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Monday 08 February 2010 | Ambrose Evans-Pritchard feed
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Comments 74 | Comment on this article
Previous of Images Next A driver stands near parked trucks on the road leading to the Kulata border crossing between Bulgaria and Greece. The roadblock was set up by farmes protesting higher taxes. Greek surveyors work above the pediment of the ancient Parthenon temple on the Acropolis in Athens. The surveyors are checking the alignment of marble blocks as part of ongoing conservation and restoration work on the 2,500-year-old building.Flow data shows an abrupt withdrawal of German and Asian capital from Club Med debt markets. The EU's refusal to offer Greece anything beyond stern words and a one-month deadline for harsher austerity – while admirable in one sense – is to misjudge how fast confidence is ebbing. Greece's drama has already metastasised into a wider systemic crisis. The world risks a replay of the Lehman collapse if this runs unchecked, this time involving sovereign dominoes.
Barclays Capital says the net external liabilities of Greece are 87pc of GDP, or €208bn (£182bn). Spain is worse at 91pc (€950bn), and Portugal worse yet at 108pc (€177bn); Ireland is 68pc (€123bn), Italy is 23pc, (€347bn). Add East Europe's bubble and foreign debts top €2 trillion.
Related Articles Fears of 'Lehman-style' tsunami as crisis hits Spain Greece rattled by 'hidden debt' controversy Should Germany bail out Club Med orBy Ambrose Evans-Pritchard Published: 5:46PM GMT 07 Feb 2010
Comments 74 | Comment on this article
Flow data shows an abrupt withdrawal of German and Asian capital from Club Med debt markets. The EU's refusal to offer Greece anything beyond stern words and a one-month deadline for harsher austerity – while admirable in one sense – is to misjudge how fast confidence is ebbing. Greece's drama has already metastasised into a wider systemic crisis. The world risks a replay of the Lehman collapse if this runs unchecked, this time involving sovereign dominoes.
Barclays Capital says the net external liabilities of Greece are 87pc of GDP, or €208bn (£182bn). Spain is worse at 91pc (€950bn), and Portugal worse yet at 108pc (€177bn); Ireland is 68pc (€123bn), Italy is 23pc, (€347bn). Add East Europe's bubble and foreign debts top €2 trillion.
The scale matches America's sub-prime/Alt-A adventure and assorted CDOs and SIVS of the Greenspan fling. The parallels are closer than Europe cares to admit. Just as Benelux funds and German Landesbanken bought subprime debt for high yield with AAA gloss, they bought Spanish Cedulas because these too had a safe gloss – even though Spain's property boom broke world records. They thought EMU had eliminated risk: it merely switched exchange risk into credit risk.
A fat chunk of Club Med debt has to be rolled over soon. Capital Economics said the share of state debt maturing this year is even higher in Spain (17pc) than in Greece (12pc), though Spain's Achilles' Heel is mortgage debt.
The risk is the EMU version of Mexico's Tequila crisis or Asia's crisis in 1998. This Ouzo crisis is coming to a head just as tougher bank rules cause German lenders to restrict loans, and it touches on the most neuralgic issue of our day: that governments themselves are running low. Britain, France, Japan, and the US are all vulnerable. All must retrench. The great "reflation trade" of 2009 is over.
Far from containing the crisis, Europe's response recalls the Lehman/AIG events of 2008 when Brussels sat frozen, and Germany dragged its feet. On that occasion France took charge, in the nick of time.
Today's events will not wait. The rocketing cost of (CDS) default insurance on Iberian debt speaks for itself. Lisbon retreated from a €500m bond issue last week, even before the government lost a crucial finance vote. Can Athens raise money at all on viable terms?
There are echoes of early 2009 when East Europe blew up, with contagion hitting global bourses, commodities, and iTraxx credit indices. That episode was halted by the G20 deal to triple the IMF's fire-fighting fund to $750bn. The odd twist today is that Greece cannot turn to the IMF because that offends EMU pride, yet no other help is on offer because the EU has no fiscal authority. Greece lies prostrate between two stools.
Both the City and Brussels seem certain that Europe will conjure a rescue, crossing the Rubicon towards fiscal federalism and a debt union. The emergency aid clause of Article 122 is on everybody's lips. Insiders talk of a "Eurobond".
On balance, such a rescue is likely. Yet leaving aside whether North Europe can afford to guarantee Club Med debt – or whether a bail-out pollutes more countries, as HBOS polluted Lloyds – there is one overwhelming fact missing from the debate: Germany has not endorsed any such rescue.
Jurgen Stark, Germany's champion at the European Central Bank, said markets are "deluding themselves" if they think others will pay to save Greece. He shot down Article 122, saying Athens was responsible for its own mess.
