Order under articles 4 and 5

WHEREAS there is a substantial lack of liquidity and a significant risk in the outflow of deposits which are likely to endanger the survival of the credit institutions with a chain reaction that could lead to the instability of the financial system and to destabilising consequences on the entire economy and the society of the country.

 AND WHEREAS under the circumstances a state of emergency is created, to safeguard public order and public security and for overriding reasons of public interest,  12(I) of 2013The Minister of Finance, in exercising the powers conferred by articles 4 and 5 of The Enforcement of Restrictive Measures on Transactions in a Situation of Emergency Law of 2013, following a recommendation of the Governor of the Central Bank, issues the following Order:  Short title.1. The present Directive shall be referred to as The Enforcement of Restrictive Measures on Transactions in a Situation of Emergency First Order of 2013.  Interpretation2. (1)  In the present Order unless the context shall otherwise prescribe:   «Committee» means the Committee that is introduced under article 9 of the Law.

 «Law» means The Enforcement of Restrictive Measures on Transactions in a Situation of Emergency Law of 2013.

«Credit or debit or prepaid card» means credit or debit card or prepaid card issued by credit institutions.

(2) Terms not defined in this order shall have the meaning ascribed to them by the Law.  Imposition of restrictive measures.

3. By virtue of articles 4 and 5 of the Law, and following the recommendation and agreement of the Governor, the following restrictive measures are imposed:

(1)    A maximum amount of cash withdrawal is imposed, which shall not exceed the daily limit of €300 per person per credit institution, or its equivalent in foreign currency. All cash withdrawals (through debit cards, prepaid cards, and from the bank’s tellers and using credit cards against balances in current accounts) are computed per account holder for all his accounts in each credit institution.

Provided that any amount of the daily cash withdrawal limit, which has not been withdrawn during the day for which the cash withdrawal limit applies, can be withdrawn at any time afterwards.

(2)  The cashing of cheques is prohibited.

(3)  Any cashless payments or transfers of funds outside the Republic or to accounts held with other credit institutions is prohibited, except that:

(i)             Payments for transactions that fall within the ordinary business activities of customers upon presentation of supporting documents as follows:

(A)  Payments of up to €5,000 daily per account are not prohibited;

(B) Payments of amounts from €5,001 to €200,000 are subject to the approval of the Committee. A list of applications for payments that fall within this category shall be submitted to the Committee by the credit institution on a daily basis and shall state the amount of each payment, the total amount and the number of payments that fall within this category. The Committee in making a decision, which must be made within 24 hours, shall take into account the available liquidity reserves of the credit institution.

(C) Payments of amounts of €200,001 or more, if the prior approval of the Committee for the specific payment is obtained after an application has been made by the credit institution. The Committee in making a decision shall take into account the available liquidity reserves of the credit institution.

(ii)           The Payment of employee salaries upon presentation of supporting documents.

(iii)          Living expenses up to €5,000 per quarter, as well as the tuition fees of a person that is studying abroad and is a first-degree relative of a person who has his habitual residence in the Republic. Provided that any payment of living expenses is only permitted if documents are submitted to the credit institution evidencing that the recipient of the cashless payment and/or transfer of funds is a first-degree relative of a person who has his habitual residence in the Republic. Provided further that payments of tuition fees may only be made to the relevant educational institution if supporting documents are submitted.

(iv)          Payments and/or transfers of funds by debit or credit or prepaid card, up to €5,000 per month per person per credit institution.

(4)  The termination of fixed term deposits before the maturity date is prohibited, unless the deposit shall be used for the repayment of a loan within the same credit institution.

(5)  On the first maturity of fixed term deposits, an amount equal to the greater of €5,000 and 10% of the total principal amount of the fixed deposit, shall be transferred, at the option of the depositor, to a sight/current account or deposited in a new fixed term deposit of the depositor in the same bank. For the remaining balance, the maturity shall be extended by one month.

(6)  Funds from transferred from fixed term deposits to sight/current accounts will be subject to the restrictive measures applicable to sight/current accounts.

(7)  Exports of euro notes and/or foreign currency notes exceeding €1,000 or its equivalent in foreign currency per natural person per journey abroad is prohibited. The Director of Customs shall implement this measure.

(8) Any financial transaction, payment and/or transfer that was not finalised before this Order came into force shall be subject to the restrictive measures. Provided that any financial transaction, payment, and/or transfer that was not processed before this Order came into force shall be cancelled and must be resubmitted.

(9) Credit institutions are prohibited from executing any cashless transfers that facilitate the circumvention of the restrictive measures.

(10)The restrictive measures apply to all accounts, payments and transfers regardless of the currency denomination.  Exemptions.4.  Exempted from the restrictive measures are:

1. All new funds transferred from abroad to the Republic.
2. Withdrawal of cash from accounts held abroad using credit or debit card or prepaid issued by foreign institutions.
3. The cashing of cheques issued on accounts held with foreign institutions abroad.
4. Withdrawal of cash from account of credit institutions with the Central Bank.
5. The Republic.
6. The Central Bank.
7. Diplomatic missions.
8. Payments that have been approved by the Committee.

Force of this Order

27 March 2013. This Order shall stay in force for a period of seven days from the date on which it is published in the Official Gazette of the Republic.

Michalis Sarris

Minister of Finance

Bunga, Bunga is back!

The return of the undead

Berlusconi to return to Italian politics. Mario Monti to quit (and return to Goldman Sachs for a annual honorarium of $50,000,000). The Italian long bond to go to 600 basis points over bunds. Investors to notice that Italy is still in the position of having massive debts and a completely stagnant economy. Panic to break out (again).

