Accessibility links
Monday 26 April 2010 | Ambrose Evans-Pritchard feed
Advertisement Website of the Telegraph Media Group with breaking news, sport, business, latest UK and world news. Content from the Daily Telegraph and Sunday Telegraph newspapers and video from Telegraph TV. Enhanced by Google Home News Election 2010 Sport Finance Lifestyle Comment Travel Culture Fashion Jobs Dating Subscriber Offers News by Sector Comment Personal Finance Markets Economics Your Business Business Club Blogs Finance Video Fund Game Evans-Pritchard Jeff Randall Damian Reece Edmund Conway Tracy CorriganBy Ambrose Evans-Pritchard Published: 9:41PM BST 25 Apr 2010
Comments 41 | Comment on this article
The relief rally fizzled shortly after Greece folded its bad poker hand and invoked aid. Bond risk as measured by Markit's 5-year credit default swaps jumped to fresh records of 280 for Portugal and 177 for Spain. Irish CDS contracts rose 13 points to 185.
This was an entirely logical response to the twisted events that are unfolding. The rescue obliges countries in trouble to go deeper into trouble. Portugal must come up with €774m as its share of the EU's initial €30bn package. Ireland must find €491m, Spain €3.7bn.
Yields on 10-year Portuguese bonds hit 4.94pc, a whisker shy of the 5pc rate that Lisbon must relend to Greece. Meanwhile, safe-haven Germany can borrow at just over 3pc. The bail-out cost falls hardest on those that can least afford it. It deepens the North-South divide that lies at the root of Europe's crisis.
In a rational world, Brussels would tap the EU's AAA rating to issue cheap "Barroso Bunds" to cover rescue costs. But we are not in a such a world. We are in the Maastricht madhouse, a currency union without a treasury, ruled by the "no bail-out" clause of Article 125 of the EU Treaties. Europe is at last paying the price for fudging the true implications of EMU 19 years ago in that Medieval city on the Maas, gambling that it would one day be able to lead Germany by the nose into a debt union.
Chancellor Angela Merkel continues to equivocate, demanding "very strict conditions". Dissent is growing louder in her coalition ranks. Both Free Democrats and Bavarian Social Christians have said it is time to break the taboo and ask whether Greece should "step outside" EMU. Werner Langen, the leader of Christian Democrat MEPs, said the bail-out appears to breach Germany's constitution.
If so, we will find out soon. Four professors will launch a legal challenge in early May at the Verfassungsgericht (high court). Should they secure an injunction, EMU may fly apart.
The Court ruled in 1993 that Maastricht was constitutional only as long as EMU remains an area of monetary order. "A 'transfer union' is a bottomless pit and is bound to threaten currency stability. That is what we are going file," said Tübingen Professor Joachim Starbatty.
When accused of consigning Greece to ruin, he told the Frankfurter Allgemeine that EMU exit and default is Greece's only salvation. "The truth has to come out into the open. Greece is in no position to pay it debts," he said.
The EU-IMF "therapy" of deflation for Greece repeats the catastrophic errors of Chancellor Heinrich Bruning in the early 1930s and must lead to a depression, he said.
Yet that is what IMF chief Dominique Strauss-Kahn is preparing for Greece, against the better judgment of his own experts. "Greek citizens shouldn't fear the IMF; we are there to try to help them," he said over the weekend. Yet a week ago he told Greece that devaluation and default are non-starters. "The only effective remedy that remains is deflation. That will be painful. That means falling wages, and falling prices. There is no other way."
Actually, the IMF pursues other ways often, last year in Jamaica. What Mr Strauss-Kahn means is that the EU will not tolerate any other way. The Greek people must be sacrificed for the Project and to hold the EMU line, like the Spartans of Thermopylae who perished to gain time for the Alliance.
They are to squeeze fiscal policy by 6pc of GDP this year in a slump – a "death spiral", warns George Soros. They are to do this without the IMF's devaluation cure. If they do stabilise the debt – to hit 130pc of GDP this year after Eurostat's revelations – they will be left paying 6pc to 8pc of GDP to foreign creditors for ever. Will Greeks comply meekly, or turn their Spartan blades on Europe?
