December 5, 2011

Today's Franco-German deal

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Just digesting the new deal from France and Germany. Two things stick out.

1. No bondholder to be left behind. France and Germany have reveresed the logic of the third Greek bailout and now have been bullied into paying every bondholder everything. This obviously increases the risk of moral hazard in the global investment game because it suggests that every bondholder, no matter what how big their mistake, will be bailed out by the average citizen. Such an approach continues the scam of each “rescue” being nothing more than professional private investors being bailed out by the little guy.

2. They also want “golden rules” put into our constitution which prevents governments from borrowing above 3% of GDP in recession. This is economic lunacy first – as anyone with a passing knowledge of Leaving Cert economics could tell you – and second, politically would require a referendum here.

Make no mistake, this is the deal which will be presented on Friday and it is less of a fiscal union and more of a fiscal straitjacket where more and more of the debt of private institutions is being passed on to taxpayers. It does nothing to improve the insolvency of debtor countries and little to improve the growth prospects of Europe.

Will come back to this later in the week.


  1. MIT

    Doesn’t this “deal” also imply that there will be NO risk difference between holding German bonds or Irish bonds because future bondholders will NOT be
    burned?

    I.e this is a type of Eurobond through the back door?

    • ZIMA

      I have a small deposit in euro, in a branch of a Greek bank(not in Greece though), located and operating in one of the 2007 EU accession countries but not a eurozone country.
      Is my deposit safe and guaranteed by some kind of a deposit guarantee scheme, or should I withdrawn it and consider alternative options?
      (nb. I am not a coroprate entity)

      • ekellylondon

        ask yourself if you are being adequately compensated for the risks involved, both known and unknown, then decide if there might be a better alternative.

  2. BlahBlah

    Stop drinking David and get ready to vote NO.

  3. Fiscal Union is a red herring to buy time to save a large EU bank and their cohorts

  4. Deco

    The French FIRE Economy (check “itulip” for the definition of the FIRE economy) is demanding number 1. Because France is a country in economic retreat, with no real growth since 1979. When France loses money, France is banjaxed, because France has lost the ability to grow the economy out of the mess that will result. And the result will be that the French will have to ask themselves very serious questions about how they operate. In other words, France is an estabilishment in denial in most respects. Sarkozy is driving an agenda of an estabilishment which has boxed itself into a corner intellectually and has failed to grasp the world has changed since the days of De Gaulle, when France was an economic achiever. Sarkozy also seems to overestimate his own ability, repeatedly – appearing confident after ever one of these “we have solved the problem” meetings.

    And the Lutheran Pastor’s daughter from the old DDR is demanding number 2. Because she is locked into an imperial construct, and needs to reassure her fellow Lutherans than the Latins are not debasing the currency of the realm, and forgiving the financially wayward (or cheating the system). Germany is a country that is being completely absent minded on the core vulnerability of it’s own system. She fails to understand that Trichet has created ponzi bubbles, and crack up booms in the PIGIS. She fails to grasp that the same feature is now appearing in NL and FI – and even in regions of Germany.

    She is looking at this like a Physicist. Seeking the perfect formula to balance the equation, and provide conditions of stability. It is the search for a stable existence, with everything in precise balance. I wish her well, in this task – honestly.

    This is not a deal. This is an exercise in fantasy. But whereas the Germans have the problem of a large knowledge blindspot, the French have a problem of a psychological blindspot. The French need to believe in something and that is going to blow up in a financial disaster. The Germans have just not got around to analyzing every aspect of their predicament at all the appropriate levels yet.

    There will be no euro-bond. They have both realised that it will destroy the credibility of DE/NL/FI/LUX/AT more than it will improve the credibility of the others.

    Rumour has it that Draghi will drop ECB rates again.

    I am certain that they will do whatever it takes to keep as many countries in the Euro. The chaos that would result from a breakup is terrifying. The entire value system in the EU would be undermined, and it is worse than the threat of austerity, and it is even worse than the threat of immediate cessation of more state borrowing.

    Basically, the Euro-Zone cannot afford to see the break up of the Euro. It might be banjaxed in certain aspects, but they will do whatever it takes to “restore confidence”.

  5. Colin

    I’m getting sick of this circus, pair of clowns is what they are, Merkozy! They make Jedward look intelligent.

  6. Deco

    I expect the next shoe to drop to be Belgium.