The bursting of the bubble

London property has been wearing anti-gravity boots for years now. Hey, the market has become so frothy that know-nothing footballers have been turning themselves into property developers (a sell signal if ever there was one.) But those anti-gravity boots are starting to lose their potency. Stand by for a massive fall in London prices. Property elsewhere in the UK will have a sympathy fall too.

Japan to have stable leadership

After too much calamitously indisciplined and indecisive leadership, Shinzo Abe has a real chance to holding onto power for a good stretch. He’s got massive problems to contend with. A structurally weak economy, massive debts and a prickly neighbour to the west. But just possibly, Abe-san is the man for the job. We’re wishing him luck: he’ll need it.

Francois Hollande to become most unpopular French President …

… since the last one. Hollande came to power on the back of anti-austerity promises, as though Sir Taxalot and his good steed Spend-Some-More was going to get France out of trouble. By now, Hollande has started to notice that France is in a fiscal mess, with chronically weak banks and far too much government spending. Will the French public enjoy Hollande’s conversion to the path of fiscal probity? We’re thinking non.

English middle classes to subsist on potatoes

Er, unless porridge is cheaper. As food inflation continues to skyrocket – beef up 75%,  lamb up 55%, fruit up 26% – and real wages continue to stagnate, more and more people will be forced to trade down to the cheapest (and least healthy) foods simply to get by. Oh, and as fuel prices continue to surge, we’re going to see a whole lot more people burning their floorboards to keep warm. But there is good news. The bankers are OK, people! And corporate profits are great! So you don’t need to worry about the FOGOs (Friends Of George Osborne). They’re all going to be fine.

The LIBOR scandal to grow

Three minnows arrested so far in the LIBOR scandal while the whales remain at large. That number’s going to rise faster than the yields on Spanish debt. If we’re lucky, we’ll start to see the stirrings of similar enquiries into the market for US Treasuries market. That market is stitched up tighter than Tony Soprano’s waste management business … and involves less savory individuals.

London Whale a "tempest in a teapot"

More of the same

Ever noticed that central bankers – ivory-tower academics for the most part – have been wrong about virtually everything for thirty years? Ever noticed that the same old advisors (take a bow Larry Summers) are recycled again and again, making the same failed policy prescriptions? Yep, well, 2013 is the year of no change at all. Same faces, same policies, same failures. Our big tip for the next big appointment: J.P. Morgan’s Dimon will smash the Goldman-only rule in Washington politics by leaving Wall Street for public service (that is: looking after his friends on Wall Street at the expense of everyone else.)

‘Triple-dip’ to become phrase of the year

If 2012 was the year of double-dip in the UK, 2013 has every chance of making it a recessionary hat-trick. Of course, the phrase is a con: it suggests that another recession now will be like some kind of temporary setback before the economy’s inevitable resurgence. But we had ten years of growth built on debt. Now we’ve got ten years of stagnation as we pay that debt back down. Triple-dip? How does quintuple-dip sound?

Civil unrest in Spain

Super Mario Draghi saved the world in 2012 (by promising to buy shoddy debt without limit for as long as needed.) We can’t even think what’s wrong with that policy … but here’s our bet: that Spain hits another crunch in 2013. Catalonian unrest grows. Unrest among those 50% of youth unemployed grows. And all of a sudden those – totally understandable – expressions of discontent force a financial, political and economic crisis. How will you escape this time, Mario?

Wanting to be head of the EU......

Merkel to be re-elected with 99% of the vote

Angela Merkel is Ms Reliable in German politics. Unfortunately she’s achieved that position by shirking every major decision in the Euro crisis, as a result of which the continent has racked up massive, unsustainable Ponzi-ish debts aided and abetted by lying bankers and southern European politicians who are either corrupt or incompetent. (Or, Silvio, both.)

Gold to hit new highs

What’s bad for money is good for gold. After a long bout of profit-taking, we expect gold, silver and other commodities to hit new highs. Meantime overvalued tech companies (we’re looking at you, Farcebook) will continue to lose value. And Exchange Traded Funds will increasingly be exposed as the new subprime market. Stand well back if you don’t want to be hurt.

Problem solved

The US fiscal cliff? OK, here’s what’s going to happen. The Democrats will sit down with Republicans. Both sides will call attention to the fact that the US fiscal gap (taking into account the oncoming medical and social security express train) is among the worst in the world. Both sides will set aside party differences and put together a plan which will be based on serious revenue increases and major cutbacks to entitlements. None of these things will be popular, but leaders from both parties will explain the logic truthfully and dispassionately to their electorates. Another US recession avoided. Also, pigs will fly.

Need a compact guide to the crisis?

Fortunately we have one for you: Mitch Feierstein’s Planet Ponzi. If only George Bush and Gordon Brown had had a copy …

If he had only read Planet Ponzi...

Over the coming weeks, we’re going to be hearing a lot about the ‘fiscal cliff’: the threat that some 5% of GDP is going to be ripped out of the economy in a combination of tax hikes and spending cuts. A fiscal slow-down on that scale will almost certainly trigger recession. The CBO thinks so, though their numbers look optimistic to me. (If you cut demand by 5%, more or less overnight, then you shouldn’t expect the economy to grow by more than 1% in the year following.)

The Feds solution to debt: more debt

Because the process of fiscal compromise acts itself out on the political stage – all big personalities and high drama – the media loves to report it. Loves to imply that vast questions are at stake, that political careers will stand or fall by the outcome.

