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Thursday 27 May 2010 | Edmund Conway feed
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Comments 40 | Comment on this article
Photo: BLOOMBERG NEWSMervyn King, the Bank of England Governor, summed it up best: "Dealing with a banking crisis was difficult enough," he said the other week, "but at least there were public-sector balance sheets on to which the problems could be moved. Once you move into sovereign debt, there is no answer; there's no backstop."
In other words, were this a computer game, the politicians would be down to their last life. Any mistake now and it really is Game Over. Or to pick a slightly more traditional game, it is rather like a session of pass-the-parcel which is fast approaching the end of the line.
Related Articles Do not pass go ? or expect house prices to rise soon Economic crisis, and a crisis for economics Three ways to reduce UK's £22bn debt OECD tells Government to cut spending or face hardship for years to come Manufacturing in midst of worst collapse in four decades Moody's predicts default rate will exceed peaks hit in Great DepressionThe European financial crisis may look and smell rather different to the American banking crisis of a couple of years ago, but strip away the details – the breakdown of the euro, the crumbling of the Spanish banking system to take just two – and what you are left with is the next leg of a global financial crisis. Politicians temporarily "solved" the sub-prime crisis of 2007 and 2008 by nationalising billions of pounds' worth of bank debt. While this helped reinject a little confidence into markets, the real upshot was merely to transfer that debt on to public-sector balance sheets.
This kind of card-shuffle trick has a long-established pedigree: after the dotcom bust, Alan Greenspan slashed US interest rates to (then) unprecedented lows, which helped dull the pain, but only at the cost of generating the housing bubble that fed sub-prime. It is not so different to the Ponzi scheme carried out by Bernard Madoff, except that unlike his hedge fund fraud, this one is being carried out in full public view.
The problem is that this has to stop somewhere, and that gasping noise over the past couple of weeks is the sound of millions of investors realising, all at once, that the music might have stopped. Having leapt back into the market in 2009 and fuelled the biggest stock-market leap since the recovery from the Wall Stre
By Edmund Conway Published: 8:21AM BST 27 May 2010
Comments 40 | Comment on this article
Mervyn King, the Bank of England Governor, summed it up best: "Dealing with a banking crisis was difficult enough," he said the other week, "but at least there were public-sector balance sheets on to which the problems could be moved. Once you move into sovereign debt, there is no answer; there's no backstop."
In other words, were this a computer game, the politicians would be down to their last life. Any mistake now and it really is Game Over. Or to pick a slightly more traditional game, it is rather like a session of pass-the-parcel which is fast approaching the end of the line.
The European financial crisis may look and smell rather different to the American banking crisis of a couple of years ago, but strip away the details – the breakdown of the euro, the crumbling of the Spanish banking system to take just two – and what you are left with is the next leg of a global financial crisis. Politicians temporarily "solved" the sub-prime crisis of 2007 and 2008 by nationalising billions of pounds' worth of bank debt. While this helped reinject a little confidence into markets, the real upshot was merely to transfer that debt on to public-sector balance sheets.
This kind of card-shuffle trick has a long-established pedigree: after the dotcom bust, Alan Greenspan slashed US interest rates to (then) unprecedented lows, which helped dull the pain, but only at the cost of generating the housing bubble that fed sub-prime. It is not so different to the Ponzi scheme carried out by Bernard Madoff, except that unlike his hedge fund fraud, this one is being carried out in full public view.
The problem is that this has to stop somewhere, and that gasping noise over the past couple of weeks is the sound of millions of investors realising, all at once, that the music might have stopped. Having leapt back into the market in 2009 and fuelled the biggest stock-market leap since the recovery from the Wall Street Crash in the early 1930s, investors have suddenly deserted. London's FTSE 100 has lost 15 per cent of its value in little more than a month. The mayhem on European bourses is even worse, while on Wall Street the Dow Jones teeters on the brink of the talismanic 10,000 level.
