We all know the drill. Bond yields start to spike in one of the smaller countries in the EU, and before you know it, the bigger countries are called in to bail them out. We’ve seen the same rerun over and over again.
This time, Italy and Spain are in the crosshairs. Jittery investors have fled their bond markets for the safety of German Bund, US Treasuries and precious metals. The selloff has sent Italian bond yields into the stratosphere making it more expensive for the government to fund its operations. So, the debts and deficits get bigger and the downward spiral begins. Same old, same old. That’s why the ECB called an emergency meeting of the EU’s Governing Council on Sunday to cobble together another 11th hour bailout before the markets opened on Monday. If they had ignored the problem, it would have been Lehman Brothers all over again; plunging stock markets, panicky bank runs, and a full-blown global financial crisis. Here’s a summary from Bloomberg:
“European Central Bank President Jean- Claude Trichet started buying Italian and Spanish assets today in his riskiest attempt yet to tame the sovereign debt crisis.
Italian and Spanish bonds surged as the ECB entered the market, sending 10-year yields down more than 70 basis points. The euro rose to $1.4355 at 10:30 a.m. in Frankfurt from $1.4277 at the close of European trading on Friday.
With governments failing to act swiftly enough to stop contagion fromGreece’s fiscal meltdown, it has fallen to the ECB to battle a crisis that’s now threatening the survival of the euro. Buying Italian and Spanish debt may require the ECB to massively expand its balance sheet and open it to accusations of bailing out profligate nations, breaching a key principle in the euro’s founding treaty and undermining its credibility. Germany’s Bundesbank opposes the move.” (Bloomberg)
Okay, so Italy’s bond market get’s a breather, but for how long? After all, investors aren’t stupid. They know that Italy has the 3rd biggest bond market in the world ($2.6 trillion) and that if ECB chief Jean Claude Trichet is serious about bailing them out, he’ll have to convince the other members to triple the size of the emergency fund. (The European Financial Stability Facility currently holds 440 euros) That has no chance of flying in Germany, where the vastly unpopular bailouts have already ravaged Chancellor Angela Merkel’s Christian Democrats and changed the political landscape altogether. So, whether this action calms the markets or not, it may not matter, because the monetary union is headed for a crackup anyway. Here’s a clip from an article in Nasdaq that helps to explain:
“Germany’s government thinks Italy is too big for Europe’s rescue fund to save, Der Spiegel magazine reports in a preview of an article to be published Monday.
The government doubts whether even tripling the size of the rescue fund, known as the European Financial Stability Facility, would enable it to save Italy because the country’s financing needs are so enormous, the magazine reports without naming the source of its information.
European Commission President Jose Manuel Barroso this week suggested increasing the size of the EFSF, which currently has a planned lending capacity of EUR440 billion ($622.9 billion), to help stem Europe’s worsening debt crisis.
German government finance experts believe euro-zone states couldn’t guarantee Italy’sEUR1.8 trillion of sovereign debt without markets considering Germany to be overstretched, Der Spiegel reports.
Germany’s government therefore insists that Italy push through savings and reforms to help it exit the crisis, the magazine reports. It thinks the EFSF should only be used to rescue small and mid-size countries, the magazine reports.” (“German Government Thinks Italy Too Big For EFSF To Save -Spiegel”, Nasdaq)
So, yes, Germany is going through the motions and trying to sooth the markets, but, behind the scenes, policymakers think it’s futile. The European Financial Stability Facility (EFSF) would have to be increased by more than $1.5 trillion and, even then, there would be no guarantees that the weaker members would comply with the deficit guidelines or grow their way out of their ECB-imposed slump. So, what’s the point? Either all 17 members sacrifice some of their own sovereignty and form a stronger fiscal union or they abandon the euro project altogether.
But what does a “stronger fiscal union” really mean? More power to the unelected, self-serving gangsters at the ECB? No thanks.
