December 5, 2011

More Euro Denial

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When the family starts talking more about the doctors than the patient, then you know you have a serious problem. Have you noticed that, when a patient is really sick and the prognosis is truly dire, the relations try to console themselves by discussing the quality of the medical staff? This is because, as the risk to the patient increases because the virulent nature of the disease or ailment becomes apparent, the chances of buying time have more to do with the dexterity of the doctors than the health of the patient.

Equally, when the patient is very ill, the family will latch onto the smallest bit of good news, a recovery here, a sign of vibrancy there, and try to convince themselves that this is the beginning of a change in fortune. This is natural human behaviour and anyone who has been through such an experience will recognise the pattern.

Last Friday, the patient – the Irish economy – revealed its current state, with the exchequer returns showing that tax revenues were running €500 million below target. Our economy is weakening again – and quickly. Yet all the attention was on the doctors.

Let’s think about the euro in its present form through the prism of a patient and doctor. At the moment, everyone is talking about the team of doctors led by Sarkozy and Merkel, the European Commission or the European Central Bank. It is very clear that the solution the doctors have proposed is insufficient and is more about enhancing the reputations and careers of the doctors than helping the patient.

However, the media is so full of people who are enamoured by the “doctor knows best” line that it will spin anything to point out that the “men in the white coats” are right. Therefore, we see in the last few days the media clutching at emergency procedures – such as the massive central bank injection of dollars last Wednesday – and seeing them as a cause for hope. We forget, at our peril, that emergency procedures are performed only when the patient is at a critical stage.

My own guess is that the central banks intervened last week after hitting the panic button. They did so because it was highly likely that last Thursday a major European bank was about to go under, causing a massive domino effect across the ruined European banking system. A European Lehman was on the cards. The doctors have bought themselves time, rather than delivered a solution.

Everyone knows that lending cheap dollars to the banking system, allowing that banking system to borrow money to pay off old debts, doesn’t make things better; it actually makes things worse. All you are doing is adding more debt to a balance sheet that has been destroyed by too much debt in the first place.

The mainstream media reported the extraordinarily bullish reaction of the financial markets to the emergency procedure as being indicative of success or a “corner being turned” – again.

But this is not accurate. The wild volatility of the markets is not a sign of confidence in the future but nervousness about what happens next.

So a panicked market focuses on the doctors and what they are saying – a speech by Sarkozy or an utterance by Merkel. However, we must remember that the patient is the economy, whose health is ailing because there is no growth. Without growth in Europe, the risk of default rises because the tax revenue necessary to pay off the debt is falling and therefore there isn’t enough money around. The remedy proposed is to raise taxes and cut expenditure, so this will cause the economy to falter. Thus, even less revenue flows into the coffers and therefore the debt spiral takes hold again.

Obviously in such a scenario, those institutions that hold the debt – mainly European banks – see their portfolio falling in value. As this happens, the mismatch that underpins all banks’ financing position becomes acutely problematic. The nub of the banking mismatch is that banks borrow short and lend long. This means they lend to you for 20 years in the guise of a mortgage, yet they borrow from your neighbour in the form of deposits that can vanish any day.
At best, the banks can try to “lock in” deposits by offering your neighbour a savings product for a year which means that your neighbour can’t take his money out.

But the truth is that most deposits can come and go as they please. If the banks have fewer deposits than they have lent out in loans, they have to borrow from other banks. So they depend on each other to keep liquidity flowing.

But if the banks lose faith in each other and stop trusting each other, because they feel that a bank may have too much worthless government stock on its balance sheet, they stop lending to each other. Rather than lend to other banks, they put their money on deposit with the central bank.

Last Friday, the use of the ECB’s deposit facility, which pays only 0.5 per cent interest rate, was reflected in an all-time high of over €313.763 billion, even higher than the €304.42 billion recorded the previous day.

This means that banks are depositing money at the ECB rather than with other banks, and therefore the other banks that need money are facing bankruptcy.

This is what has been happening in Europe all week and this is why it is likely a major bank was about to go bust last week.

Now we face into another week of turmoil. The doctors – Merkel and Sarkozy – have come up with the latest remedy, which is fiscal union.
But what they have come up with is not a fiscal union but simply an aggravated version of what we have now, which is all countries issuing their own bonds but with penalties from Brussels if we issue too much. For this they want us to vote on a new treaty.