No country in Western Europe has defaulted since the Second World War. More than €7 trillion has been lent to Club Med states, banks and homeowners in the belief that it cannot happen. EMU shut the warning signals, disguising risk. What investors overlooked is that currency risk mutates into default risk in a monetary union. It makes default more likely, not less. The bond markets have suddenly twigged.
In barely two weeks, the City mood has shifted from ruling out a Greek default as absurd, to accepting that it could happen, to now fearing that restructuring is highly likely.
A country such as Portugal with total debt of 300pc of GDP, a current account deficit of 11.2pc, and a budget deficit of 9.4pc should not think it has the luxury to trim spending at a leisurely pace. Portugal has an ugly choice. If it tightens hard to soothe bond markets, it too risks depression. EMU's Faustian Pact is closing in.
Comments: 41
David Lincoln: "Therefore, I see banks closing up shop, and new ones coming into being, and the new ones will be handling new currency" It nearly happened in Sept '08 here across the pond, and it'll happen again. When it does, it'll be unholy fast and most people will have only the slightest hint beforehand. http://themeanoldinvestor.blogspot.com/2009/11/sum-of-all-fears.html
A way out of the mess: Buy the Greeks for what they're worth then sell them to someone for what they think they're worth.
With all respect to the rabid anti-EU Telegraph and its readership. It should not be forgotten that Club Med's problems have originated from lack of fiscal discipline, and in Greece's case, from outright lying about its fiscal deficits. The team that is EMU cannot be faulted if some players unwilling to carry their weight.
Oh great,the taxpayer of Germany is the moron of last resort!In excess of Euro70Billions of Greek debt are from French state pension funds,so of course this bailout is to the benefit of France and French pensioners and to hell with German taxpayers!German banks have so much toxicity residing on their books coutesy of America,that they dare not be even slightly transparent-yet another bailout waiting to happen.When do German taxpayers have enough?
Dr Jonathan Wilson on April 26, 2010 at 06:08 AM I hope your blast theory wipes out the French banks a nanosecond after the initial detonation. It was the French who drove Maastricht and Euro madness. They alone should be responsible for all sticking plaster for their Club Med casualties.
Tom Araxias on April 26, 2010 at 06:14 AM But Chelyabinsk has a political dream (like the EU which caused the Maasstricht laxity), and no economic reasoning.
[EMU shut the warning signals, disguising risk. What investors overlooked is that currency risk mutates into default risk in a monetary union. ] There is the heart of the matter. The Euro Project is, and always was, a deceit to sell the idea of risk being magically removed. It was sold to adolescent minds longing for relief from the burdens and constraints of adulthood. It was a proposition of mothers milk. It was a con sold for short term benefit of Euro elites. The outcome of such behaviour is always the same, although the timing is always different. Now might be the time for the Eurozone. p.s. can we have some data on Eurozone member state exposures to Greek, Portugese, Spanish and Irish default? These numbers explain whats really happening I think. Ooh la la! Quelle surprise Rodney!!
The simultaneous policy pursued in the last decade of shoehorning the EU into a pseudo-political union combined with the short-term profit-grabbing disaster of globalisation will drag Europe into another civil war in the next 10 years. After the Soviet Union fell there should have been a europe-wide policy of Lustration so that these ex-Marxist and ex-Maoist idiots never got their greedy paws anywhere near the levers of EU power.