Whatever yardstick you care to choose – share-price moves, the rates at which banks lend to each other, measures of volatility – we are now in a similar position to 2008.
Europe's problem is that the unfortunate game of pass-the-parcel came at just the wrong moment. It resulted in a hefty extra amount of debt being lumped on to its member states' balance sheets when they were least-equipped to deal with it.
Europe was always heading for a crunch. For years, the German and Dutch economies pulled in one direction (high saving, low spending) while the Club Med bloc – Greece, Portugal, Spain, Italy (and their Celtic outpost Ireland) – pulled in the other. At some point, there was always going to be a problem, given that these two economic blocs were yoked together in the same currency, controlled by the same central bank. By triggering the global recession and shovelling an unexpected load of debt on to Greece's balance sheet, the financial crisis has effectively smoked out the European folly.
The Club Med nations – and in many senses Britain – were not so different to sub-prime households: they borrowed cheap in order to raise their standards of living, ignoring the question of whether they could afford to take on so much debt. But, as King points out, sub-prime households – and the banks that lent to them – can usually be bailed out. The International Monetary Fund simply does not have enough cash to bail out a major economy like Spain, Italy or, heaven forfend, Britain. So, again, we find ourselves in unknown territory.
There are plenty of episodes in history when countries have been as indebted as they are now, but they are all associated with periods of war. History shows that when nations reach as high a level of indebtedness as Greece, and have as few prospects of growth, they will almost certainly default. Indeed, the IMF, which has pretty good experience of fiscal crises, privately recommended that Greece restructure its debt (a kind of soft default, renegotiating payment terms). It was refused point-blank by the European authorities.
To understand why, step back for a moment. It is fashionable to compare the current situation to the Lehman Brothers collapse, but that understates its severity. The sub-prime property market in the US, together with its slightly less toxic relatives, represented a $2 trillion mound of debt. The combined public and private debt of the most troubled European countries – Greece, Portugal, Spain and so on – is closer to $9 trillion.
Moreover, whereas the pain from sub-prime was spread out relatively widely, with investors hailing from both sides of the Atlantic, the owners of the suspect European debt tend almost exclusively to be, gulp, Europeans. No one is suggesting all of this debt will go bad, but the European policymakers fear that the merest hint that Greece might default would spark a chain reaction that would cause a more profound crisis than in 2008.
The problem is not merely that holders of Greek government debt would dump their investments, or even that they would ditch their Spanish and Portuguese bonds while they were at it. It is that government debt is the very bedrock of the financial system: should Greek government bonds collapse, the country's banking system would become insolvent overnight. In fact, banks throughout the euro area would be at risk, given that they tend to hold so much of their neighbours' government debt. That, at least, is the theory, but as was the case in the aftermath of Lehman's collapse, no one really knows how great their exposure is.
The other, more cynical, explanation for Brussels' refusal to countenance default is that it fears that this would fatally destabilise the euro project itself – which of course it would. But as the politicians are discovering, organising a European sovereign bail-out is far, far more difficult than rescuing a bank. It took barely more than a few days in September 2008 for the Government to push through the semi-nationalisation of Royal Bank of Scotland and HBOS.
Earlier this month, when the French President Nicolas Sarkozy announced that the continent would be saved by a "shock and awe" $1 trillion bail-out package, markets convinced themselves for a moment that the politicians might be able to manage it. But the challenge of having to co-ordinate an unprecedented rescue across a 16-nation region without a common language or central Treasury is proving too much for Europe's leaders. Add to this the fact that most citizens (particularly in Germany) resent the idea of bailing each other out at all, and are willing to vote out their governments to prove it, and you get the idea of the challenge at hand.
Despite his rather aloof appearance, European president Herman Van Rompuy put it pretty well this week, saying: "Today, people are discovering what a 'common destiny' in monetary matters means. They are discovering that the euro affects their pensions, savings, and jobs, their very daily life. It hurts. In my view, this growing public awareness is a major political development. It forces the governments to act."
