Compact and ESM ? No Way !

February 29, 2012

All is not what it seems with this Compact which asks us to ratify and sign up to the terms of the ESM. We don’t need to see the contract much less see the fine print. According to ELmer Brok member of the German CDU party and MEP, we’re already signed up to it in Maastricht. As the best boys in the class, unlike the Greeks, its really for the Greeks, not us. Its there to make sure the contagion that spread from the US bank meltdown in 2008 won’t happen again.

Actually no! The meltdown in the euro periphery was caused by the badly designed euro and would have happened with or without the meltdown in 2008 in US banking; this current attempt by the EMU to regulate itself and transform itself into a viable currency is ill designed to address the problem of uneven capital flows between the euro core and the periphery leading to excessive trade balances.

No liquidity transfers designed to restructure the debt of the peripheral countries of Portugal, Ireland, Italy, Greece, Spain except through the means of austerity and further debt are envisaged in the proposed ESM Treaty. But austerity through increased taxes and reduced public expenditure to pay for the massive debt paybacks in so-called bailouts will not lead to growth, they will make long term austerity and recession a certainty and are doomed to failure. Current austerity patterns in Ireland and Greece point to a deteriorating and self reinforcing economic cycle of austerity and recession.

In the Federal Reserve system, a member Central Bank undergoing measures imposed by the regulatory FOMC, has the power to close down banks and impose austerity balanced by the need for write off of debt. This debt is transferred onto the credit side of other participating Central Banks in surplus. Thus balance is maintained throughout the system. The only balance in the currently fatally flawed euro system is the balance sheet where funding is leant out to peripheral EMU states at extortionate rates of interest; the profits from which flow to the core. Debt write down is not tolerated. Such a system is fatally flawed. This is the system that is bolstered and reinforced in the ESM debt embrace.

But lets examine in somewhat closer detail what exactly this ESM Treaty is about. Is there anything in it we should be concerned about?

Here are some sparce facts

http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/127788.pdf

Also the Treaty here

http://www.european-council.europa.eu/media/582311/05-tesm2.en12.pdf

The first thing to be concerned about is the erosion of sovereignty contained in the following.

Majority rules here.

We have no automatic right to any further bailouts. They will be given depending on the “kindness of strangers”. Of course many will argue other countries will have greater priority than Ireland. So, not much hope there for us in Article 4. Plus we should be concerned re the powers to impose terrifying conditionality we have no control over.

“ARTICLE 4 Structure and voting rules 1.

The ESM shall have a Board of Governors and a Board of Directors, as well as a Managing Director and other dedicated staff as may be considered necessary.

2. The decisions of the Board of Governors and the Board of Directors shall be taken by mutual agreement, qualified majority or simple majority as specified in this Treaty. In respect of all decisions, a quorum of 2/3 of the members with voting rights representing at least 2/3 of the voting rights must be present.

3. The adoption of a decision by mutual agreement requires the unanimity of the members participating in the vote. Abstentions do not prevent the adoption of a decision by mutual agreement. “(g) on the actions to be taken for recovering a debt from an ESM Member, in accordance with Article 25(2) and (3);

“ARTICLE 12 Principles

1. If indispensable to safeguard the financial stability of the euro area as a whole and of its Member States, the ESM may provide stability support to an ESM Member subject to strict conditionality, appropriate to the financial assistance instrument chosen. Such conditionality may range from a macro-economic adjustment programme to continuous respect of pre-established eligibility conditions. ”

Remember that famous Carlsberg Advert, “The Danes Hate To See It Leave”, well likewise the ESM has its own trapdoor. If they think your country is a mess, or perhaps if Ireland or Greece are not performing, who knows, even through lack of growth, maybe they are reckoned to cost too much money to maintain, they can pull the trapdoor.

“5. The Board of Directors shall decide by mutual agreement on a proposal from the Managing Director and after having received a report from the European Commission in accordance with Article 13(7), whether the credit line should be maintained. ”

“ARTICLE 16 ESM loans 1. The Board of Governors may decide to grant financial assistance in the form of a loan to an ESM Member, in accordance with Article 12. 2. The conditionality attached to the ESM loans shall be contained in a macro-economic adjustment programme detailed in the MoU, in accordance with Article 13(3).

3. The financial terms and conditions of each ESM loan shall be specified in a financial assistance facility agreement, to be signed by the Managing Director.

