December 5, 2011
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 â‚¬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 â‚¬313.763 billion, even higher than the â‚¬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.