Tag Archives: sovereign debt

Central Bankers – The Fifth Estate.

Nowadays, the  bank to government to Central Bank and back to bank cross-border flows of money (both real and imaginary), the constant borrowing and re-borrowing , the bond auctions etc. appear to be behaving as if controlled by a separate, non-governmental , non-economic entity.

Sovereign bond auctions have now become a weekly sport, generating the sort of interest formerly reserved only for TV soap operas.

European banks gather around the European Central Bank like pigeons at feeding time.

Rather worryingly, this new pseudo-economic essence behaves as if it is more-or-less dislocated from what we call “the Global Economy”.

It is the Macro Banking System. The FIFTH ESTATE.**

It is behaving as a totally separate, self-perpetuating, high-level mutant economy which exists for its own sake and is presided over by senior bankers and financiers with politicians merely fetching and carrying.

One of the symptoms which we are currently witnessing is the demise of democratically-elected officials. Their status seems to be diminishing day-by-day, to the extent that their job is simply to row the boat according  to the drumbeat set by very senior bankers – the New Rulers.

The very people who created this financial crisis four years ago have gradually created a brand-new debt-fuelled edifice  which has become anchored both in the economy as well as in our collective psyche. We have come to see the Debt Mountain as our Saviour with  Central Bankers in the role of its High Priests.

The concept has become so embedded, that we have grown to believe that only they (the High Priests) can save us.

This new entity appears divorced from the old-fashioned concepts of growth, production and distribution and now only needs sovereign economies to feed it occasionally.

This gradual power-shift has only occurred in the last year-or-so and so, imperceptibly, we have entered an age where politicians have finally become subservient to the bankers.

The jury is still out as to whether the development of this new ruling financial class is good or bad or even sinister. The Conspiracy Theorists have notions of Bilderbergers, a New World Order and all sorts of other conspiracies – I do NOT subscribe to that view.

Politicians have shown that they do not have the intellectual or technical capacities to deal with a multi-causal, multi-faceted, vastly complicated economic crisis, borne more out of greed-conceived chaos, rather than the usual rules of Keynesian economics.

We have to take a leaf out of the politicians’ book.

Heads bowed, we wait.

** First Estate – Clergy. Second Estate – Nobility. Third Estate – Commoners. Fourth Estate – the Press.

Greece and the Deutschebond

Hopefully, Europe is NOT relying on yesterday’s conference call between Angela Merkel, Nicolas Sarkozy and Greek Prime Minister, George Papandreou.

Lets not beat around the bush. The Greek government lied in order to gain entry to the Eurozone. It did it with the connivance of Goldman Sachs who were paid $190 million for their trouble. CLICK HERE.

Euro auditors ought to be in Athens performing Due Diligence in order to make sure that the numbers stack-up and more importantly, that Athens really is making progress and reducing its budget deficit.

The days of “My word is my Bond” are over.

Greece is an economic Basket Case which will be a  drag on the Eurozone economy for ever. Historians will also know that Greece tends to make a habit of going bust and defaulting.

The destructive influence of Greece is now causing rifts within Europe and there is now a very real danger of the German government disintegrating.

Finally, empty pronouncements by senior European officials which are designed to manipulate Stock Market prices MUST stop.

The ONLY morsel of common sense was delivered yesterday by Guido Westerwelle, Germany’s Foreign Minister. He said: “….we  believe you can’t fight debt in Europe by making it easier to take up debt.”

We all know that economic GROWTH is the answer. That’s something that Greece will not be capable of for years – if ever.

The Greek Entry.

Last week I predicted that it was Sarkozy’s turn to deliver yet another mealy-mouthed statement. Looks as if it’s this afternoon!

The question is CAN he save the French Banks whilst convincing an increasingly cynical public and sceptical markets that it’s all about saving Greece?

Money Market Funds have been selling French Bank Shares for about a year, during which time they have reduced their holding in French banks by about 50%.

After Sarkozy (or Angela Merkel) tells us that Greece is “doing the right things” or that ” it is making good progress“, it will be interesting to see what the markets make of it all.

The MOST likely outcome of today’s meeting between Sarkozy, Merkel and Greek Premier Papandreou is a statement indicating that Greece needs more  time.

The Euro and the Eurozone both need time – another commodity which is fast disappearing.

Today’s summit has an interesting sub-plot. Rating agency Moody’s has just downgraded France’s two major banks. Credit Agricole has been  busted down from Aa1 to Aa2 and Société Générale from Aa2 to Aa3.

