By Philip Pilkington, a writer and journalist based in Dublin, Ireland
While I was writing on the unsustainability of the haircut deals yesterday, the peripheral bond markets in Europe rallied. My argument was that when other countries started getting uppity and demanding haircuts, European government bond investors would slowly but surely come to realise that they were the ones on the end of the hook and that politicians didn’t give a damn about them. This would eventually result in their piling out of the bond markets, sending yields into the stratosphere. The ECB would then be forced to step in and buy up bonds in the secondary market – or perhaps do something even more responsible, who knows?
And indeed, as the Greek deal began to solidify, Ireland quickly joined the queue:
Ireland would see any European Central Bank contribution to the restructuring of Greek debt as a precedent that would boost Dublin’s efforts to ease the burden of its own sovereign debt, the country’s finance minister said on Wednesday.
In the meantime, however, the markets for peripheral company and bank debt rallied – and rallied rather hard at that. The FT reports:
For all the uncertainty over Greece, Europe’s bond markets have been rallying strongly. Now the ‘risk on’ sentiment has spilled over into markets for company and bank debt, with investors snapping up a wave of bond issues from Italy, Ireland and Spain.
Of course, this isn’t the European government bond markets; this is just company and bank debt. And we can’t expect investors get nervous until they start seeing governments in countries like Portugal rattle the cage and demand a haircut. But still, some explanation is surely needed.
Is it that these investors are stupid? Well, we should never assume stupidity when easy moneymaking might be involved. And that, of course, is precisely what’s happening here. Per the FT:
Bankers say that the European Central Bank’s €489bn injection of much-needed liquidity through a three-year loan programme into Europe’s financial system not only provided unlimited and cheap funds to the region’s banks but helped to lure cash-rich investors back into the public bond markets, and those of so-called peripheral eurozone nations in particular.
Sorry, what? Let’s hear that again:
Torsten Elling, co-head of the European rates syndicate team at Barclays Capital, says that the ECB’s so-called longer-term refinancing operation has convinced investors to look at higher-yielding assets again. “The door is open for covered and senior unsecured bond issues in the periphery. There’s definitely demand from investors and that’s been driven by the LTRO.”
Aha! Of course! It’s the ECB bailout that is facilitating this bond market rally. Investors grab the LTRO funds and bang them into high-risk assets, while at the same time investors are told that they’re going to get burned in the Greek bond market.
Naked they came from their mothers’ womb, and naked they shall depart. The Troika gave and the Troika has taken away; may the name of the Troika be praised!
Yesterday I claimed that the Eurocrats had not thought their strategy through; I said that they had not considered how bond markets would react when more haircuts became inevitable and began to be demanded by other countries. Was I wrong? Is there indeed a master plan? Is the LTRO the mechanism by which this master plan is launched?
No. I don’t think so. The LTRO bailout fund will not stem the tide in this regard. The key problem is that this is not a liquidity crisis, but a solvency crisis. And it is not a solvency crisis in the typical sense, but a solvency crisis of a group of sovereign states that don’t use their own currencies.
The LTRO cannot make up for the fact that countries such as Ireland and Portugal do not issue their own currency and are being starved for funds by their de facto central bank, the ECB. This is for the simple fact that, as a BCA Research reports said recently (via WSJ blog):
The ECB’s LTROs can solve the banks’ refinancing needs for the next few years if they choose to take advantage. [But] the LTROs’ effect on peripheral sovereign debt is only indirect and is subject to the banks’ fickle appetite for risk.
The LTRO then, has a few functions. The most obvious is to keep the banking system operating while the Eurocrats continue to spit fire on the economies of the periphery and, in doing so, greatly increase the risk on these very banks’ holdings of sovereign debt. Tied to this, the Eurocrats can walk daily into the same room as the bankers and the financiers and not get shouted at for ruining their portfolios. Oh, it’s a wonderful life!
Yet people would be misled if they thought that this was, at heart, a nefarious banker-driven scheme. No, the bankers are being kept wriggling on the hook like everyone else. They’re just being fed rather well.
