Tag Archives: Euro zone

The work method needs to be changed, right now!

In my most recent monthly column in Le Monde – Économie – published on May 9th, I point out the fact that underlying the negotiations held since 2008 in view of a financial overhaul, there is an implicit premise that the representatives of the financial community have the ability of relating with the common good. The period 2007 to 2009 provides us however with sufficient evidence to falsify such an optimistic hypothesis. I suggested in conclusion that appropriate measures be implemented now with no further consultation with the financial community.

In his recent post entitled “C’est raté!” François Leclerc reports on the disastrous meeting of European finance ministers that was held on May 8th in Luxemburg. Since early last year, this was the umpteenth meeting aiming at solving the crisis in the euro zone. It is not without reason that François entitled his post: “Fiasco!”  And indeed he could have entitled his whole series of articles about the euro crisis: “Fiasco!” from the first one to number 14th. As with the case of the financial overhaul, the time has come to draw the conclusion that the negotiating partners have no ability for solving the problems of the hour: opportunities for finding a solution did exist in sufficient number and they were all allowed to go. Nothing has been achieved but delaying until 2013 the time for a solution – still very shaky in its terms –because of the various balloting concerns of each of the governments involved.

In February of last year, one of my posts here was entitled “The House is on Fire!” More than one year has passed since, the fire is still smoldering and the final conflagration is imminent. The shock resulting from the final conflagration of the euro zone would be equivalent to the one that resulted from the bankruptcy of Lehman Brothers. It is now known that if the global financial system miraculously survived it has been at the cost of all concerned nations’ economic health.

Because negotiators who secretly met in Luxemburg on May 8th once again did not achieve anything despite the looming conflagration, the inescapable conclusion is that they will never get anywhere: their credibility has been lost as the months went by, from one unsuccessful meeting to another fruitless meeting. Therefore, as in the case of a financial overhaul, what is needed now is to change the entire formula. The time has come to think out of the box, to summon up the resources of lateral thinking without any further delay. The old ways of thinking and doing did not lead us anywhere but inexorably into the abyss. The work method needs to be changed, right now!

Le Monde – Économie, Monday 8 – Tuesday 9 March 2010

Here an English translation of La machine infernale, my monthly column for March in Le Monde – Économie.

A DEVILISH DEVICE

Only five years ago, we were led to believe that the advertised model of the economic and financial apparatus represented a system that was finally mature: stable because thoroughly predisposed to self-regulate and practically safe thanks to super-efficient risk-spreading.

Self-regulation did not happen. Risk, although atomized, was nonetheless concentrated by the more astute players into enormous portfolios of financial products with, influenced by the economic climate, inflated risk premium; an unavoidable downside correction triggered the implosion of the Bear Stearns, Lehman Brothers, AIG, Fannie Mae, and Freddie Mac.

Computers brought complexification to the credit-based world of finances which from then on prevented it from functioning in anything but bubble mode: euphoria concealed the non-existence of self-regulation, while concentration of risk, for a time minimal, went undetected.

By contrast current events highlight the dysfunctional nature of the economic and financial workings outside the dynamics of an economic bubble. Thus, in the case of the speculation against the Euro, a collection of harmful elements combine in a potent toxic mix.

Sometime during 2001-2002, the European Union turns a blind eye to Wall Street’s currency swaps-disguised loans to member states in order to allow them to comply with the terms of the Euro zone Stability and Growth Pact (SGP). Yet, the increasing complexity of financial products makes it impossible for rating agencies to correctly assess the underlying risk. When the subprime crisis breaks in 2007, rating agencies are rapidly discredited. Vague attempts to reform those agencies suffer the fate of all proposed regulations at the time (with the exception of some, sufficiently innocuous): they are shelved into oblivion. Meanwhile, scientific rigor proving elusive, rating agencies will do with inflexibility.

The downgrading of Greece tainted currency swaps put them just a notch above the trigger for a margin call that that nation is unable to honour. Speculation on the, by now, strong likelihood of Greece defaulting gets under way. By taking long positions in Credit-Default-Swaps (CDS), speculators are “insuring” against a risk they don’t face, but by so doing, increase the likelihood that it materializes. Rising CDS prices, considered as an objective measure of risk, according to the prevailing “efficient market” economic theory, generate a proportional increase of the coupon required upon issuance of new debt by Greece, further penalizing her. A vicious spiral snaps in place that nothing can stop. Like so many dominoes, other Euro zone states are being lined up. Once one is in default, the rest of those still unscathed would be weakened, and speculation will immediately target the next most exposed.

When banks were failing, States provided help. The heat is now turned on States. Only the IMF will be left to stage a rescue. On February 26, an announcement was made, through its president, Dominique Strauss-Kahn that the IMF was ready to take up its role. We count on it: the IMF is surely the last defence line.

Many thanks to “bb”.