22.12.2011
Playing the blame game
With hundreds of billions of debt due to be repaid in the first quarter of next year, writes Eddie Ford, the euro zone crisis has not gone away
Despite the endless succession of ‘rescue packages’ and ‘make or break’ summits, there is still no sign of a resolution to the euro zone crisis. Quite the opposite. Though it would be mistaken to think that a catastrophic break-up of the euro is inevitable, it is equally true that the momentum remains towards malfunction. If so, it is beyond doubt that such an occurrence would trigger an economic slump or depression at least on the scale of the 1930s. We are confronted by the possibility that the world capitalist-imperialist system could descend into general chaos.
The warnings are all there. On December 9 the Moody’s rating agency downgraded France’s three major banks (BNP Paribas, Société Générale and Crédit Agricole) on the basis that liquidity and funding conditions had “deteriorated significantly” due to a “continued lack of investor appetite for bank debt”. Then, perhaps more seriously, a week later it downgraded Belgium’s credit rating by two notches, citing “sustained deterioration” in funding conditions for euro zone countries with relatively high levels of public debt - plus the economic woes associated with the dismantling of the troubled Franco-Belgium banking group, Dexia. In October, Dexia was nationalised at a cost of €4 billion and this move inevitably increased Belgium’s exposure to the rest of the banking group’s combined debts - Moody’s estimating that this could come close to 10% of Belgium’s total GDP. Potentially calamitous, for sure, even if the Qatar royal family and Luxembourg have teamed up to buy Dexia’s private banking arm in a deal valuing the business at €730 million.
On the same day that Moody’s downgraded Belgium, Fitch cut the “issuer default ratings” - which in theory “reflect the ability of an entity to meet financial commitments on a timely basis” - of the Bank of America, Goldman Sachs, BNP Paribas, Barclays, Deutsche Bank, Crédit Suisse and Citigroup. According to Fitch, US and European banks are presently “particularly sensitive to the increased challenges the financial markets face” - a problem facing the financial sector “as a whole”. For example, Fitch explained, Citigroup no longer enjoyed the same very high level of financial support from the US government - which previously saw it receive $20 billion in capital injections from Washington during the 2007-09 credit crunch, as well as a $45 billion credit line and $300 billion in guarantees; not to mention hundreds of billions more in emergency loans from the US Federal Reserve. Now that the state handouts are drying up, Citigroup is in an extremely vulnerable position. Too big too fail?
Furthermore, Fitch gloomily concluded that a comprehensive solution to the euro zone crisis was “beyond reach” - a damning verdict on the European leaders. Therefore the crisis will “likely be punctuated by episodes of severe financial volatility” and as a consequence Spain and Italy - alongside Ireland, Belgium, Slovenia and Cyprus - were told by Fitch to brace themselves for a “near-term” downgrade. Knives out, the rating agencies will claim more and more scalps unless the euro zone governments embark on a dramatic change of direction.
It is widely expected that France too is on the cusp of a disastrous downgrade, its banks heavily tied in to Greek, Spanish and Italian debt - maybe before Christmas. Rattled by the prospect of losing their coveted triple-A status, French representatives lashed out in frustration at the UK. Christian Noyer, the governor of the Bank of France, suggested that the credit rating agencies should look instead at the UK because of the level of its debt and inflation, and the poor levels of growth and bank lending. A French downgrade “doesn’t strike me as justified based on economic fundamentals,” he said. Pick on Britain, not us.
Spat
Similarly, François Baroin, the French finance minister, maintained that “one would rather be French than British at the moment”, given that Britain is in a “difficult economic situation” with a deficit level “equivalent to that of Greece” - an obviously absurd comparison from a financial-economic point of view, but which served the political purpose of sticking the boot in. He also remarked that the UK government was “marginalised” within Europe, a reference, of course, to David Cameron’s decision at Brussels in the very early hours of December 10 to veto proposed changes to the European Union treaty - amendments heavily pushed by Angela Merkel and Nicolas Sarkozy as part of their plan for fiscal union. By all accounts Sarkozy was openly rude to Cameron at the Brussels negotiations, so perhaps Noyer and Baroin are remaining true to the spirit of modern-day French diplomacy.
Responding to the French jibes, an official spokesperson for David Cameron declared that the British government has “put in place a credible plan for dealing with our deficit” and that the “credibility of that plan can be seen in what has happened to bond yields in this country”. In other words, ‘I’m all right, Jack’. The spokesperson also played down any idea that the prime minister was seeking to undermine the agreement, such as it was, reached at Brussels between the EU 26 and repeated Cameron’s promise to “engage constructively” in the talks taking place on the implementation of the new “fiscal compact” devised by Merkozy. But Britain would only sign up to the new treaty, the spokesperson added, if it obtained “safeguards” for the City of London - keeping up the silly fiction that the duplicitous Brussels bureaucrats would strangle the life out of British capitalism if given a chance.
In reality, as we all know, Merkozy’s putative fiscal union would leave the City - and the UK’s financial services - untouched. But why let small things like facts get in a way of a cheap, populist gesture?
Less temperately, David Ruffley, a Conservative member of the treasury select committee, thundered that the remarks of Noyer and Baroin were “another example of Gallic self-delusion on an epic scale” - seeing how, he spluttered on, they are “tied to a currency that could become a basket case at any moment”. As for Jesse Norman, another Tory treasury committee member, he opined that Noyer had misunderstood the agencies’ warning, arguing that the ratings agencies views “do not simply reflect the fundamentals of the French economy, but also the continuing failure to resolve the euro zone crisis” - because at root “this is an expression of anxiety at a failure of political leadership” in the euro zone. Norman may have a point.