At heart this is, as it always has been, a political problem. And it must be said that, disgusting and ruthless though it all is, those that are pulling the strings are doing a rather good job at balancing all those political forces – like the bankers and the financiers – that might have the power to actually hold them accountable for their destructive and reckless actions.
But the situation remains a house of cards. And once other peripheral countries, squeezed hard in the vise of austerity, begin to demand the haircuts that are all but inevitable, those same bankers and financiers will look back to Greek default and remember just how important their interests really are relative to the naked political desires of those in power.
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No, not a nefarious scheme on the part of banks and financiers, but one by the political elite in Germany, France, IMF, and the ECB (which I guess is a bank). But a situation in which the banks and financiers “that might have the power to actually hold them accountable for their destructive and reckless actions.”
Did I get that quote right? That the banks and financiers just might hold the political elite accountable? Now that seems a stretch. I suspect its really only the people of Europe who ultimately have that power.
“I suspect its really only the people of Europe who ultimately have that power.”
They will when they become the people of Europe. Right now, the key to how this is playing out is how few people of Europe think of themselves that way and how many think of themselves in terms of nationalities.
It is a kind of 1914, only with debt the weapon of choice this time. I had been hoping that Europe could be a bit more humane than America or China.
If the bankers were not kept ‘well fed’ by the LTRO, I think you would see them complaining a lot more about what is going on in Europe, given that they hold all the sovereign debt. Purely out of self-interest, of course, but still.
Let’s see their attitude when the other countries fail to bring down their deficits and fail to grow and start to demand a bailout…
The only purpose of LTRO is to prevent total meltdown through Credit Default Swaps. Everyone knows these debt restructurings merely kick the can. What is important is their voluntariness.
“Yet people would be misled if they thought that this was, at heart, a nefarious banker-driven scheme.”
BWHAHAHAHAHAHAHAHAHA!!
I mean really.
After all is said and done who will be left with the money?
The technocratic “leaders” might be deposed, political bodies might be dissolved, but at the end of the day I don’t really see a mechanism by which the bankers – who you consistently seem to defend or at least clear of blame – will lose their shirts.
Again, political leaders have a very good chance of losing their grip on power/careers but I don’t really see the banks losing everything.
Throughout the crises of history, politcal leaders are the ones who pay sometimes very high prices – their heads – but the same can not be said for the shady financiers involved.
Note: I say this as a generalization knowing that you’ll provide me with the exception to the rule – thanks.
I mean, who do you think created and manipulated the systems of governance we have today?
The politicians on their own?
Or the financiers who have billions/trillions at their disposal to shape the governments to their own advantage?
I understand you don’t like to compare the EU mess to America but, really, using you POV you’d have us believe that it was the US politicians who were the prime movers in all this mess, that they themselves were the ones who crafted the complicated financial bills that lead to the wrecking of the US/world economy.
How laughable is that?
Remember that little thing called TARP? Where the banks basically marched into Congress with a 3 PAGE plan and told our elected leaders to give us nearly a trillion dollars or we will destroy the world’s economy?!!
I guess that wasn’t a nefarious plan either, huh?
Or maybe you seem to think that there’s a huge difference between American bankers and their Europan kin, eh?
Iceland, anyone?
Again, these bankers may lose some money but can you really believe that they will be “broken” by any machinations of the EU?
Pshaw.
“The technocratic “leaders” might be deposed, political bodies might be dissolved, but at the end of the day I don’t really see a mechanism by which the bankers – who you consistently seem to defend or at least clear of blame – will lose their shirts.”
So the bankers don’t lose money, hence they’re to blame. That’s bizarre logic. Those gold shops that opened up everywhere are making a fortune too. By your logic they should be doubly to blame.
That logic is crude.
And, no, the US situation was completely different. In that case the bankers WERE the root of the problem. In Europe they’re not. They’re just a sideshow.
Blaming bankers in the US is spot on — in Europe its just an excuse to avoid actually thinking about the situation here.