The best way forward is to jettison the euro and start from scratch. However painful and disruptive that may be, the alternative is infinitely worse. Just look at the way the financial crises have been handled. In every case, the interests of the bankers and bondholders have taken precedent over the interests of the people. And, in every case, the working people have been expected to bear the brunt of the losses in terms of austerity measures. That’s led to the shredding of the social safety net, higher unemployment, and privatizing of public assets. Why? Because policy is dictated by the ECB, and the ECB’s primary duty is to make sure the banks don’t lose money. Here’s how the Financial Times sums it up:
“Italy can afford to ignore rising bond yields for months. Europe’s banks cannot wait. Worries about the banks, measured by the gap between euro forward rate agreements and overnight indexed swaps, are now worse than at the height of last year’s panic over Greece. Eurozone bank shares were last this low in April 2009, just after the market bottomed.” (“Dr Trichet’s medicine leaves bitter after-taste”, Financial Times)
So, Trichet’s bond purchasing program is not really about Italy at all. It’s just another bank bailout. And the reason the banks need another bailout is because they’re going to lose tons of money on the dodgy bonds they bought during the bubble years. This is from The Independent:
“The problem is that all the European banks have lent huge amounts of money to each other – Italy has lent Spain $31bn, Germany has lent $238bn to Spain and Italy has borrowed $511bn from France. The worry is that it is like a pack of cards – once one goes they will all fall. And the banks are scared that if political leaders agree a new package many of them will be forced to take losses on their loans.” (“Worried about the worldwide crisis? Our experts explain what’s going on”, The Independent)
This just confirms what we’ve been saying from the very beginning, that it’s all about the banks. If bond prices fall too sharply, so what? The countries effected have to restructure their debts, that’s all. Sure, it’s a painful process, but it’s not the end of the world. In contrast, it WOULD be the end of the world for a lot of the banks, because they don’t have enough capital. That’s why the ECB is intervening, so it can artificially prop up bond prices. It’s basically a subsidy to the banks that’s paid for by the taxpayer. Can you recall a time when the ECB or the Fed ever did the same for ordinary working people? Like with housing?
No way. The average homeowner took it in the shorts for $8 trillion when the housing bubble burst wiping out most of his savings and leaving the economy high-and-dry. Only the banks get favors.
If they win, they keep the profits. And if they lose, they get a bailout. And, of course, all of this has terrible consequences for the real economy because diverting capital to failing financial institutions constricts growth and prolongs the slowdown. It’s no coincidence that the massive bank bailouts have been accompanied by belt-tightening measures that have pushed the broader economy to the brink of another recession. Propping up toxic assets is a costly business that results in chronic high unemployment, flagging demand, and slow growth. Just look at the data.
This is from an article in The Economist:
“Concerns over bank funding are on the rise, as European banks in particular find it difficult to get hold of short-term funding. Analysts are keeping a close eye on the Euribor-OIS spread, which, in effect, measures how nervous European banks are about lending money to each other: that gauge is widening again. The amount of cash that euro-area banks deposited with the European Central Bank (which means, of course, that it is not being lent out to other banks) hit a six-month high this week.
Across the Atlantic, investors withdrew $66 billion from money-market funds in the week ending August 3rd, according to data from Lipper, a research firm. That is the second-largest net outflow on record…..money-market funds are pushing down hard on maturities. One European bank boss said privately this week that he had never seen risk aversion this intense.
In response the ECB announced yesterday that it was reintroducing six-month unlimited funding to banks that wanted it, up from three-month loans currently.” (“High Anxiety”, The Economist)
Get the picture? The money-grubbing activities of the banks have put us all in harm’s way again. The whole worm-infested financial apparatus is beginning to shimmy and shake just like 2008. The banks are hoarding cash overnight at the ECB, investors are pulling their money out of the money markets, the gauges of market stress are blinking red, and interbank lending is starting to sputter. If liquidity freezes up; it’s Game Over. The EU financial system will grind to a halt and the global economy will go into freefall. That’s why Trichet stepped in despite objections from German members of the ECB’s governing council. It was the only chance he had of heading off another catastrophe.
But what does that say about the state of democracy in the eurozone? Do people really want the landsharks at the Central Bank dictating economic policy? Not likely.
So, is the euro really worth saving?
We’ll let economist Mark Weisbrot answer that question:
“It appears that much of the European left does not understand the right-wing nature of the institutions, authorities, and especially macroeconomic policies that they are facing in the Eurozone…..
The problem is that the monetary union, unlike the EU itself, is an unambiguously right-wing project. If this has not been clear from its inception, it should be painfully clear now, as the weaker Euro-zone economies are being subjected to punishment that had previously been reserved for low- and middle-income countries caught in the grip of the International Monetary Fund (IMF) and its G-7 governors. Instead of trying to get out of recession through fiscal and/or monetary stimulus, as most of the world’s governments did in 2009, these governments are being forced to do the opposite, at enormous social cost. The insults added to injury, as with the privatizations in Greece or “labor market reform” in Spain; the regressive effects of the measures taken on the distribution of income and wealth; and the shrinking and weakening of the welfare state, while banks are bailed out at taxpayer expense – all this advertises the clear right-wing agenda of the European authorities, as well as their attempt to take advantage of the crisis to institute right-wing political changes.” (“Why the Euro is Not Worth Saving”, Mark Weisbrot, CounterPunch)
Repeat: “…the monetary union…. is an unambiguously right-wing project.”
Amen, to that. It’s time to put the euro out of its misery and start over.
Mike Whitney lives in Washington state. He can be reached email@example.com