A brand new development in the history of the ECB has occurred: leaks yesterday revealed the broad outlines of its new sovereign debt securities’ purchase programme. One cannot help thinking that it was necessary to prepare the ground in advance, with the ECB decisions falling well short of some of the mounting speculation.
According to Mario Draghi, there will be no limit to the amount of bond purchases on the secondary market – but the scope of the announcement needs to be put into perspective. They will in fact be decided on a case by case basis, and not as soon as a specific threshold has been crossed: based on interest rates or spread for example. It has also been confirmed that it will concern securities with a maturity of between one and three years, something already anticipated recently by the market, judging by the result of the issues which have occurred.
An interview with Dominique Berns which appeared today in the economy pages of the daily newspaper, LE SOIR.
“To save the Euro, we must mutually pool the debts”
Q : The president of the ECB, Mario Draghi, has pledged to do “everything within his power to save the Euro”. Numerous observers expect the ECB to start buying up sovereign securities once again, only this time in a far more pro-active manner, in order to reduce the interest rates for the countries in difficulty, in particular for Spain and Italy. And this is in spite of opposition from the Bundesbank, the German Central Bank. Do you also think that Draghi is the only person now who can save the Euro?
A : Perhaps a little paradoxically, I feel very close to Jens Weidmann, the President of the Bundesbank on this point. There aren’t many things one can be certain about in Economics, but the principles underlying the monetary system are fortunately one of the things we do know. A monetary mass needs to be managed prudently as one would manage a household’s finances. It has to reflect the economic situation of the monetary zone where it is being put into circulation. One can – and one has to – create additional money when more wealth has been created, but one cannot simply create money because there isn’t enough of it. That is a recipe for disaster! Apparently this is not something which is well understood. Jens Weidmann understands it, as did his predecessor Axel Weber and the former Chief Economist of the ECB, Jürgen Stark, both of whom resigned last year because they disagreed with the European institution’s sovereign debt repurchase programme.
Q: But all the same, wouldn’t you say that the interest rates asked by the markets for Spain and Italy are excessive – and, above all, unsustainable if they stay at current levels?
A : Indeed. But we are trying to lower the level of Spanish and Italian interest rates by buying their debt, as if the problem was an issue of supply and demand! Their rates are elevated to these levels because they include a double risk premium: one premium to cover the risk of non-repayment, but also a conversion premium since there exists a real risk of a Eurozone collapse and a return to national currencies. It is these risk premiums that need to be reduced, by implementing a real solidarity with these countries, and guaranteeing that they will not be abandoned. If this was done the risk would be reduced and as a result the rates would automatically fall.
Q : But isn’t that just it, isn’t the real problem that absence of any real solidarity between the various Eurozone members ?
A : To pool the debt or not to pool the debt? That is the question! However, for the moment, in words everyone swears it is a ‘yes’, but the facts only seem to indicate a ‘perhaps’. Jens Weidmann declared, quite correctly, that the ECB cannot implement a policy of integration which the political leaders do not have the courage to carry out. The politicians content themselves with saying to the ECB, “get printing then!” (money, that is). Yes, it is true to say that the Federal Reserve, the American central bank, has not held back. But it can, because it still benefits from the fact that the Dollar is the reserve currency. The Eurozone cannot allow itself to do the same. So, there remain two choices: either one puts an end to the Euro, acknowledging that one hadn’t understood that a monetary zone could not function without fiscal unification; or on the other hand, one creates a federation.
Q : But who wants European federalism today ?
R : But that is really the only solution – mutually pooling the public debts of all 17 members of the monetary union. One Sunday evening, before the financial markets open in Asia, the decision needs to be taken that there will no longer be any national sovereign debts, only Eurozone debts, a Eurodebt. As a consequence it will be restructured in accordance with the cash that remains in the Eurozone as a whole. The next day, the market will decide what the Euro is worth in relation to the other currencies. This is the only solution if one wants to avoid a gradual break-up of the Eurozone, which will see countries jumping overboard one by one. First Greece, then Portugal, then Spain…..and still without resolving any of the problems of those still on deck!
Since the beginning of the crisis in 2007, one thing has become clear in European politics: the outgoing parties are not voted back in. Confronted by the incapacity of the governments and the majorities in place to resolve the problems of the moment, the electors – at least, those increasingly few and far between who still go to the trouble of travelling to the urns – vote for the opposition, whoever it may be.
In these conditions, the merry go-round can only make a restricted number of turns before passing to national unity governments, which are really warm-ups for some kind of dictatorship.
