by Paul Goodman Ministers' public case for making taxpayers liable for bailouts is as follows. Britain has an interest in a stable Eurozone. Were it to slide into recession, let alone depression, British exports to the Eurozone would fall as foreign markets contracted. The flow of Eurozone bank lending would slow to a trickle, hitting British consumers. (Santander accounts for almost 15 per cent of household loans in the UK.) Britain's bailout commitments are part of an international effort to a prevent a fully-fledged European banking crisis - which would dry up lending altogether, leading to the damaging consequences for British exporters and consumers that I describe above. They add that the political implications of a banking collapse would be ominous: the parties likely to benefit abroad would almost certainly be protectionist and chauvinist, and most likely far-left or fascist. But cheer up, they say: our €7.5 billion commitment is a mere one per cent of the €750 European support package, because Britain contributes only to the European Financial Stability Mechanism (EFSM), and not to the much larger European Financial Stability Facility (EFSF). Furthermore, bailouts in themselves would cost us nothing, since under the EFSM arrangement funds for them would be raised by the European Commission borrowing from capital markets. Only if defaults take place will British taxpayers stump up. Greece is going down. Ireland too, probably. And maybe Portugal as well, plus others. British taxpayers are going to take a hit to the likely tune of millions if not billions of pounds. These may be a tiny percentage of the overall rescue package, but they're a vast sum of money for British taxpayers: I invite readers to list how, say, £3 billion could be otherwise spent at a time of gnawing economic pain. The Government will simply be throwing good money after bad. So why don't Ministers do what Mark Reckless advised them to do in the Commons recently, when he moved the motion to which Heaton-Harris's amendment was tabled? Why won't George Osborne go to the next big EU meeting, and say that enough is enough? The reason is twofold. First, there is the psychology of senior civil servants and the entire establishment network of which they're a part - the Euro-equivalent of what in British education Sir Chris Woodhead once labelled "The Blob". This is substantially unchanged from the ERM fiasco of the early 1990s, to which this crisis bears an eerie resemblance. The collapse of the banks could end the Euro as we know it. To the Euro-Blob, this is unthinkable. And to be fair to it, its fears aren't altogether unreasonable. Such a fate for the Euro would turn Europe's economic and political future into a new question mark. And no sensible person licks their lips at the prospect of a banking degringolade. Second, there is a reason which Ministers are shy of briefing or even talking about, but is the kind of consideration that politicians think about a lot, though everyone else scarcely at all. Let's imagine that the Chancellor did go to the next meeting of EU Finance Ministers and "do a Thatcher" - bang the table and demand our money back. It can be argued that there'd be no point in him doing so, since Britain's already signed up to the EFSM, and in any event these matters are now decided by qualified majority voting. But where there's a will, there's usually a way: for example, the Government could always threaten to veto a settlement on the EFSF's successor unless Britain's allowed to junk its EFSM commitments. In doing so, however, the Chancellor would have to say more or less what I've said - namely, that Greece is a goner, that Ireland, Portugal and others may be too, and that Britain has no intention of taking money from its taxpayers and lending it to countries that are unlikely to pay it back. Such words would be likely to bring about precisely the events of which they warn. For the British Government to declare that it has no confidence in the entire European system in general - and the Euro in particular - would be to hurl a nuclear bomb into the markets. There would a financial stampede. And if Britain delivered the kick which brought the whole tottering edifice down in a heap, there would be consequences. Namely, that the Euro-Blob would blame Britain in general, and its Coalition Government in particular, for the collapse from now until doomsday. Nick Clegg will be well aware of this, and were Conservative Ministers minded to act in the way I describe, their Liberal Democrat partners would move to stop them. But the former will be no more inclined to than the latter, which brings us to that second reason: they want to avoid blame. Politicians always do. And Ministers have a point in wishing to do so, after all. Let someone else bring the building down, they say. Why should Conservative politicians shoulder the blame for the collapse of a currency that they helped to keep Britain out of? To which a question comes in reply: isn't the blame of British taxpayers for losing their money more dangerous than the blame of EU governments for igniting a crisis that isn't Britain's fault? My guess is that Ministers believe that the answer is no - and that if the current economic circumstances resemble those of the ERM debacle, the current political ones are different. ERM membership was the guiding star of the Major Government's economic policy; this one's equivalent