From arabianmoney.net today... Bullish commentators are grossly distorting recent US economic data to support their case that the US economy is in some sort of V-shaped recovery. The reality is that the economy is still largely flat on its back and facing at best a slow recovery, and at worst a second downturn as global deleveraging becomes essential to halt the rise in government debt. Take the Bloomberg headline on orders for durable goods last week. It trumpeted the 2.8 per cent rise in bookings excluding cars and aircraft as the ‘best result in four years’. Cars and planes crash Fine, except that when you include those not inconsiderable items – automobiles and planes – then total orders actually dropped by a completely unexpected 1.3 per cent due mainly to a 67 per cent crash in commercial aircraft orders. Now the same distortion also applied to the US new homes data. The headlines focused on the one-month 27 per cent jump in March to an annualized 411,000 homes. Great except that this bounce came off the all-time record low of 324,000 in February, and was supported not only by better weather but by the $8,000 tax break that expires at the end of this month. So you might argue that US new home sales touched their pitifully low bottom in February, the worst figure in more than 60 years. But this is still a terribly depressed level for one of the motors of the US economy. And to try to claim that a V-shaped recovery is expected from one month’s data is just bullish nonsense and cannot be done. If the bulls are sinking this low to prove their case what does that tell us? It surely signals that the rally in stocks is well, well overdone and due for a correction. What would it take now to stop this thundering herd? Herd mentality The pictorial analogy is surely the herd of buffalo heading towards the edge of the cliff – perhaps being corralled by Indian hunters. They would now be the market professionals who can go short at the touch of a button. What does it take to push this lot over the edge? Not usually very much. Indeed, herds of buffalo will fall over the edge due to the weight of the animals behind them. By rounding up the last bears and strays and driving them into the bull camp Wall Street is setting us up for a huge market reversal when it comes. The bullish argument is that it just has not happened and so it never will. The bearish lesson from experience is that the bulls are loudest just before the crash – although their arguments are woefully misleading on any rational analysis like just now – and that what has to obviously happen almost always does. Only if you exclude US automobile, aircraft and house sales can the current US economic date be presented as positive. How bullish is that?
Ambrose, it is no doubt more exciting to report on the machinations down at the casino, (unfortunately, without the champagne to oil the verbiage.)Still,such commentary continues to fail to address the central problem - it merely reflects this. deflation is to be imposed on Greece et al ? well, effective deflation has occurred in Europe´s largest economy these past ten years, disguised by internal transfer payments and the artificial demand created by such payments. it is such domestic deflation which has given rise to the massive export surpluses - aided, abetted and supported by the EU currency union. yes, we are again speaking of Germany - which, once more, expects to export its way out of its current problems - as does just about every other country !*!. problem is, Germany might just succeed in so doing - adding mightily to the problems such action creates. is there an answer to this within current EU arrangements ? this is actually the CENTRAL problem of the EU. it can be summarised in the observation that we either succeed in making other Europeans behave like Germans, or we succeed in making Germans behave like other Europeans. Certainly the technology to enrich us all is available if properly applied. proper application would entail the balanced spending (not saving)of money down at the casino. but how do we get this message through to populations whose ideology of thrift is shrouded by a mystical, semi-religious veil ? (known as capitalistic free-markets, operating in the absence of manipulation - given that such things actually exist) in my view, we certainly DO require a second-edition KEYNES to analyze as a pre-requisite of commentary. kind regards,
You've got to admit Walther's right. Walther 6.31am writes: "Another weekend, another jealous Anglo pipedream about Europe breaking down". "Since the start of the Euro 10 years ago, Ambrose has predicted a breakdown at least twice a month". (More like twice a week). Is there really likely to be "EMU wide contagion from Greece"? Is Greece likely to default or bond investors take a "haircut". Highly unlikely. The key to understanding all of these tongue in cheek, hysterical comments about Europe lies in the second sentence. "Bond risk as measured by Markit's 5 year credit default swaps jumped to fresh records etc". AEP is the voice of the CDS derivatives market. AEP does not have a brief to write about Britain which makes his comments about the EU appear one sided and unbalanced. For a much more balanced report about Greek debt resolution read "Germany refuses to help Greece unless it agrees to tougher terms" written by AEP with with Edmund Conway in the Daily Telegraph today. No talk about the Euro collapsing at all. Britain faces a debt and deficit problem greater than that of Greece. The FT's front page headline today reads "BRUTAL CHOICES OVER BRITISH DEFICIT". "The next government will have to cut public sector pay, freeze benefits, slash jobs, abolish a range of welfare benefits and take the axe to such programmes as school building and road maintenance - or make a set of equally politically perilous choices, according to an anlysis by the Financial Times" FT 26 April. Pity AEP can't comment on this.
"Lets see what 2011 brings" I think you've summed up the policy of the Eurozone's leaders nicely, Mr Kowolski. The ship is sinking. It has to - it was launched without a bottom. They're hoping that their "Project" will be rescued by the oceans drying up.