Allow me to quote the pedestrian Wikipedia for a neutral and simplified take on EU debt crisis:
“In 1992 members of the European Union signed the Maastricht Treaty, under which they pledged to limit their deficit spending and debt levels. However, a number of EU member states, including Greece and Italy, were able to circumvent these rules and mask their deficit and debt levels through the use of complex currency and credit derivatives structures.[28][29] The structures were designed by prominent U.S. investment banks, who received substantial fees in return for their services and who took on little credit risk themselves thanks to special legal protections for derivatives counterparties.[28]
Hmmm, appears that banks were at there at the incipience of the problem, huh?
Continuing:
“A number of “appalled economists” have condemned the popular notion in the media that rising debt levels of European countries were caused by excess government spending. According to their analysis increased debt levels are due to the large bailout packages provided to the financial sector during the late-2000s financial crisis, and the global economic slowdown thereafter. The average fiscal deficit in the euro area in 2007 was only 0.6% before it grew to 7% during the financial crisis. In the same period the average government debt rose from 66% to 84% of GDP. The authors also stressed that fiscal deficits in the euro area were stable or even shrinking since the early 1990s.[30]”
Hmmm, so the banks are also responisble for the continuance of the crisis to the present day it appears as well.
And tell us again, Mr. Pilkington, how banks are NOT to blame?
They profited on manipulating the system from the beginning, they profited on the bailouts they received at the expense of sovereign nations and we shouldn’t expect that they will also profit on the “solutions” that are manufactured to “solve” this mess in the future, huh?
Why the continued banker apologetics?
Sorry, here’s the Wikipedia link:
http://en.wikipedia.org/wiki/European_sovereign_debt_crisis
If you want to use Wikipedia as a means to decode world events, that’s up to you. I’d be a bit more careful, but hey…
As for the ‘defending banks’ insinuation. I’m not. I’m just telling it like it is. This is a crisis that was manufactured by the EU. The banks helped to hide certain signs of stress but they did not CAUSE them. The current debt levels and the inability to make debt repayments have to do with the political and economic structures of the eurozone. The banks are just caught in the middle of that.
In certain countries, however, like Ireland — where I’m from, so I know it well — the banks were engaged in bad loans etc. That needs to be dealt with. BUT while it did trigger the crisis, it did not cause it. The CAUSE of the crisis is the eurozone structure itself which forces countries to engage in austerity when they bail out crooked banks. In the US, you could have it both ways. You could bail out the crooked banks AND run high deficits. In Ireland we cannot. This is a political choice by the Germans and the French.
P.S. Banks are not ‘profiting’ on the current situation. They’re avoiding losses through the LTRO, but they’re very nervous right now.
The world isn’t black and white.
Putting aside the differences between the US and Europe for a moment so I can depict by analogy what you are stating:
What you’re saying – in effect – is that the US framers of the Constitution then are should also be to blame for our current crisis as it was the system of governance that they set up which is to blame not the bad actors – the banks – who took advantage of said system and ultimately gained control of it, right?
The banks should just be considered neutral predatory vehicles that will alway find a way to destroy any system of governance that they encounter and everyone should just shrug and say, “Oh well, that’s a bank for ya! Gee, shucks!”
You used the term “sharks” in your title, is this how you feel we as human beings should view banks as a social construct?
I mean, in America corporations are people but in your view banks shoud be – shall I say it?
sharks with frickin’ laser beams attached to their heads!!
That’s an awful analogy.
It would be better to say that deregulation that was initiated by the Carter administration, ramped up in the Reagan years and perfected under Clinton led to the crisis.
And yes, I think I would agree with that analogy.
Except in Europe the authorities are even more to blame. Because in the US this was a gradual and largely ‘invisible’ process. The Troika’s actions in Europe are having immediate and painful consequences. So, they cannot put their heads in the sand so easily.
Sure, they’re not profiting RIGHT NOW but somehow I’m not to worried about their abilities to survive into the future – yes, maybe in different forms, modified structures – but if history – especially recent – is any guide I sure wouldn’t worry about the influence of gargantuan transnational banks waning any time soon.
What happened after the US crisis?
Consolidation!!!
Sure, some banks bit the dust but if anything banking’s influence became even stronger as dead were absorbed and reconstituted.
Hey, maybe JPMorgan and GS can buy out the major European banks in a few years, huh?
