Booker in The Daily Mail reckons that this crisis could not only deep-six the euro, but the whole of the EU as well.Thursday, October 09, 2008
It ain't working … yet
If the point of yesterday's "rescue" was to ease liquidity in the banking sector, it has not had any discernible effect on the all-important Libor (London inter-bank offered rate).
According to Bloomberg, the Libor dollar rate has jumped to the highest level in the year and the credit is staying frozen.
The rate for three-month loans rose to 4.75 percent, the highest level since 28 December and, while the overnight rate fell to 5.09 percent, it was still 3.59 percent more than the US Federal Bank's 1.5 percent target rate. The three-month rate in euros held at a record high of 5.39 percent.
Says Barry Moran, a currency trader in Dublin at Bank of Ireland - the country's second-biggest bank, "To see little or no reaction in the fixings is very disappointing and reinforces the fact that Libor is broken and the transmission mechanism from central banks isn't working … Things are still very stressed and we don't know what's going to fix it."
Alessandro Tentori, an interest-rate strategist in London at BNP Paribas SA, adds to the gloom, saying that, "I don't see a wave of liquidity coming into the market … People are still holding on to their cash because there's still a great deal of uncertainty out there."
Then we get Cezar Bayonito who tells us that, "Libor spreads are still wide, which suggest offshore banks are not willing to take more risks lending to other banks." Bayonito is a liquidity trader at Allied Banking Corp. He adds: "Interest-rate cuts will be of little help in the near term because the issue is trust, not rates."
Interestingly, Bloomberg then gives us a little background, telling us that Libor, set by 16 banks in a daily survey by the British Bankers' Association at about noon in London, determines rates on $360 trillion of financial products worldwide, from home loans to derivatives.
That actually puts the bank rescue in perspective. Of the two sums on offer from the Bank of England, £200 billion as lending and £250 billion as loan guarantees, this is supposed to kick-start a market of $360 trillion. Given the paper losses arising from the write-downs under the mark-to-market accounting system, this is a drop in the ocean.
Mervyn King, governor of the Bank of England (pictured), had better get his printing presses cranked up.
COMMENT THREADThe politics of denial
An overnight communication from a trusted source - very close to the "horse's mouth" – put the final pieces into place.
It confirmed beyond any doubt that the UK's bank rescue plan was not a unilateral action but – as we had suspected – part of a carefully structured and co-ordinated plan devised at Ecofin, building on the foundations laid at the "summit" in Paris on Saturday.
Thus, when Darling and the Gordon Brown stood up in parliament yesterday, the one during a ministerial statement and the other during PMQs, they may have taken on the familiar mantle of Her Majesty's ministers. In fact, they were speaking as representatives of a bigger entity, the government of Europe (or, more specifically, the government of the European Union).
This is not some grand fantasy – not some deep, dark conspiracy. It is fact. The evidence is there for those who want to see, apparent in part from the contrast between events here and those in the United States.
Confronted with a global crisis, in the US a plan was formulated in broad daylight, subjected to intensive public scrutiny and debate, put before Congress for approval and again subject to massive debate before being approved by the democratically elected representatives of the country and put into action.
Over here, what do we see?
As the crisis develops, the complaint arises of government "dithering" – reacting to events rather than taking the initiative with a pro-active strategy. The main action we see is a series of meetings with the European "colleagues" behind closed doors, poorly reported and completely misunderstood.
Then, after the final, key meeting of Ecofin on Tuesday, we see action taken. Parliament is not consulted. There is no debate. Parliament is simply told what is going to happen. It is then allowed to discuss the issues. But there is no vote, no approval. None is needed. Your government has spoken – the government of Europe.
Therein lies the difference – on the one hand in the United States we see, with all its imperfections, a functioning democracy in action. Here, we see a cabal of rulers working behind closed doors, coming out into the daylight only to inform us what they have done and how much it is going to cost us.
Why the "elephant" that now runs our government should remain so invisible is a subject all on its own. We touched on it in this post and many others. We will, undoubtedly, return to the issue many more times.
The bottom line, though, probably lies in psychology. Essentially, the political collective, the media and the hangers-on are in a state of collective denial. The phenomenon itself, helpfully described here, is triggered in the individual when he or she "is faced with a fact that is too uncomfortable to accept and rejects it instead, insisting that it is not true despite what may be overwhelming evidence".