Clearly, this unedifying Anglo-French spat - or Entente Discordiale - shows the extraordinarily fragile nature of the capitalist system, as it enters another stage of its profound crisis. It is painfully obvious that establishment politicians and the capitalist class have absolutely no idea how to extricate themselves from the situation. Rather, they are looking around for scapegoats, with the French blaming the British and the British blaming everyone but themselves.
However, it could be the UK government and Ruffley who might turn out to be deluded in their conviction that the British government’s triple-A status is inviolable - UK plc is a safe pair of hands for your money forever. Moody’s stated on December 20 that, although the UK’s credit status was “currently secure”, it did face “formidable and rising challenges” - noting that the country’s prized triple-A rating depended on the government keeping its deficit reduction plan on track. For Moody’s the outlook on the UK’s rating is “likely to be sensitive to future developments in the euro area’s debt crisis”. Which is to say, if the euro zone crisis deepens - hardly an impossibility - then the UK government could quickly find itself in the same position as the French: facing an imminent downgrading.
Sobering
Meanwhile the head of the European Central Bank, Mario Draghi, made a sobering address to the European parliament on December 20. He told the MEPs that the ECB’s bond-buying programme was “neither eternal nor infinite”, doubtlessly a worrying message for the Spanish and Italian administrations, given that it was only ECB intervention that prevented the bond yields (interest rate) on government debt reaching utterly disastrous levels. Not that the current levels are sustainable. For example, as of December 21 Italian bond yields stood at 6.92% percent - again dangerously near the 7% critical threshold, the point at which the Irish, Portuguese and Greek governments were forced to ask for a bailout.
Draghi cautioned viewing the ECB as some sort of potential Superman who at the last minute will magically fly to the rescue of the euro zone, arguing that there is “no external saviour for a country that doesn’t want to save itself”. The only recourse was “sustainable growth”, which can be achieved only by undertaking the sort of “deep structural reforms” that EU leaders have “procrastinated” over “for too long”.
More alarmingly though, he drew attention to the risk of “global contagion” in the new year thanks to the unpalatable fact that a huge volume of debt is to be rolled over in the first quarter - reminding his audience that €230 billion of bank bonds, up to €300 billion of sovereign bonds and more than €200 billion of “collateralised debt obligations” all become due for payment in the first three months of 2012. Even though the ECB president had “no doubt whatever about the strength of the euro, its permanence, its irreversibility” - as if anyone would suggest otherwise - Draghi feared that pressure in bond markets in that first quarter would be “really very, very significant, if not unprecedented”. Not just banks, but countries like Portugal, Spain and Italy will seriously start to feel the strain - might even go bust or collapse under the sheer weight of debt.
Furthermore, in its financial stability review published on the day that Draghi spoke to the European parliament, the ECB noted that protracted indecision among European leaders has created a “cycle of risk” - helping to create a “systemic crisis” not witnessed since the 2008 collapse of Lehman Brothers”. The outcome of all this is that the “risks to euro area financial stability increased considerably” during the second half of 2011, and any “positive market responses” to the numerous European summit agreements and deals had been “short-lived” - indeed, a “bumpy ratification process appears to have contributed to additional market uncertainties”. In conclusion, the report demanded “bold and decisive action” both within and outside the euro area.
Yet there is very little evidence of action, whether “bold” or “decisive”. Currently, EU leaders are stumbling towards an extension of extra credit lines through a system of bilateral loans to the badly undercapitalised International Monetary Fund - falling short of the €200 billion target they had set themselves. Which itself was woefully inadequate by any serious calculation. These loans, in theory, would be used by the IMF to support struggling euro zone countries - but you do not have to be a fiscal genius to work out that €150 billion divided by 17, or even by three or four (Italy, Spain, Portugal, Ireland) does not go very far. Not nearly enough to make a difference if events take a turn for the worse.
One of the reasons for the failure to reach the €200 billion target was that the UK government refused to make a contribution of £25 billion. David Cameron may want Europe to get out its “big bazooka” to stop the euro from collapsing, and hence decimate the British economy, but he is certainly not prepared to pay for it. Wolfgang Schäuble, the German finance minister, admitted there was “no chance” of the US increasing its contribution to the IMF either - the Republican-dominated Congress would never give its stamp of approval. China is also unwilling to contribute, as its economy shows the first distinct signs of contraction - property prices in Beijing fell by 35% in November compared to the month before (looks like China’s credit bubble is finally about to burst). Nor is Germany’s Bundesbank particular keen on the IMF scheme. With a slight hint of desperation, EU finance ministers on December 19 put out a joint statement saying they would “welcome G20 members and other financially strong IMF members to support the efforts to safeguard global financial stability by contributing to the increase in IMF resources”. You bet. No wonder that the IMF’s former managing director, Dominique Strauss-Kahn, castigated the euro area’s leaders for their “poor leadership” and bleakly assessed that the zone only had a few weeks to come up with viable solutions.
The escalating nature of the crisis was exposed on December 21 when more than 523 banks borrowed almost €500 billion in cheap three-year loans from the ECB - taking advantage of a long-term refinancing operation that allowed them to offer lower-grade collateral in exchange for loans pegged to the ECB’s main interest rate, which currently stands at a record low of 1%. Draghi has insisted that “no stigma” will be attached to banks applying for the loans, which for many is more than three percentage points cheaper than they could obtain on the open market.
But again, it seems like far too little, far too late. The sovereign debt crisis remains toxic and deadly, and the new year looks set to bring nothing but more debt, austerity, unemployment, poverty and recession.