Then we could have only 4 or 5 banks on the entire planet!!
Sweet.
Megaladons with frickin’ laser beams attached to their heads!!
The root of the problem is a flawed edifice. The EuroZone is viable only if a permanent transfer union exists. Otherwise, you will have trade imbalances that exacerbate inequality.
I don’t blame the bankers nor do I blame Germany.
I blame the Eurocrats in Brussels who have imposed a inherently unstable economic system on 400 million people.
I’m shocked, shocked to find that gambling is going on in here!
“It would be better to say that deregulation that was initiated by the Carter administration, ramped up in the Reagan years and perfected under Clinton led to the crisis.”
AND WHO INITIATED THE DEREGULATION?!!
Did peanut farmer Jimmy Carter just wake up one morning and say one day, “Gee, let’s start letting the banks run the show?”
No, it was the bankers, their lobbyists, the think tanks they funded and the business schools they bought out which initiated a decades-long siege upon the system they were “trapped” in.
Free Willy with a frickin’ laser beam attached to HIS head – if you will.
What I’m saying is that the banks were the prime movers here and no matter what the system the banks can be seen to be the cause as to the system’s eventually being co-opted and rendered subservient to their interests.
Why? Because they have the money, baby!
A confused piece that a kleptocratic perspective can really clarify and simplify. Neither politicians nor bankers are independent players in this but rather parts of a kleptocratic system. Kleptocrats constructed the EU and eurozone and sold it to credulous 99%s all over the continent as an idealistic project that would put the tragedies of the past behind them and usher in a new world of economic security and well-being.
And for a while it worked as all bubbles appear to on their upside, even if a closer look reveals their math makes no sense. Germany and the center got a relatively cheap euro which gave them a competitive advantage. Center countries used their enhanced wealth to buy into other bubbles like the real estate bubble in the US as well as create ones of their own in the Southern Tier. And they recycled profits as loans to consuming peripheral and Southern Tier countries, like Greece. Kleptocrats in the center and periphery had no problem with this since most of these wealth flows actually ended up with them, either as profit or debt they owned.
Bubbles by their very nature burst. The real estate bubble burst in the US precipitated the cascade that led to the bursting of Europe’s bubbles, but these bubbles would have gone splat at some point anyway.
The mantra of the kleptocratic classes is to privatize gains (which they did during the upside of the bubbles) and to socialize losses (which they are doing now the bubbles have burst). This is no less true of the periphery. Local kleptocrats can move their money out of collapsing countries like Greece, and have. If and when they want, they can come back and buy up what’s left of the country at firesale prices. The kleptocrats of the center simply use politicians and bankers to keep the screws on the debtor countries for repayment of loans which will ultimately flow back to the bonds they own, and when necessary have them introduce stopgaps like the LTRO to keep things greased.
But it is important to realize that the LTRO is not meant to be a solution. Real solutions run completely contrary to the interests of kleptocrats. Such solutions would benefit the 99% and serve to disempower the rich of the kleptocratic classes. No, kleptocrats prefer to keep things pretty much as they are where they are in control. Indeed the current situation of simmering crisis advantages them even more because their level of control and wealth continues to increase.
jsmith wins the debate Phil, for exactly the reasons Hugh states.
Consider: all of the promised 130 billion euros promised to Greece in the next bailout tranche will go to pay off and refinance Greek sovereign bonds, over half of which are held by banks, the balance mostly in hedge funds.
You may be talking strictly about banks, but I don’t see how you can argue that Europe’s finance sector has not won the battle to convert Europe to a neo-liberal economic regime – a battle that has been going on for nearly twenty years. Like in US, “they own the place”.
Good comment, Hugh.
As noted above though, EU kleptocrats could not have pulled this off without recourse to the fairy tale products created and peddled by US keptocrats who very much insist their current colossal positions be covered. Just because it’s a kleptocracy doesn’t mean there is not a pecking order.
Very good comment, Hugh.
UNSETTLED TURMOIL
Who cares?
They will come back when the understand that it is the Only Game in Town. Unsustainable haircuts? Me arse …
Unless, of course, they want to play the stock markets? (Yeah, right, now pull the other leg!)