    In fact I expect Belgium to become a disaster before Spain. Spain will have a government that has a mandate. However, the new Belgian government is only formed to make sure that the borrowing can continue so as to prolong the one thing that all the elements of the Belgian state can agree upon – the need to keep the state operating, and to keep the salaries of the politicians on the roll. An exercise of superficial nonsense, before an eventual, divorce.

    This “deal” tells me that the French FIRE economy is in a fairly stretched state, perhaps even worse than those of Spain (even accounting for the fact that I know that the numbers from the banks in Spain are based on fantasy assumptions – as do a lot of Spanish people).

    The EU is in a leadership problem – muppets in denial seem to abound.

    I am reminded of Nouriel Roubini’s favourite phrase “kicking the can down the road”.

  7. Dorothy Jones

    I agree with you David.

    This is awful. This is an absolutely dreadful scenario.

    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

    Srings which are pulled include:

    - Bundesbank President Waidmann is against the Eurobond idea; Schaueble wanted his deputy Asmunssen to be allied to him; both 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

    Because….of the backdrop:

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

    And the political spin:

    -Merkel sends out all the wrong signals when she mentions ‘Durchgriffsrechte’ 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 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.

    Markets behave like weather systems.I would have have expected shark-like attacks now with traces of blood in the water

    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.

    • stiofanc02

      Dororthy, your attempt at being clever in your post proves that writing a financial column, and knowing what you are talking about, falls into the category of “dont try this at home”. Maybe you should just work on your “novel”. This blog is however good practice for you, as there will be some who post here that agree with and answer you favorably as they too are wannabes.

  8. Reality Check

    David McWilliams says; \2put into our constitution which prevents governments from borrowing above 3% of GDP in recession. This is economic lunacy first — as anyone with a passing knowledge of Leaving Cert economics could tell you — and second, politically would require a referendum here.”

    Why can’t we have 0% defecits?
    Why should we have defecits at all?
    Isn’t living beyond our means part of the problem?

    David, you have often said “you can’t solve the problem of too much debt by adding more debt”
    I would have thought having a defecit contributes to this problem as it has to be financed by adding more debt!

    • bonbon

      Anyone who has studied Alexander Hamilton’s Federalist papers, and the First US National Bank can understand how to deal with debt. Hamilton was dealing with the War Debt of 1783.
      Compare what has happened – the result is just like that of a war – the economy ruined. Some of that debt is owed to the enemy, to be defeated. Too bad.

      FDR applied this to Wall Street, and with Glass-Steagall broke them, while certain debt was honored and used to create a Credit for the New Deal. Hamiltonian Banking at work. As opposed to the enemy’ Central Banking.

      This war has been going on for 200 years, Ireland only got into it recently. No time now to leave the field. As DMcW hints at, austerity will kill us for sure.

      The Marshall Plan to rebuild from nothing was not a Versailles II. Germany was living “beyond its means” in 1948. What would austerity have meant?
      And for every Dollar to Germany, $4 went to Britain and France each. The Euro is a Versailles II.

      In 1923 Germany printed bills to reduce the deficit as an insane last act of desperation. Numerically you can solve the problem.

    • gizzy

      Is the point not to balance the books but when, how and over what timeframe you should reduce your deficit and balance the books. Too many cuts too quickly with no growth strategy in a poor global environment does not lookd like good strategy or timimg.

      Lest not forget we are not just atttempting now to sort deficits but also failing and failed Banks when a new Banking system could be set up for a fraction of the cost.

  9. bonbon

    I wonder if Merkozy are joking – March 2012 before France’s presidential election?
    First, the financial system will not last that long.
    Second, are they feeding the election in France?
    Third, Obama has other plans, of the WWIII type building up right at this moment.

    They could indeed be as mesmerized by each other, the Euro, and Obama, rather like a lot of observers, that they simply do not know reality anymore. They may really not realize what Obama is about to do.

    They will deny that too.

  10. gizzy

    Read a quote last week

    We now have socialism for the rich and capitalism for everyone else.

  11. LonesomeDub

    So here’s a question: what would be the worst possible course of action for the EU leaders and Ireland to tkae in the near future. This is not me asking ‘what’s the worst possible scenario’, simply what the worst decisions you think they could make would be. The thinking being that based on the last 18 months, the worst possible action is invariably the one they have taken.

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