For T.Andreen: "Ambrose Evans-Pritchard is virtually alone in pointing out the factual (grim) state of affairs and potential ramifications in the Eurozone and beyond" "Cassandra spent a night at Apollo's temple, at which time the temple snakes licked her ears clean so that she was able to hear the future..... When she did not return his love, Apollo placed a curse on her so that no one would ever believe her predictions..... While Cassandra foresaw the destruction of Troy (she warned the Trojans about the Trojan Horse, the death of Agamemnon, and her own demise), she was unable to do anything to forestall these tragedies since no one believed her." http://en.wikipedia.org/wiki/Cassandra
The cracks in the union are starting to show. Quite a few number of friends already started to convert their money into dollars. I think I might have to do it as well.
Another weekend, another jealous Anglo pipedream about Europe breaking down. Since the start of the Euro 10 years ago, Ambrose has predicted a breakdown at least twice per month. AEP's problem; instead of breaking down it has increased in value about 50% against Anglo currencies. Continue the good work Ambrose!!
Whatever the immediate future for Greece, it got itself in this situation by its profligate government spending, corrupt and sclerotic government bureaucracy, poor productivity and head-in-the-sand behaviour over many years. Let other countries take note and act now in their own domestic policies to help steer clear of such future troubles. In particular: the demographic baby-boomer bubble has long been known about but the years tick by with little real change as successive governments buy current votes rather than take the long view. A rise in protectionist nationalism seems highly likely.
A country such as Portugal with total debt of 300pc of GDP, a current account deficit of 11.2pc, and a budget deficit of 9.4pc should not think it has the luxury to trim spending at a leisurely pace. Portugal has an ugly choice. If it tightens hard to soothe bond markets, it too risks depression. EMU's Faustian Pact is closing in. In times of adversity Portugal was always up for the challenge. It won't be different this time. Those who bet against it, surely don't know nothing about Portugal and its people.
Yet more Acres of newsprint about Greek and other countries 'debt' but WHO exactly do all these countries 'OWE' this 'money' to? If only 5 or 6 countries in the World are significantly in credit, where does all the 'debt' and 'loans' come from? All smoke, mirrors and BS?! The answer lies in the article when it states Greece will be paying 6-8% of GDP to 'service it's loans' forever. The Bankers got what they want as always!
"The root of Europe's crisis"--which is also the root of the U.S. crisis and the world crisis--is that it has a middle class. Just starve the middle class to death, and everything will be fine. This scum must go, and will go.
The solution requires the ECB to print money to rescue Greece and the rest of the troubled debtor nations within the EU. Politics and ignorance currently have left the door closed to the best alternative. It doesn't help that Bernanke is too cautious and too meek to stare down the inflation hawks on the Fed and dare to print more money. Currently one in five mortgages in Florida are 90 days or more past due. This means almost one in ten homes in Florida is awaiting foreclosure. How much courage does it take to see the economy is still sick and the Fed needs to be more aggressive? Nero fiddled while Rome burned. Today we see the modern equivalent with Central Banks fiddling while the debt-induced deflationary depression rages on. http://www.escapethenewgreatdepression.com
Despite all the difficulties, I'm thinking that Greece will make it thru this year at least; the Greek unions will go on strikes, German politicians will grumble, court challenges will fail, and for this year at least Greece's economy survives. Lets see what 2011 brings.. I'm far less sanguine about next year than this. Greek unemployment & taxes will go uncomfortably high, as will German annoyance at having to cough up another $40 billion next year as well. My guess.. in 2011, a "negotiated default" occurs. http://themeanoldinvestor.blogspot.com
@ Chelyabinsk Selling the taxpayers share of the banks will probably bring in more than £100bn. Was reading in The Scotsman that every pence over 50p of RBS is worth 900 million to the taxpayer. People tend to overlook that fact. I wonder what RBS will be worth in 2013?
I still think Rothchild / Builderberg / Goldman Sachs /Federal Reserve is behind all this trouble.. They as a group want to take control , suck all the money from the average working man.. They want a one world government.. we must stop them...