But they’re not. Not really. This so-called ‘cliff’ is really just the first in a series of steps. The US budget is arguably the most distorted in the Western world. Greece and Japan may have higher debts, Italy and Portugal may have worse growth prospects – but for sheer budgetary insanity, the US is probably the world leader, combining huge current deficits with vast unfunded promises to retirees, and welfare entitlement program recipients. You don’t need to take my word for this. The IMF states, ‘under our baseline scenario, a full elimination of the fiscal and generational imbalances would require all taxes to go up and all transfers to be cut immediately and permanently by 35 percent. A delay in the adjustment makes it more costly.’

The political ructions of the next few weeks will simply constitute the first scenes in a drama that will run for the next ten or fifteen years. And what’s more, this is a play where we already know the ending. Taxes will have to go up. Spending will have to come down. No other outcome is available: just ask the Greeks.

And meantime, there is a monetary time-bomb charged and ticking. A bomb which is being constantly primed with further explosive, further destructive force. Remember that the economic catastrophe of 2008 was created by loose monetary policy, the indisciplined expansion of credit and a market where increasingly shoddy securities were sold as investment grade assets. You might think that a logical reaction would be the steady tightening of policy and encouraging a climate of credit discipline.

Alas, however, such logic has no place at the Fed. Interest rates are on the floor, and have been for four years now. Because four years of loose money isn’t enough for the ivory-tower academics in charge of monetary policy, the Fed has explicitly committed to keep rates low indefinitely.

Loose money in the past, loose money guaranteed into the future … but that’s still not enough. The Fed has enlarged its balance sheet by $2 trillion since the crisis began to unfold. But that doesn’t even say it. The unelected officials at the Fed handed out an extraordinary $16 trillion in secret loans to bail out banks and businesses in the 2008-10 period. Those loans were not known to, or authorized by, Congress and many of the recipients were firms owned and headquarter abroad. Sen. Bernie Sanders, who has much to call attention to these issues, comments, ‘No agency of the United States government should be allowed to bailout a foreign bank or corporation without the direct approval of Congress and the president.’ Well, duh! It’s frankly extraordinary that there should be any question about this.

As Sanders also points out, the actual operation of the bailouts was largely outsourced in large part to investment banking firms on Wall Street who benefitted directly from the bailout. According to the Government Accountability Office, some two-thirds of such outsourcing contracts were awarded on a no-bid basis, an extraordinary failure. And meantime in a ‘money-laundering‘ style operation, the Fed is acquiring $40 billion of low-quality mortgage backed securities – in many cases from the firms that created and missold them – thereby cleaning corrupt balance sheets at the risk of the US taxpayer.

The problems created by this unconstitutional misconduct go far beyond the mere trillions of dollars involved. The US Treasury market is being currently manipulated on a heroic scale. At times we’ve seen the Fed buying as much as 70% of US government bond issuance. Worse still, it’s effectively told the market that it intends to continue supporting the market as much as necessary for as long as necessary. In effect, we have a tiny group of unelected officials pursuing a set of radical and experimental policies – QE infinity, money-printing, unlimited bond buying, call it what you will.

The impact of money printing and the value of the US dollar

And the theory behind this activity is simply crazy. When have price controls and state intervention ever worked? I don’t just mean for the US Treasuries market, but for any major market at any time? State intervention always fails. The Fed is simply setting up what looks set to be the largest Ponzi Scheme in history.

What’s more, because financial markets are interlinked, indiscipline in one market soon ripples through the system and unintended consequences impact many other markets. Wall Street traders, both currently and historically, price junk bonds off the US ten year treasury, which currently trades at an implausible 1.61%. But since the US Treasury market is flawed, every related market is too. As the Economist notes, a bubble is being inflated in government bonds, quality corporate bonds, junk bonds, and (I would add) global equities. As that newspaper comments, ‘When the market does turn everyone will want to head for the exit at once, as was the case with mortgage-related bonds in 2007. That might turn a retreat into a rout.’ I’d agree, except that the word might ought to be will.

The Feds exit strategy: Pray

And all this wouldn’t be so bad, except for one thing. What’s the exit strategy? Could it be hope-based by any chance? How do you climb down from these heights? Who will buy these bonds when the Fed stops? Who absorbs the losses? What exactly happens to the economy when interest rates normalize and bond prices collapse back to normal levels? Indeed, what happens to the banks when they can no longer sell their lousy assets to the Fed, can’t bump up their profits by selling no-bid services to the dumbest buyer in town? Too big to fail is still getting bigger.

The fiscal cliff is scary, because an abrupt one-off change in fiscal posture is a dumb way to do something that needs doing. But still, it needs doing. If a temporary economic slowdown is the price we pay for that, too bad. We’ll still be in better shape for taking the hit.

The monetary neutron bomb is worse. We’re still building it. No one’s talking about it. And the amounts are colossal.

Four More Years

Obama’s an accomplished individual. Smart, cool, in control. But his standout quality is probably his ability to create euphoria. Create it, sustain it, ride it. Watch the people celebrating with him at his victory rally in Chicago and you could easily believe that the USA had just won a war or beaten a recession.

Unfortunately for Obama, reality doesn’t have much time for speeches. The economy was dire going into the election. Coming out of it, you can almost hear the engine failing.

Let’s take the first indicator of failure – the stock market. The market mood darkened in September and October, then dropped abruptly as news of Obama’s victory sank in. I don’t actually think that’s because Wall Street hates Obama. I think it’s more that as the election hoopla dies away, investors realise how little they can expect from the government, how bad the economic situation really is. And, for that matter, how bad the political situation is. The House remains solidly Republican, the Senate comfortably Democrat – and the whole divisive status quo guaranteeing gridlock for another four years.