is deficit reduction, not Euro-bailouts. If the taxpayer loses out, I suspect that Ministers will congratulate themselves for keeping Britain's exposure limited in Government, and for warning in opposition that the Euro was "a burning building with no exits". And they may get away with it, so to speak. There is no raging media campaign against bailouts. The state broadcaster - i.e: the BBC - isn't pushing the issue. Bills for defaults will be paid quietly and gradually. There will be no equivalent of the totemic appearance of Noman Lamont outside the Treasury after the pound left the ERM. But Ministers shouldn't be so quick to pat themselves on the back. They are part of the failure of the entire European political class, the author of the continent's present horror story. Sure, they're far less to blame than some, but that class should long ago have striven to restructure the PIIGS debt, support the banks as they take the hit, and - crucially - get the PIIGS out of the Euro. For until Greece quits that currency, lending it more money is like shovelling more cash at an alcoholic: just as the second can't recover till he stops drinking, so the first can't do so until it has an exchange rate that meets its needs. As I say, no reasonable person should be gleeful about a banking collapse, but would the end of the Euro - or, rather, its reinvention as a Franco-German core currency - really be that bad? The PIIGs would have a chance to do what Britain did after 1992, and export their way back to prosperity. Even accompanied by the consequences of default, this is better than the alternative of mass bankruptcy, unemployment, poverty and misery - the human cost of the inhumane dogma of the Euro-Blob. But here I am writing as though there's a choice. There isn't. Default is going to happen. British taxpayers are going to be hit. And the millions if not billions of pounds that they'll lose are the price which Ministers are prepared to pay for the avoidance of blame. ------------------ Mr Deputy Speaker (Mr Lindsay Hoyle): Mr Speaker has selected the amendment. Mark Reckless (Rochester and Strood) (Con): I beg to move, That this House notes with concern that UK taxpayers are potentially being made liable for bail-outs of Eurozone countries when the UK opted to remain outside the Euro and, despite agreement in May 2010 that the EU-wide European Financial Stability Mechanism (EFSM) of €60 billion would represent only 12 per cent. of the non-IMF contribution with the remaining €440 billion being borne by the Eurozone through the European Financial Stability Facility (EFSF), that the EFSM for which the UK may be held liable is in fact being drawn upon to the same or a greater extent than the EFSF; further notes that the European Scrutiny Committee has stated its view that the EFSM is legally unsound; and requires the Government to place the EFSM on the agenda of the next meeting of the Council of Ministers or the European Council and to vote against continued use of the EFSM unless a Eurozone-only arrangement which relieves the UK of liability under the EFSM has by then been agreed. I thank the Backbench Business Committee for facilitating this debate. Ever since the civil war, and perhaps back to the Plantagenet era, the primary duty of this House has been to control supply, to hold the purse strings and to decide what the Executive may or may not spend on behalf of our constituents. It is not for Her Majesty’s Treasury to decide what unknowable liabilities to sign our constituents up for. It is for us, as their elected representatives, to make that decision. I ask every Member to consider that point when they cast their vote later. It is our decision, and only we stand between our constituents and the ability of others to spend their money on their behalf. My simple point is that it is unaffordable for this country to bail out countries that joined a currency that we chose not to join, when we ourselves are borrowing as much money as, if not more than, those very countries. We are seeing £12.5 billion of our constituents’ money—twice as much as was saved in the whole first year of the coalition Government, and £500 a household—being spent on bail-outs; and I mean “spent”, because although the Government tell us that they expect the money to be paid back, if that is so, why will the private sector not lend? Why are there rates of 10% to 17%? Kelvin Hopkins (Luton North) (Lab): I congratulate the hon. Gentleman on raising this issue and support what he is saying. Does he agree that although bailing out Greece, Ireland or Portugal is expensive in itself, today the contagion is spreading to Spain and Italy, bail-outs for which would be absolutely prohibitive for the whole European Union? Would that not be nonsense? Mark Reckless: The hon. Gentleman is quite correct, and it goes on and on. Yet it is not our problem, and it is not our currency. If we can do anything, we can save ourselves and perhaps Ireland, but we cannot save the 24 May 2011 : Column 806 euro. The eurozone countries made their decision. We advised them against it, yet they chose to create a currency without a fiscal union to back it up. It is their problem, not ours. Mr Andrew Tyrie (Chichester) (Con): Given that the “no bail-out” clause has turned out to be completely worthless, the eurozone will need to design some type of resolution procedure for countries, in much the same way as we are trying