The French Government has only just celebrated its first 100 days in power, but it is not too early for it to start thinking about this new trend which is starting to emerge in the European electorates.
“What we need is audacity, more audacity and then yet more audacity!” This is exactly what is needed if we are to get out of the rut we are stuck in; even more so when this rut is merely symptomatic of the immense quagmire that the Eurozone has now become in its entirety.
Nonetheless, the European treaty which France has to ratify in October is anything but audacious. The famous balanced budget offers a false sense of security when things are going well – if indeed this could ever go well again– and it dramatically worsens the situation when things are going badly.
A nation’s expenses are not measured in Gross Domestic Product points; they are measured rather more mundanely by its fiscal receipts. The GDP is a poor yardstick at the best of times since the more it contributes to the destruction of the planet, the better it seems. But that isn’t even the point: in a world where jobs are fast disappearing and where the concentration of capital is scaling new heights due to the excessive manner in which the wealth created is distributed (and which we tolerate) the GDP of nations nowadays are like bodies attacked by a fever, and it seems therefore a very inappropriate moment to use it as a thermometer.
If, since 2007, those leaving power are no longer being re-elected in Europe, it is because they have kept a low profile, gone with the flow, waited for things to sort themselves out. However, unfortunately things won’t sort themselves out any more: the crisis we have endured since 2007 – a crisis stemming from substituting leveraging and easy credit for salary – is within a whisker of being transformed into a full-blown depression. This is what all this is about; this is what needs to be attacked, since there has already been a tremendous delay – five years in fact.
“The means must be commensurate with the gravity of the situation” said Barroso a few years ago. But neither him, nor any of his European colleagues, nor anyone at the head of one of the 17 nations making up the Eurozone, has really understood the true meaning of these words. Those who in the future speak as members of government, or as representatives of the French nation, need to bear these words in mind.
Marching in perfect unison works well for a regiment which is progressing calmly through the countryside, but here there is something else at stake: saving one’s skin as the bombs rain down!
There are some sinister goings-on behind the scenes of the European financial system, which are hardly being proclaimed from the rooftops! Even Mario Draghi himself is preoccupied by it, drawing attention to vague manifestations of “fragmentation” which are developing at the heart of the Eurozone. What was he alluding to?
It is occurring in three stages: an ongoing capital flight from countries on the verge of the abyss, leading to their banks becoming increasingly dependent on ECB loans, with the liquidities then supplied by the latter being used to buy state-issued debt, in order, for the time being, to prop up the whole edifice.
The way to put an end to this ultimately destabilizing process would be to renew confidence in the continuity of the Eurozone. This explains the plan to put together a fiscal union, then a banking one, and finally a political union. But all this takes time, and there is precious little of that available. All the more so as the regulators themselves are pushing for a reduction in these financial establishments’ cross-border exposures so as to reduce systemic risk, thus accentuating a process that people are trying to stop elsewhere ….
A short while ago, I was taking a siesta, sleeping with a sound conscience, when I woke up with a start, my heart beating wildly, my forehead soaked with sweat and prey to a strong emotion: what if we had completely misunderstood the words of Mario Draghi, President of the European Central Bank, the day before yesterday? What if he had actually said something completely different to what we had heard him say?
This is far from impossible: during the period from 1997 – 2006, I conscientiously read every single speech made by Alan Greenspan, who was head of the Fed at the time, and I very often heard him say things of which subsequently not a trace was to be found in the Press, which believed nonetheless that it was conscientiously reporting his remarks. Some examples of this are to be found in my book La crise du capitalisme américain (2007) *
Everyone thought they heard Mario Draghi say on Thursday that the ECB would purchase as much Spanish and Italian debt as necessary to ensure that the lending rates charged by the capital markets returned to a reasonable level.
This is what I believed I had heard myself, and I droned on in my video yesterday, in unison with the International Press, that Draghi would keep the European money printing press running for as long as necessary.
But this makes no sense, if one bears in mind that Jens Weidmann, the head of the Bundesbank, would never accept such a monetary heresy.
Of course, Weidmann’s predecessor at the head of this venerable institution, Axel Weber had resigned in April 2011 rather than continue suffering from affronts of this kind, and Jürgen Stark, the Chief Economist of the Bundesbank, had also resigned for the same reason, and this in September of last year.
Hence without doubt the reason why I suddenly woke up in a cold sweat: Draghi was not talking about printing money, but about convertibility. He uttered the words, “these premiums are, as I have already said, to do with liquidity issues, but also, and increasingly so, to do with convertibility and with convertibility risk”!
