Guest post. Translated from the French by Tim Gupwell
In accordance with the predictable script, the bond market is under pressure again. The cost of servicing Spanish and Italian debt has continued to increase as their financing plans move forward in little measured steps. The effect of all this is to place an additional burden on the budgets, undermining those measures which are intended to reduce the deficits.
The statistical institutes INSEE (France), IFO (Germany) and ISTAT (Italy) all agree: Europe is sinking into a recession which they describe as ‘technical” in an attempt to make it sound innocuous, but which, regardless of what they call it, amounts to the same thing. This is why the ECB has, unsurprisingly, just decided to cut its main interest rate.
It explained that it was trying once more to encourage banks to develop credit in a bid to restart the economy. With the markets having anticipated the move, there is no guarantee of success. Success is assured, on the other hand, for the Eurosystem in its role of bad bank, the central bank having once more lowering the bar for the collateral guarantees it will accept from banks in return for this operation. Once again, the hidden purpose is to ease the pressure on the banks.
“The government bond purchase program is in a deep sleep and will remain there,” emphasized Klaas Knot, the President of the Dutch Central Bank, slamming the door on governments who will have to manage by themselves. He attempted to justify this by stating that “….the price of aid is that the risks on the ECB’s balance sheet increase”, as if aiding the banks did not have the same effect! The Bank of England does not seem to share the same concerns and has authorized a further 50 million Pounds program of quantitative easing and gilt acquisitions in the British sovereign bond market. The Fed might well follow its lead. Considered as the only real financial ammunition which can impact on the bond market, the ECB for its part is continuing to slip quietly out of the secondary market, despite Christine Lagarde’s exhortations in the name of the IMF.
The Spanish Government is once again attempting to escape its inevitable fate, preparing a new program of austerity measures and budget cuts to be spread over several years, which should (according to Reuters) be announced next week. It will increase VAT, reform the pension system, cut pay for civil servants, install new motorway tolls, and lead to cuts in ministry and regional spending. It is a never-ending race, attempting to reduce a deficit which is continually slipping through its fingers, and is accentuated by an increase in borrowing costs, a recession and a social crisis.
As for the Greek Government, it is fine-tuning its demand for an extension in the time-scale over which its bail-out plan is implemented. It has little more to offer than its 50 billion Euro privatization program which has never really got started, and which offers the advantage – if it can be called that – of a lesser social impact in the short term than any other budgetary measures. With the bail-out plan having gone off the rails, the question to be asked, according to Anders Borg the Swedish Finance Minister, is whether Greece can avoid a default at all. In order to take the pressure of the Greek finances, Tsipras has proposed an extension to the Greek banks of the measures which are intended to bail-out the Spanish banks.
A Eurogroup meeting on the 20th July will focus on these two burning issues; the European authorities are clinging on by the tips of their fingernails and, for want of anything better, they manage to content themselves with this – but they are going to have to move mountains if they are to avoid the collapse of Greece.
In the eyes of public opinion, the guilty parties must be found and punished! The recently resigned Bob Diamond and the management of Barclays are on the hot seat in the United Kingdom, where the Government seems to feel the need to make a gesture in the face of a continually growing resentment towards the banks. In France, the socialist deputy Henri Emmanuelli has requested a hearing for the Governor of the Bank of France, in the event that the manipulation of the LIBOR and the EURIBOR did not stop at the French borders.
Things have gone even further in Spain. Rodrigo Rato, former Finance Minister, former Managing Director of the IMF, and President of Bankia before his recent resignation, has been accused by the Spanish High Court of nothing less than fraud, embezzlement, unfair and deceptive administration, falsifying accounts and price-fixing! The judge has extended the enquiry to the other board managers of the bank – often members, or close members, of the Partido Popular Party which is currently in power – as well as their families, in order to determine whether they may or may not have been the fortunate beneficiaries of loans or guarantees… The show will commence on the 23rd July.
INSEE has just thrown new light on the situation by announcing the development of a new statistical tool. The objective is to be able to measure with greater accuracy the evolution in living standards – and not of revenues or salaries – of the intermediary population (those who are neither poor nor rich), who represent around 80% of the whole. Forward-thinking, the institute is seeking to equip itself with the means to measure the disintegration of the middle classes, by avoiding a one-size-fits-all notion which fails to distinguish developments that are nonetheless clearly underway.