to devise one for banks at the moment. Is it not therefore all the more important that, since we are not members of the eurozone, the UK taxpayer should have absolutely no part in the construction of that resolution procedure? We do not want to find that there are any more burdens on the UK taxpayer. Mark Reckless: My hon. Friend is quite correct. There is talk of establishing a permanent bail-out arrangement, and we, the United Kingdom, have a veto over that. We should use that veto to relieve ourselves of all liability under a mechanism that should never have been agreed. That is what my motion proposes, and the amendment fails to do so. When the European financial stability mechanism was set up, we were told that there would be €60 billion in it, whereas €440 billion would be paid by the eurozone members. Yet in the case of every bail-out we find that the mechanism is used to the same level as, or even more than, the eurozone facility. We in the House and this country are being forced to pay for the mistakes of others, and only this House has the power to stand up, vote and say no. The whole mechanism is illegal. Let us remember Maastricht and the "no bail-out" clause that the Germans insisted on. What has happened to that? Let us remember article 122 of Lisbon, which states that the mechanism is for natural disasters or other exceptional circumstances beyond the member states’ control. Did not Ireland, Portugal and Greece decide to sign up to the euro? Portugal has barely grown at all as a country since it joined the euro, and it has done next to nothing to control its spending. I am afraid there is nothing exceptional about that, and nothing beyond its control. It is just using the mechanism, to which we should have said no, to make our constituents pay for its own mistakes. Mr William Cash (Stone) (Con): Does my hon. Friend recall that Madame Lagarde herself, the prospective head of the International Monetary Fund, said on 17 December last year on that very point: “We violated all the rules because we wanted to close ranks and really rescue the euro zone”? She was being very clear and telling the truth. Mr Deputy Speaker (Mr Lindsay Hoyle): Order. Before the hon. Member for Rochester and Strood (Mark Reckless) responds, may I warn him that he only has three minutes to go? Mark Reckless: My hon. Friend the Member for Stone (Mr Cash) is quite right.I hear that that lady is a good friend of the Chancellor, but I do not believe that we should put the debtors in charge of the bank. The IMF money, too, or 5% or so of it, is our constituents’ and taxpayers’ money. We should have an emerging market candidate to run the fund, and we should not 24 May 2011 : Column 807 allow the eurozone to continue to perpetuate a French-led IMF that nods through bail-outs with no restructuring and no devaluation. The markets know, and all of us know in our hearts, that bail-outs will not work. The eurozone says that there will be a “soft restructuring”. In other words, when Greece, Portugal, Ireland or—who knows?—Spain cannot pay back what it has promised, the eurozone will say, “Oh, don’t worry about it, we’ll just roll it over.” In the City, they call that an extend-and-pretend policy. Such a policy was pursued in Japan for the whole of the 1990s, which then lost two decades of growth instead of dealing with the banks and recognising its insolvency. The European Central Bank should avoid that. Unless and until the ECB deals with that problem and understands that the assets that it has taken supposedly to back the loans are worth far short of what it currently assumes, the banks will not lend, because they do not to whom it is safe to lend. The ECB should write those assets down and have that reckoning. The extend-and-pretend policy—the patching up and bailing out, and the throwing of good money after bad—is destined to fail. Why are we supporting a currency that we very wisely did not join, after warning exactly what would happen? I ask Members of this House to stand up for their constituents. We should require—yes, require—the Treasury to vote against the use of the bail-out mechanism. If the EU does not agree to that, we should require the Treasury to use our veto over the permanent bail-out mechanism until we are extracted and removed from all liability. We should never have been liable for that mechanism. We know that it is unlawful and that that is not for our currency. It is right that we stand up for our taxpayers and our constituents, who look to us as Members of this House to do so. They do not look to us to seek permission from those on the Treasury Bench, or to urge them to do something rather than require them to do something. Surely as Members of the House we are more than that. Surely our country is more than a star on somebody else’s flag. I urge all hon. Members to vote no to the Government-sponsored amendment. Kelvin Hopkins (Luton North) (Lab): It is a great pleasure to speak in this important debate and to support the motion of the hon. Member for Rochester and Strood (Mark Reckless). I hope very much to have the opportunity to vote for the motion as it stands rather than in amended form. Today of all days is important because the crisis and contagion in the eurozone is spreading. As reported in the Financial Times and other journals, there are serious problems in Spain, where there is youth unemployment of 41%, and where the economy is in serious crisis, and even in Italy. Those are major economies, not small countries. If we are dragged into a mechanism to save the eurozone even in one of the smaller countries, we would be throwing good money after bad, as the hon. Gentleman said. Bail-outs have been required for Greece and Ireland, and there might be one for Portugal, but those are relatively small countries in EU terms. Spain and Italy are much larger, and bail-outs for them would be prohibitive. 