So the ignoble wrangling over the American debt ceiling is over. An agreement is reached and the market reaction was to promptly sell everything. The Dow fell 2.19, the Nasdaq fell 2.75 and the S&P fell 2.56. So that's what 'victory' over the debt ceiling looks like. Both sides were after all claiming a victory and a good deal for America. I'm tempted to ask, whose America?
The markets know this was not any kind of solution. It was the opening salvo in a re-election campaign. The Republicans have merely ensured that the whole crisis can be visited upon the White House again closer to the elections.
And after all what was all the wrangling when one clears away the shameful deceits of party political posturing? Each side, Democrat and Republican with the Tea Party in there to add extra zest and drama, claimed to be fighting for a noble principle and a vision of America's future. All sides were lying. There was no great principle at stake nor any differing visions. On one side were those who wanted to pile yet more debt on the backs of America's tax payers - and not in order to support the tax payers particularly, but to pay for more QE for the banks. And on the other side were those who felt the proper use of the American tax payer was to cut all services to them, such as welfare, but still expect them to pay their taxes and for a cherry on the top to cut taxes for the wealthier.
So any way I look at it what I see is two groups broadly agreed on who to help and protect - the bankers and financial class (themselves and their friends) - and agreed on who should pay - the broad base of America's working and lower middle class, their only disagreement was over how to extract the money and where to place the burden. Should it be via more debt to be paid off or via savage cuts to any social or infrastructure programme. Should we flog the lower classes or drown them? Decisions decisions.
The slight problem is that while the two political teams will fight for the right to be Betrayer in Chief, Wall Street and its rulers do not much care which party is in charge since they will buy the services of whichever gimp is elected.
And so while it makes all kinds of political in-fighting sense to re-run this battle again when even more political capital can be made from it, it makes less sense in Wall Street. Sure there will be opportunities for those with the best inside knowledge to make a killing, but the risks of volatility spilling over and getting out of control are already far too high.
The currency markets internationally are dangerously out of control.
Meanwhile in Europe we are playing our own fanfare of failure.
What was always going to happen is now starting. We were a badly holed ship but instead of closing the bulk heads, flushing the debt out of the flooded compartments of Greek, Irish, Spanish, German, French and Italian banking, and then repairing the holes, our leaders, those living it up on the upper decks, decided that the loss of those valuable compartments would curtail their party and opted instead to pump the ingress of debts from the banks to other larger rooms. The section of the ship from which we pumped seemed to rise fractionally, or at least the water level, it was claimed, was going down, and the ship, we were assured could deal with the extra cargo now being 'safely' stored for later disposal in two private rooms marked ECB and EFSF.
Sadly the holes, unfixed, are larger than was admitted, the flood is still coming in, the pumps are at capacity and the new store rooms, the ECB and EFSF, are filling up rapidly. In fact the EFSF is now flooded.
OK enough of the tortured analogy.
The EFSF (European Financial Stability Facility) is in trouble. Double trouble in fact. In an attempt to calm the debt markets by words alone (the European way) the rules of the EFSF were changed recently. The new rule said,
Second their non-solution is a failure even in its own stupid terms. The extra ability to intervene has to be agreed unanimously, and so the markets have quite logically concluded it would never actually happen until the disaster was too overwhelming for it to make a difference anyway. This is why, I think, the cost of insuring Italian and Spanish debt has shot up to record levels in the last week. It seems clear that the markets don't believe the EFSF will work.
Third you have to look at how the EFSF is funded. These things get created, given names and buildings, their functionaries get titles, plush offices and salaries paid from our taxes, and their words are duly reported as edicts from some new power in the land. But the EFSF has no money nor any power of its own.
The EFSF exists on the basis of promises made by EFSF's backers and with the amounts of money they have pledged. It is their pledges, promises and their financial strength which gave the EFSF its AAA rating and allow it to act as Europe's version of the IMF. Here is a list of the EFSF's backers with the amounts they have pledged.