Over the next few weeks, you’re going to hear a lot about the fiscal cliff. In January 2013, a whole lot of things happen together. George W. Bush’s tax cuts expire. A payroll credit expires too. Some automatic spending cuts are imposed across the board. (These last cuts, of course, aren’t thanks to some outbreak of sanity in Washington, but a bad compromise cobbled together in the course of 2011’s debt ceiling crisis.)

The fiscal cliff is huge, and real. Its impact is potentially around 5% of American GDP. By contrast, George Osborne’s fiscal tightening amounts to little more than 1% a year. If you want to get your head round what a comparable tightening would imply in the British context, then just imagine that the basic rate of tax increases by 10 pence in the pound overnight. Or that spending in the NHS is halved, again overnight.

No economy is strong enough to take that kind of punishment. The British economy is struggling to come out of a double-dip recession even with its own weak-as-milk pace of tightening – and, indeed, I think a triple-dip recession is highly probable. The fundamentals of the US economy are in some ways better than ours (less reliance on the finance sector, less proximity to European travails) but a 5% cut in economic demand overnight? The result will be crippling.

Although the US jobless rate has improved slightly in recent months, that’s only because dispirited workers have left the jobs market altogether. The US employment rate is a horror story. Piling a massive fiscal shop on top of those weak fundamentals, and you’re going to see a massive rise in unemployment. (If you look at U6 unemployment data for the US it’s hovering close to 15%, a shocking stat.)

You might think that the solution is obvious. If the fiscal cliff is so bad, then simply decrease the slope. Go for a slow-but-sure Osborne-style tightening so the budget deficit floats gently lower. And sure enough, there are plenty of economists, living comfortably in their ivory towers, who suggest just such a solution.

But that solution is not available. The IMF – hardly a sensationalist organisation – says that the elimination of America’s long run fiscal gap requires both a 35% increase in all taxes and a 35% cut in all entitlements. The fiscal gap is heinous, but it’s only the first step. It doesn’t even take America where it needs to go.

It gets worse. If fiscal policy can’t save America, how about monetary policy? Alas, and just like in Britain, monetary policy is all out of gas. Interest rates can’t go any lower. quantitative easing (QE) has reached its limits. (And, in any case, QE is little more than a way to rescue Wall Street at the cost of inflation for the rest of us.) The worst thing that could happen to America is that Ben Bernanke, the unelected Chairman of the Federal Reserve, tries to rescue things. The best thing that could happen is that he goes on holiday for four years, having left his Blackberry in the office.

The Princeton Professors Economic Experiment

In short, America’s problems are profound and there is no way to deal with them except one that imposes huge short-term costs on the economy and the people. I don’t think it’ll get quite as bad as it has done in Greece – the US economy has a lot, lot more about it than that – but most of the pain still lies ahead.

And in matters of finance, everything is circular. So the government needs to raise taxes and slash spending to sort out its debt problems. The result: a huge reduction in demand and heavy job losses. The result: countless homeowners being unable to service their mortgages and a huge rise in ‘jingle mail’, as homeowners send their house keys to the foreclosing banks. The result: an already weakened banking system sinking further under a tide of ill-advised boom era lending. And of course, as all this happens, the economy will shrink, which means that the US government has to slash spending yet further in a desperate effort to keep its deficit reduction efforts on track.

These words might seem apocalyptic, but I’ve been saying these things for a while. (My book, Planet Ponzi, has the whole story, and it’s out in paperback now.) What’s more, we’ve already seen disaster scenarios such as these come true in well-managed countries of the developed West. Spain had a much lower debt to GDP ratio than the US. It had better supervised banks and less casino-banking. But we all know the state that Spain is in: a death-spiral that even Germany may not be able to help with.

And the signs are everywhere in America. Go-go stocks have lost their lustre. Facebook trades at little more than half its IPO price. Apple, for so long a do-no-wrong stock market darling, is down more than 20% from its recent highs. Businesses are hoarding cash, because they don’t dare invest it, don’t dare return it to shareholders.

I don’t suppose Mitt Romney thinks of it like this, but you could argue that the 2012 election was a heck of a good one to lose. America has outrun financial reality for decades now. Debt-fuelled, government-funded. The future bought on the never-never.

But the debts are falling due. Reality is knocking at the door. And the fiscal cliff is only the start.

The British calling in the calvary

A hundred years ago, a generation of men – many of them volunteers – fought an unprecedently bloody war for almost invisible gains. The men were heroes, but the generals commanding them were too often blunderers, too little conscious of the ever-mounting casualties. David Cameron is right to demand that our schoolchildren are reminded of the Great War and the vast sacrifices involved.

He’s right, but he’s also showing some chutzpah. History remembers those men as ‘lions led by donkeys’. Heroes betrayed by blundering and unimaginative leaders. We are not – thank God – at war on that scale now, but in economic terms we are deep in our own version of trench warfare and David Cameron has too little idea how to lead us out.

The current recession is the longest and (almost) the deepest in modern British history. Its costs are borne, primarily, by those least able to afford them. Those responsible for the damage – the bankers, the regulators, the New Labour generation of politicians – have been largely untouched. The fraudsters who manipulated LIBOR, who missold subprime assets, and so much else, are sitting in Monaco, instead of in jail. The politicians in charge now too often rely on soundbite and deflection; there’s still a shocking lack of transparency and accountability.