24 May 2011 : Column 808 As I have said in the Chamber several times before, it is time to urge the EU to accept the recreation of national currencies for countries that cannot sustain membership of the eurozone. As I and many others have argued, strong currencies derive from strong economies, not the other way around. The Deutschmark was a strong currency because the German economy was strong. Weak economies cannot cope over time when a strong currency is thrust upon them. The best example of that was Argentina, which chose mistakenly to link its currency formally to the US dollar. For 10 years, it struggled, and its economy was almost destroyed before it bailed out and recreated its own currency—not before billions of its dollars had gone abroad. The Argentine economy, which had been one of the strongest on South America, became very weak, simply because it adopted a strong currency, and someone else’s currency at that. Adopting a strong currency that an economy cannot sustain is a foolish decision. The right to flex a currency as of need is a vital component of economic management. Indeed, at Bretton Woods in the 1940s, it was argued that depreciations and appreciations could be appropriate for different countries, even though a stable exchange rate system was agreed after the second world war. Mr Edward Leigh (Gainsborough) (Con): Is it not strange that the Government are backing so strongly the candidacy of Madame Lagarde for the position of head of the International Monetary Fund, given that that lady is part of a ruling European elite, and that she is on record as wanting to go on bailing out the euro? Should we not be more independent in supporting a really good, tough candidate for that important post? Kelvin Hopkins: I have not always agreed with our former Prime Minister, but I agreed very strongly with his position on the euro. Of course, my right hon. Friend the Member for Kirkcaldy and Cowdenbeath (Mr Brown) might take a more sensible approach to those things, should he be appointed. I think he is something of an outsider at the moment, but Madame Lagarde has not been appointed yet. Let us hope that he still has a chance of the job. As the hon. Member for Rochester and Strood said, Britain was wise to stay out of the euro. Because of that, we can flex our currency when needs must. Of course, during and after the crisis, we wisely depreciated our currency. Perhaps a bit more depreciation will help manufacturing and our economy. Countries that have their own currency, such as ours, can also choose their interest rates. Two vital components of any economic management system—the ability to flex the currency and control of interest rates—are given away when countries join a single currency. Even beyond that, there are fiscal policy controls. Countries would do well to retain all the components of economic management if they want to succeed. When countries do well individually, they can do well collectively. Destroying the economies of EU member states or other countries does not help us in any way. Getting them back into some sort of order by permitting, encouraging or helping them to recreate their currencies, and finding an appropriate parity and interest rate for that currency, so that they can manage their economies for their needs, would raise demand for our goods. The 24 May 2011 : Column 809 shock absorber effect of different currencies would, over time—a fairly short time, I believe—make the economies of Europe work better singly and collectively. Therefore, the recreation of those currencies is in our interest. Mr Ian Davidson (Glasgow South West) (Lab/Co-op): Does my hon. Friend have any idea why this Government are so keen on bailing out the euro when that was certainly not in the Conservative manifesto? Is this a case of the Liberal tail wagging the Conservative dog? Kelvin Hopkins: That is one mystery that will no doubt be revealed when the 30-year rule is applied. We found out some interesting things about what happened in the 1970s under the Jim Callaghan Government recently, so perhaps we will know what is happening now in 30 years’ time. I know no more than my hon. Friend about why the Government do not take a more sensible line, as is proposed in the motion. Matthew Hancock (West Suffolk) (Con): I have listened carefully to the hon. Gentleman’s speech. Does he share my frustration that a Labour Chancellor signed us up to a mechanism over which we now have no veto? Kelvin Hopkins: Throughout the period of the Labour Government, I put the views that I have put in this debate. I hope that I had some influence, but in the end, the Government decide what they must. They will not necessarily do what Back Benchers like me suggest. Nevertheless, I am on record as writing and speaking on such things many times in the past. We must bring this crisis to a head. The way to do that is to say, “No more bail-outs. Let’s start recreating national currencies.” I have said that