That action, so far as Van Rompuy is concerned, means more integration and some eye-watering spending cuts across the continent. Unfortunately, both are being carried out in haphazard fashion. The bail-out package may pave the way for a central EU Treasury, but it is still being muddled through the legislative process, and could well fall foul of voters in France or Germany. Spain and Italy are, rightly, inflicting severe cuts on their budgets, but so is Germany, which ought, according to a host of economists including Mervyn King, to be spending more, not less.
In the meantime, European politicians, torn in one way by their voters, in another by Brussels, emit even more confusing signals which only destabilise markets further. Angela Merkel's ban on investors short-selling German bank shares, and the collapse of a swathe of Spanish savings banks have hardly helped, either. And all the while, the euro continues to fall as investors mull its fate. The single currency can survive – but only if its members agree to more political union, and the prospect of that would be about as palatable to the people of Europe this summer as an ouzo and retsina cocktail.
Comments: 40
I just don't get it. I look around the 3 bed semi I live in together with my wife and 2 kids. I am the main breadwinner, my wife comes in a close second holding down 3 part time jobs. We both work but never seem to have money to spare. Our house is reasonably furnished, its warm and has a mish mash of furniture, some brand new and some second / third hand but still serviceable. We live within our means (just) the bills get paid. We have a few 'luxuries' mainly my love of high tech gadgetry, and run 2 cars, both small and more than 7 years old. I look around my friends and colleagues. Most seem to live the same kind of lifestyle. Some earn more and this is evident in their spending and a few of the younger ones have mortgages that would give me sleepless nights but they all seem to service their debts. None of my friends are bankrupt. In fact, I have never met a 'bankrupt,' someone who default on all their debts. I look around the 36,000 population town where I live. The only investment this town enjoys are the big, privately funded housing developments on the outskirts. There has been no new investment in the towns infrastructure for the 20 years that I have lived here. All the schools, sports center, library etc. etc. were there long before I moved in. We have gone a bit backward, the Police station is shut and the fire station is part time, but the Police get here and the fire brigade arrive to put out fires. I look around the 100,000 population town of my childhood. Again, its pretty much the same thing. The only real difference is that the Hospital that this town 'enjoys' is dying the death of a thousand cuts and can't have that long left. I look at work, I work in the public sector, the demons of the nations crisis. I look around and the lack of investment is evident and chronic. All I keep hearing from my employers is how we must do more with less and that there are hard times ahead. I would be lying if I said that there was not the occasional 'crackpot' initiative to do with diversity or that which is required to support someone's promotion portfolio. Personally, I would stop these before cutting back on the tools required by the troops to do their job, but this is the public sector, after all. So, and this is a heartfelt question, what has bought us to these levels of debt? I am being told that the government has spent thousands on behalf of every man, woman and child that it simply does no have. On what? I submit the above as evidence that it hasn't gone to me and mine. So where? When money is spent, does it not go somewhere? Who has benefited from all this money? Who has got it? Can someone please do an economics 101 and explain where has all the money gone to?
"should Greek government bonds collapse, the country's banking system would become insolvent overnight. In fact, banks throughout the euro area would be at risk, given that they tend to hold so much of their neighbours' government debt. That, at least, is the theory, but as was the case in the aftermath of Lehman's collapse, no one really knows how great their exposure is." A chart appeared in the New York Times depicting the borrowings and lendings between them. http://www.nytimes.com/interactive/2010/05/02/weekinreview/02marsh.html?ref=weekinreview I find it curious that the irresponsible gambling "family member" who had to be bailed out to such a large degree is now giving their saviour such a hard time for borrowing too much to help them out in the first place.
