A Racket For Financial Elites

Ambrose Evans-Pritchard The Telegraph October 12, 2011

Wednesday 12 October 2011 | Blog Feed | All feeds

By Ambrose Evans-Pritchard Economics Last updated: October 12th, 2011

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Richard Sulik during the debate on the eurozone's debt rescue fund (Photo: AFP)

Slovakia's "Nie" last night will not stop the approval of Europe's revamped bail-out fund (EFSF).

The ultimate outcome has never been in doubt. As in Germany, the opposition backs the bill. In any case, Slovakia's political class knows that their country will pay a fearful diplomatic price if this drama in the Národná Rada drags on for much longer.

What the Slovak debate has shown us yet again – as if the political storm in Germany over the last two months has not been enough – is that escalating bail-outs are nearing their political limits.

The traumatic affair almost brought down the German government. It has in fact brought down the Slovak government. You can't keep doing this. Democracies are not to be toyed with.

This political revolt matters a great deal because Europe will soon have to come back for more money and bigger bail-outs. The revamped EFSF was overtaken by events two months ago.

It was agreed by EU leaders in July before Italy and Spain were drawn into the maelstrom. (Lest we forget, Italian and Spanish 10-year yields punched above 6pc in early August on mounting fears of a global double-dip, which would play havoc with debt dynamics.) Only bond purchases by the ECB stopped a spiralling debt crisis at that moment. The apparent calm today is entirely artificial.

The EFSF's â?¬440bn firepower – or â?¬300bn after Greece, Ireland, and Portugal have taken their bites – is not enough. We can argue over headlines. Willem Buiter at Citigroup has called for â?¬2.5 trillion, RBS and the European Parliament have called for $2 trillion.

So even when the Slovaks fall on their sword, nothing will have been resolved. A reluctant ECB will remain the only credible lender-of-last resort standing behind EMU, in breach of the Lisbon Treaty. Its actions already face a challenge at the European Court.

No doubt German finance minister Wolfgang Schäuble is plotting all kinds of schemes to leverage the EFSF into the stratosphere, perhaps by using it to guarantee the first 20pc of losses on Club Med bonds (ie the sort of CDO alchemy of structured credit used to disguise risk in the US subprime conspiracy). He has allies in Brussels, Paris, Rome and elsewhere.

However, he was forced to give categorical assurances to the Bundestag that the bail-out fund will not be enlarged further. Most people understood him to mean that it will not be "leveraged". Pledges to parliaments have consequences. And as Mr Schäuble himself said, the September ruling by the German Constitutional Court has blocked off any possibility of eurobonds.

Slovakia's cry of defiance has not been entirely pointless. Richard Sulik – the speaker of parliament – has caught a mood of popular disgust that goes far beyond his own country.

His objections are unanswerable. How can there be any justification for a state of affairs where a poor but rule-abiding EMU state must bail out a serial violator with twice the per capita income, and triple the level of the pensions – a country which is in any case irretrievably bankrupt? How can it be that the no-bail clause of the Lisbon treaty has been ripped up?

But he also touched on the most neuralgic issue, reminding everybody that the EFSF is "mainly for saving foreign banks". These are French, German, British, Dutch, and Belgian banks, of course.

Mr Sulik is right. The EU-IMF rescue loans have not helped Greece pull out of its downward spiral. They have pushed the country further into bankruptcy. Greek public debt will rise from around 120pc of GDP to 160pc under the rescue programme, and the IMF is pencilling in figures above 180pc.

The rescue loans have rotated into the hands of creditor banks, life insurers, pension funds, and even a few hedge funds. ECB bond purchases have allowed to investors to dump their holdings at reduced loss, shifting the risk to EMU taxpayers. It is a racket for financial elites. A pickpocketing of taxpayers, including poor Slovak taxpayers.

"I'd rather be a pariah in Brussels than have to feel ashamed before my children," he said.

Bravo.

Tags: debt crisis, ecb, EFSF, EU, Germany, greece, imf, italy, lisbon treaty, Národná Rada, Richard Sulik, Slovakia, spain, willem buiter, Wolfgang Schauble

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