4. The Board of Directors shall adopt the detailed guidelines on the modalities for implementing ESM loans. ”

Article 17 is particularly dodgy, if not nefarious. On the surface its pleasing enough. Member states eg Ireland unable to sell their bonds on the open market, ESM purchases them, Ireland gets its money. Or does it? The question re bonds purchased on the open market at a discount is not addressed. Is the ESM going to act as a speculator profiteering from the lack of confidence the bond markets have in Irish bonds? This question is not adequately addressed.

“ARTICLE 17 Primary market support facility 1.

The Board of Governors may decide to arrange for the purchase of bonds of an ESM Member on the primary market, in accordance with Article 12 and with the objective of maximising the cost efficiency of the financial assistance.

2. The conditionality attached to the primary market support facility shall be detailed in the MoU, in accordance with Article 13(3).

3. The financial terms and conditions under which the bond purchase is conducted shall be specified in a financial assistance facility agreement, to be signed by the Managing Director. ”

“ARTICLE 20 Pricing policy

1. When granting stability support, the ESM shall aim to fully cover its financing and operating costs and shall include an appropriate margin.

2. For all financial assistance instruments, pricing shall be detailed in a pricing guideline, which shall be adopted by the Board of Governors.

3. The pricing policy may be reviewed by the Board of Governors. ” “ARTICLE 21 Borrowing operations

1. The ESM shall be empowered to borrow on the capital markets from banks, financial institutions or other persons or institutions for the performance of its purpose. ”

The question of investment policy is a particularly loaded and dangerous concept for Ireland. So, who gets these investments?
What controls are there to govern these investments. Will there be freely available documentation for us to view what these ‘investments’ are. Will certain countries benefit from these investments to the exclusion of other countries?

“ARTICLE 22 Investment policy

1. The Managing Director shall implement a prudent investment policy for the ESM, so as to ensure its highest creditworthiness, in accordance with guidelines to be adopted and reviewed regularly by the Board of Directors. The ESM shall be entitled to use part of the return on its investment portfolio to cover its operating and administrative costs.”

We, in Ireland, should be particularly concerned re the following. What is “an appropriate course of action”? Are we talking about V-1 Flying Bomb Doodlebug or Buzz Bombs? I would be very concerned at the lack of detail here following?

“2. If an ESM Member fails to meet the required payment under a capital call made pursuant to Article 9(2) or (3), a revised increased capital call shall be made to all ESM Members with a view to ensuring that the ESM receives the total amount of paid-in capital needed. The Board of Governors shall decide an appropriate course of action for ensuring that the ESM Member concerned settles its debt to the ESM within a reasonable period of time. The Board of Governors shall be entitled to require the payment of default interest on the overdue amount. ”

Oh, great, think the ESM is answerable to the courts? Perhaps this Treaty should be renamed the ESSM? They give themselves full immunity from prosecution, investigation.

“3. The ESM, its property, funding and assets, wherever located and by whomsoever held, shall enjoy immunity from every form of judicial process except to the extent that the ESM expressly waives its immunity for the purpose of any proceedings or by the terms of any contract, including the documentation of the funding instruments. ”

It will be a highly secret organisation immune from prosecution and above the law.

“8. To the extent necessary to carry out the activities provided for in this Treaty, all property, funding and assets of the ESM shall be free from restrictions, regulations, controls and moratoria of any nature.”

“Professional secrecy

The Members or former Members of the Board of Governors and of the Board of Directors and any other persons who work or have worked for or in connection with the ESM shall not disclose information that is subject to professional secrecy. They shall be required, even after their duties have ceased, not to disclose information of the kind covered by the obligation of professional secrecy. ”

“ARTICLE 35 Immunities of persons 1. In the interest of the ESM, the Chairperson of the Board of Governors, Governors, alternate Governors, Directors, alternate Directors, as well as the Managing Director and other staff members shall be immune from legal proceedings with respect to acts performed by them in their official capacity and shall enjoy inviolability in respect of their official papers and documents. ”

The following piece I find grossly nefarious. Consider a doubting Thomas, say a Governor of the Irish Central Bank ? Well, they’ve given themselves the right to throw him to the wolves.

“2. The Board of Governors may waive to such extent and upon such conditions as it determines any of the immunities conferred under this Article in respect of the Chairperson of the Board of Governors, a Governor, an alternate Governor, a Director, an alternate Director or the Managing Director.

3. The Managing Director may waive any such immunity in respect of any member of the staff of the ESM other than himself or herself.”

“ARTICLE 37 Interpretation and dispute settlement 1. Any question of interpretation or application of the provisions of this Treaty and the by-laws of the ESM arising between any ESM Member and the ESM, or between ESM Members, shall be submitted to the Board of Directors for its decision.