To do with convertibility! Due to the fact that the extraordinary rates charged by the capital markets for Spain and Italy – right up until the moment he pronounced his reassuring words on Thursday – were not due to a risk premium for non-repayment but to a convertibility premium: for the loss that lenders would suffer in the event of a return to the peseta and to the lira!
To forestall this, all Draghi needed to do was to declare ‘we will do everything in our power to save the Euro’, and to convince everyone of what he was affirming by the firmness of his voice. To hell with ECB acquisitions of Italian and Spanish debt! To hell with Jens Weidmann and his monetary orthodoxy! To hell with the German Constitutional Court in Karlsruhe, reflecting on the beaches until September on whether the ESM is constitutional or not!
Nobody had heard what Mario Draghi had actually said: “Trust me: we will never abandon the Euro – and what I am saying here should be enough to make sure the convertibility premium falls back to zero, because there is no way there will be a return to the peseta and the lira, you have my word for it as President of the ECB”
“We will never abandon the Euro!” “We”? Let’s hope these “We”s really know what they are doing! Otherwise the Spanish debt will rapidly shot back over the 7% mark, as soon as everybody realizes that unfortunately these “We”s really didn’t know what they are doing…
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* ‘The Crisis of American Capitalism’
Events are moving fast. We were expecting it of Greece, but Spain is overtaking it. Yesterday evening, a human tidal wave invaded Spanish town streets, which these days have become virtually permanent places of mini-demonstrations at midday or after work. Today, at the very moment when the Eurogroup ministers were adopting the bail-out plan for the Spanish banks, the bond rate had edged up to 7.20% and the Madrid Stock Market plunged more than 5%. Instead of falling as had been predicted, the government has announced that the official unemployment rate is going to reach 24.6% by the end of 2012. A bona fide rescue package will soon be required, something the Bundesbank and the Members of the Bundestag have been advocating, seeing an opportunity to carry out yet another brilliant demonstration, associated with another round of austerity measures. Time will tell soon tell us which one will be first.
Italy is likely to be the next domino to fall. Major stock values fell by around 5% on the Milan stock market, since the Italian banks are saturated with debt securities whose value is gradually falling as bond rates increase in line with Spain’s. The Spanish scenario is repeating itself due to the increasingly interconnected links between public and private debt which have developed over recent months. Italy may not have the colossal property bubble, but it has a public debt situation that is just as bad.
“I can’t see any time soon when…the pressure will be off” replied David Cameron, the British Prime-Minister, in an interview with The Daily Telegraph. He continued, “this is a period for all countries, not just in Europe but I think you will see it in America too, where we have to deal with our deficits and we have to have sustainable debts”. In conclusion, his austerity policies are likely to continue beyond 2020, as the situation is “a lot tougher than the forecasters were expecting”. Georges Osborne, the Chancellor of the Exchequer, has already extended to 2017 the austerity plan of 2010, which was initially intended to last five years.
The prolongation of the schedule which is taking shape is now being referred to, in veiled terms, within the Eurozone, a good example being Jérôme Cahuzac, the French Budget Minister, when he announced that “ I’m afraid that reducing the debt may take a little longer” in reply to a journalist who was talking of one, two or three years.
In its annual report, the IMF has just outlined a road map for the Eurozone, advocating – when it actually makes any concrete proposals – measures which focus on pooling the debt, an issue which radically divides politicians. The continuing crisis, it now says, is raising questions about the viability of the monetary union because “its root causes remain unaddressed” and “the adverse links between sovereigns, banks, and the real economy are stronger than ever”.
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.
What can you say when you are in total disagreement? You can always assert, with one voice, the need for a union! This is this perspective that the quartet composed of José Manuel Barroso, Mario Draghi, Jean-Claude Juncker and Herman Van Rompuy (in alphabetical order) continues to work on.
A new magic word has been discovered and is going to be proclaimed with all its variations, to push for the implementation of four unions: banking, fiscal, economic and political. With the fiscal union already in the pipeline, the next stage which urgently needs to be reached is that of the banking union. According to a leaked document, it is supposed to be ready in a year – reverting back to a new season of this tactic of putting out feelers to see how people react.
This is an exclusive preview – in English! – of my column which will be published in the Belgian weekly Le Vif/L’Express this coming Thursday
The phenomenon is the way in which things manifest themselves to us, and this can be real – either with things appearing as they really are; or it can be deceptive – with things appearing other than they really are – such is the case for optical illusions for example which suggest a false reality. Where the Greek language said phainomenon, latin said apparentia, appearance, with the same two nuances as for phenomenon – either an appearance faithful to the nature of things, or, on the other hand, an appearance which is deceptive.