You'll note that some of those backers are also the same countries who are bankrupt. Problem number three. I have highlighted those countries already bankrupt and those whom the world knows are one short step away from needing rescuing.
You can see that Ireland and Greece are not major backers and so their relegation form backer to beggar is not erminal for the EFSF. But take out Spain and Italy from the list of backers and have them take money out rather than putting money in and "Berlin, we have a problem."
This is what is meant when people say the cost of bailing out Europe is going to fall increasingly upon Germany and France. Ireland is not going to stump up more money for the EFSF. Nor is Greece nor Cyprus. And who is going to be so stupid as to think that all is well if Spain and Italy give money with one hand and "stand fully behind" the EFSF while also nipping round the other side of the counter to stand in line in order to take far more money out, with the other hand?
The EFSF has €440 billion. Everyone inside and outside the EFSF has already admitted this is not enough. And that was before Italy joined the general collapse. Who will give the EFSF the hundreds more billions teh banks are saying will be a necessary minimum?
Contagion is not an 'if' nor even a 'when'. It is already a fact. The only questions are who's already infected, how badly and who is next?
Contagion is the dark twin to 'We're all in this together". Let's just take one example but a relevant one - UniCredit. I could just as easily use Santander but not today.
UniCredit is in all kinds of trouble. Its vast US subsidiary, Pioneer, is the Marie Celeste. I do not believe it is long for this world as a going and profitable concern. But it is in Europe that the infection is most advanced. UniCredit has had trading in its shares suspended time after time on the Italian Bourse because of massive and unstoppable losses in the last few weeks. In the last few days the other main Italian banks also had trading in their shares suspended. Why now? Because of what I wrote about a few days ago - Support Uplift - the support a bank has from its national government. Italy's government is in a bad way. There is talk of the head of the Italian Central Bank, Mr Draghi, being asked to head a new government of national unity to steer a perilous course through the present crisis. How this would work with him also becoming the new head of the ECB I have no idea.
UniCredit and the Italian Financial sector will not survive if Italy is perceived as not being able to support them. But if Italy itself has to go with a begging bowl to the EFSF then how much confidence can investors have in the future stability of UniCredit? The answer is there every day on the Italian Bourse - and it is "Not much."
But if UniCredit were to implode and need rescuing would this be Italy's problem only?
UniCredit own Austria's largest bank - Bank Austria. I know that there are already political concerns in the Austrian Parliament that UniCredit's troubles would hammer Austria. And they're correct. It would.
It would also hammer Ireland and Bavaria because UniCredit also owns what was HVB (HypoVereins Bank). HVB is big in both Ireland where it has a major part of its operations and in Bavaria where it came from.
Bank Austria is also perhaps the largest player in banking in Eastern and South Eastern Europe. Were UniCredit to collapse it would set off a line of depth charges from Greece , through the Balkans, further East and up the Adriatic as well.
The plan is failing, as it was always going to. It is starting to pick up speed. Can the European powers regain control? How much longer before the German voters rebel? How much more uncertainty and fear will the coming Spanish election create? How much stronger will the Swiss franc become as a 'safe haven' alternative to the Euro before no level of Swiss Central bank intervention has any effect and the franc gets so strong it kills countries like Hungary stone dead?
And before I go, transfer what we have said about the EFSF to the IMF. The IMF has been around, hurting people, for so long it almost seems a fixture. It has also recently been given the power to issue its own bonds. Both of which make the IMF seem like a power in this world in its own right. But it is not. The IMF is actually not unlike the EFSF - it is not a country with a tax base of its own - it has to be funded and most of that funding relies on the assurance that behind the IMF lies real power and real financial clout. The IMF's sugar daddy has always been America. The IMF's power was that it was seen as a projection and arm of American power.
But America is broke and living off a parabolic rail gun trajectory of increasing debt. At what point in the ruination of America will the IMF be seen for what it is, America's version of the EFSF?