2. The Board of Governors shall decide on any dispute arising between an ESM Member and the ESM, or between ESM Members, in connection with the interpretation and application of this Treaty, including any dispute about the compatibility of the decisions adopted by the ESM with this Treaty. The votes of the member(s) of the Board of Governors of the ESM Member(s) concerned shall be suspended when the Board of Governors votes on such decision and the voting threshold needed for the adoption of that decision shall be recalculated accordingly. ”

The following is also not what it seems. Firstly, the Court of Justice will make any interpretations on legal grounds. Catch 22, but legal grounds are what the complainant signed on the dotted line for, not any constitutional provision in their own jurisdiction, case closed, another trapdoor sprung.

“3. If an ESM Member contests the decision referred to in paragraph 2, the dispute shall be submitted to the Court of Justice of the European Union. The judgement of the Court of Justice of the European Union shall be binding on the parties in the procedure, which shall take the necessary measures to comply with the judgment within a period to be decided by said Court.

There is cause for worry in the following also. This relates to the powers ESM gives itself to perhaps interfere with negotiations between any member state’s right to negotiate loans outside the ESM Treaty.

“”ARTICLE 38 International cooperation The ESM shall be entitled, for the furtherance of its purposes, to cooperate, within the terms of this Treaty, with the IMF, any State which provides financial assistance to an ESM Member on an ad hoc basis and any international organisation or entity having specialised responsibilities in related fields.”

Overall, the ESM is a political treaty and not merely a fiscal treaty. Its demanding greater political control and binding rules of absorption into a European Union that through the terms of this new ESM is in breach of the original Maastricht Treaty. This is a blueprint for a new Europe controlled by banking and financial interests trampling on the grave of democracy. The European Union was a free enterprise project built on respect for sovereignty and democracy. It has a shadowy socialism for banks agenda, is, I believe, anti capitalist in nature. As a method to deal with the crisis in the euro it is an abject failure.

It should be rejected by all who cherish capitalism, free enterprise and democracy. It has the capacity to destroy public services built in Ireland over generations at the stroke of a pen while removing any ballot box right of dissent to the odious and unconscionable measures it may enact against those public bodies.

It should be rejected outright!

Hopefully debate over all matters related will be opened here as it is critically examined by media from Ireland and abroad. I look forward to Sunday Times supplements: all you need to know on Fiscal Compact and ESM. Hopefully no efforts will be made to stifle, control or close down debate. Hopefully each side will be able to put their respective sides before the people. We can all help me this rather than hindering it.

Worst that can happen is the debate may descend into a don’t want to know campaign ranging across different levels of:

Don’t want to know? No need to know? Can’t know? Dunno? Can’t say no? Who knows? Nobody knows? Everyone knows? You know? What’s to know? They know? Sure we all know? I know? I’ll know? They’ll tell us, you know? Just say, no!

The fact is many don’t want this debate at all. They want their own light weight views to prevail without rancour or dissent of any kind.

The question of secrecy attached to the ESM Treaty is a very troubling one. For example, the ECB has a board with a seat for each Central Bank governor including our own.

This ESM hedge fund which will have large decision making powers re bailouts, purchase of sovereign bonds, investments, has no such democratic, representative mandate. The members of the ESM will be unelected and perhaps represent unknown decision makers from the core.

“Professional secrecy

The Members or former Members of the Board of Governors and of the Board of Directors and any other persons who work or have worked for or in connection with the ESM shall not disclose information that is subject to professional secrecy. They shall be required, even after their duties have ceased, not to disclose information of the kind covered by the obligation of professional secrecy.

“ARTICLE 35 Immunities of persons 1. In the interest of the ESM, the Chairperson of the Board of Governors, Governors, alternate Governors, Directors, alternate Directors, as well as the Managing Director and other staff members shall be immune from legal proceedings with respect to acts performed by them in their official capacity and shall enjoy inviolability in respect of their official papers and documents. “

No mention as to the makeup of the ESM board except that they will enjoy immunity from prosecution, bound to secrecy except the4 following:

“ARTICLE 4 Structure and voting rules 1. The ESM shall have a Board of Governors and a Board of Directors, as well as a Managing Director and other dedicated staff as may be considered necessary. ”

Debate so far has flowed about the question of membership without looking at the proposed structural makeup of the Board of Governors and a Board of Directors.

We should question how democratic in EU terms will be the makeup of the above structure. From a quick interpretation of the above, democratic representation is not high on its agenda.

Will Merkel provide the ESM’s appointees?