Once again, this has come as both a surprise and relief to the experts because the downgrades were “not as bad as expected“. It seems that these days, NOTHING is as expected.

For politicians and most economists, these are indeed The Days of Mystery!

The seriousness of not-only the Greek but the entire Eurozone situation is exemplified by the fact that The US treasury secretary, Tim Geithner, will be attending Friday’s meeting of EU finance ministers.

Even the Americans can see that Greece is the No1 domino!

The hard fact is that Greece ought never have been allowed to join the Euro. It was a predictable accident waiting to happen.

As many politicians will attest – especially those who attended boarding school, the “Greek Entry” was always going to be painful.

Casino Economics

After three years, the scales have fallen from our eyes and finally, the light has flooded in.  It has been long time coming but suddenly – an Epiphany!

The politicians,  bankers, economists and even the Central Bank astrologers have absolutely NO IDEA as to how to deal with the gradually building waves of a massive economic crisis which is about to sweep the world. They’ve been gambling that  random fiscal and economic measures would somehow provide a solution and make everything well again!

Money has been printed and distributed, bonds have been issued, promises have been made, false political visions have been shared and yet  the self-amplifying problem continues to self-amplify.

Some of us finally realised  that the Eurozone had run out of ideas when the German authorities temporarily banned “naked short selling” of Eurobonds. The action had absolutely NO effect. However,  it did demonstrate that the politicians (who initially blamed the bankers for the pit of shit that they had help to create) were now turning a rheumy eye on everyone’s new bête noire – the SPECULATORS!

Bankers were greedy bastards with large bonuses but now it was the turn of the “casino-banking” speculators. Spit!

In any crisis, it is always a good idea to look for the root or initial cause. In the case of the Euro and the Eurozone it was an ill-conceived plan which , without tighter integration of fiscal policies between states was doomed to failure.

Make no mistake, the increasingly pathetic bleating of the French and Germans in respect of the looming Greek collapse and default has absolutely NOTHING to do with Greece.

It is all about their joint delusive attempt  to prevent the inevitable collapse of their banks –  which are holding billions in Greek IOUs. Nothing at all to do with Franco-German altruism.

As the French and Germans intertwine, hug each other and panic, their assault on the “speculators”  and the markets , although understandable is also ironic.  Why? Because eventually, the Western-European begging bowl will be  waved at the markets and the “speculators” –  in the vain hope that they will lend the impoverished Eurozone BILLIONS so that the sacred Euro cow can be reprieved.

Biting the hand that could feed you is never a good plan but currently, the markets are dealing with increasingly desperate politicians who have painted themselves into a Euro corner with absolutely NO way out.

Euro and Western economies in general are in debt – both in the public and private sectors. Several countries are bankrupt.

The only REAL solution is GROWTH which unfortunately is NOT achieved by insisting that the weakest economies attempt to restore growth through the unusual and meritless medium of  The Austerity Plan.

Austerity gains you a lot of points with the rating agencies, makes it easier for you to borrow more but in the long-term, it is NOT a sustainable strategy –  as we  in the West are ALL about to discover. Overborrowing  is what caused the problem in the first place.

The economic affliction is the mire of public and private sector debt and uncompetitiveness into which  the weaker economies of southern Europe have sunk.

The cure should be to create an atmosphere for economic growth.

Unfortunately, the generally accepted (unproved but imposed) speculation  is to force broken countries to try and balance their budgets and restore economic growth whilst slashing expenditure and demotivating taxpayers through increased unemployment, inflation and the resultant decimation of tax-revenues.

It will NOT be long before the inevitable wake-up call is heard!

Casino economics does not work.

What did the Greeks ever do for us?

The politicians are very happy to accept credit for taming the debt dragon which, in fact, they themselves created by allowing the banks a free rein for far too long.

The Bank of England’s solution of Quantitative Easing, that is to say handing more and more cash to the banks has done little else apart from allow institutional investors and  the investment banks to maintain Stock prices at  falsely high levels and to push Commodity prices to new stratospheric levels.

These days, the name of the game is to hunt around for any excuse to push the markets higher and higher – not by buying stock and holding it but by keeping it on the move, i.e.   “working those shares”, thus making a dying market look as if it is in rude health.

Last week’s announcement about a possible Greek bailout moved prices up as did the Greek government’s announcement that their austerity measures had been voted through. Good news is all that investors want to hear.