The British people bear all this with a huge amount of dignity. High inflation, stagnant wages, crazy property prices, an economy that seems only ever to move sideways? ah well, could be worse. Mustn’t grumble. We’re lions, led by donkeys.

What time is Murray Playing?

But it’s not just in Britain where an economic Great War is laying waste to lives and savings.

In the US, a presidential election is unfolding that will do nothing to solve the fiscal crisis that is engulfing the country of my birth. The fiscal problem has become so bad, the politicians can’t even talk about it. Republicans won’t raise taxes. Democrats won’t cut benefits. The result is a fiscal jam so bad that serious economists estimate true US indebtedness at over $200 trillion. That’s more than three times the total GDP of Planet Earth. And virtually no one talks about the issue.

In Europe, meantime, the latest rescue of the latest crisis is beginning to fail. Again. Spanish bond yields have fallen from their high of nearly 8.00%, but they’re still glued close to the 6.00% mark. And a country in deep financial crisis, mounting debt and deepening recession cannot fund itself at that rate for long. Meanwhile, the wealthy Catalans are beginning to reconsider their ties to the rest of Spain. The ratings agencies are cutting their ratings, again. Italy is in pretty much the same position, only a step or two behind. Germany is beginning to backtrack on the deals that averted the crisis that loomed earlier this summer. The slow-mo European crisis is getting ready for the next hideous encore.

Welcome to Spain - nearly 60% youth unemployment - this will not end well

 

 

You might think that nothing changes, but you’d be wrong. A year or two back, the IMF believed that a £1.00 cut in government spending would only reduce economic activity by £0.50, as new private sector growth surged into the gaps created. That clearly hasn’t happened. We’ve had the exact reverse pattern where increasing austerity has led to increasing recession… and an increased deterioration of government finances. The IMF now estimates that the same £1.00 cut actually depletes the economy by £1.30. The task ahead of us is getting worse.

It’s the same with the banks. Forget the pre-Thatcher miners or the teaching unions under Labour – if you want real government largesse, the financial sector still outshines the rest. When you hear of the Bank of England ‘pumping money into the economy’, what it is actually doing is propping up the trading profits of the same handful of bloated institutions that created this mess in the first place. And those self-same institutions are still not lending, the economy still not moving. Meantime, the stock of dubious debts and inflated assets rises just that little bit more. A burden that the rest of us will have to pay for: through absent growth, stagnant wages, high inflation, and a hopelessly unsustainable property bubble.

Amidst such confusion, it would be easy to think that there’s no fix out there. Easy and wrong. We don’t need rocket-science, we need common sense.

Although I don’t like a lot about what the current government is doing, I do like its approach to the deficit. Under George Osborne, the government is still borrowing 8p in every £1.00 generated by the economy. So when you earn £100 at work, the government has just borrowed £8. Since that’s obviously nuts, government borrowing needs to come down. At least Osborne has got that part right.

But then consider monetary policy. The Bank of England is widely expected to announce an expansion of its quantitative easing programme to £425 billion. Which is just a fancy way to say it’s printing £425 billion of new money, which is a sure fire way to create inflation. (Just ask Zimbabwe.) It’s craziness – or, in fact, craziness doubled, given that the intended effects of the policy (boost lending and encourage investment) have clearly not happened.

Or take the banks. It’s pretty obvious that bankers don’t need our sympathy. (Many of them, in fact, need jail terms.) Far from coddling the banks any further, we should force them to play by the same rules that all the rest of us have to live by. If a bank goes bust, it should be left to fail. Small depositors should be protected. Everyone else should get no sympathy. Instead, we pump money into the system and pretend we’re helping the broader economy. It’s insanity squared.

I wrote a book about these matters: Planet Ponzi, which is out now in paperback. That book tells you in detail, and in easy, everyday language, just how bad the problems are – and what we need to do to fix them.

I didn’t write the book because I wanted to make money, but out of belief – even passion. I’ve been involved in the financial markets for thirty years. Over that time I’ve seen a kind of sickness take hold. A belief in the power of debt. A belief that any problem is OK, so long as you can defer the reckoning. The sickness isn’t confined to Britain (though we are now the world’s most indebted country). The problem is equally bad in Europe, maybe worst of all in the United States.

The cure for this disease is, in essence, simple. It’s total transparency, total accountability. That needs to apply to politicians: no more false promises, no more evasions of responsibility. But the same magic formula needs to apply to banking and the media. And we, the voters, need to retain our sense of anger. When we hear politicians evading an important question, we need to demand a real answer. When we see bankers grossly manipulate the financial markets, we need to reject any outcome that does not end up with one or more bankers doing some serious jail time.

I first conceived of writing Planet Ponzi, when the first tremors of the financial quake were starting to strike. I thought the issues covered in the book were the most urgent matters facing the Western world since the end of the Second World War. I still do. It’s not too late to turn things around – but we can’t delay our actions any further. Planet Ponzi has got to stop. We still need our lions, but it’s time to lose the donkeys.

Those same finance ministers are also set to approve a year’s delay in the deadline given to Spain for reaching a budget deficit of 3% of GDP. That won’t, of course, be the last bailout for Spain and, please note, a budget deficit of 3% is still pushing debt ever upwards in acountry whose economy is getting smaller not bigger.

Unsurprisingly, government bond markets have once again been wildly unimpressed. Spanish bond yields briefly touched 7% today, before falling back. Given that Spanish debt (according to the misleading official figures) is around 7% of GDP and rising fast, interest rates at this level mean that about 5 cents in every euro are going to pay the interest on that debt.