Look PP, they piled on Greek debt because it seemed e “easy money” as recent a two years ago. But, oh mah gosh, the game rules have changed. Haircuts. Ouch!!!!
That is really too, too bad. They should have known they were betting in a casino.
There are a finite number of ways to manage any financial asset. Stocks, bonds, money-markets, precious metals/minerals, art …
Which of those seem safest going into the rest of this year of yet unsettled turmoil in international markets? Right, debt.
“Yet people would be misled if they thought that this was, at heart, a nefarious banker-driven scheme.”
My sentiments exactly.
I can’t speak for bankers in Europe, or address the European debt crisis, but bankers in the USA are certainly not to blame for the subprime crisis. Stan (i.e., Stanley O’Neal, former CEO of Merrill Lynch) didn’t even know Merrill was holding $50 billion worth of CDOs until it was too late.
His only mistake was to fire everyone who ever disagreed with him, then fill the board of directors with friends and hire a bunch of math PH.Ds. None of the bankers knew that the modern CDO business was a Ponzi made of assets that never existed and that were marketed through fraud. We had no idea what was going on, and can’t be guilty of any crime, because there was never any intent to defraud.
Admittedly taking huge short positions against the same products we were selling doesn’t look good, but no one knew. It’s the fault of politicians and greedy home-buyers.
At Goldman we’ve often been blamed for letting a short-seller design collateralized debt obligations that we then marketed to clients. And yes, at first glance, this looks kind of unsavory to the unsophisticated eye, but look at it this way: by betting correctly against the housing market, Goldman helped to mitigate the crash.
Once again, by betting correctly against the housing market, Goldman helped to mitigate the crash.
I’m aware this is contradicted by almost every book that even mentions Synthetic CDOs or Credit Default Swaps, but they don’t know that they’re talking about. I was there on the frontlines, doing God’s work by designing Synthetic CDOs, what I’m telling you is true.
You can trust me, I’m a banker.
Haven’t seen you in quite some time, Lloyd. Love your comments.
Wrong.
Bankers were negligent in not verifying the creditworthiness of the subprime loans that they were packaging for purposes of securitization. They then accepted (some say finagled) the Triple-A ratings of the CRAs, which also did not verify the nature of the underlying debt, in order to enhance the sale of the debt instruments. In addition, they peddled the junk to the world with the nomenclature “Real-estate backed debt instruments” to further facilitate sales.
They sold Toxic Waste and did so perhaps knowingly, for personal profit. In fact, they were the only ones to have made any profit whatsoever on sub-prime debt. Since they did not insist on clear creditworthiness verifications and created the mortgages without due diligence, they were guilty of professional negligence.
Thus, those responsible deserve to find themselves before a court of justice to explain their actions.
Debt, like any product, service or commodity has an inherent quality-quotient. Buyers deserve to know that a Triple-A rating actually means the best quality and not junk-debt.
“No, the bankers are being kept wriggling on the hook like everyone else.”
Kept wriggling on the hook by WHO? How you see this as a fundamentally political problem, but NOT identify that problem as one of the public interest in all of these States vs the interests of the financial/corporate elites escapes me entirely. Mr. Market, which has since 2008 been the overt tool of those elites, has repeatedly slapped the West’s political classes silly in order to force the coughing up of the public’s money to make REAL over a decades’ worth of utterly BS financial “gains” for “investors” of all stripes (note that includes the top 20% minimum, as well as pension funds, not just the 1%). Note also that the majority of those who made earned income gains over that period did NOT lose the fruits of those gains, nor have those gains been reversed, i.e., much of the broader elite scored big time throughout. To get lost in the recriminations of EU politics is to take up exactly the position the banksters et al want – looking at the shell that doesn’t hide the pea. And in any event, the apex of both financial and political power resides in the US, not the EZ or EU. If you want to lay the blame on political leadership, look to the US and the top of the power chain not a secondary hub.