They are all in La-la land!

Scratch the surface and what do you see?  How do all the investors really feel about the possibility of a Greek default? In short, they KNOW that it is going to happen.

That is clearly demonstrated by how much they are willing to pay in premiums for the insurance  contracts which are designed to protect them from future losses in case of default.

The equation is simple, the more the likelihood of a default, the bigger the premium.

The billions in bailouts have made no difference to the perceived likelihood of Greece defaulting and in fact, the likelihood of a total collapse and default is increasing daily.

Today, the cost of insurance against a Greek default is FOUR times greater than it was when their Euro partners announced the very first bailout package.

On May 12, 2010  the European Union (EU) and International Monetary Fund (IMF) announced a €110 billion  bailout for Greece. At that time, the cost of insuring $10 million in bonds against a Greek default was close to $540,000. Last week, it was $2.3 million –  FOUR  times more!

As a comparison, when Lehman Brothers failed and even when the likelihood of a global collapse was at an all-time peak, the absolute maximum that investors were willing to pay for $10 millions-worth  in Greek debt-default insurance was only $52,000.

So, the premium for the cover has increased from $50,000 to over $2 million for the same amount!!  THAT’S FORTY TIMES MORE!!!

To put it simply, investors believe that the likelihood of a Greek default is over 40 times greater today than it was at the height of the 2008 financial crisis.

Meanwhile the politicians are celebrating. Do they really believe that as far as the Greek economy is concerned it’s “job done”? Of course not. Not really!

It’s all window dressing, prevarication, obliquity and procrastination, designed to protect the Sacred Cow of the Euro for the time being, in the vain hope that by some miracle, under-investment and austerity will reboot the Greek economy.

The austerity measures which have been agreed for Greece – massive tax increases and suffocating spending cuts will make it impossible for Greece to pay both its bills AND its debts.

In the United Kingdom we are following the same path to decreasing government revenues by killing entrepreneurial confidence and creating the ideal conditions for another recession – or worse.

Like any business, making staff redundant and selling assets is not the way to generate higher net revenue because in the background, debts are constantly increasing. Both Sovereign States and Commercial enterprises have been forced into this totally nonsensical process.

Without new revenue streams and by “over-slashing” costs there is only one possible end-game. All that we are all achieving is putting-off the evil day whilst at the same time hoping for the lottery win which never comes.

The lotterry win which our own Chancellor is hoping for, is a sudden Phoenix-like rising of  non-existent entrepreneurs who do not have the non-existent backing of the banks. These entrepreneurs’ job (theoretically) is to create new businesses or grow existing ones in order to create employment and produce goods which we can exchange for foreign currency.

Greece is hoping for a similar Miracle on Skid Row but in reality, it will survive through the summer and then the begging bowl will reappear. This time, however, it will remain empty.

So, who do we believe? The politicians who have achieved very little except boot the can along a narrowing cul-de-sac OR the investors who are willing to pay incredible insurance premiums to protect the money that they have lent? The Dreamers or the Pragmatists?

In spite of very generous Euro handouts, Greece is already twitching and Rigor Mortis will have well and truly set-in by the final quarter of 2011.

The answer of who to believe is telegraphed to us daily by people who know – the global investors. Nowadays “buy and hold”  investment seems almost anachronistic.  If you look at Stock prices every day,you will see that they move up and then down , then up again….etc……What is known as a volatile market.

So what WILL the end game be?  What will the Greeks do for us?

Firstly, both European and American banks will collapse (again). European Banks have loaned money to Greece but it is the American Banks who are holding a lot of European bank debt. If European bank shares plunge to ridiculously low levels, financial markets could freeze whilst at the same time, investors will want to withdraw their non-existent money.

Incidentally, money is already being withdrawn and in the last 10 days, over $50 millions has gone from primary money market funds.

Secondly, the market for short-term debts — especially corporate IOUs (commercial paper) may freeze up. (That’s what happened in 2008 as a result of the Lehman Brothers collapse). The difference is that for instance in the United States, the Federal Reserve will not step-in with guarantees or cash – they have said so. Safety net gone.

No doubt other Central Banks will come running-in with the sticking plaster and splints but hopefully, by then, we will have learned to recognise more futile attempts at a temporary fix.

