Guest post. Translated from the French by Tim Gupwell.
The case has been heard: Barack Obama and David Cameron demanded immediate action from the Euro zone leaders, frightened by the prospect of the Spanish and Greek crises occurring at the same time, and Angela Merkel responded by announcing that no miracles should be expected from the Summit at the end of June. She continues to insist on a gradual long-term evolution towards budgetary and political union (within the next 5 to 10 years according to Mario Draghi) and to dig her heels in with regard to any measures which would ease off on this preliminary restoration to order of public finances, according to the timetable and criteria which she has already had adopted.
Implementing this has become more and more like passing through the eye of a needle. A renegotiation of the terms of the Greek bail-out is inescapable (without forcing a Euro zone exit with all the unknowns that this would entail), as is the elaboration of the details of a plan for Spain. In both cases, the opposition parties or the government in place, are looking for new sources of economic synergies so they do not have to impose any new additional austerity measures. If we are to believe Antonis Samaras, the leader of the Greek New Democracy party, the answer is to be found through taking measures against fiscal fraud and waste. Let’s have a bet on it! In both cases, it will be necessary to stagger the debt reduction over time if the initial timetable is to be compatible with this new state of affairs, and there will be no greater guarantee of success. Negotiations are likely to be strained, and the atmosphere created is likely to spread the contagion to other countries in acute crisis.
The banking system has been identified as the cause of this acute crisis. But the German team in power does not intend to deviate from the roadmap they have set out in this matter, as in others. There will be no question of direct aid to the banks, other than through state intervention, which amounts to increasing yet again the burden of public debt and to tightening the Gordian knot which unites public and private debt. Anything which could incite governments to take their foot off the gas with regard to budgets is outlawed.
What hypotheses are the experts who have been asked to examine the final needs of the Spanish banks going to employ? Two suppositions have to be postulated: a hypothesis of (negative) growth and a ratio for capital requirements (which has reached a dead-end in terms of its precise definition and has had to be left open). The rest is a jiggery-pokery which consists of analyzing the banks’ assets, classifying them according to their presumed qualities, and then assigning them a discount, all of this over a defined period of time. So as not to neglect the political implications of these economic choices, there is a great temptation to do the calculations backward, departing from the final result that one would like to obtain at the end in order to deduce the initial hypotheses! Current estimations vary from 40 to 200 billion euros.
The trend is towards a new type of permanent ‘bail-out’ which advances in small steps for Spain, in keeping with the general strategy adopted by Angela Merkel, and which she has been able to impose up to now. Keep kicking the can down the road….
What can the markets possibly expect of the ECB, the source of all their hopes? This latter has maintained its measures of support for the banks, but has halted its secondary market bond purchases which were intended to help states at risk. It has merely reserved the right to intervene in urgent cases, if the situation suddenly worsens, thus refusing to follow the example of its American and British colleagues and to shoulder a greater responsibility than it feels responsible for (or that it feels capable of assuming).
A detour via the Fed and the Bank of England helps to gain a measure of the limits of what the Central banks can do. Would renewing the purchase of financial assets lead to better results now than has previously been the case? The Fed can increase the average maturity of its portfolio of sovereign bonds in order to push down the long term rates, as it has already done, but with 10 year rates already being extremely low, what more is to be gained by doing so? It can also buy up housing loans once again, which would relieve the financial establishments but this would not re-stimulate a market which remains in the doldrums. After a debate which we can surmise must have been intense, the Bank of England decided, for its part, to ……do nothing. Ben Bernanke, the chairman of the Fed, did the same, dashing all expectations. As a lesson for Europe the conclusion is easy to draw: the central banks’ tool box does not allow them to re-launch the economy, merely to keep the financial system afloat. The ECB is no better equipped than its counterparts and if its reticence at the moment can be partly attributed to political calculations, it also reflects this fundamental reality.
The well-known theory of ripping off a sticking plaster holds good: it hurts less when it is done in one go! Exactly the opposite of this strategy is being followed. By putting things off, the bill continues to mount up, starting with that of successive state and bank bail-outs. The result of this is a growing discrepancy between the financial means which need to be employed and the effects of the deepening recession. The costs of the crisis become less and less manageable as a consequence.
At the convention of the Institute of International Finance, its director Charles Dallara, has just declared that ‘bank deleveraging’ has gone too far, implying that the future regulatory framework of the Basel III accord was a negative influence on banks. Indeed, a reduction in bank-lending is apparent, and, even worse for the banks, other parties including insurers are stepping into what is left of the banking intermediary market. Moreover, hedge funds left to their own devices are seeing a new upsurge, taking advantage on the margins of the terrain abandoned by the banks.
A “pause” is demanded for the banks, as if it what is looming on the horizon for the deleveraging of the states is not sufficient! It is the whole strategy which continues to flounder, whose very collapse is contained in its improvisation – which in the end sums it up rather neatly.