Good article. For those of us who were opposed to the great bank bailout of '08 (yet more received wisdom as per AGW both flawed theories perfect for keeping an existing hierarchy comfortably sat on its gravy train) the only surprise is the scale of the problem. Tensions in the Euro zone were kept under wraps while the going was 'good'. I guess the only good thing about the investors gasps is that they cover the noise of all the chickens coming home to roost. Get short selling everyone while you still can!
"Game over" "Meltdown" What? so people in the Eurozone are going to start hoarding weapons? They are going to start eating each other? Such terms are meaningless. Sure, there are some serious economic problems in the Western world - or at least according to the undemocratic IMF orthodoxy - but all this anti-Euro schadenfreude doesn't really add much.
"But, Edmund, where has all the loot gone? Who are the counter-parties? Or is it just an illusion and we've been printing money, so none of it really exists apart from in electronic accounts? Widget on May 27, 2010 at 10:12 AM " ------------------------ Mr Widget...the Russian so-called 'Oligarchs' have taken at least £ 1 trillion out of European and US banks and laundered it into football clubs, palatial properties in every major city and resort, ocean-going liners , villages and of course , gold and diamonds , all hidden away in Swiss bank vaults. All the above lending secured against worthless and in some cases, non-existent, assets in the former Soviet Union (viz former USSR utilities which are unceasable in the event of default) And that is just the 'oligarchs'. Every inch of construction in Dubai and throughout the Middle East is funded by European and US banks.And they can default tomorrow and there ain't nothing we can do: they will just switch off the oil and gas if we give them a hard time Then you have all the Ponzi-style frauds of 'wealth managers' who have been (and still are) selling packets of fresh air and bum debt instruments as 'corporate bonds' and then that money finds its way back into the crminla system having been laundered And do you know what Mr Widget: most of the EU Commissioners and The European Central Bank know (knew) exactly what is going on so you must suppose that either : a) they are very useful idiots , or b) in on it. MR THOMAS FRYER @10:42am Thank you sir, your point is well made. I was thinking of a long term investment for afterwards and London property seems a good one , but would only apply to those who can ride out the storm financially and survive what's coming.!
The reason that the Euro is NOT headed for a melt-down(at least in the foreseeable)is that if Greece & Co bailed out and defaulted, the French and German Banks take a monumental hit - esp the French. This is not in the plans of the US/Euro Bilderbergers.... As the Continentals have ambitions to take over the running of major European financial affairs/trading from the City of London, this cannot be allowed to happen. If the UK had ANY politicians who would stand up to these paper tigers and refuse to take part in supplying funds for bail-outs etc., they would be toast. As all UK politicians want to get on to the Euro Gravy Train, this will not happen(witness Blair's sell-out of the UK's Rebate won by Margaret Thatcher, which will require billions more in contributions from UK taxpayers every year)... There will just be years of austerity for all the PIIGS - and the UK too. This will carry on long after the Cleggerons have departed. Man On Waterloo Bridge is quite correct...except that the mind-altering drugs would have to be Super-strength to make me consider Harriet Harman - Lady G at a push, but the Harriden ? Monastery first, if you pls....!
Man on Waterloo Bridge 10.11am Mr Man. I was with you all the way until you spoilt it and let on it was a joke by saying, "get down on your knees and pray".
Quote: "There are plenty of episodes in history when countries have been as indebted as they are now, but they are all associated with periods of war." I thought the whole'success' of the EU was to stop Europeans having wars with each other. So, the wars have been avoided, but the financial effect remains. The EU needs to go back to what my parents voted for - a Common Market - a free trade area, and leave it at that. Wars are averted through strong trade.
Sailor Steve on May 27, 2010 at 10:30 AM There's nothing xenophobic about wanting to live in a democratic, free country. Rather that than be anti-democratic like you. Tell us all please, when was the election where we got to vote for a EU president? Too difficult? Ok, then please tell us when & for which EU commissioner you voted? Tricky, hmmm?