I know, let's all pretend our leaders and financial geniuses really understand what they're doing so they can keep on making more mistakes and never have to admit their stupidity. And, of course we'll be happy to lose our savings, take a pay cut, and watch them just keep piling up more debt so they can be re-elected by the morons who believe in free lunches.
I would expect a lot of family reunion type immigration to melbourne australia, which has the largest greek population [300,000outside greece] if the debt bailout goes ahead. deflation ,wage cuts and higher tax impositions on a very digruntled and restless greek population will see a greek exodus.
Just so I'm clear on the logic here, when Portugal, Spain, et al put up their hands for a bailout, Greece is going to have to contribute to them also? Mindboggling! Of course toxic waste's (aka Chelyabinsk) solution is just to extend the terms of the debt, while piling on more debt -- and go on doing that forever. I can understand why this arrangement is attractive to debtors, but don't you suppose lenders might decide to give it a miss? This is one turkey short of a few feathers.
Chelyabinsk says: "AEP is right in saying that Greek debt is likely to be restructured. The maturity of much Greek government debt needs to be lengthened." No, Sir, Greek debt needs to be wiped out, not be lengthened. Extend and pretend doesn't solve anything. The banks made loans to someone that can not pay back. What they need to do is to take a haircut, write the loans off and acknowledge the loses. It's time we started dealing with these immense issues not merely kick the can down the road.
Excellent article, the only way to start a week is with an Ambrose special much better than a strong coffee; everyone else seems to have fallen asleep on watch, again. The argument surely has to come around to Germany leaving the currency union? This allows the Euro to find a lower peg and give the PIGSS some breathing space. Otherwise it will turn into a slow car crash. It will also mean that dream property overseas will become a real possibility as sterling’s strength grows against the Euro and we can take advantage of the falling asset prices...
I am just so grateful that I can find frank commentary when I come here. I am in the US and I can not stomach the tripe served up by our media. Reuters + telegraph for me. Thanks so much, Mr. Evans-Pritchard. Yes, Germany should leave the EU. Let the dominoes fall. And, yes, I realize the same collapse will eventually hit here as well -- I would rather see it done sooner than later. Like a cancer -- hit it as early as possible. Though I think it likely we will just pretend and extend for a long time.
Ambrose This is like witnessing the collapsing of a derelict building (the Euro) with bond spreads acting as the detonators and sovereign debt, the high explosive, packed around the pillars of national banking systems. It is all interconnected in a way which guarantees mutually assured economic destruction. Such MAED is deliberately designed to raise the stakes to such a level that even Germany is supposed to blink at the last moment and offer their taxpayers on the altar of debt union. But the designers of this mutually assured destruction have miscalculated. They have not taken into account the heterogeneous nature of real risks. Some nations will act in their own self interest because they calculate that they will survive better than others if they act now rather than later. For this reason the unthinkable happens and the firing sequence is initiated – by Germany acting in their self interest. The firing sequence goes something like this. On the ground floor of the derelict building (the Euro), Greek spreads detonate Greek sovereign debt (the aptly named PIMCO bed of nitroglycerine) for the first explosion. Now denotations occur with such speed that they look as if they occur simultaneously. What happens is that Portuguese spreads on the first floor, detonate followed by Spanish spreads detonating on the third floor. Each in turn causes the Portuguese and Spanish sovereign debts (nitroglycerine) to explode. This Greek, Portuguese and Spanish nitroglycerine is packed around the pillars of European banks but not in equal proportions. It is packed most heavily around French national banks. The combined explosion of the Club Med nitroglycerine causes the main pillar of the French banking system to collapse. This is turn causes French spreads to detonate French sovereign debt on the fourth floor. Now spreads detonate sovereign debts throughout the Euro building with the pillars of European banking collapsing from the force and frequency of explosions. In an act of desperate self preservation Germany attempts to escape the collapsing building by reintroducing the DM and hosing down their banks with funds from international investors eager to find a safe haven currency. The Euro building seemed indestructible and yet all that is left is dust and debris – in a few short moments of time. I am no theologian, and claim no special insight, but some things do seem remarkably prescient: Revelation 18:17: 17For in one hour so great riches is come to nought
Read Full Article »