Bundesbank chief Axel Weber said it would be "politically impossible" to ask taxpayers to bail out a profligate state. Both the finance and economy ministers have forsworn a rescue. Die Welt has called for Greek withdrawal from the euro.
I cannot judge how much is brinkmanship, pressure to make Club Med sweat. But I remember vividly lunching with the British prime minister's economic adviser in August 1992 and being told that Germany would soon rescue sterling in the Exchange Rate Mechanism by cutting rates. Such was the self-deception of the British elite. Anybody following German politics – such as George Soros– knew it was nonsense.
Germany is harder to read today. The euro is a giant step beyond the ERM. Yet there are powerful counter-currents. Germany's constitutional court issued a crushing put-down of EU pretensions last June, ruling that the sovereign states are "Masters of the Treaties" and that EU bodies lack democratic legitimacy.
So if you are betting that Germany must forever more efface itself for the European Project, be careful. Berlin hawks might prefer to lance the Club Med boil sooner rather than later.
Comments: 74
I also believe that this whole process will lead to the next evolutionary step towards a European Federation. Germany will rescue Greece only through European structures and with explicit support from other strong states. As we all know, once you have a new EU structure/organisation that one quickly becomes permanent. On top, Angela Merkel has finally understood taht cooperation at European level is the only way forward as national policies are not very sucessful, the failure of the Copenhagen summit on global warming was a stark reminder to her. Europe without a united voice counts for nothing in the world.
Martin Carter well said. Germany is correct. The Greeks and the other PIGIS need to behave responsibly. Any chance that it might happen ? Though secretly, under Control Freak Brown's rule, I admire their attitude to paying taxes. In Greece, paying taxes is optional. Lucky lucky sort they are. Brown Harman and co have Britain sucked dry with stealth taxes and stupid charges. And then the money is wasted.
Of course the Germans will bail out club med but only on condition that they will run the countries finances hence spain greece et al will become federal states of the EU or Germany by proxy. So the euroists will have had their way !! A reward for fiscal prudence and hard work something with which the UK has become sadly unfamiliar
Ambrose is right, some kind of rescue is likely. Just look at these figures that I have found in Frankfurter Allgemeine today: Greece owes foreign banks $303 billion in total, split up like this - France $76bn, Switzerland $64bn, Germany $43bn, USA $16bn, UK $12bn. There is every good reason even for the American and British governments to save Greece and support Germany and France. But again, if there is going to be a rescue Germany will dictate the terms on the Greeks. Ambrose's reminder regarding the verdict of the German Constitutional Court is important. That court is the most important arbiter on European law. And Germany will pursue its own interest in this matter (which in this case suits the French and British very well). I would think that with US and British involvement the IMF would be the best organisation to stage such a rescue as it is more detached from public opinion and far more independent than any EU institution.
times variability without intergovernmental economic vapor last
but Ambrose, proportionately speaking, the level of German debt is as high as that of Greece. and the present main concern of the German government is to purchase stolen tax-data from some Swiss individual in an attempt to reduce this debt. the recognition of German responsibility is, domestically speaking, at a very low level kind regards
All that mess went so far that the sooner it bust, the better for all. Holds true for EU, US and global economy (if there is still such a thing) in general. Peoples wanted a lot of things/services they don't need paid with money they don't have. Well, that party is now over. Some sanity will return. Long live depression!
Mr Charles Lee is sure that the Greek farmers are "like spoilt children," because "they didn't want to pay higher taxes." It's possible, however, that they are men and women with real children, even rarer in Greece, I understand, than they are in the United Kingdom.
There is serious concern that the so-called PIGS (Portugal, Ireland, Greece and Spain) economic crisis could undermine or destabilize the nations of Europe most of which are still reeling or gradually coming out of recession. But, it's not as terrible as it was at this time last or thereabouts; except that of Greece. Furthermore, Italy is anither nation in deep trouble. So, if it's substituted for Ireland, the PIGS economic Syndrome still stands. Greece just let he good times roll without a solid back-up, economic-revitalization plan; until it was too late. High taxes, tax evasion, export decline, high unemployment and other factors aggravated the situation, and to worsen the situation, Greece misled EU's supranational government with grossly misrepresented economic statistics to paint a rosier picture of a badly mismanaged economy bubbling with higher deficits estimated around $300 billion. EU member-nations are mulling options. But bail-out is out of the question as France and Germany leading the pack of opposing nation, fear that bailing Greece out will encourage other troubled Eurozone nations to consider largesse dependency, instead of taking tough, economic measures that will rein on deficits, spending, taxation and tax evasion, which are all options the Greek govermrnt are pursuing, some of which have, also, triggered strikes and threats of strikes; especially among farmers who protested the higher taxes. Higher retirement age to stablilize the heavily indebted and costly pension systems is a part of the economic recovery plan, also. All eyes are on Greece. Because, they don't want the situation to spill out of control and undermine the economy of other EU or European neighbors. The sitation was heavily discussed at the G-7 conference in Iqaluit, Nanavut, Province Canada. Greece means business and is determined to get to the bottom of this matter. But, the patience of other jittery nations who still remember how haphazard Wall Street financial-investment transgressions spinned out of control and globalized, is running out. Igonikon Jack, USA
Ambrose gets it right. "Both the City and Brussels seem certain that Europe will conjure a rescue. Insiders talk of a Eurobond". (Chelyabinsk 10.15am 7 Feb) US Treasury Secretary, Tim Geithner's ringing endorsement that Greek would not default on its debt in the FT, has confounded many commentators, who are simply lost for words. The US and the EU are standing shoulder to shoulder on the issue of sovereign debt. The crisis is over. Excellent news from the markets this morning, the Euro is becoming more competitively priced as Chelyabinsk predicted, easing the burden on its weaker members.
