And here I'm breaking bread With the upper crust! Beggar at the feast! Master of the dance! Life is easy pickings If you grab your chance. Everywhere you go Law-abiding folk Doing what is decent But they're mostly broke! Singing to the Lord on Sundays Praying for the gifts He'll send. But we're the ones who take it We're the ones who make it in the end!
– “Beggars at the Feast,” from Les Miserables
J. Luis Martín: The European Union will hold yet another do-or-die summit this week. On this occasion, “growth” is the plat du jour;
the allegedly missing recipe in the “plan” to save the euro. In
addition, some suggest that this time is also “different” because Greece, France, Italy and Spain may now be ready to corner Germany to relax its sacrosanct fixation with austerity. This summit truly promises to be quite a gathering of beggars at a feast, no less.
Billions to nowhere
The outcome of previous European summits leaves little room for hope that anything substantial will be achieved
this time around, except perhaps for another massive central bank
intervention, as was the case after last summer’s “Marshall Plan”
summit, as well as after last December’s “10 days to save the euro”
meeting.
In the four years since the crisis broke out, the EU
cannot point to a single action, policy, or even a meaningful statement
that has not been questioned later, if not completely overruled by one
of its members or institutions.
There is absolutely nothing that
even suggests that Europe’s leaders are even close to agreeing on
something with regards to a rational plan to address the Eurozone’s
systemic problems. In fact, as much as European Commission President José Manuel Durão Barroso
calls for coordinated European action in the form of a banking union,
fiscal integration, eurobonds et al, his words prove to mean nothing
unless they are sanctioned by the institutions that truly matter in the
EU: namely the European Central Bank (closely monitored by the Bundesbank) and the German Finance Ministry.
The only thing Europe has managed to accomplish this far is to extend its monetary union’s survival through a series of circular debt-piling rescue schemes.
Precious time and billions of euros worth of bailouts into the crisis,
we are now being warmed up to the next summit with the same solemn
messages of urgency and hope of the past, only this time there is a new
euphemism to root for: the “growth compact.”
Besides the adoption of “growth” as the newest European mantra, some are openly
calling for Europe’s beggars to become choosers as a way to force the
debt mutualization scheme that will ultimately backstop the euro project. A type of chest-beating strategy, by the way, which seems to rhyme with Spain’s recent dealings with Europe.
Beggars unite?
Essentially, those suggesting that the periphery could and should threaten Berlin
into an “all-in” German bet on the euro zone have decided to ignore two
fundamental problems: the prevailing institutional and political
idiosyncrasies of each of the 17 member-states, as well as the lack of
real statesmanship and vision from those who represent them.
The
latest “beggars becoming choosers” narrative basically suggests, in the
case of Spain, that Berlin must be forced into accepting the following:
-- That the Spanish government, as per Prime Minister Mariano Rajoy’s
own words, will not let any bank fail, and that the (still
undetermined) European financial bailout is injected directly into
the country’s troubled banks. Spain’s aim here is twofold: to
separate the financial sector’s troubles from the state, and to prevent a
hypothetical apocalyptic and highly contagious disaster stemming
from Spanish savings banks’ downfall.
From a
German standpoint, this formula would pass the Spanish financial
“hot potato” to the euro system without any real guarantee over the
bailout’s success – and much less over its repayment. To Germany,
this plan has moral hazard written all over. Accept that austerity in
Spain does not include curbing the political structures that
perpetuate heavy state intervention and a system void of political
accountability.
-- That “austerity” is
to hit Spanish citizens in the form of more taxes and less public
services, but not the political apparatus: an entanglement of
publicly-financed labor unions and political parties, NGOs and
foundations, dozens of highly indebted state-owned mass media
corporations, thousands of public companies, hundreds of thousands of
politically-appointed bureaucrats, and the 17 regional governments,
which double and sometimes triple public functions.
Naturally,
relaxation of bailout conditions, as well as any joint debt
instrument issued at supranational level, would further delay the
potential for such structures to be significantly downsized and/or
eliminated. Again, a problem of moral hazard surfaces should
Germany fold to a debt mutualization scheme.