Why this talk about epistemology? Because of the Greek elections last Sunday, and the European political class which has fallen victim to an appearance which is deceptive: it thought that encouraging the Greeks to vote for the right-wing party New Democracy was a way of saving the Euro, fearing that a vote for the left-wing coalition Syriza, would signal the end of it. Whereas in fact the opposite is true
Why? Because the formula adopted so far to try to save the Eurozone has been a spectacular failure. To persist stubbornly with the same policy following the principle of ‘TINA’ (There is no alternative, the infamous words of Margaret Thatcher), is to be sure of pursuing the hellish spiral descent which was triggered at the end of 2009. The Europeans who are roped together like a climbing team (let’s not pull the wool over our eyes) are in spiritual turmoil. The ropes of its members are working loose one by one: Greece, Ireland, Portugal, Cyprus…. whilst the number of them looking to have a secure foothold – burdened by the weight of those already dangling in mid-air which is growing heavier and heavier – is reducing dangerously.
With the G20 meeting being held in Mexico at the start of the week, our perspective will find itself altered, falsely accustomed as we are to only seeing the debt crisis from a European angle. On the 18th and 19th June, the greats of this world are going to gather in Los Cabos, a tourist resort in Southern Lower California, under the double auspices of debt and global recovery.
To avoid standing idly by whilst confronted by a disaster of its own making, the British Government has just announced a plan to relaunch the economy with banking credit, funded by a Bank of England liquidity programme. In the context of an overall 80 billion programme, there are plans for monthly injections of around 5 billion Pounds (6.1 billion Euros). But the question that needs to be asked is whether the results will be as inconclusive as those obtained from the ECB’s massive injections, or indeed the tireless pursuit of zero-rate loans (from 0% to 0.1%) by the Bank of Japan – still without any further success – and whose 700 billion Euro acquisition programme of private and corporate securities is still in force.
The British Government wants to make these banking loans conditional on the latter making specific commitments, but hasn’t this been heard before? The monetary policy instruments of the Central Banks merely allow more time to be bought, and do not resolve any of the unanswered questions.
The 10 year rate for Spanish debt has just reached a historic high. On the 25th November of last year, the rate had beaten a record when it reached 6.72%. Yesterday early in the morning, when the European markets were in ecstasy about the news of an 100 billion euro aid package for the Spanish banks via the Spanish state, the rate had dropped back down to 6.02%. It has just reached 6.809% (at 16:27 Paris time).
Of course the danger of this type of progression is that an increase in the rate generates a positive feedback loop: the rise reflects the impression that the credit risk is deteriorating (the risk of the debt not being reimbursed and of the non-payment of the interest promised), a deterioration which will lead to capital markets demanding the inclusion of a higher “risk premium” in the rate. But a higher rate will make it more difficult for the state to meet its debt commitments (reimbursing the sums borrowed and paying out the promised interest), which will increase the credit risk for its lenders….. which will in turn lead them to require the inclusion of a higher “risk premium” in the rate, etc..
There is a threshold beyond which this mutually reinforcing effect becomes irreversible. Unfortunately for Spain, it has just entered into these waters
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 European Commission in Brussels is getting ready to unveil a project aiming to prevent and cure the banking crises, destined to enter into service in 2014, certain procedures being foreseen for 2018. There is a certain sense of timing, but certainly not a sense of urgency.
The Spanish are now appealing for help, admitting that they have been cut off from the markets, ready to sell off whole swathes of their banking system to save it, calling for direct aid so as not to fall into the clutches of the Troïka. At the end of the G7 finance ministers’ conference call only one important piece of news could be gleaned: the Europeans are committed to a ‘rapid response’ to the crisis, revealed the Japanese finance minister, Jun Azumi. All the other participants endeavoured to play down its importance, which indeed had led to nothing concrete in the short term.
The rest is in keeping. There will be plenty of time to analyze the Commission’s propositions in detail – as long as there are some. What has already come to light, however, is without ambiguity: the project carefully avoids tackling any of the difficult questions. It leaves great latitude to national regulators, in spite of them being suspected of all kinds of leniencies, and it clearly avoids tackling all the financial aspects. Its vagueness allows us a glimpse of the possibility that under cover of relieving states from the costs of banking bail-outs, it leaves the door ajar which will allow them to be asked to contribute in future.
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