For Forsaken2: "Who was that Scottish guy who claimed to have found the philosophers stone and got the French King to issue paper money,and what happened?" That would be good old John Law, who persuaded people to invest in the swampland of Louisiana (amongst other great ideas). http://en.wikipedia.org/wiki/John_Law_(economist)
It would appear that the bailing out of Greece has the same level of moral hazard and systemic risk implications for the financial markets of Lehman and AIG crisis. Is history repeating itself as the financial crisis is not over and deleveraging is still ongoing and ponzi schemes unwinding? The bail out of Greece (and other PIGS) is necessary, but probably not sufficient, to save its banking counterparts and avoid snowball effects in the financial markets, including the famous Credit Default Swap one. I still contend that the roll over of sovereign and public debt is a kind of Ponzi scheme not simple “debt hysteria” as James Kwak and also Krugman wrote few weeks ago. Of course there might be some big speculators behind sovereign defaults but that does not change the features of governments Ponzi schemes particularly in the case of Greece. And we are again in a market for lemons, this time of sovereign debt. http://mgiannini.blogspot.com/2010/02/sovereign-debts-markets-for-lemons-and.html
It would appear that the bailing out of Greece has the same level of moral hazard and systemic risk implications for the financial markets of Lehman and AIG crisis. Is history repeating itself as the financial crisis is not over and deleveraging is still ongoing and ponzi schemes unwinding? The bail out of Greece (and other PIGS) is necessary, but probably not sufficient, to save its banking counterparts and avoid snowball effects in the financial markets, including the famous Credit Default Swap one. I still contend that the roll over of sovereign and public debt is a kind of Ponzi scheme not simple “debt hysteria” as James Kwak and also Krugman wrote few weeks ago. Of course there might be some big speculators behind sovereign defaults but that does not change the features of governments Ponzi schemes particularly in the case of Greece. An we are again in a market for lemons, this time of sovereign debt. http://mgiannini.blogspot.com/2010/02/sovereign-debts-markets-for-lemons-and.html
When the end comes, as I suppose the end must always come, it seems it will be the stronger, deeper, more cunning, and more beautiful who will survive. This seems to be an outcome for which even we who are weak, shallow, conscience-bound, and plain can hope, provided we are also men of good will toward the race of men.
For Andrew: "California accounts for 15% of US GDP and is likely to go bust." The people of California are just like the PIGS - they want the services and the lifestyle but aren't prepared to fund either with taxes. It's interesting to watch the collision between childlike, pampered self-delusion and reality. When bills aren't paid, people eventually refuse to supply those who live beyond their means.
Oh and I know the US and the UK have problems but I am interested to know what has happened in Europe. So spare me the ridiculous comments saying Ambrose should stick to the UK. I am sure AEP is aware of the dangers of fiat money and the constant fiddling required to maintain it. That is the world we live in.
Who was that Scottish guy who claimed to have found the philosophers stone and got the French King to issue paper money,and what happened? I recon the smart money understands very well that timing is everything. The paper money go round is all very well but make sure you get rid in time. What do I know I did not foresee QE and a Euro bond, well will the people buy it? I dare say they will. This paper really would be as good as gold because it is backed by a promise from the European Union and that's that.
I was interested in that photograph of Greek drivers blocking the road because, like spoilt children, they didn't want to pay higher taxes. It crystallises the dilemma of weak governments, led by scuzzball politicians who don't want to lose their jobs. Clearly, there are no political giants waiting in the wings who might solve the problem. The problem will be solved by the markets or by the Germans, prepared to bankroll their self-indulgent Southern partners. The former will lead to chaos and immediate economic pain for the PIGS, but a rapid lancing of the boil. The latter will lead to far longer-term pain for Germany and the Eurozone. The boil will subside but will require lancing at a later date. Take your pick. Politicians, by the very nature, do not like confronting pain and alienating voters. The Germans will opt for a carefully disguised bail-out of the PIGS.