Snap out of it, Angela. If you want our support, come up with something that helps the patient. The banks are bust, the economy is in a tailspin and you want more rules and regulations when what we need is growth.

Give us a break.

We are moving into phase three of this crisis, and it is time that we in Ireland realised what is proposed in Europe now will do nothing to arrest the collapse in our economy.

It is time to think of the patient and not the doctor.


  1. Dorothy Jones

    From Above:

    ‘Snap out of it, Angela. If you want our support, come up with something that helps the patient. The banks are bust, the economy is in a tailspin and you want more rules and regulations when what we need is growth.

    Give us a break.’

    German handling of the crisis is like watching an attempt to take a wide angle-shot using a zoom lens; the resultant antics of European politicians resemble a 17th Century French farce. It would be hilarious….except that it really, really is not

    Strings which are pulled include:

    - Bundesbank President Waidmann is against the Eurobond idea; Schaueble wanted his deputy Asmunssen to be allied to him; both Asmunssen and Waidmann studied together at University under Axel Weber, who…..is…. opposed to the idea of Eurobonds.

    -Same Axel Weber as advisor to UBS and his admirer Josef Ackermann at Deutsche will make sure their interests are protected.

    - New guy for the helm at Deutsche is Achleitner, former head of DD Goldmann Sachs

    Backdrop in Germany now:

    -‘Canary in the coalmine’ Commerzbank may have to be nationalised in the immediate future. [Sign of things to come, keep an eye on Sparkasse, will it follow suit?]

    - Deutsche denies that it will need State assistance to maintain its required capital and intends to sell some of its asets to an already crowded market to make up the shortfall. That old chestnut again.

    And the political spin:

    -Merkel sends out all the wrong signals when she mentions ‘Durchgriffsrechte’ [ability to intervene] in tandem with the fiscal union. Even I blanche.

    -Roesler, the Economy Minister, says that there is absolute opposition to Eurobonds; he says ‘God helps those who help themselves’. [They haven’t forgotten about Depfa, LBB you know; or anything]

    -Schaeuble the Finance Minister says they might be open to the idea of ‘Tilgungfonds’, [whatever they are when they’re at home], which Draghi would accept as a short term solution. He wants to fast-track the EFSF proposals / committee, but the constitutional court in Germany won’t even have this addressed before year end.

    The truth is that there is no German plan to deal with the crisis at all. There is only a concerted effort to save the German banking system.

    The solution for this has to come from outside.

    It’s a Thelma and Louise moment; after Merkel and Sarkozy exchange knowing looks; the car is likely to career off the edge.

  2. Malcolm McClure

    Sub.

  3. Malcolm McClure

    David suggests that ‘as the risk to the patient increases….. the chances of buying time have more to do with the dexterity of the doctors than the health of the patient.’

    In fact, if there is something seriously wrong with the patient, his case is passed on to a consultant. Already consultants recognise that many serious illnesses have a genetic basis. They are interested in the family history of the complaint and increasingly seek guidance from analysis of the patient’s DNA. It is becoming feasible to treat some complaints with drugs that attach to a specific gene and with stem cell modification of a target defective gene.

    Thus we are entering the realm of eugenics and, remembering Mengele, we need to proceed with the utmost caution. Scientists recently announced the discovery of a gene that causes over-sleeping in many individuals. It may soon be possible to identify the genetic potential for criminal behaviour.

    It is likely that risk-taking has a genetic basis, and who knows, perhaps fecklessness with money. Already, US Border and Immigration officials can request a blood sample from entering non-citizens. Others have palm and finger prints and iris scans taken.

    Looking ahead, how long will it be before there is an EU directive that everyone is required to have a passport chip that contains the individual’s complete genome? (Feasible very soon.)

    David’s doctor-patient analogy was intended to illustrate an important point, but if the EU comes to regard the PIIGS as being genetically imperfect, what are they likely to do to make us “better”?

  4. Raymond Laffan

    The euro is no longer about the people it’s just about oligarchs and vested economic interests the europroject is dead we should look to our friends in the US Europe doesn’t give tuppence for the periphery countries sarkozy only wants to bury our corporation tax first chance he gets we should get out of Europe and realign our punt to the dollar to safeguard all the US companies already here after all we are paying 5percent on this bailout from our so called friends so screw them as they say

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