The IMF is not the lender and disciplinarian of last resort. It is the ideological bully of last resort paid for principally by America. If America itself starts to lose control of its own debts (which I think it already has) then the IMF is just another larger hollow colossus and its guarantees of help will be questioned and discounted exactly as may soon happen to the EFSF.
http://golemxiv-credo.blogspot.com/2011/08/fanfair-of-failure-american-debts-and.html
Here some of the comments that followed:
steviefinn said...
...On another point, David Norris has been forced out of the Aras election, am I right in thinking he was someone who took WhistlebowerIRL seriously ?
Golem XIV - Thoughts said...
Whistleblower IRL said...
The markets know this was not any kind of solution. It was the opening salvo in a re-election campaign. The Republicans have merely ensured that the whole crisis can be visited upon the White House again closer to the elections.
And after all what was all the wrangling when one clears away the shameful deceits of party political posturing? Each side, Democrat and Republican with the Tea Party in there to add extra zest and drama, claimed to be fighting for a noble principle and a vision of America's future. All sides were lying. There was no great principle at stake nor any differing visions. On one side were those who wanted to pile yet more debt on the backs of America's tax payers - and not in order to support the tax payers particularly, but to pay for more QE for the banks. And on the other side were those who felt the proper use of the American tax payer was to cut all services to them, such as welfare, but still expect them to pay their taxes and for a cherry on the top to cut taxes for the wealthier.
So any way I look at it what I see is two groups broadly agreed on who to help and protect - the bankers and financial class (themselves and their friends) - and agreed on who should pay - the broad base of America's working and lower middle class, their only disagreement was over how to extract the money and where to place the burden. Should it be via more debt to be paid off or via savage cuts to any social or infrastructure programme. Should we flog the lower classes or drown them? Decisions decisions.
The slight problem is that while the two political teams will fight for the right to be Betrayer in Chief, Wall Street and its rulers do not much care which party is in charge since they will buy the services of whichever gimp is elected.
And so while it makes all kinds of political in-fighting sense to re-run this battle again when even more political capital can be made from it, it makes less sense in Wall Street. Sure there will be opportunities for those with the best inside knowledge to make a killing, but the risks of volatility spilling over and getting out of control are already far too high.
The currency markets internationally are dangerously out of control.
Meanwhile in Europe we are playing our own fanfare of failure.
What was always going to happen is now starting. We were a badly holed ship but instead of closing the bulk heads, flushing the debt out of the flooded compartments of Greek, Irish, Spanish, German, French and Italian banking, and then repairing the holes, our leaders, those living it up on the upper decks, decided that the loss of those valuable compartments would curtail their party and opted instead to pump the ingress of debts from the banks to other larger rooms. The section of the ship from which we pumped seemed to rise fractionally, or at least the water level, it was claimed, was going down, and the ship, we were assured could deal with the extra cargo now being 'safely' stored for later disposal in two private rooms marked ECB and EFSF.
Sadly the holes, unfixed, are larger than was admitted, the flood is still coming in, the pumps are at capacity and the new store rooms, the ECB and EFSF, are filling up rapidly. In fact the EFSF is now flooded.
OK enough of the tortured analogy.
The EFSF (European Financial Stability Facility) is in trouble. Double trouble in fact. In an attempt to calm the debt markets by words alone (the European way) the rules of the EFSF were changed recently. The new rule said,
"To improve the effectiveness of the EFSF and address contagion, we agree to increase the flexibility of the EFSF, allowing it to intervene in the secondary markets on the basis of an ECB analysis recognizing the existence of exceptional circumstances and a unanimous decision of the EFSF Member States."First the "exceptional circumstances" have been exceptional now for over a year at least and show absolutely no signs of ever returning to 'normal'. Simply because nothing is being done to address the root cause. The flood of bad debts. Pumping them into larger and larger rooms in the ship was never a solution.
Second their non-solution is a failure even in its own stupid terms. The extra ability to intervene has to be agreed unanimously, and so the markets have quite logically concluded it would never actually happen until the disaster was too overwhelming for it to make a difference anyway. This is why, I think, the cost of insuring Italian and Spanish debt has shot up to record levels in the last week. It seems clear that the markets don't believe the EFSF will work.
