel Greece from the euro, whatever the new Greek government does. Vice-Chancellor Philipp Roesler says the "horror" of Greek exit has worn off. The markets will hardly miss a beat when the day comes.
Greece has already failed to complete 210 targets imposed by the EU-IMF Troika. "Unfortunately it is likely that Greece will not be able to fulfil the requirements. And I say quite clearly, if Greece fails to comply, there should be no more payments to Greece. I have to say I am more than sceptical," he said.
Before we all join together to kick the Greeks when they are down, let us be clear why the country has kept missing the targets. The Troika originally said that Greece' economy would contract by 2.6% in 2010 under the austerity regime, before recovering with growth of 1.1% in 2011, and 2.1% in 2012. In fact, Greek GDP has been in an unbroken free-fall. It did not grow last year. It contracted a further 6.9%, and is now expected to shrink 6.7%this year.
This was entirely predictable – and was predicted by many critics – since Greece faced an IMF-style austerity package without the usual IMF cure of devaluation. The Troika's ideology of "expansionary fiscal contraction" – which the IMF has to its credit since abjured, but the fanatics in charge still swear by – is breaking a whole society on the wheel.
The result of this Great Depression – as the Greek prime minister calls it – is in implosion in tax revenues. The budget deficit has remained stuck near 9% of GDP despite draconian wage cuts and hospital closures. Roughly speaking, the Troika has misjudged the scale of economic decline over three years by 12% of GDP. "That is a massive miscalculation," said David Bloom, head of currencies at HSBC. "The collapse has been exponential. Greek GDP is contracting faster than they can reduce debt. The Troika really has a duty to give Greece the next tranche of money," he said.[..]
What Mr Roesler really means is that Germany is not willing to spend any taxpayer's money on Greece. Not one euro. Previous losses were entirely concentrated on pension funds, insurers, banks, and other private holders who took a 75% haircut – punished for their loyalty – but there is not much more to be squeezed out of them.
Any further aid puts creditor governments directly at risk. That's what this is all about. OK, but please cut out the humbug, the rhetoric about Europe's unshakeable will to hold EMU together, the flowery promises to uphold the cause of peace and comity in Europe. It is all just squalid calculation, and a lot of lies.
I wrote everything above before I saw this last piece by Evans-Pritchard. Nevertheless, my point stands. While Ambrose sees the issue, "GDP is contracting faster than they can reduce debt", "The collapse has been exponential", he doesn't seem to get it.
So event no. 1, ignored across the board, is economies that deteriorate faster than bailouts and debt reduction measures can be pushed through. It will play a huge role in what happens going forward.
On to event no. 2: the EC/ECB/IMF troika is crumbling and will soon fall to pieces.
The letter by IMF official Peter Doyle I referred to in Spiegel bombshell: The IMF plans to dump Greece ("After twenty years of service, I am ashamed to have had any association with the Fund at all…"), was published a few days ago. But it is dated June 18.
Granted, the fact that it took over a month to become public could be due to all kinds of innocent factors. Then again: mere days, maybe even just hours, later, the Spiegel article I translated in that same piece was posted. It talks about IMF officials telling Brussels brass that their fund will no longer support Greece. It's not clear if the anonymous source is IMF or EC. And that is not all that important for my point. since either there are internal issues inside the IMF, something Doyle's letter would seem to bear witness to, or there are issues between the two organizations. In both cases, walls are crumbling.
The troika has outlived its usefulness, from the point of view of its participants, in the same way that, as I wrote at the time, sometime last year the German-French united stand in the eurocrisis came apart. And for the same reasons too: the respective interests of the participants are growing apart too much and too fast to hold it all together.
The European Commission (EC) has no real power; it can't go against German wishes. The same goes for the ECB. There are European institutions in which a – Latin – majority could outvote Germany, but it would have paper value only. There are a lot of entities in Europe, in Brussels, Frankfurt, Strasbourg, that have looked mighty shiny and powerful so far in the good times. Now the good times are over, so is their power. They'll take the entire European project down with them.
The IMF wants Europe to agree to such measures as QE, eurobonds, fiscal union, direct bank bailouts and – "preannounced over a given period of time, buying a representative portfolio of long-term government bonds" -. While some of the poorer nations would obviously agree with most of this, Germany will not – and probably legally cannot – let that happen.
And why should it? What good would it really do to have the ECB buy trillions of euros more in government bonds, or any sort of debt, if nobody dares look at the debts that still exist within the financial system? Chances are, the money would just be thrown away and squandered, just to keep up appearances a while longer. Before one more penny goes to Spain, Europeans should demand to see the books of its banks. Yeah, the same ones that got a €100 billion bailout last week. Which they will transfer to Wall Street and the City of London. What a wonderful world.
The people of Europe, like their American peers, still live under the illusion that they can exert their political influence in the ballot box. They will all find out that this influence can be fought for, gained and exerted in one place only: the street. And that is where we will find the people.
So there's a third defining event coming to the surface as we speak: like the troika, the European project itself, or the eurozone if you will, is dissolving.
Things might have worked out differently if Europe would have been a union along the lines of the US. But there was never even a glimmer of a chance of that happening. Too much history, too many differences, too many languages. And now less than ever. Everybody will go home to their own piece of land, and hopefully stay home, and not go fight over who's to blame for the failure and the misery, and that’ll be it for the European union. Whether the tighter US union is a blessing remains to be seen, there's no going home there when things go wrong, but that's another story.
There will be efforts to keep the rich core of Europe together, but respective diverging interests in that group will cause a fatal rift there too. To understand why, you might want to read this from Thomas Pascoe, for instance: Why France is on the road to becoming the new Greece. Or ponder that Holland has the perhaps highest personal debt per capita in the entire world.
Don't listen anymore to all those pundits who claim that Merkel or Draghi or anyone else can and should safe the euro by buying this or purchasing that. They can't. Project Europe is over.
The best we can hope for is a peaceful withdrawal. I don't know if that hope is all that realistic. No promises here.
Image: Detail, Guernica, Pablo Picasso