The response to being confronted by further evidence, however, is simply to reinforce the denial. We have seen this on this blog. As we have unravelled the story of quite how deep the European Union is involved in our financial affairs – with quite impeccable evidence - the groupescules shriek and run for cover. The more we shout, the faster they run.
Thus, while the daily hit rate of this blog has been increasing, the bulk comes from direct hits. The number of referrals from other blogs has declined sharply. We have been put firmly in quarantine. Part of this must be due do our (my) aggressive approach (itself born of frustration and despair) but, in the main, what we have to offer is too enormous, too scary for the collective to admit.
We also see the media retreating to its comfort zone, The Daily Telegraphprojecting the myth – without saying so explicitly – that the UK action was "unilateral" and contrasting this and other events unfavourably with "the shambles of last weekend's EU summit".
The Times, on the other hand, retails in turgid detail how "Alistair Darling and his team got ready for all-night negotiations to part-nationalise Britain's banks – with tandoori chicken."
This is the sort of detail the hacks can deal with. This is what they are comfortable with. Real journalism would have been to reveal precisely what happened in Paris and in Luxembourg. But to acknowledge the big, outside, scary world is too much. The hacks prefer to bury their heads in the sand and indulge in the politics of denial.
COMMENT THREADSomething smells
That huge stinking elephant is on the rampage again, and I'm not the only one who thinks so. Whichever way you look at it, the UK's bank rescue plan drives not so much a cart and horse through EU law as a fleet of 32-ton trucks with a supertanker in their wake.
The big question is, whether the UK acted unilaterally or whether the deal was stitched up at Ecofin, with probably the germ of the idea hatched at the "pre-meeting" – the so-called "summit" in Paris on Saturday.
My instinct is that Ecofin in Luxembourg was where the final deal was done. Most likely, there would only have been a small group in the know – the "Paris four" ... France, Germany, Italy and UK. Spain might have been brought into the deal, and perhaps a few more (possibly Ireland, Holland, Belgium and Luxembourg). And, of course, Barroso would have been in the loop.
The deal would have been sealed in the couloirs, with no witnesses. Nothing would have been said in plenary but all 27 member states would have agreedthe communiqué, written in advance by the [French] presidency, with the text written to cover the backs of the plotters.
Some others think that the UK might have acted unilaterally, with Barroso going along with the plan after the news had broken. But, while he might have been able to keep little Neelie in her box, it is significant that not one other member state protested. Compare and contrast with the howls after the Irish unilateral action.
Either way, as we see from the previous post, the “colleagues” are going along with it, with further confirmation from an AP report, which tells us that:Both France, acting as the current head of the 27 EU governments, and the European Commission said the plan to partly nationalize banks and guarantee bank loans met EU guidelines agreed Tuesday [Ecofin] on how far nations could go to save their financial systems.
The essence of this is repeated in the IHT and by Reuters. But, no matter how many times the story is repeated, it ain't true that the plan conforms with EU law. It just does not.
Of course, for the commission to have stepped in to condemn the plan, ex post facto would have been suicide. It would have precipitated a bust-up far bigger than the "Beef War" of 1997 and, this time, the EU would have been the loser.
But who is writing the script is not an academic question. If the UK did act unilaterally, then the EU is in trouble. But if this is a conspiracy of silence between the UK and the rest of the "colleagues", then it might suggest that the EU institutions are getting a grip and reasserting their authority. Upon that distinction rests the prospect of the EU emerging from this crisis much weakened, or stronger, more powerful and much more dangerous.
Someone who seems to think that the EU has been weakened by the UK plan is Bruno Waterfield, although his piece has been so heavily "Londonised" that it is hard to divine precisely what his line is.
However, he starts by telling us that a "Europe-wide funding plan" will be discussed at a Brussels summit next week, "despite the continuing failure of European Union leaders and institutions to pull together in the face of the global financial crisis." The "summit", of course, is not a summit. It is the autumn meeting of the European Council and there we expect the next stage of the "plot" to be hatched, if there is one.
But Bruno is writing that Gordon Brown's call for EU unity and funding may fall on deaf ears at the Council "as other national leaders scrabble to save their own political skins."