directly to some of our friends in Ireland, when members of the European Scrutiny have met Irish politicians. Mark Reckless: Does the hon. Gentleman agree that subject to a request from Ireland and to the protection of UK depositors as against the ECB, we should consider extending our currency to allow Ireland to work with us? Under sterling, we could treat Ireland on an entirely equal basis. Kelvin Hopkins: Ireland is a very special case—it is our next-door neighbour and we are Ireland’s major trading partner. Effectively, the Irish would do very well to join the sterling zone rather than the eurozone. That would mean their recreating the punt and choosing the value of it. I would like us to do a lot more to help our Irish colleagues, not simply because I have a large number of Irish people in my constituency, but because that would be a comradely and brotherly thing to do for a nation with which we have had great links for many centuries. I once again express my support for the motion. Joseph Johnson (Orpington) (Con): It is critical that we put into perspective UK taxpayers’ exposure to the bail-out mechanism. No Government Member relishes having to put the faith or the credit of Her Majesty’s Treasury behind the bail-outs of profligate peripheral eurozone countries, especially at a time of austerity at 24 May 2011 : Column 810 home, but the coalition Government inherited this situation. The temporary bail-out mechanism, which runs until 2013, was agreed on 10 May 2010 by European Finance Ministers at ECOFIN—after the general election, but before the coalition Government were formed. As the right hon. Member for Edinburgh South West (Mr Darling) admitted in Parliament, the Chancellor opposed the mechanism at the time, as was clearly recorded in Hansard on 15 December 2010. [Interruption.] Any Labour Members in doubt about that can verify it for themselves. Mr Cash: Will my hon. Friend consider the answer I received from Ministers this morning, and reflect that although the Chancellor opposed the mechanism, the Government had every reason then to challenge it in the European Court? Why did they not do so? Joseph Johnson: I thank my hon. Friend for that intervention. I have been led to understand that the Government took the position that there was no strong legal case to support any such challenge. None the less, it sticks in the craw of many Government Members to be in this position and, like them, I have my doubts about whether the mechanism is being applied in exceptional circumstances beyond member states’ control, which is the test for triggering the deployment of financial assistance powers under article 122(2) of the treaty on the functioning of the European Union. Government bond yields in the eurozone periphery are trading at the level they are in some countries because of the reckless management of public finances and the political gridlock in those countries, and because of backsliding on long overdue structural reform. In Greece’s case, Government bond yields are trading at about 20% because of Athens’s lack of progress towards meeting the pledges it made last year as part of the EU-International Monetary Fund bail-out. That is a case in point. Painful though it was for the Government to be saddled by the outgoing Labour Administration with an indirect contingent liability through their involuntary participation in the mechanism, the truth is that our overall exposure is a rounding error when compared with that facing Germany and other northern European countries in the core euro area. The debts of the eurozone periphery are being progressively socialised by European Central Bank financing operations that could, in time, be seen as the forerunner of an effective eurozone bond. In the meantime, the €60 billion mechanism is just part of a far larger package of measures to preserve financial stability in the EU to which we have no exposure, except indirectly through our share in the IMF. We are on the hook for a share of €60 billion out of an overall package of €750 billion. Our share, which is about 12.5% of that €60 billion, is just €7.5 billion, or 1% of the €750 billion package. We do not wish to throw away that 1% lightly, of course, but happily, for that exposure to crystallise, all the countries that have thus far subscribed to the mechanism would have to default in totality. IMF data on the history of sovereign defaults around the world suggest that that is highly unlikely. Even in the unlikely event of a domino series of defaults across the countries that have subscribed to the mechanism, it would be extraordinary for there to be a 100% default rate. The pattern of defaults around the world suggests that losses from default are normally between 25% and 35% of the total losses to which countries or investors have exposure. 