Edmund Conway has a good article explaining the challenges arising from current, European, economic crisis, springing from the Greek, financial woes and ramifications among the Eurozone nations, EU member-nations, the feared repercussions in the global market. Europe may not reach a meltdown. But, there are consequences if the trends in currency gyrations and fears about further euro slump continues as some richer nations are reluctant to lend to Eurozone nations; unless slide toward economic and financial catastrophe is stemmed and contained. This is why the US Treasury Secretary Timothy Geithner is travelling in Europe to coordinate a trans-Atlantic strategy to curb the European, financial crisis. He has already met with his British counterpart Chancellor George Osborne; BoE governor, Mervyn King; European Central Bank President Jean-Claude Trichet, and planned to meet with his German counterpart Wolfgang Schauble on Thursday; according to the article written by Sumeet Desai and Gavin Jones, published in the May 26 online edition of Reuters. According to the source, what worries Geithner among other things, is Germanamy's abrupt banning of short selling without consultations of other allies. But, the Greek financial crisis, stock-market gyrations in Wall Street, as the Down Jones Industrial Average sank below 10,000 for the first time in months, and other uncertainties indicate that America is not immune to European economic crisis. In an article written by Graham Bowley, published in the May 25 online edition of the New York Times, Spain owes Anerican institutions $197.7 billion, and a total of $1.1 trillion to foreign creditors, compared to Greece's $236 billion. It's these kinds of European debts that worry foreign countries and creditors. Which is why Geithner has arrived to help in shoring up the Euoropean economy and confront the economic crisis head-on. European economy is unlkely to collapse. But, if the current, regressive trend continues unabated, the consequences on the overall global economy will be extremely grave. Which is why Geithner comes knocking on European doors. Igonikon Jack, USA
I could foresee a halfway-house solution being planned to save th EU - a Greek Euro, and Italian Euro, a German Euro, etcetera, and an attempted return to the ERM. I'll bet a fiver the designs are already being secretly approved by mints all over the continent.
The one recurring question I have is, will such a collapse cause an instant deflationary catastrophe beyond repair, or will the threat to sovereignty precipitate a broad money printing exercise and hyperinflation?.. The problem is that I cannot protect myself against both outcomes at once, and so my investments are effectively a gamble!
MOWB All but number 1 are correct, when it hits the fan the last place you want to be is in a big city. Buy land as far as possible from large urban populations, there are way too many people who have no idea how to survive.
We can only hope,for too long Euro countries have been breaking the rules of membership of the Euro.Not only Greece/Spain and Italy.For years France broke the rules but who was going to bring them to book,Not Germany who was breaking the rules themselves.But in there blind panick to keep everything together the rules were ignored.Europe is not the same as the US we are different economies with different needs and to try to make them all follow the same economic cycle was always going to fail.
Debt is going up and up and up !!! and this is the fundamental reason why things are getting dangerous . The socialists think that they can government spend themselves out of the crisis using debt but they assume that things will turn around soon and the debt can be paid off . What if that doesn't happen ? - do the maths - base it on the turn around points - 5 years , 10 , 15 - and then factor in the debt costs and the effects of that debt on the wider economy - then you see the whole pack of cards come crashing down !!!
A very good article, very well explained. But what worries me, is that should a EC Bank be formed RobinD I thaink you are right on the or dot on the point We have EU weak and no help But only unemplymenst all over the world. What are we going to do to that? Who created these and how do we leave the humans on one side? I thank you Daily Telegrapg has been great as far as the miniters thfts etc But now we have the huge assets not wanted Manpower. I thank You Firozali A.Mulla DBA
A sober reflection on the European financial crisis, unlike many of those in the Telegraph that over-indulge in schadenfreude in order to appease the paper's more xenophopbic readers. It is worth considering the situation that could occur if neither the Euro or EU existed. In this case individual countries would have no external support and would be picked off one-by one by currency and bond market predators. Systemic financial collapse would follow, with terrible consequences for economies well removed from the immediate failures. We should be grateful for the existence of both the EU and the Euro despite all their weaknesses - without the support of these institutions our standard of living and way of life in the UK would by now be under severe threat. German voters might not like having to bail out Greece, but the alternative is far worse.