Third you have to look at how the EFSF is funded. These things get created, given names and buildings, their functionaries get titles, plush offices and salaries paid from our taxes, and their words are duly reported as edicts from some new power in the land. But the EFSF has no money nor any power of its own.
The EFSF exists on the basis of promises made by EFSF's backers and with the amounts of money they have pledged. It is their pledges, promises and their financial strength which gave the EFSF its AAA rating and allow it to act as Europe's version of the IMF. Here is a list of the EFSF's backers with the amounts they have pledged.
Country
Guarantee
Commitments
EUR (millions)
Kingdom of Belgium 15,292.18
Federal Republic of Germany 119,390.07
Ireland 7,002.40
Kingdom of Spain 52,352.51
French Republic 89,657.45
Italian Republic 78,784.72
Republic of Cyprus 863.09
Grand Duchy of Luxembourg 1,101.39
Republic of Malta 398.44
Kingdom of the Netherlands 25,143.58
Republic of Austria 12,241.43
Portuguese Republic 11,035.38
Republic of Slovenia 2,072.92
Slovak Republic 4,371.54
Republic of Finland 7,905.20
Hellenic Republic 12,387.70
Total Guarantee Commitments 440,000.00
You'll note that some of those backers are also the same countries who are bankrupt. Problem number three. I have highlighted those countries already bankrupt and those whom the world knows are one short step away from needing rescuing.
You can see that Ireland and Greece are not major backers and so their relegation form backer to beggar is not erminal for the EFSF. But take out Spain and Italy from the list of backers and have them take money out rather than putting money in and "Berlin, we have a problem."
This is what is meant when people say the cost of bailing out Europe is going to fall increasingly upon Germany and France. Ireland is not going to stump up more money for the EFSF. Nor is Greece nor Cyprus. And who is going to be so stupid as to think that all is well if Spain and Italy give money with one hand and "stand fully behind" the EFSF while also nipping round the other side of the counter to stand in line in order to take far more money out, with the other hand?
The EFSF has €440 billion. Everyone inside and outside the EFSF has already admitted this is not enough. And that was before Italy joined the general collapse. Who will give the EFSF the hundreds more billions teh banks are saying will be a necessary minimum?
Contagion is not an 'if' nor even a 'when'. It is already a fact. The only questions are who's already infected, how badly and who is next?
Contagion is the dark twin to 'We're all in this together". Let's just take one example but a relevant one - UniCredit. I could just as easily use Santander but not today.
UniCredit is in all kinds of trouble. Its vast US subsidiary, Pioneer, is the Marie Celeste. I do not believe it is long for this world as a going and profitable concern. But it is in Europe that the infection is most advanced. UniCredit has had trading in its shares suspended time after time on the Italian Bourse because of massive and unstoppable losses in the last few weeks. In the last few days the other main Italian banks also had trading in their shares suspended. Why now? Because of what I wrote about a few days ago - Support Uplift - the support a bank has from its national government. Italy's government is in a bad way. There is talk of the head of the Italian Central Bank, Mr Draghi, being asked to head a new government of national unity to steer a perilous course through the present crisis. How this would work with him also becoming the new head of the ECB I have no idea.
UniCredit and the Italian Financial sector will not survive if Italy is perceived as not being able to support them. But if Italy itself has to go with a begging bowl to the EFSF then how much confidence can investors have in the future stability of UniCredit? The answer is there every day on the Italian Bourse - and it is "Not much."
But if UniCredit were to implode and need rescuing would this be Italy's problem only?
UniCredit own Austria's largest bank - Bank Austria. I know that there are already political concerns in the Austrian Parliament that UniCredit's troubles would hammer Austria. And they're correct. It would.
It would also hammer Ireland and Bavaria because UniCredit also owns what was HVB (HypoVereins Bank). HVB is big in both Ireland where it has a major part of its operations and in Bavaria where it came from.
