by Mitch Feierstein about 5 years 5 months ago
Don’t you love Europe? The way it messes with your head. The way really, really bad things somehow get blotted out in so much waffle, double-speak and spin, you start doubting your own instincts. Like, is it you or is it them?
Take the bold European rescue of Greece. A broad-shouldered continent saving a country in peril. Yes, that country brought its difficulties on itself, but the wise heads of the Brussels Eurocracy have ensured that the country is obliged to work its own way out of trouble, as far as that can be managed.
So: the Greek government will find a new sense of adult responsibility. The EU will continue to supervise things. The ECB will lard the entire system with money. And all shall be well and all manner of things shall be well.
The trouble is there’s so much wrong with this picture, it’s hard to find anything right with it. I could probably, if I put my mind to it, find fifty horrible things lurking like undetonated mines in small print. But, from that fifty, here are my top five.
First, any semblance of fairness has been discarded. Anyone who lent money to Greece was a dumbass who ought to lose money. And in most bankruptcies, that’s precisely what happens. If you don’t happen to be a secured creditor – that is, if you don’t have collateral, like property or financial securities – you just have to take your share of the loss. That’s what bankruptcy is. It is the basis for capitalism.
But not in Greece. In Greece, official creditors haven’t taken any hit at all. They’re fine. The entire burden of adjustment is falling on private lenders. In effect, Greece has changed the rules retrospectively. Bond investors thought they were lending under one set of conditions, but – hey presto! – they weren’t. It turns out that official bodies made loans while the private sector picked up the losses. You can call that what you like. Me, I call it fraud.
Second, this whole rescue is bogus anyway. A report compiled for the troika of the EU, the IMF and the ECB argued that economic conditions in Greece are so dire, so little likely to improve, that the real level of debt is likely to be 160 per cent in 2020, not the 120 per cent officially projected.
Since 120 per cent would only take Greece to the desperate position Italy was in before Christmas, that would hardly have been a rescue anyway. Since 160 per cent is the beyond-desperate position that Greece was in when the whole sovereign debt problem unfolded, that wouldn’t be a rescue at all.
The only long-term effect of the rescue will be to burden the Greek economy with so much debt that recovery will be all but impossible. The Greek economy is contracting, not growing. And that’s no way to get out of debt.
Third, loads of private investors were worried about their Greek exposures, so they bought insurance on it. In the financial markets, that insurance goes by the forget-you-even-asked name of Credit Default Swaps, or CDSs. Those things are simple in essence. If you lend £1,000 on an insured loan, and the creditor only repays £300, then your insurer should pay out £700. Simple, huh?
Yes, but that’s too simple for the financial markets of today. As I write, a financial outfit called the International Swap Dealers Association, or ISDA, is considering whether a ‘credit event’ has happened in Greece. If no credit event has taken place, that CDS insurance won’t pay out. And ISDA may well decide that because the restructuring was ‘voluntary’, no credit event has happened.
Which would be crazy. Beyond crazy, actually. A child can see that if private creditors take a haircut of more than 50 per cent on their loans, a credit event has taken place. Sure, it was voluntary. Creditors enjoyed roughly the same kind of choice their predecessors had when Dick Turpin stuck his pistols into their faces and said, ‘Your money or your life?’
Fourth, there’s a stunning lack of transparency here. The whole bailout is so complex, so full of sweeteners and buried provisions, that the most important act of European financial rescue since the Marshall Plan is pretty much impossible for any outsider to analyse. In effect, a huge financial restructuring has taken place without democratic oversight. Voters can’t comment on the deal, because they don’t understand it. And they don’t understand it, because no-one ever wanted them to.
And fifth, the entire rescue has simply made everything worse. Do you want to know why Italian government bonds were yielding more than 8 per cent before Christmas and are yielding less than 5 per cent now? Is it because the clown Berlusconi is no longer in government? Because a new technocratic (but unelected) government is finally getting to grips with some economic basics?
Or is it because the ECB has just splurged another €1,000,000,000,000? It’s lent that money at low interest rates, against dodgy collateral, to weak banks, on the understanding that they’ll prop up insolvent governments. Great stuff.
If you’ve got too much debt, the European solution turns out to be to make more of it. To permit no vote on the issue. And to proclaim it all a rescue.
It’s not you. It’s them.