The costs of euro collapse will be huge, but those costs are coming anyway. And they only get bigger the longer you defer the moment of truth

Put another way, Spaniards have to work about three weeks a year, simply to pay off the interest they owe on the national debt. No wonder their economy is failing under the weight of that burden. No wonder unemployment is so extravagantly high.

It’s time to end this massive Ponzi Scheme. If the problem is too much debt, you don’t solve the problem by extending more debt. If the problem is banks with irresponsibly reckless lending practices, the solution is not to “gift” them more money. If the problem is a wildly uncontrolled money supply, you don’t solve that problem by printing money until the presses are smoking hot.

A Ponzi Scheme is any merry-go-round fraud where you have to keep pulling new idiots into your scheme to keep things going. It’s the economics of the chain-letter. People can sometimes make money, but only if the supply of idiots is big enough. These things always collapse – and collapse disastrously – in the end.

We’re near that point now. Spain can’t receive a Greek-style bailout: all the EU rescue funds combined don’t have the resources to do it. Even if Germany decided to do all it could, the scale of these debts would simply overwhelm Germany’s (already very indebted) economy. In any case, if the fairies came and Spain were rescued, the pressure on Italy would soon become almost overwhelming. And though France hasn’t been hitting the headlines recently, it has higher debt than Spain, a history of deficits and a huge banking sector with vast exposure to Spain, Italy and Greece.

So why not let’s just call it a day? For Spain. For Italy. For the Euro. For this whole misconceived and duplicitous Ponzi Scheme. The costs of euro collapse will be huge, but those costs are coming anyway. And they only get bigger the longer you defer the moment of truth.

David Cameron wants to hold a referendum on Europe sometime after the next election. But he’d better get on with it. Europe, in its current form, doesn’t have that long to live.

I published this in the Daily Mail.

‘Frankly, we are not here to receive lessons in terms of democracy or in terms of how to handle the economy,’ he said. ‘This crisis was not originated in Europe; seeing as you mention North America, this crisis originated in North America and much of our financial sector was contaminated by, how can I put it, unorthodox practices, from some sectors of the financial market.’

Hmmm. So evil Americans are responsible for European woes, huh? That’s an interesting claim, but does it really stand up? And who, really, is to blame for this extraordinary mess?

Who’s to blame? World leaders assemble for the G20 summit in Los Cabos, Mexico

In the spirit of Euro 2012, I thought I’d follow a system of ‘player ratings’. I’ve listed the major players in the Eurozone crisis below. A score of 10 implies, ‘Totally to blame. Why are these guys not in jail already?’ A score of 0 implies … well, it doesn’t really matter: there are no zeroes. Who’s to blame for the Euro crisis? Here are the major players with their scores.

1. American Banks 4/10

OK, I’m no fan of the US banking system. US regulators completely failed to enforce their own rules. The banks screwed up horribly and did a vast amount of damage to the the US economy. But there’s the point: they blew up the American finance system, not the European one. Get a map, Manuel. That big blue thing? It’s the Atlantic Ocean.

2. European banks 9/10

European banks, on the other hand, are vastly to blame for the mess in Europe. For one thing, a lot of the mess in the US was created by the US subsidiaries of European banks: outfits like HSBC, Deutsche, RBS. But then Societe Generale, Paribas, Lloyds, Northern Rock, Bankia, Unicredit, Dexia – these are all home-grown awful, and it’s their problems which have added so much to the European debt load.

Star performer: Greece must take full responsibility

3. Greece (Star Player) 10/10

Every team needs a star man, a Steven Gerrard, Captain Reliable character. The Euro-Blame Team has to name Greece as that €500 billion star. It cooked its books. It never even attempted to reform its economy. It doesn’t get its citizens to pay taxes. It offers crazy pensions. Its rail system notches up losses that exceed its sales. It has a mountain of Ponzi debt that, even after vast write-offs, will be unpayable. You can’t beat that performance. Greece: it’s ten out of ten, all the way.

4. Spanish Real Estate 9/10

It wasn’t so long ago that the Spanish state looked prudent. It had debt levels way lower than those of Germany. (Indeed, it still does.) Its economy thrived. It had a team that played beautiful football. What could possibly be wrong with this picture? Answer: a real estate bubble even worse than the one in America and Ireland. A bubble that Spanish regulators never even attempted to address. A bubble that is currently threatening to wreck not just the Spanish government, but the entire Euro project.

Spain is higher up the radar of international investors at the moment, but Italy is a whale of even larger dimensions. In the decade to 2010, do you want to know how many economies had worse growth than Italy’s? Answer: just two. Zimbabwe and Haiti. If you add to that terrible economic performance a mountainous debt and a corrupt and dysfunctional state – well, 8/10 seems way too generous. I must be Mr Nice Guy as it’s sunny in London today. Portugal, by the way, has somewhat similar problems, but the country’s size means I can’t award it more than a 6/10. Think of it as an impact sub.

6. France 6/10

France lies even further from international radars than its two big southern neighbours, but when you think about a highly indebted country with an exceptionally leveraged banking system, gigantic unfunded pension liabilities, an addiction to state spending, and huge assets parked in the not-so-safe countries of the Mediterranean … well, you probably don’t feel like putting your funds on deposit anywhere that smells of garlic. Stay away.

7. The European Central Bank 9/10

The ECB. What can you say? How Ponzi-ish, irresponsible, non-transparent and undemocratic can a central bank be? The answer, it seems, is ‘very’, four times over. The ECB enabled asset bubbles to form in Spain and elsewhere. It permitted a vastly overleveraged financial sector. And its response to crisis: to extend trillions of euros in soft loans to insolvent banks to gamble on dubious bonds issued by failing governments. That’s not monetary policy. It’s monetary insanity.