Thirdly, Greece has more cash tied up in debts than their economy produces in a year (debt/Gross Domestic Produce ration of over 100%).  Greece is not alone. Their protests and riots may be just a foretaste of what most Western economies will experience in the not-too-distant future. America is just one example of an economy which has passed the danger threshold and is currently playing a waiting game.

It is not just the well-publicised countries such as Spain, Portugal, Ireland and Italy which are on the brink. The United Kingdom is not far behind.

So what do we do? Do we dance to the politician’s drum-beat?

To a certain extent we have to. Even a wounded tiger is dangerous, so we are forced to ride it along with our governments.

However, we should follow the facts and not believe government “spin”. Do not forget that a skilled tailor can make a hunchback look straight – and our governments have been sewing like crazy for nearly three years!

We (as individuals) should ensure that whichever institution (bank or insurance company) is holding our money, has the ability, will and wherewithal to fulfil its obligations. Not all of them do. Some will have to rely on more government handouts and guarantees.  When you want your money, you want it in full and NOW.

Finally, we should all be very very vigilant.

Remember the 2008 crisis?  The banks did see it coming but to all outward appearances, it all seemed sunny and “business as usual”. Profits….. bonuses……..obsequious governments prostrating themselves before the Gods of Banking…..

Once bitten……….

Nearly forgot: Happy July 4th

Banged-up Bankers

Norman Tebbit is right. It is about time that the banking industry told us who was responsible for the banking Chernobyl of 2008. So far, apart from one or two career casualties, no-one has been brought to book. There certainly have been no criminal prosecutions.

Politicians continue to be in awe of the bankers. This is in spite of the fact that many “spooked” governments had “no-strings” money extorted by the bankers. Governments had to go cap-in-hand in order to borrow and over-commit themselves whilst  bankers behaved merely as the wayward child who had slightly overspent a term’s university loan.

The biggest mistake that governments made was not to ask the banks to try and stay “within budget” in future and not (at least) appear to be over-indulging themselves quite as openly as they used to. As we now know, the banks did not listen , took the money in the sure knowledge that they could carry on exactly as before, because there would be no sanctions. On the contrary, the governments told them that if they were ever in trouble again, government would borrow even more on their behalf.

Some would argue that governments, in handing those vast quantities of cash over to the banks, overstepped the mandate that had been handed to them by the electorate. But the consequence is very straightforward: we are now locked-in. Governments will keep on coming back to the people who elected them and will keep asking them for more and more money.

I say “more and more” because one of the by-products of the recessions suffered by most countries is more and more unemployment. The unemployed , no matter which way you cut it , are a burden on the State – a burden which needs to be supported. Support to the unemployed costs the State which once again has to return to the working electorate for funds.

Our own government spends more than it earns. The shortfall is made-up by borrowing. The difference is called a “deficit”.

Chancellor Osborne thinks that within the life of this Parliament ( by 2015) we will be able to eradicate that deficit. This , from a Chancellor who said this in a lecture to the LSE  three years ago:

“Around the world, countries like Ireland and Australia shrewdly took advantage of these huge opportunities. They reformed their economies, made themselves more competitive, and strengthened their public finances. Both of these countries, for example, now have a “future fund” of assets built to provide security against future shocks and liabilities. Their public finances are well placed. Their competitiveness has risen. Their institutions are stronger.”

Whlie we’re at it, here’s another George Osborne quote:

“A Generation ago, the very idea that a British politician would go to Ireland to see how to run an economy would have been laughable. The Irish Republic was seen as Britain’s poor and troubled country cousin, a rural backwater on the edge of Europe. Today things are different. Ireland stands as a shining example of the art of the possible in long-term economic policymaking, and that is why I am in Dublin: to listen and to learn.”

Mr Osborne then went on to say that he would endeavour to create a British economy in the same mould as that of Ireland.

Some may say in that statement, we have at least one Tory electoral promise which will be achieved.

In retrospect, the above very sincerely-delivered quotations may be interpreted as the ramblings of a future Chancellor who had no idea of what he was taking on or what he was talking about – and THAT is the point.

The banks perpetrated their frauds so cleverly that not even the brightest economists or politicians saw it coming. One could even say that some bankers were SO cunning that even they had no idea of what was about to happen. Although, having said that, the accounting techniques which the banks used suggest that even when they were technically bust, they still managed to declare profits and pay bonuses. Those were the days when the phrase “off-balance sheet” came into common usage.

Whatever the excuse, we do need to see some justice.