He makes a case, but it is pretty thin. Even so, he may be right – the EU may be on its uppers. I sense he is not but, frankly, I do not know. What is indisputable, though, is that there is a major drama being played out in thecouloirs of Brussels and Luxembourg, the outcome of which could shape our lives for decades to come, and even change history.
The other indisputable point is that, as far as the MSM goes, most of the hacks are blissfully unaware of what is going on, so profoundly ignorant of the nuances that the "elephant" could sit on them and they still would not notice. (The sentence reads better with a "h" inserted in the appropriate place.)
That aside, this is written in the early small hours. Whether the Brown/Darling plan (with or without EU prior assent) is working may become apparent later today. If the market calms down and, more particularly, if we see movement in inter-bank lending – some signs of which may already be apparent – then today could be a turning point.
If it is, then all of us will breathe a sign of relief, and we can go back to our normal hostilities, hunting down that "elephant" - and working out how to pay the bill for the "rescue".
COMMENT THREADWednesday, October 08, 2008
Now there's a thing
With the unlikely figure of Britain emerging as a shining example of how to rescue banks, writes Lionel Laurent for Forbes,… the real credit should go to the Ecofin meeting of Europe's finance ministers on Tuesday. It was there that the conditions were laid for measures such as partial nationalisation, which otherwise may have run into trouble from regulators because of limits to state aid.
Then, EU commission president José Manuel Barroso is recorded by ForexTV, welcoming the UK banking sector proposals to supply the banking system with £200 billion in a speech before the EU parliament today. "I take this opportunity to welcome the measures announced by the UK, which are in line with the principles adopted yesterday at Ecofin," he says.
Yet the British media still haven't begun to understand what is going on, or even Ruth Lea, who is still writing about our local government having been "dithering".
With increasing clarity, though, it is emerging that Brown and Darling werewaiting for the go-ahead from the "colleagues" before acting. That is why they took no action on Monday – they could not until they had had their marching orders from the "colleagues".
Thus, overnight on Tuesday and into the early hours of this morning was the first time they could have acted, having been given the green light at Luxembourg to break the EU rules. No wonder Mr Barroso is looking quietly confident. This is the face of the man in charge.
COMMENT THREADA crisis of "enormous proportions"
Poor old Ambrose this morning was running out of hyperbole. Once you've proclaimed that the sky is falling in, there is not much left in the vocabulary to describe a situation that is getting even worse.
Nevertheless, our brave correspondent rose to the occasion, lifting a quote from Miguel Angel Ordonez, Spain’s ECB governor. In testimony to the Spanish Cortes, Ordonez "acknowledged" that the world now faced a crisis of "enormous proportions."
Guy Quaden, Belgium's ECB member, also helped out. He declared that the violent storm ravaging Europe's banking system was far from over. "This is the worst financial crisis since the Thirties," he told the Belgian parliament.
This is the European Central Bank, dramatically changing its tune over the last twenty-four hours. It is getting to grips with reality and testing out its own disaster vocabulary.
The problem is, once the situation does get even worse, what is there left after Ordonez's "enormous"? Do we raid the dictionary or start inventing new words, like "gigahorrendous" perhaps?
But, squeezed into Ambrose's dictionary of disaster, is a more pedestrian word, but one which nevertheless retains its power. That word is "shock". The collapse of Germany's Hypo Real, writes Ambrose, "has come as a deep shock since the company's assets are mostly high quality." The crisis, he tells us, was triggered when Hypo was unable to roll over loans or issue bonds in the closed credit markets.
Although the point is not directly made, this takes head-on the current mantra that the market is being taken down by "toxic" debt. Much of the paper being written down now would be, in an orderly market, of high value with limited default risk. But, in today's febrile climate, even these are worthless.
That point – rarely made – is that even much of the "dodgy debt" still has a default value. Yet, while one banker commenting on a Wall Street Journalblog was writing that even foreclosed mortgages were fetching 40 cents on the dollar, he was being forced to write down securities at zero value.
This is actually the madness that is infecting the market and when banks like Hypo Real Estate go down, when in fact they were perfectly sound, "shock" is a good a word as any.
COMMENT THREADNot just the euro
Some of the comments are interesting as well – the EU does not have a lot of friends amongst Mail readers.
COMMENT THREAD
Thursday, 9 October 2008
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