24 May 2011 : Column 811 Steve Baker (Wycombe) (Con): I would say gently to my hon. Friend that only a few years ago the banking crisis was not foreseen, and the same people who did not foresee that are still giving us advice. We are probably in far worse trouble than is generally accepted. Joseph Johnson: My hon. Friend is perhaps right to caution me. It never pays to be too optimistic. More importantly, the coalition Government, who came into power in May 2010, deserve to be congratulated not only on limiting our exposure to the temporary funds—we are on the hook for just one, not both of them—but on successfully capping our exposure. We have been kept out of the €440 billion European financial stabilisation facility, as well as what will be the permanent successor vehicle, the European stability mechanism, which, as mentioned, is due to come into existence in 2013. That said, we would be wrong to kid ourselves that Britain can shield itself completely from the affairs of the eurozone, and I would suggest that Schadenfreude, in the Chamber or elsewhere, at the turmoil in the euro fringe might be short-sighted. First, our banks remain fragile. People who read the Financial Times will know that 14 British banks and building societies were this morning downgraded by Moody’s, and there were particularly negative outlooks for Barclays and HSBC. The UK banking sector’s exposure to the so-called PIIG economies—Portugal, Ireland, Italy and Greece—alone amounts to about £211 billion, which is the equivalent of about 4.7% of UK bank assets, according to Capital Economics. UK banks can ill afford fresh write-downs that would force them to raise expensive new funds at a difficult time in the capital markets, and a further leg-down in the eurozone financial crisis would certainly not help the Government in their laudable efforts, under Project Merlin, to push the banks to lend more and at reasonable terms to capital-starved businesses in the UK. The second transmission channel of pain in the eurozone will come in the form of reduced lending to UK consumers and businesses by eurozone periphery banks located in the UK. Irish banks account for about 3% of household loans in the UK, and about 7% of corporate loans. Spanish banks play an even more important role. Through 24 May 2011 : Column 812 Santander, which owns Abbey, Alliance & Leicester and Bradford & Bingley, Spain accounts for 14% of household loans in the UK. If troubles at home force these eurozone banks to rein back their lending, especially overseas, credit conditions in the UK could clearly start to worsen again. We should think hard about that before expressing any Schadenfreude at what is happening on the continent. Furthermore, distress will be felt at home through the trade channel. At a time when domestic sources of growth are under pressure and few and far between, the UK’s trade links with continental Europe are of pivotal importance. Although Spain and Portugal might be less significant as trading partners than Ireland, the PIIG economies together account for 14% of UK exports, compared with Germany’s 9% and the 16% of UK exports that go to Asia. A wave of defaults, or at the very least a considerable weakening of the euro, would not only hit demand in these countries, but damage UK export competitiveness—a linchpin of the Government’s economic strategy. The Government are right to limit our financial exposure to future bail-out mechanisms, and need to be congratulated on having done so successfully, but it should go without saying that we still have much at stake in the success of these future bail-out mechanisms. We cannot wash our hands of them. The health of the UK banking system, the extent to which the UK economy is dependent on credit extended to UK companies by eurozone banks and the UK’s own need to earn a living from exports make it abundantly in the UK’s interests to wish our European partners every success in tackling the crisis through future eurozone-only arrangements. Anyone taking pleasure in the discomfort of our European partners might be in for a nasty surprise. ----------------------- By Andrew Lilico 1. Greece is going to fail to honour its debts, some time between now and 2013. It's not if - it's just a matter of when. Even if Greece were itself to attempt to pay, there is to be a new financial architecture in the Eurozone from 2013, with rules for sovereign bankruptcies, debt-equity swaps for banks, a special new bailout fund, and a new Treaty. Greece isn't getting in. 2. The EU and IMF (the latter including EU Members such as the UK) agreed a €110bn bailout package in May 2010. Participation by EU Member States in this bailout was blatantly, explicitly, specifically, and in terms forbidden by Article 125 of the Treaty (an article designed with precisely this sort of situation in mind). This has been acknowledged by senior members of the French government, recognised by the European Scrutiny Committee of the House of Commons, and indeed the European Union was sufficiently nervous about the matter that it has proposed a revision the Treaty, to be ratified by the end of 2012, to set bailouts from 2013 onward on a more secure legal footing. 3. The Greeks, having made some modest (albeit futile) progress on deficit reduction in 2010 have since lost control once again, particularly as tax revenues have fallen. And as to the wider economic situation, the following graph is self-explanatory... 5. A key vote to agree those reforms was due this week. The run-up to this vote saw up to 25% of the Greek population involved in anti-cuts protests, a weeks-long permanent protest in a key square in Athens, marches involving hundreds of thousands, and clashes with police. 6. The vote has been delayed (perhaps until July) and the Greek Prime Minister has said he will form a new government with a confidence motion on Thursday. It is unclear what they implications are for the crucial IMF payment and hence for whether Greece will service those debts falling due in June. 7. Given the escalation in its deficit, it is suggested that, in addition to receiving the IMF/EU payments already promised, Greece might need another bailout of perhaps a further €60-€100bn to keep it going until 2013. 