Part 11

Article 17 is particularly dodgy, if not nefarious. On the surface its pleasing enough. Member states eg Ireland unable to sell their bonds on the open market, ESM purchases them, Ireland gets its money. Or does it? The question re bonds purchased on the open market at a discount is not addressed. Is the ESM going to act as a speculator profiteering from the lack of confidence the bond markets have in Irish bonds? This question is not adequately addressed.

“ARTICLE 17 Primary market support facility 1.

The Board of Governors may decide to arrange for the purchase of bonds of an ESM Member on the primary market, in accordance with Article 12 and with the objective of maximising the cost efficiency of the financial assistance.

2. The conditionality attached to the primary market support facility shall be detailed in the MoU, in accordance with Article 13(3).

3. The financial terms and conditions under which the bond purchase is conducted shall be specified in a financial assistance facility agreement, to be signed by the Managing Director. “

First objection to the above is effectively the ESM will be allowed to invest in foreign debt eg US treasury bonds. It has no mandate to either purchase the debt of members of the EMU or to make direct investment in public companies in the EMU. As far as I know, it has complete freedom to choose where it invests its money. You don’t need to watch the Dragons to see the crucial need for investment across Europe. The potential to be influenced on a political and commercial level is too high for safety and because of the lack of regulatory oversight the ESM in one scenario could turn out to be Super Anglo run by the croney golfing club.

Consider the following hypothetical figures/scenario: Interest rates changing in the economy, interest rates going up/down. Interest rates going up, yields go up, prices of bonds go down.

If Ireland goes back to the market and the only buyers that will buy the bond are the ESM. Say the bond is purchased at an interest rate of 10%. Five years later bonds are trading at a yield of 20% because of growing uncertainty re Ireland as an investment prospect. No one will buy those earlier Irish bonds because they were sold at 10% yield; but now anyone can buy Irish bonds which are required to be sold reflecting current market rates, ie now gone up to 20%. In order to sell those earlier 10% bonds the Irish bond seller has to discount the price of the bond itself. The face value of the bond in such a scenario may have to be discounted to 80% of its face value. Such a situation has already arose in the case of ECB purchase of Greek sovereign debt.

The point I wish to make is that there is profit and loss opportunity in the above both for the buyer and the seller. But because of the ‘house always wins’ condition where the house can use its resources and power to influence markets particularly on the decision to purchase or not to purchase, to issue or not to issue bonds, based on factors that may be influenced politically, based on sensitive information it has acquired in dealing with competing interests and ‘chinese walls’, the ESM lies open and vulnerable to potential charges of misuse of information.

The fact that the ECB has a primary mandate to bring down interest rates and curb inflation, its ability to set interest rates, renders the ESM privy to market information uniquely valuable and uniquely vulnerable to misuse and abuse. In the purchase of sovereign debt its easy to comprehend a situation where the ESM privy to confidential information interest rates will fall, goes into the market to purchase Irish sovereign bonds that traded some months previous at 10%, but because of catastrophic employment stats including the withdrawal of some MNC’s and Obama new legislation preventing transfer pricing, Irish sovereign bonds now trade at 20%, and purchase that Irish sovereign debt at a 40% discount on its face value. But the ESM is privy to information that ECB is going to forgive the PN’s and set the Promissory Note obligation to nil.

Some days later this information is released and Irish sovereign bonds go up in value and now trade 20% higher than their previous value leading to opportunity for a vast profit. The profit of course will not be put into Ireland’s pocket. Its this unique access to information that can be used to manipulate sovereign markets in the EMU that should require the ESM be sent back to the garage for brake pads on all four wheels to prevent it crashing the ECB.

Another criticism of the ESM is that the ESM is not a programme for equity investment. Its interest lies only in the issuing and management of debt. This makes loads of money for traders but makes the debt all consuming and vulnerable to the shifting tide of interest rate changes and the shifting price of debt. For sovereigns issuing the bonds it sucks when rates go up, less ability to borrow money in the future, new bonds then need to be sold at a higher interest rate.

In the case of the IBRC, the ECB has stuck us with a bill for ¢31 bn which along with promissory note repayments of ¢3bn + over X number of years has spiked us with an unconscionable bill for ¢47 bn as part of our odious ‘bailout’. Because there is no profit to be made in another form of equity stake investment, namely, eg 50%, which would reduce the bill to ¢15.5 bn, the ESM is ruining its core function to bailout countries such as Ireland.

Equity stake investment would provide opportunity for recovery much more so than the provision of stupid bond purchasing schemes and similar bailout mechanisms that provide boats of stones for titanics like Ireland sinking under the deleterious influence of the ECB and its ill omened response to meltdown.

End

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