Yesterday the Washington-based International Monetary Fund released an official statement from Antonio Borges, the director of its European department, about the rolling crisis in the eurozone. Now, background: given the purpose and methods of the IMF, it was a surprise when it became entangled last year with the EU and its bail-outs. The Brussels-directed 'rescues' excluded the possibility of debt-crushed eurozone countries such as Greece being allowed to default. Yet the IMF's way of operating usually includes as a first step a default on the struggling country's sovereign debt. But the EU sucked the IMF into the eurozone problems as a junior partner anyway. You can reckon the IMF only agreed to this because at the time Dominic Strauss-Kahn was running the fund and he wanted to paint himself as the saviour of the eurozone -- that would be his selling pitch for the French presidential election. Terrifric, he's gone, but now unfortunately Christine Lagarde, another French euro-cult technocrat is in charge. Despite her appointment, some of us had hopes that the most powerful of the IMF's 187 members would insist the fund pull back on involvement in the eurozone: they have realised by now that what is supposed to be liquidity provided by 187 different nationalities of taxpayer, all to be repaid, is in fact billions poured down a deep, deep hole, little of which will ever be recovered. So yesterday's announcement from Director Borges of the IMF's European department was a surprise. Instead of saying --as one would expect any IMF expert to say -- that it's time for the weak eurozone countries to get out of the poisonous currency union and default on their debts, the director said: 'To put the crisis behind, we need more Europe not less.' He went on about expanding the bail-out fund into a vehicle for buying government bonds and to recapitalise banks. What? I couldn't understand how that perfect European Commission propaganda line come out of the IMF headquarters in Washington. So I checked out what path Borges took to the IMF: the 2010 annual report of European Corporate Governance Forum -- a creature of and advisor to the European Commission -- lists the Portuguese Borges as a member. He also worked on the whole economic and monetary union project. This is my column from today's Irish Daily Mail. In among his figures are these: Italy, perhaps on the brink of sovereign debt default, has close to two trillion euros in debt outstanding. But the entire euro system – that is, the European Central Bank plus the 17 central banks sharing the euro – has a combined balance sheet of only 1.9 trillion euros. OMG. Consider those figures, then look at how the Italian two-trill compares with the entire GDP of Germany, the Netherlands, Finland and Austria. The total sum is about €3.5 trillion. So, according to Prof Johnson, you will see ‘Europe does not have enough fiscal firepower to handle an Italian crisis.’ Tom Stevenson, an investment director at Fidelity International, wrote this in the Daily Telegraph on Saturday: ‘Italy has become a proxy for hedge funds betting on a break-up of the eurozone. The markets are trying to force the issue, weary at the politicians’ failure to tackle the long-running sore at the heart of the European crisis.’ Which is why the next few days in the markets may be dramatic. The pretence that any of the PIIGs countries can be saved from default by piling more debt and austerity on these struggling economies and calling it a ‘bail-out’ is over. It is no longer a question of whether Greece and other eurozone countries will default on their debt, but when, and which banks are going to get hit worst by the losses. And yet a sovereign default – which would be the starting pistol for a eurozone break-up -- was not included as part of the European Banking Authority stress tests which were released on Friday after the markets closed. We will see when the markets open this morning just what investors think of that EU attempt to fudge the threat of default. More, we will see what financial analysts found over the weekend in the statistics released on individual banks, especially in relation to asset disclosure. Stand by for market attacks on any country with banks whose assets the analysts have decided look dodgy. Instead of political and technical leadership, we just get more meetings. Last week it was the eurozone finance ministers, followed by the EU finance ministers, and this Thursday an ‘emergency’ summit of the heads of state and government of the EU. It is supposed to agree to save Greece (again) but this time with private investors taking some of the pain and lower interest rates and longer pay-back times for the Athens government. Note to EU leadership: Greece was yesterday’s crisis, and if you think today’s crisis, which is to say, the going-over-a-cliff vast economies of Italy and Spain, are going to be saved from default by the tweaks made to the deal for the small economy of Greece, you are wrong again. Yet the leadership insist this meeting will be an ‘emergency’ summit that will stop the Greek problem leading to contagion across the rest of the eurozone. ‘Emergency?’ The fact that the EU leaders were not in Brussels over the weekend, signing up to the agreement before the markets were ready to open today, shows they haven’t grasped how quickly events may move this week. They have no sense of urgency. So this week the markets could rip up a big chunk of what’s left of the eurozone project. I don’t know if they will, but I do know that this idea the EU leaders and eurocrats are putting around that the ‘permanent’ solution to Greece and the rest can wait until September, after the holidays, is absurd. Do they imagine that investors with billions in eurozone assets are going to put their decisions on hold until President Sarkozy and Carla get back from the South of France? ‘What’s happened over the last few weeks is that the timeline for that has been compressed. The markets have been clamouring for clarity that has not been forthcoming, and in situations where there’s uncertainty people tend to reach their own conclusions and the markets get very volatile.’ ‘I’ve been saying for a while that they [the peripheral countries] haven’t got until the end of the calendar year, but that they’ve probably got the summer. But now I think they’ve probably got some of the summer. You wouldn’t want to see the current situation perpetuated across August and into September.’ And yet that is just what we will see, no matter what sort of ‘solution’ is signed by the EU leaders on Thursday. This thing will drag on through August and into September. Then what the EU leadership will come up with as a permanent solution will be to turn the EU into a fiscal transfer union. They will claim the crisis is so severe that fiscal union is the only solution. Put aside for the moment that that would mean the surrender of what is left of the financial and economic independence – in other words, the national sovereignty -- of the members of the eurozone. In other words, it would mean rule of this country, in a phrase from the Greek economist Yanis Varoufakis, by ‘a junta of foreign officials.’ That would be repulsive enough, even if a new centralised EU fiscal regime showed some economic skill. But just consider how badly-judged every decision by the EU leadership has been, not just since the beginning of the eurozone financial crisis, but since the beginning of the eurozone itself. In particular, Italy and Greece should never have been admitted. There can be no reason to expect that once Brussels has control of a unified fiscal zone its economic judgement will be any better. So this fiscal union which will be proposed for the eurozone would mean more than just government of this country by a foreign junta. It would mean government of this country by a Brussels regime which lacked technical expertise and political leadership: it would be not just a junta, but a bungling junta. No wonder the markets want out.
20 July 2011 3:12 PM
How the EU has infiltrated the IMF
Sunday, 24 July 2011
The Alien euro-creature: or as Ripley said, 'How do we kill it, Ash? There's gotta be a way of killing it. How?'
That is not Washington straight talk, 'more Europe' is Brussels code for 'we need to take more power away from member states and their parliaments, and give it to the EU and its eurocrats.'
Ridley Scott covered this situation in a 1979 film: there is an Alien forming in the host...
Here are some illuminating nuggets; or you could call them some ‘Oh, my God!’ eurozone statistics. They are from Simon Johnson, a former chief economist at the IMF and now a
member of the US Congressional Budget Office’s panel of economic advisors. Even before last week’s market turmoil – and what is most likely going to be this week’s continued turmoil -- Prof Johnson was doing his sums on the eurozone debt crisis. He was asking, ‘Could Italy be the next European domino?’
And yet an Italian crisis is just what we have. Nothing less than €500bn, and possibly one
trillion, is going to impress the markets on this one. But the EU can’t come up with that kind of money, not even with the help of the IMF, and the markets know it.
Indeed, stand by for attacks on the eurozone as a whole. As Mr Stevenson says, the markets have now had it with the months of bungling by Brussels: investors can no longer
believe (if any of them still do) that the EU leadership will solve this crisis. Mohamed El-Erian, the chief executive of Pimco, the largest bond dealers in the world, wrote last week in the Financial Times: ‘Europe lacks the political and technical leadership needed finally to catch up with this damaging crisis.’
Yet in market terms, it is a very long time from this morning until Thursday evening. Market
days are like dog years, seven times longer than Brussels days: between now and Thursday investors can make a lot of decisions on how much eurozone debt to dump. Not that I actually think that form of words worked out by the finance ministers will make any difference to the debt problem, but the EU wants the markets to think it will. Hanging around to sign it for ten days after it was drafted last Monday just confirms to the markets that there is no political and economic resolve at the top.
Investors have already been warning Brussels that they will not wait. Peter Clarke, the chief executive of the Man Group, the biggest hedge fund in the world, gave an interview to the Telegraph last week in which he warned: ‘Until very recently, everyone has been assuming that the eurozone would come up with a solution for the peripheral countries’ debt that would provide sufficient certainty for the markets to be able to move on.’
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