8. The Germans and members of the European Commission have argued that any second Greek bailout must include pain for private sector bondholders, perhaps around 30% of the total costs of the bailout. The ECB has been vigorously opposed. 9. Credit Ratings agencies have said that even the most modest of these "burden-sharing" proposals would constitute a technical default. 10. A small technical default, removing perhaps 3% of the burden of its debts, will not solve Greece's problems. Standard & Poors expects a default of 50-70%, by 2013. Financial markets have priced in near-certain default over the next five years. 11. Even a technical default would, under bank regulatory rules, require banks around Europe to change the valuation for their holdings of Greek debt to its market value (as opposed to the assumption that it pays out, which they have operated on up to now). Valuing Greek debts at market levels would imply large losses for a number of French and German banks. More specifically, market rumour and analysis suggests it could mean very large losses for the joint Franco-Belgian-Luxembourgish nationalised bank Dexia and for the European Central Bank. 12. The European Central bank has capital of about €80bn. Greek default of 50%, along with near-total default of all Greek banks, would impose losses on it of about €70bn. 13. If the view of some analysts is correct, Dexia might go below regulatory capital requirements. Given that the Belgians have lacked a government for about a year, and have a very high government debt-to-GDP ratio of about 100%, and have the opportunity to try to press France and Luxembourg to increase their proportionate stakes, there is the risk of wrangles. 14. Greek default would very probably persuade the Irish government to walk away from the debts of its banking sector. Ireland has today announced that it has applied to the IMF to be allowed to impose losses on senior bondholders in Anglo Irish Bank. 15. The key holder of Irish banking sector debt is the European Central Bank. A walkaway by the Irish government would impose further losses on the ECB of about €15-€20bn, rendering it insolvent. 16. An insolvent ECB would not be able to provide the support upon which the Portuguese banking sector is totally and continuously dependent. The ECB is estimated by Open Europe to have about €40bn in outstanding loans to the Portuguese banks. 17. The ECB would in practice be recapitalised by the taxpayers of Eurozone members. If ECB insolvency had been caused by Greek, Irish and perhaps also Portuguese default, it is near certain that the Greeks would not be permitted to participate in recapitalisation and so would be ejected from the euro. It is less clear whether Ireland and Portugal would be permitted to participate. If negotiations dragged on, there would also definitely be speculation and rumour as to whether Spain and Italy would be permitted to belong. 18. The original purpose of the sovereign bailouts was to continue the banking sector bailouts by another name. Their purpose now has become to avoid ECB insolvency and the potential disintegration of the euro. 19. UK bank exposure to Ireland is material, but to Greece is modest (much less than France or Germany) and to Portugal and Spain only small. The UK banks should only experience difficulties if the crisis reaches France. 20. The key to avoiding Britain being sucked in will be to (a) stick to Osborne's fiscal consolidation plan; (b) urgently introduce credible banking sector reform, in particular debt-equity swap mechanisms to the Special Administration Regimes for the banks.
So, whom do I sue?
Friday, June 17, 2011
Losing billions on defaults is the price Ministers are willing to pay to avoid
blame abroad
Eurozone Financial Assistance
2.53 pm
2.2 pm
2.10 pm
Andrew Lilico: Twenty things Westminster needs to know about Greece and its debts
Friday, 17 June 2011
Everyone knows that this Treaty article was violated by the Greek, Irish and Portuguese bailouts.
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Besides - they go on - even if there is a default, we're very unlikely to lose the whole €7.5 billion, because lender countries usually get at least some of their money back. So at the most, Britain's losses will be limited. But this line of argument is flawed by a fatal weakness. The bailout procedure is illegal - a fact explicilty recognised by Chris Heaton-Harris when he moved a Commons motion on bailouts recently that Ministers themselves trooped through the lobbies to support. But even were it not, there is an obvious retort to Ministers - namely that, as Greece approaches its "Lehman Moment", this Eurozone crisis is going to happen anyway, defaults and all: Andrew Lilico explained why yesterday in a magisterial article on this site.
4. Greece had €13bn of debts to service in June 2011. To service those debts, it was totally reliant upon receiving €12bn in IMF funding due on June 29th. There was a question as to whether the IMF would pay, given that IMF rules would require Greece to have financing in place for the following year. Following an investigation, the IMF agreed to pay subject to Greece agreeing further reforms.
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