Briefly:
1) A couple short months ago you (and countless others) argued the ECB, presumably due to its German input, was incapable of any effective action and an imminent, total meltdown was in the cards absent Eurobonds/printing. I’ve argued all along the ECB would do what was required of it by the banking cartel’s Mr. Market NOT the political class. You now apparently concede the ECB has bought a couple of years through a somewhat different can-kick mechanism – LTRO. What have the UK and US done other than buy themselves a year to 18 months and hope for the best with each of their repeated CB operations? And who have those helped exactly? We know it’s not the public. Who, then?
2) I noted some time back, among other things, that there were reports that corporate cash was backstopping some EZ banks at the height of the liquidity squeeze. I now note that corporate bonds as collateral will form the heart of the ECB’s plan – until Mr. Market demands more down the line.
http://www.reuters.com/article/2012/02/10/us-ecb-collateral-idUSTRE8191H120120210
Goldman claims as much as 7 trillion euros could be eligible.
3) Can Bernanke be far behind? PIMCO has apparently positioned itself for massive Fed purchases of MBS. Sure looks like a can to me – and a lucrative one at that for some.
4) Back to the politicians:
You rail incessantly at Merkosy in their role as leaders of the “core” bent on savaging the “periphery”. Yet NO public anywhere with the exception of Greece and Iceland has even attempted to rise to the occasion, and even then, the target was wrong, i.e., going after the political class, even though repeatedly betrayed by same, rather than the financial predators who control that class in some more direct way. OWS in its infancy was intended to do just that – we all saw how long it was before that effort evaporated as the public’s eye was directed from the ball by 1001 different distractions, a great many provided by purported supporters of the “movement” themselves.
The problem facing Southern Europe at bottom results from a financial/corporate globalization the House Rules for which were written by the moral and ethical sewage that passes for our elites. The system is designed with only 1 thing in mind: maximum asymmetric profit and power. Very big winners floating atop an ever-increasing pool of losers. NOT a game small nations can possibly hope to win absent some REAL advantage. The time to fight like blazes was a generation ago. But nobody much cared, as the miracle of credit and peddled fantasies like “service” or “knowledge” economies worked their beggaring magic. For growing numbers now, and far more coming down the road, it’s going to be a fight for survival – let’s not waste that fight yet again on the wrong targets.
TIME TO PAY THE PIPER
It is easy to say that the politicians have sold out but difficult to swallow as truth. (If, indeed, that is to what you are referring.)
How many heads of corporations come from the political class? Nada. How many politicians come from the Business Class? In the US, when you’ve made your megabuck or plus, if you really don’t know what to do with your life, you become a politician. Congress is infested with millionaires – just less than half of them (47%).
Why do you think it is soooo easy to lobby them? Most come from the Business Class, so they are very responsive to arguments in favor of that class. They really do think they are the Golden Boys. What a comeuppance these jocks need!
I defy anyone to find that ratio anywhere in Europe. Why? Because here politics is a profession and there are fewer wealthy dilettantes.
In Europe there is less need for money to get elected. Besides, it is a career path for a lifetime in most instances. Where will you find a dis-elected politician in Europe? S/he is good for what job in commerce or industry? There résumé would not stick anywhere. Lobbying maybe. Teaching.
So, as a Greek can hold his/her head in shame as regards their politicians, so might the Spaniards and the Portuguese as well as the Irish and Italians. But, they were simply gaming the political system. Rather than bite the bullet and reform Labor Regulations that would free the market from its strap-down, they just kept borrowing to keep the down and outers relatively quite with UI.
Europe’s post-war Boom-Economy has come to an end. Europeans must get used to that dismal fact. They are now in a Bust-Economy, which tests their mettle as a people.
It was a stupid game and it had to stop at some point in time. Meaning now’s the time to pay the piper.
In short, what you’re saying is the US political class has already been absorbed by finance/corporatism, and I do not disagree, and that the final stages of the same process are what we are witnessing in Europe, about which I don’t much disagree – the politicians’ world is being smashed to bits.
But that makes my point re public opposition to being totally screwed over. It’s a lost cause going through the politicians. The only way to escape Bobbit’s (and many others) “Market State”, i.e., supra-national corporate globalism that is in no way accountable to popular, democratic needs ANYWHERE, is to bypass traditional politicians/parties completely and take the fight directly to the real powers that be.