Euro plan: rejoice a deal, but no salvation.

Rejoice; a deal has been made; markets are calmed. But, unfortunately, the Eurozone agreement has added layers of bureaucracy, removed democracy and failed to answer the fundamental issue of the Euro itself.

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The new plan is insufficient to iron out the Eurozone's problems.
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Simon Miller
On 28 October 2011 10:58

“Good morning, I would like to speak to the president.”

“Which one?”

“The one dealing with the Eurozone crisis?”

“President of the European Union?”

“Umm, maybe…”

“President of the European Council?”

“…possibly…any more?”

“President of Euro Summits? President of the Eurogroup? President of the Euro Group Working Group?”

And so bureaucracy lumbers ever onwards.

The damp squib that was the rescue summit was more enlivened by the utterings of French president Sarkozy and the wandering eye of Italian prime minster Berlusconi than by what emerged in the early hours of Thursday morning.

The markets have breathed a sigh of relief but besides adding more chefs to the Euro-stew, the deal was utterly predictable in its inability to resolve the crisis.

Are you surprised by this statement? After all markets are up, the grand plan is in place and Greece is still surviving.

But we’ve been here before. The last deal and the last deal before that were both meant to solve the crisis and didn’t.

The main principles behind the current deal in question are Greece, banks, and leveraging the European Financial Stability Facility (EFSF).

Troubled by riots and inaction, Greece will be giving up fiscal independence to the Eurocrats with its budgets examined by a permanent team on the ground. I am sure that Greeks will be as hospitable to their unexpected rulers as they are towards their government as the austerity measures really bite.

The announcement was very pleased with itself over the 50 percent haircut by private holders of Greek debt and is confident that this will not trigger a credit event. I’m fairly sure that it won’t. After all, I very much doubt investors want to go down that route at the moment and voluntarily giving up half of what they’re owed, albeit with sweeteners, will avoid this.

However, what comes afterwards? Who on earth will want to buy Greek bonds? Who will provide the necessary spending money for Greece?

Essentially, unless there is a marked sea-change among investors, Greece will be cut-off from private money. No-one would be willing to buy its bonds, so who will provide funding? Are Greeks now permanently on the Eurozone balance sheet?

I wrote before about the madness of fast re-capitalisation of banks. But now that it has been officially announced that banks only get eight months to reach nine percent, Tier 1 capital ratios at a cost of around €106bn (£92.8bn), it’s not just one flying over the cuckoo’s nest, it’s a whole flock.

With the concordat demanding that banks do not deleverage and cut business lending to reach the ratio – although how that is legally enforceable I don’t know – how exactly are they going to get this capital?

Once again, it seems that taxpayers’ money, through either state intervention or ultimately the EFSF, will be tapped. Considering that the EFSF will have around €250bn after the next hand-outs, how exactly will it cope with a future crisis?

Spivs, in the form of Flash Harry or Private Walker, were a media indulgence; the chirpy petty criminal selling knocked off goods to ration-carded housewives. So is it any wonder that the Eurozone is considering its own SPIV – a Special Purpose Investment Vehicle – to bolster the EFSF to as much as €1trn?

It will do this through “leveraging”; accountancy black magic which would see no new money put in but to attract sovereign wealth funds and, inevitably, China.

The SPIV is aimed at looking attractive to investors but has a far higher risk than other investment vehicles. It will be able to camouflage the risks and debt exposures from investors who would take a huge hit if it failed.

Does this sound familiar to you? It should do; it’s what American banks did with structured investment vehicles during the crisis to hide the true state of their balance books until it was too late.

Surely it is ironic that after making such a fuss over transparency in the marketplace, the Eurozone may offer what took the global economy down in the first place with their opaque structures and high risks?

Once again, the can has been kicked down the road without addressing the fundamental problem of the Eurozone.

It is not the US, or for that matter the UK. It does not have the workforce flexibility that comes from having a shared culture. It doesn’t have the wealth transfer that is needed to counteract banking policies that benefit richer states. It is not a union.

Portugal is on its way down as I write. Its real M1 deposits have fallen at an annualised rate of twenty-one percent over the past six months while Spain is down eight percent. Austerity measures are hurting and without the necessary rate cut to help with the pain, Portugal could be heading down the plug hole.

The agreement may have calmed the market place but the real issues with the Eurozone have yet to be addressed and without these, we could all end up relying on spivs as contagion hits the world. 

Simon Miller is the Editor of Financial Risks Today. He tweets at @simontm71 

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