Damaging to Britain: But can Sir Mervyn King and Gordon Brown really be blamed for the eurozone crisis?

8. Gordon Brown & Swervyn Mervyn King 6/10

If we were talking about how far this pair of superheroes had injured the UK economy, we’d be pulling out perfect tens. But the question here is about the damage to the European economy and although Britain has been saddled with eye-watering debt, hideous inflation, rotten banks and a stagnant economy, those things have only a marginal impact on the Eurozone. That little strip of blue, Manuel? It’s the English Channel. (And don’t call it La Manche.)

9. Angela Merkel 7/10

OK, this is a tough one. Germany has a strong economy. It has weak and overleveraged banks, a scarily under-recognised pension problem, and too much government debt. But still. Angela and team didn’t create this problem, they’ve only compounded it. They’ve compounded it by always choosing to kick the can down the road, instead of addressing and fixing the giant issues in the European system. Germany’s not mostly to blame, but still. It should have done so much better.

10. Jacques Delors 9/10

Jacques Delors, the principal architect of the Euro, has admitted that the project was structurally flawed from the outset. He’s even admitted that British objections to the idea had real substance. (Thanks, Jacques, and it only took you 15 years to figure that out.) Basically, this project could never have worked and now here it is not working. Quelle surprise.

L’homme culpable: European Commission President Jose Manuel Barroso should take a look in the mirror

11. Jose Manuel Barroso 9/10

Manuel Barroso: if you have a mirror anywhere in your €1.4 billion offices, take a look. The person looking out at you is responsible for maintaining and boosting an impossible system. If EU officials had ever had any respect for democracy, this crisis would never have occurred. If the EU had ever recognised the real gravity of the crisis, if it had allocated blame and responsibility in the right quarters and in a timely way, this would never have happened. Manuel Barroso, l’homme culpable – c’est vous.

Meantime, and in light of the football theme of this article, I have a simple, neat suggestion to make everything right. Spain wants to be bailed out by the German taxpayer. German taxpayers, understandably, aren’t all that keen with the idea. But there’s a footie tournament on, right? Spain and Germany: the two favourites. So what about a simple little wager, double or quits according to which team fares better. And that’s a game I’d pay to see. 

I published this in todays Daily Mail

Meantime, over the same weekend, another rescue act took place. This ‘rescue’ involved €100 billion of taxpayer money (though not yours, fortunately) and is intended to bail out the worst Spanish banks whose balance sheets have been looking desperately fragile in recent months.

Global stockmarkets have been so relieved by the transaction that they leaped almost 2% on opening for business today. Let’s see how long that lasts…

Bailout: Eurozone finance ministers agreed to lend Spain up to $125billion to help its battered banks

Only, what actually has been rescued?  There are at least four problems with the Spanish economy at the moment. One, too much debt. Two, not enough growth. Three, a government austerity programme that’s been forced on the country by the first issue but which is severely worsening by the second. You can add a fourth issue to this list: a housing bubble that’s burst so badly, the construction and other ancillary industries will be decimated for at least a generation.

The first three of these issues aren’t just Spanish problems; they’re European ones. Germany itself is normally spoken of as an exception, but if so it’s a very partial one. The fact is that the Spanish government is less indebted than the German one. German growth which, despite everything, has been relatively healthy since the financial crash has started to stutter badly. And no wonder: it’s hard to sell to people without money.

Criticism: Spanish Prime Minister Mariano Rajoy has been slammed by Greece for the deal

But go back to that list of Spanish problems. Spain has just borrowed a further €100 billion. Forgive me for stating the bleeding obvious, but you cannot spend your way out of debt by borrowing more money. And let’s assume – a generous assumption this one – that Spain uses that money with prudence and wisdom, that it cleans up its dodgy banks, that it removes dead assets from their balance sheets, that good management is installed, that lending procedures are overhauled, that their capital base is made strong, that boards and shareholders learn to oversee their charges with intelligence and care.

Truth is, you only have to write that list to know that those things are never going to happen. The banks that got intro trouble did so by being incredibly stupid, badly run and forgetting every rule of sober banking. They aren’t about to turn themselves overnight into some shining examples of financial wisdom.

But, I’m an optimist, let’s assume a miracle happens and the banks come good. What then?

Well, so what? The burden of debt that Spain has to bear is still €100 billion greater than it was. The banks are hardly going to act as the engines of a new Spanish economy for two reasons. First, Spain is acutely short of credible international businesses to lend to. Secondly, the Spanish economy is shrinking not growing. Under such circumstances, intelligent bankers should be doing all they can to preserve their capital and avoid making risky loans. 

And how credible is the Spanish government as a borrower? We know what the international financial markets think: they think Spain is dangerously at risk. That’s why Spain borrows at some six and a half percent, when German can borrow at less than one and a half.

To be sure, this ‘rescue loan’ isn’t coming from the financial markets. It’s coming from ‘Europe’. I put ‘Europe’ in inverted commas, just to make it clear that the cash doesn’t come via any recognizable electoral or democratic process. Politicians and unelected officials have essentially conspired to make these decisions without the assent of their peoples.