-- That it must trust a political establishment that – like Greece’s
– tells its citizens that bringing to justice those responsible
for the current state of economic and financial affairs is not a
priority, and that any parliamentary initiatives to such an end are
to be systematically blocked. The epitome of moral hazard, indeed.While some have focused on last Friday’s announcement of a €130bn European-funded growth package as
proof of Germany’s loosening up to the periphery’s demands, the Spanish
government’s alleged tough stance on the negotiating table was swiftly
put aside by German Chancellor Angela Merkel, precisely on the grounds of moral hazard.
And yet it is also true that Germany’s own delusion to have it both ways in the EU have resulted in the schizophrenic policies of austerity and bailouts which have exacerbated the Eurozone’s demise.
Ultimately, Spain needs to focus on transforming its educational, economic and territorial model in the face of an extremely dire economic and demographic outlook.
To think that such profound matters of pressing national concern, along with the prevailing divergences within the Eurozone, can be solved by virtue of transferring sovereignty to Brussels – backed by the core’s checkbook – is both infantile and negligent. In fact, to promote “more Europe” to “save Europe” is nothing but a replay of the same mistakes which characterized the flawed European Monetary Union’s foundation.
No more European bailout feasts
Last winter, I asked Economics Nobel Laureate Dr. Vernon Smith about his views on Europe’s troubles. At the time, Smith explained, “the strong countries of Europe are being asked to foot the bill for the profligate countries and that is not a sustainable policy. The weak countries are de facto bankrupt, should face that fact, and default, if necessary, on their debt. This will force them into balancing their budgets, becoming more disciplined, and to live within their means. Investors will return if these actions are credible, as investors are remarkably forgiving, buoyed by hope that stability and growth will return.”
Dr. Smith went on to warn about the potential damage bailouts could have on Spain’s path to overcoming its economic hardships: “The open question,” he underlined, “is whether the Spanish political process can credibly put its house in order if they are being protected from default. That is an umbrella fraught with incentive leaks and hence may not even be in Spain’s interest.”
Today, Dr. Smith’s comments remain as pertinent as ever – especially when we are beginning to witness how the people’s austerity for the sake of useless bailouts revives long-buried European extremisms. It is time to stop thinking in terms of impossible rescues and “compacts”, and demand that our European leaders adopt a more responsible conduct at their upcoming summit; a change from the customary European “beggars at the feast” spectacle, no less.
Source
And yet it is also true that Germany’s own delusion to have it both ways in the EU have resulted in the schizophrenic policies of austerity and bailouts which have exacerbated the Eurozone’s demise.
Ultimately, Spain needs to focus on transforming its educational, economic and territorial model in the face of an extremely dire economic and demographic outlook.
To think that such profound matters of pressing national concern, along with the prevailing divergences within the Eurozone, can be solved by virtue of transferring sovereignty to Brussels – backed by the core’s checkbook – is both infantile and negligent. In fact, to promote “more Europe” to “save Europe” is nothing but a replay of the same mistakes which characterized the flawed European Monetary Union’s foundation.
No more European bailout feasts
Last winter, I asked Economics Nobel Laureate Dr. Vernon Smith about his views on Europe’s troubles. At the time, Smith explained, “the strong countries of Europe are being asked to foot the bill for the profligate countries and that is not a sustainable policy. The weak countries are de facto bankrupt, should face that fact, and default, if necessary, on their debt. This will force them into balancing their budgets, becoming more disciplined, and to live within their means. Investors will return if these actions are credible, as investors are remarkably forgiving, buoyed by hope that stability and growth will return.”
Dr. Smith went on to warn about the potential damage bailouts could have on Spain’s path to overcoming its economic hardships: “The open question,” he underlined, “is whether the Spanish political process can credibly put its house in order if they are being protected from default. That is an umbrella fraught with incentive leaks and hence may not even be in Spain’s interest.”
Today, Dr. Smith’s comments remain as pertinent as ever – especially when we are beginning to witness how the people’s austerity for the sake of useless bailouts revives long-buried European extremisms. It is time to stop thinking in terms of impossible rescues and “compacts”, and demand that our European leaders adopt a more responsible conduct at their upcoming summit; a change from the customary European “beggars at the feast” spectacle, no less.