The Onion, that exemplar of American journalism, reports that the White House Jester has been executed for tactless remarks about the US deficit. http://www.theonion.com/articles/white-house-jester-beheaded-for-making-fun-of-soar,17495/
Gone too many falgs flying and no one to look at the members recruitments I state my sympathies for the cook up. Too mant receips cionfuses the cook that is what I say I thank You Firozali A.Mulla DBA
Calm down dear, no meltdown in sight. What the euro-zone will do is create a debt union with strict limits aimed at overspenders. In fact they're already doing it through the ECB now being authorised to buy govt bonds.
"There are plenty of episodes in history when countries have been as indebted as they are now, but they are all associated with periods of war." But we are at war, as the almost daily deaths of our young men demonstrates. The billions that have been quietly syphoned out of the UK economy to support the wars in Iraq and Afghanistan have made a significant contribution to the failure to balance income and expenditure. And what do we have to show for it ? Hundreds of thousands of dead ? Cheap Heroin on the streets of London ?
But, Edmund, where has all the loot gone? Who are the counter-parties? Or is it just an illusion and we've been printing money, so none of it really exists apart from in electronic accounts?
I knew all this long before any of you and have been telling you all that the so-called 'banking crisis' was actually a symptom of something far worse and even your predictions are not severe enough. I tell you all now : last time : 1. Sell all your shares and buy residential property in London and gold (as in 'the metal' or second best, shares in...but the companies trading shares will all go bust eventually). 2. The lighting and heating is going to go out. Stock up on matches, lighter fuel , candles and coal. 3. The shops will run out of food : stock your cellars with corned beef, sardines, tuna, baked beans and dried dates. You will be very healthy on that diet. 4. Buy an air rifle and lots of pellets for shooting pigeons, squirrels and rabbits to supplement your stored rations (above) 5. Put carp in your ponds because the public parks wil be stripped of them and all geese and ducks. 6.Stock up on sugar and fruit juice : it makes great wine after a 10 day fermentation !I recommend the large Spanish glass 'demi-johns'; they hold about 50 litres. 7. Keep a supply of mind altering drugs like valium and vicodin in the home : you'll need them ! Grow your own weed if you smoke. Grow opium poppies (easy: they are the big ones...just prick the seed bulb and lick the white goo and you'll fancy Lady Gaga and Harriet Harman at the same time) , if you don't! 8. Get down on your knees and pray !
Greece and Spain and Portugal to leave the euro - cheap holidays again next year. But as ever - Gordon Browns great solution was worse than the disease - he has been like some 17th century doctor killing his patient with his 'cure'. Billions borrowed to save the banking system now have to be paid back. there is no such thing as a free lunch. But the borrowing has not really been to save banks - it was to save reputations.
we UK retire at 65 66 67 ? and going up... Greece 50-55? italy and Spain likewise France 60 and earlier for many teachers etc ? yet we are 3rd top contributer to EU to put greek bailout in simple terms WE are bailing out (via IMF) and indirectly via our EU contributions-- the banks of France and Germany-spain these banks lent too much to Greece-Greece cannot pay it back- so we lend to Greece to allow them to pay back euro banks interesting times ahead but my money is on No real action just pass it down the line for a few years something wrong here
'as palatable to the people of Europe this summer as an ouzo and retsina cocktail.' Thin this out with a shot of meths' and it is a very palatable cocktail. Some of us cannot afford 'Manhattan's'
Another thumping great article, more of the same please. Nick R Brilliant and funny, with luck the BBC will suffer the same fate that awaits the EU. Both are equally dishonest and irrelevant, rotten to the core and a colossal waste of tax payers money.
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