 

Pain in Spain: You cannot spend your way out of debt by borrowing more money and banks are simply not going to act as the engines of a new Spanish economy

Would Germans, if given a vote, want to lend €100 billion to Spain? Would the Dutch? Would the Finns? And what would these people say if asked to give their verdict on the European Central Bank’s ‘LTRO’ programme, under which it has lent €1 trillion or more to European banks? Truth is, everyone knows what the outcome of any referendum would be. That’s why the people are never asked. That’s why these bailouts are effectively based on the theft of taxpayer funds.

Optimistic: Spain’s Minister of Economy Luis de Guindos said he hoped that companies would have more solvent banks as a result of the bailout

But back to the question. Spain is being lent €100 billion by baffling European institutions, without democratic oversight. Normally when loans are made under these circumstances, international lenders insist that some tough eligibility criteria are enforced, but in this case – no criteria.

It would be nice to think that Spanish politicians had proved their mettle to such a degree that no such criteria were required. But this is a government that has already missed its fiscal targets. That has long claimed no banking bailout was necessary. That has, in fact, already engineered one failed bailout (the one that led to the creation of Bankia and it’s shares are down 70%) and is now desperately seeking another. That has 55% youth unemployment, a shrinking economy, deep popular dissatisfaction and no proven ability to control its spendthrift regions. Oh, and one of the largest housing busts in the world. That’s the government which has just been given a no-strings-attached loan.

Britain, thank goodness, stands on the edge of all this. And of course, every new bailout, every new loan, every new increase in the tidal wave of debt, defers the problem a little longer. Deferring these problems isn’t smart, of course. Adding to the debt mountain only makes the fundamental problem worse. But that’s fine. Politicians only care about the next election. About keeping one step ahead of their voters.

Spain did enjoy a rescue act at the weekend, but it came from Fabregas’ boot. The faux European bailout has just made things worse.

This was published in todays Daily Mail.

It’s a strange world we’re living in. This newspaper reported yesterday that, ‘Britain and the US joined forces to urge Germany to create a central Brussels body that could assume sovereignty over individual countries’ budgets and fiscal policies.’

David Cameron and George Osborne are said to believe that ‘a single currency can only work if the Eurozone creates an effective fiscal union.’ Barack Obama is in on the act too. Everyone, it seems, wants a Euro superstate … except for Angela Merkel, the woman who’d be in charge of running it.

Now this seems like a simple story, only the more you look at it, the more it’s like one of those pictures where you have to count up the number of impossible things: fish flying through the air, roofs with no walls, water flowing uphill. And right now, we’ve got a lot of flying fish.

Point number one, a simple one. Germany can’t bail out Spanish banks. It’s illegal and unconstitutional. I know that democracy has taken a pasting recently – just witness an unelected Italian government or the almost total absence of democratic consultation over the fiscal stability treaty. (Take a bow, Ireland, for remembering that voters matter.) But even in these undemocratic times, the rule of law still matters. Germany is coming under acute pressure to break or bend laws passed in good faith. It is right to resist.

Secondly, another simple point. As a hedge fund manager, I’m charged with looking after money on behalf of my investors. It’s my job to make money when the markets are good, to avoid losing it when they’re not. And one of my rules is the oldest one in the market: you never double up on a losing trade. You don’t throw good money after bad.

That plain good sense has been altogether lost in recent times. Europe has too much debt, right? So what’s the solution everyone’s been talking about? Answer: more debt. Yes, sure, we’ve been hurling money – whether borrowed or printed – at these problems for the past four years. That solution has clearly failed … yet the answer, apparently, is to do the same again, only on a larger scale. That’s craziness, the very definition of insanity.

What makes it worse is that we see the same recycled advisers coming up with the same failed solutions. I estimate that, if you include guarantees, the co-ordinated money printing since 2008 has currently added at least $14trillion to the global money supply. That’s almost one quarter of world GDP. Does anyone really think that if $14 trillion hasn’t solved the problem, more money is going to do the trick? The problems and challenges have been getting worse, not better.

And third, don’t we live in a capitalist world? Where smart ideas are meant to make money, where dumb ideas lose it. Capitalism without bankruptcy is comparable to Catholicism without hell – yet G7 leaders seem ready to gang up on Germany for holding fast to this basic truth. If a Spanish or Greek bank has got itself into trouble by making bad bets with its shareholders’ capital, it deserves to lose everything. If the Spanish government wants to fix its financial system, it should do so with money belonging to its own taxpayers.

And finally, the Elefant in the Zimmer. Germany doesn’t have the money to bail out Europe. In the first place, its debt to GDP ratio is actually worse than Spain’s. It’s about the same as Britain’s, and we’re hardly in fine financial fettle at the moment. Furthermore, those ratios are based on the official debt numbers … which exclude, for example, any notion of pension liabilities, an area where Germany has massively under-provided over the years. The German economy itself is robust, but that country’s pensioners are going to need every ounce of that muscle for themselves.

Merkel is unwilling to bail out Spanish banks – which would be unconstitutional – despite the encouragement of the G7

Personally, I think Angela Merkel is resisting the G7 pressure for some honourable reasons. I think she doesn’t want to break the law. I think she believes completely in the law of capitalist consequences: that the people who make the mistakes need to be the ones to pay for them.

But she’s also a numerate, intelligent woman. She knows that Germany’s financial strength is far from impregnable. The country’s financial capacity is strong, precisely because she and her predecessors have taken care not to overload it – not to do to Germany what Blair and Brown did to Britain. I don’t want a superstate any more than you do. I certainly don’t want a British Prime Minister to be advocating the development of such a state. But fortunately, I think Merkel doesn’t want one either. Can’t finance it, doesn’t want it. Let’s hope she holds firm

I published this in todays Daily Mail