Source
Additional:
Spain Formally Comes A Begging
Submitted by Tyler Durden: While the world has known for over two weeks
that the Spanish banking system is insolvent and locked out of global
liquidity, the country was reticent about formally bowing down to
Germany and announcing in proper protocol that it was broke. Until a few
hours ago, when Spain's Economy Minister Luis de Guindos Monday sent a
letter to Eurogroup President Jean-Claude Juncker, as expected, formally
requesting aid to assist with the recapitalization of Spanish banks
that need it, the ministry said in a statement.
Market News has details:
De Guindos said the precise form of the aid will be decided taking into consideration "the different possibilities currently available and those that might be decided in the future." The comment seems to suggest that Spain is holding out hope that European leaders will ultimately agree to allow Europe's bailout fund, the European Stability Mechanism, to fund banks directly rather than being required to channel the loans through the government.
Under current statute neither the ESM nor the temporary bailout fund it will be replacing, the European Financial Stability Facility (EFSF), is allowed to inject capital directly into banks. Unless that changes, the bank aid to Spain would add to the Madrid government's debt, with worrying implications for its ability to continue servicing it.
In his letter to Juncker, De Guindos confirmed that Spain's bank restructuring agency, the FROB, would receive the aid funds and distribute them to the banks needing them.
"The Spanish authorities will offer all of their support in evaluating eligibility criteria, in the definition of financial conditionality, in following up on measures to be implemented, and in the definition of the financial aid contracts, with the goal of finalizing a 'memorandum of understanding' before July 9, so it can be discussed at the next Eurogroup meeting," de Guindos wrote.
July 9 is also the date on which the ESM is supposed to become operational, though it could be pushed back several days because of a legal action pending against it in Germany.
De Guindos noted that in deciding the amount of aid required, two independent audit reports issued last Thursday as well another report by the International Monetary Fund would be the starting points.
The two independent audits, commissioned by the Spanish government, showed Spain's banking sector would need between E16 billion and E26.5 billion in a baseline economic scenario and between E51 billion and E62 billion in a "stressed" scenario where economic activity and housing prices fell further than currently anticipated. The IMF reported an aggregate capital need of around E40 billion for Spanish banks. However, the rating agency Fitch, calling for higher core Tier 1 capital buffers than assumed in the two independent auditors' reports, said on Friday that Spanish banks would need up to E60 billion in the baseline scenario and up to E100 billion in the pessimistic one.
Sadly, at this point we can all just sit back and await for the next
Spanish bailout letter demanding more cash, because, as we have
explained on several occasions, the ultimate funding need of Spanish
banks will be well over €100 billion, as further confirmed overnight by
another analysis from Open Europe, which notes the patenly obvious: "Up to mid-2015 Spain faces funding needs of €547.5bn, over half its GDP and a large majority of its debt." Good luck:
Key Points
- The IMF estimates of €40bn for Spanish bank recapitalisation look too low. We estimate that the banking sector needs between €90bn and €110bn, meaning even the expected €100bn rescue package may not be enough. The amount needed could further increase if banks struggle to raise provisions against losses on top of their capital requirements. The external stress tests announced yesterday are equally too low given that they worked from current data, which may be insufficient or incorrect.
- We expect that this package, along with higher borrowing costs, could increase Spanish debt to 94% of GDP in 2013 and 112% in 2015 (with only slightly lower growth than expected).
- This package will intensify the sovereign-banking-loop in Spain as banks come under more pressure to load up on Spanish debt. Unless the far-reaching problems in the Spanish banking sector are resolved – which looks unlikely – further reinforcing this loop could eventually force Spain into a full bailout (as the burden becomes too much for one side to stand). This is something for which the Eurozone’s current bailout fund would not be equipped.
- Ultimately, Spain’s problems are not confined to its banking sector. The state faces funding costs of €548bn over the next three years, as well problems controlling regional spending and encouraging economic growth – all of which, again, makes the risk of a full bailout for Spain more likely.
- Therefore, in order to avoid the plan being counterproductive, stabilising the country’s banking sector in longer requires the right conditions – including ‘bail-ins’ and bank wind downs.
- The ESM will not be in place to provide the funds, meaning that the EFSF will have to. This reduces questions over seniority but will lead to demands for collateral from Finland – a messy issue which could itself prompt seniority concerns.
- We estimate that total exposure of EU countries to the Spanish economy is around €913bn, a huge amount which highlights the vital importance of ensuring that this rescue package works the first time around.
Full briefing below:
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