Fools rush in where where Angela likes to thread !

June 30, 2012

More and more Angela Merkel is featuring in a leadership role in Europe’s debt crisis. It would appear the old order is crumbling, a shared European Union being replaced by a new order with Germany to the fore laying down the law.

This was not the European Union that drove the vision behind the euro project. It is instead a new Third Reich driven by the carrot without the stick; it would appear this is the only way to preserve the old order from disintegration.

The latest carrot offered to avoid German banks pay the piper, a bill of circa ¢1.5 trillion if the euro fails is the promise of direct funding for banks paid for out of the ESM. Notwithstanding the triumphalist hailing of this by our seiser Micks who’ve handed the country over to foreign banks and made the whole country up for grabs and seizable by our bailiffs, there are problems with the current solution proposed to solve the euro crisis.

Currently the opt in for the ESM is ¢80 bn with about ¢27 bn of this to come from Germany

“”What we decide today is an important step to make clear to the world that we stand by the euro, we want it as our stable currency,” Merkel said earlier in her second speech to parliament on the euro crisis in three days.

As they have done since the start of the eurozone debt crisis, members of the two main opposition parties backed Merkel who needed their support since the fiscal pact entails changes to the German constitution and thus required a two-thirds majority of lawmakers in both chambers.

Merkel also defended decisions by EU leaders which included agreeing that the EU’s new European Stability Mechanism (ESM) fund could recapitalise banks directly and that the bailout funds can buy up bonds of ailing nations.

She said any use of the bailout funds would follow agreed guidelines, calling it a “good decision, a sensible decision” and stressed any changes or new functions would have to come before the parliament first.

German Finance Minister Wolfgang Schäuble said Merkel had “defended and imposed exactly what had been German government policy for years,” namely firm conditions in exchange for aid.

“Today, with the adoption of the fiscal and ESM treaty in the Bundestag and Bundesrat, across party lines, Germany is sending an important sign,” Merkel said before the votes.

“It is a sign of unity and determination, domestically and abroad, a sign of overcoming the European debt crisis, sustainably, and a sign that, for us, Europe means our future,” she added.

Late on Friday, in the Bundesrat representing Germany’s 16 regional states, 65, out of the 69 who voted, approved both the fiscal pact and ESM.”

Clearly Germany is usurping the role of the IMF in the approach to the debt crisis.

What should be noted from the above is:

“German Finance Minister Wolfgang Schäuble said Merkel had “defended and imposed exactly what had been German government policy for years,” namely firm conditions in exchange for aid.”

Germany is setting the terms for a new order in Europe. No doubt it sees itself to the fore in Germany’s new Europe it seeks to unify under its flag. Debtor nations provide opportunity for expansion of Germany’s economic and political interest. The only question is what tune the piper wishes to be played.

Markets initially will bounce in favour of the euro followed by a crestfallen fall when its realised there may not be enough in the ESM kitty to pay for all the delinquent sovereign debts of Spain, Portugal, Greece, Ireland, Cyprus, and latterly even Italy and France. Its hoped ESM can be boosted to an ¢800 bn by turning it into a CDO type financial paper.

ECB is like super Anglo except its busted by developer sovereigns who unwisely bet everything on the euro credit bubble deregulated Tiger. ECB approved lenders who did not know what the word regulation meant.Its remit is to protect the financial services industry at expense of taxpayers across Europe.

Ireland hopes to gain from the decision to directly fund banks but its hard to see what gain there can be for Ireland. In the case of Spain, Spanish banks in the wake of a burst property bubble are underwater. That’s the reason interbank lending to Spanish banks has dried up. Fears the losses will have to be passed onto the sovereign mean lending costs for Spain precipitated the current milestone in the euro debt crisis.

Its proposed directly funding Spanish banks will save the Spanish sovereign from taking on debt as Ireland has done through its guarantee. The question of how Spanish banks will pay back debt aimed at bailing them out through direct funding from the ESM has not been addressed.

The question of how the interbank lending market will lend to Spanish banks already fed with ECB LTRO and now fed by bonds from the ESM is simply ignored.

Its simply not reasonable in the medium to long term to see how Spanish banks with piled on loans outstanding from the ESM are going to make enough money to pay back their present loans, never mind the extra burden of ESM ‘bailout’. Its a Spanish fairytale. When markets realise this, they will lose trust in the Spanish sovereign and we are back to square one.

Only this time its worse, because now Germany is on the hook for losses along with Spain. That ESM bailout money is headed for the drain. Similarly in regard to Ireland struggling with ¢65 bn odious debt from its banking ‘bailout’, its difficult to see how troika bailout can be bettered by switching sovereign debt into directly funding the debt of Irish banks, particularly the IBRC portion of this debt.

ITs possible a better deal to beat the promissory note ELA ¢3.1bn annual repayment scheme can be alleviated with a bond buyout of this managed through the ESM fund. But one should be particularly wary of the word ‘better’ used here.

Will this be better for German lenders, rather than Irish taxpayers? Its likely to be the former. Instead of demanding a write off of this odious debt incurred by the IBRC amounting to ¢31 bn, Irish negotiators will through a mixture of incompetence, propaganda, ignorance of economics and telling a lie often enough in the hope it will become the truth, will likely extend the maturity of the debt owed by the Irish banks.

Its probable the extension of maturity dates will be balanced by extra overall cost that will be born by coming generations of Irish people.

In return for the above Germany will extract a heavy price compromising Irish sovereignty into a new Vichy, satellite status more in common with former satellite states of the USSR than any US state.

Germany whets itself on the future possibilities of eventual annexation of sovereign states such as Ireland, Schauble’s “namely firm conditions in exchange for aid” while Irish politicians hail ESM as a breakthrough is fundamentally derisory.

Stringent conditionality attached to ESM ensure the ECJ (European Court of Justice) can be invoked if penal terms are not complied with. Germany currently fears a future Irish government may choose to go the way of Iceland and say simply, we are not going to pay up the Promissory Notes as this is odious debt, debt that should not be repaid.

Meanwhile our debt profile due to rise to 118% debt/gdp unmanageable levels next year has become focus of a vague, indeterminate promise of a switch into ESM, is hailed as a breakthrough. Its laughable. After years of negotiations, all that is proposed is that Irish debt will be examined in the light of the recent announcements above.

Once again its back to where we came from, the blind leading the blind ! As a counterbalance to all of this the original fault lines of the euro project still remain. Germany, a more productive economy, gets to sell its goods to the periphery, Germany provides loans that have now morphed into bailouts to less productive economies unable to compete with it. Fundamental imbalances between the core and the periphery that gave rise to the european debt crisis are further exacerbated.



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