|Europe - into the end game
By Chan Akya
A few years ago, one of the usual suspects on my e-mail group sent a series of
photographs detailing "idiots" who had been called over to help pull a car out
of the water. Presumably, the car driver had gone careening off the dock into
So the crane operator comes in and parks dangerously close to the edge. He then
starts pulling out the vehicle from the water, getting progressively lop-sided
while doing so. No matter, the
crane operator carries on with his job.
Then the inevitable happens with the laws of physics being asserted. The
overall weight of the car is so high, and the arm extended so far that the
rescue truck is itself pulled into the water. Hopefully, no one is hurt at this
So they do what should have been done up front, namely to get an even bigger
truck with a stronger crane. Helpfully, this crane operator first stabilizes
himself before pulling out the car (see the strut on the side of the truck).
After first removing the car from the water, the green truck's crane operator
proceeds to rescue the previous, hapless red truck.
There is of course another photograph, which has been proven as a fake
subsequently through the good graces of Photoshop (but which came through in
the original e-mail). This one shows the green truck also encountering a
I was thinking of this series of pictures when watching the latest bout of
crisis hit the screens. Specifically, we have to contend with at least three
major issues in the markets now:
a. Fears of an outright default by Greece
b. Imminent downgrades of French banks and
c. Funding problems for Italy and Spain in the sovereign debt markets.
All of these are linked to the pictures above. You can imagine for example that
the white car is Greece, and the European Union is the red truck that is
attempting to pull out the car. What is now happening for the major countries
seems apt in that analogy, with the red truck crane being pulled into the water
due to its poor management of the crisis.
Another way to think about it is to consider the more global view, ie that the
white car is the global banking system. Sovereigns rushed to save their banks,
without quite understanding the excess weight in the fuselage due to what the
banks had been doing previously. Sure enough, the governments just didn't have
the financial resources to pull the banks out of the crisis. Now that the
European project looks to be shot, you have the green truck approaching.
On September 13, there was much talk of the Chinese government jumping in to
rescue Italy or at least to subscribe fully to the Italian government's bond
auctions that have been attracting falling investor interest with each auction.
It probably doesn't help matters that there are so many of these auctions
across Europe, nor indeed that various types of rumors on government liquidity
and fiscal rectitude have been flying around since summer.
The naming of a French bank as being shut out of the US dollar funding market
than '08, Asia Times Online, August 30, 2011) created more angst among
investors about a renewed attack on the European banking system. With reports
of downgrades by rating agencies around the corner and also that American banks
were curtailing their exposure to European institutions on the double, debt
markets have remained on edge for the past few weeks.
French banks have been under attack for their accounting policies; for example,
two banks only took a haircut of 20% or thereabouts on their Greek exposure
even as the markets looked to be expecting a 50% haircut. This kind of game
isn't good when markets are on edge - sure enough, French banks have fallen
fast and fiercely. The way that their debt trades now it wouldn't surprise me
if the French government has to explicitly rescue one or more of them by
year-end. This would do no wonder for the French sovereign's credit rating.
Greece is the first (and possibly also last) part of the puzzle that Europe has
become. Words like "farce" do not quite capture the magnitude of the unfolding
tragedy at the core. Even with the debt markets trading Greek debt at 60 points
up front (ie you are expected to recover a maximum of 40% when the country
defaults), the message is clear - the much ballyhooed 135 billion euro (US$184
billion) rescue of Greece (the details of which I questioned at some length)
may be stillborn.
German Chancellor Angela Merkel rode to the rescue again on Tuesday, declaring
that an "outright" default and "uncontrolled insolvency" were beyond the realm
of probability. Unfortunately, Ms Merkel did not seem to have any concrete
ideas on how to control the situation and also did not address the key market
issue of the resignation of Jurgen Stark as chief economist of the European
Central Bank (ECB), reportedly over disagreements around the continued purchase
of Italian and Spanish bonds by the central bank, which caused the biggest
rupture in the markets in recent days (last Friday).
Equity markets in Europe and later in the US rebounded on Tuesday over
speculation that the situation at French banks was not as bad as originally
feared, but credit markets did not appear impressed as spreads were still
Typically, a situation like this can only be resolved with concerted action.
However, that appears unlikely as the ECB, the US Federal Reserve and various
other institutions are all at war with each other over the likely economic
trends of the next few months. External intervention - like that of the Chinese
in buying Italian government bonds - also doesn't have much of a positive
history as past "support" initiatives, eg for Greek bonds, have shown.
With the euro falling almost 10 US cents since last week alone, the confidence
of central banks and global investors in the supposed replacement-reserve
currency is shot to pieces. Even in the instances when US authorities do their
best to talk down the dollar, for example President Barack Obama's new $450
billion jobs program and Fed chairman Ben Bernanke's pronouncement of "no
foreseeable inflation" - the markets simply do not have the confidence to
purchase the euro.
Any reasonable person would suspect that we are approaching or are already in
the end game for the euro project. Not to great lament, mind you.
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