Ambrose you say: "For the third time in 18 months the global financial system risks spinning out of control unless political leaders take immediate and radical action". You go on to make a number of well placed observations but you do not go on to say what those "immediate and radical actions" should be. Most governments who would be in your frame of reference are unable to help themselves let alone help anyone else if that help is in the form of raising their own debt levels. It also cannot mean some form of joint QE which is another debt bomb with a delayed fuse set to explode on the same exhausted tax payers. So what do you mean by immediate and radical action"? This leaves only the possibility of radical structural reform. This could take the form of (a) Germany leaving EMU (with its near friends)or (b) it could mean radical fiscal restructuring across EMU to give confidence to creditors, or (c) it could mean the end of democracy as we know it - which is what implementing point (b) would entail. So Ambrose what precisely did you have in mind?
In the short term : Greece etc. will have to look at selling off the family silver . In the long term : as the debt is paid off , there will be an excess of investment moneys - the wise ones will start placing it in corporate investments starting now .
"The EU's refusal to offer Greece anything beyond stern words and a one-month deadline for harsher austerity – while admirable in one sense – is to misjudge how fast confidence is ebbing" Relax. Germany will bail out its prodigal Southern partners. It wouldn't like its exercise in European hegemony to collapse. You can bet the farm on this. It'll be disguised with smoke and mirrors of course, but a German bail-out will nevertheless take place.
I just wonder why everybody tries so hard to focus on Europe? The US has AT LEAST the same problems, much probable even worser. All who are running into the Dollar now have a good chance of loosing a lot. Just look at the depths, at the Commercial Real Estate Market, at the smaller companies and so forth. And on top just keep China in mind. If these dudes selling just a bit of their 2400.000.000.000 Dollars....my o my. It can be dangerous to underestimate China! So I don´t see ANY reason to point at Europe - especially if you are an American.
Manav on February 07, 2010 at 10:52 PM "TARP the Debt" Thanks a million Manav, you have given me another "Newspeak" entry for my "1984 Dictionary" which I am compiling as the Great Melt-Down proceeds. This Global Extravaganza Spectacle Part 2 is more exciting to observe than Apollo 13 - What Drachma!...uhhh DRAMA - sorry! http://my.telegraph.co.uk/therockcalledpeter http://www.leave-the-eu.org.uk/
If the Greeks are bailed out won't the Irish want to reopen negotiations?
Call me cynical and suspicious if you will but isn't it advantageous for the Germans to let Greece fail? I would have thought that a devaluation of the Euro is exactly what "The World's Biggest Exporter" should want to help their economy.
Considering an AP article of 3 March 2009 that is now no longer carried by AP and that I have been able to find only on Fox http://www.foxbusiness.com/story/markets/economy/eu-solutions-case-euro-state-default/ (I had written a post on my blog at the time: http://guidoromero.wordpress.com/2009/03/03/eu-has-solutions-in-case-of-euro-state-default/) it would appear that the EU would be unable to issue Euro bonds to bail out states. But more importantly, why would a Euro Bond be of any help? All countries today are engaged in Quantitative Easing; that is we have now abandoned the floating exchange rate mechanism that says that sovereigns should buy each other's sovereign debt. In other words, nobody can or wants to buy anybody elses's sovereign debt either because they cannot or they do not want to. This being the case, I don't see how a Euro Bond can help. Besides, from the article: "Almunia said it was unlikely that the European Commission could issue more bonds to help out EU nations because treaty rules forbid it from running a deficit. The EU executive is already selling bonds to help pay for a euro9.6 billion ($12 billion) bailout for Hungary and Latvia." And here is the other problem. If the EU continues to steam roll all the laws that it has laid down, then why should investors be encouraged to invest in the Eurozone where the rule of law is not assured? States, like companies, should be allowed to fail early on. Let's take the medicine.
Berlin 'hawks' Ambrose? Surely, 'eagles' ? Just a thought.
Another great piece of analysis Ambrose. Could the loss of Greece and club-med be too big a loss for the Germans and French this time? It seems to me that we still have some way to go before the Euro project gets to END Game, although End Game we will reach. The Spanish in particular have just started to realise how Nice it would be to have our own currency so we can deflate , print some more and carry-on as usuall. Economically, life is getting very hard in the land of Sangria.Please keep on writing these excellent articles.
.... meanwhile in a little Pacific Paradise called New Zealand, our gross debt is 165% GDP, our net debt (as of mid 09) 88 billion euros, or 98% GDP. So please don't forget us, we want to be known as fair and committed players in the global financial merry-go-round and our contribution to the world debt crisis properly acknowldeged. Thank you.
Anthony 10:33 Your post makes me think of a South Park episode where Grdon Brown arranged to save the world by stealing money off aliens!
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