Bank Austria is also perhaps the largest player in banking in Eastern and South Eastern Europe. Were UniCredit to collapse it would set off a line of depth charges from Greece , through the Balkans, further East and up the Adriatic as well.
The plan is failing, as it was always going to. It is starting to pick up speed. Can the European powers regain control? How much longer before the German voters rebel? How much more uncertainty and fear will the coming Spanish election create? How much stronger will the Swiss franc become as a 'safe haven' alternative to the Euro before no level of Swiss Central bank intervention has any effect and the franc gets so strong it kills countries like Hungary stone dead?
And before I go, transfer what we have said about the EFSF to the IMF. The IMF has been around, hurting people, for so long it almost seems a fixture. It has also recently been given the power to issue its own bonds. Both of which make the IMF seem like a power in this world in its own right. But it is not. The IMF is actually not unlike the EFSF - it is not a country with a tax base of its own - it has to be funded and most of that funding relies on the assurance that behind the IMF lies real power and real financial clout. The IMF's sugar daddy has always been America. The IMF's power was that it was seen as a projection and arm of American power.
But America is broke and living off a parabolic rail gun trajectory of increasing debt. At what point in the ruination of America will the IMF be seen for what it is, America's version of the EFSF?
The IMF is not the lender and disciplinarian of last resort. It is the ideological bully of last resort paid for principally by America. If America itself starts to lose control of its own debts (which I think it already has) then the IMF is just another larger hollow colossus and its guarantees of help will be questioned and discounted exactly as may soon happen to the EFSF.
http://golemxiv-credo.blogspot.com/2011/08/fanfair-of-failure-american-debts-and.html
Here some of the comments that followed:
steviefinn said...
...On another point, David Norris has been forced out of the Aras election, am I right in thinking he was someone who took WhistlebowerIRL seriously ?
Hello Steviefinn,
Yes, Norris was the onoly one who actually tried to do something about the WhistelblowerIRL situation. Norris was also the ONLY one who tried twice to get the Irish government to discuss who the Bond holders of Anglo Irish Bank actually were. Twice he tried to read out the list of Bond holders and twice was silenced.
Whatever else, he was one of the very few to stand up and fight for the ordinary people of Ireland.
Yes, Norris was the onoly one who actually tried to do something about the WhistelblowerIRL situation. Norris was also the ONLY one who tried twice to get the Irish government to discuss who the Bond holders of Anglo Irish Bank actually were. Twice he tried to read out the list of Bond holders and twice was silenced.
Whatever else, he was one of the very few to stand up and fight for the ordinary people of Ireland.
@ Steviefinn
Here is the link to one of the Irish Seanad (Senate) debates in which Senator Norris tried to read out the list of Anglo bond holders. What a weird idea?!? trying to discuss the burning issues of the day in our houses of parliament. No wonder the powers that be dug out everything they possible could to ensure he would change his mind about running for presidency (he withdrew yesterday). After all, David Norris single-handedly challenged the Irish State in the European Court of Human Rights in 1988; the last thing our puppet parliament would want now would be a strong-minded man in as the president of country. Good heavens, NO!
http://debates.oireachtas.ie/seanad/2010/11/25/00005.asp
http://en.wikipedia.org/wiki/David_Norris_(politician)
Here is the link to one of the Irish Seanad (Senate) debates in which Senator Norris tried to read out the list of Anglo bond holders. What a weird idea?!? trying to discuss the burning issues of the day in our houses of parliament. No wonder the powers that be dug out everything they possible could to ensure he would change his mind about running for presidency (he withdrew yesterday). After all, David Norris single-handedly challenged the Irish State in the European Court of Human Rights in 1988; the last thing our puppet parliament would want now would be a strong-minded man in as the president of country. Good heavens, NO!
http://debates.oireachtas.ie/seanad/2010/11/25/00005.asp
http://en.wikipedia.org/wiki/David_Norris_(politician)
