By Default

It's another Euro crisis, so it's another deadline. It's reported that this weekend bankrupt Greece faces the ultimate decision of whether to stay in the Euro or not.

Now we have been at 'deadline hour' many times before, which has so far always proved false, so a little cynicism is in order. But the indications are that the momentum does appear to be heading towards a conclusion - I do agree with Richard North when he writes "There is definitely a sense that we are moving to the end game".

The pressure on Greece is intense and there seems to be a non-too subtle attempt, on behalf of the EU and Germany, to force Greece to default, and possibly exit the Euro. The likely reasons for the EU's bullying are manifold.

The cost of trying to save political face by keeping all the countries in the Euro has been superseded by the embarrassment of the Greek crisis to the Euro project, which has no prospect of ending anytime soon. Greece is an economic basket case - so the EU needs to get rid of, in part to try to improve the currency's 'respectability'. That Greece will default has always been a matter of when not if - a reality the EU has long known about. After over 2 years, weariness is creeping in. Greek promises are never kept and more importantly for some European politicians elections are due this year. Taxpayer's money to keep bailing out Greece is not popular to say the least.

The constant bailouts, or rhetoric, has also conveniently given time for the Eurozone to prepare for the inevitable Greek default - in short economic sandbagging. As Louise Armitstead argues in the Telegraph:

The bankruptcy of Greece is no longer the threat to the eurozone that it once was. For all the frustration caused by the constant delays - Greece missed four deadlines last week alone - the time has not been wasted. Banks have busily untangling themselves from the thicket of Greek debt; repricing and restructuring debt and taking large write-downs. In total foreign banks have slashed their exposure to Greece by 60pc.

In a note last week, Willem Buiter, Citigroup’s chief economist, said: “In early September 2011, we argued that the cost of Greek exit to the rest of the world would be very high. We now consider these costs to be much lower because the 'exit-fear-contagion’ could be contained.”

In essence preparations are being made to hang Greece out to dry, a view echoed by Jeremy Warner:

There is only one way of interpreting the set of fresh demands tabled by eurozone finance ministers last night in return for agreeing a new €130bn bailout for Greece – that they are now quite deliberately trying to push Greece out of the euro. All pretence at European solidarity has been abandoned, to be replaced by the vengeance of Shylock.

There is now no chance whatsoever of Greece making it in the eurozone. Economically and politically, the country is in meltdown. Richer Greeks...are all getting their money out as fast as they can, as those of us who have been gazumped in the London property market by Greeks bearing piles of wonga know only too well.

It's a disgrace what's going on, little short of the rape of Greece by its own countrymen, but it is an entirely rational and logical response to the grossly overvalued currency they find themselves with.

Greece has very little option now but to impose capital controls and leave the euro. The longer it leaves things, the more desperate will its plight become.

Despite enduring economic, social and political hardship strangely most Greeks still want to be members of the EU and the Euro. Sadly they are about to find out the hard way that membership of the EU, and more specifically the Euro, only works one way - it means doing what the EU orders when a member, and being jettisoned overboard without concern when an inconvenience. The other Euro members are saving their own skin but not without causing economic and social meltdown, without a care, in another country first.

But no doubt if the inevitable Greek default doesn't lead immediately to a Euro breakup, much rejoicing will occur in Brussels, along the lines of 'we're dealing with the problem'. However next up will be Portugal, and then... well close your eyes and put a pin randomly into a map of Europe.

Last Man Standing

Contagion contagion everywhere; Spain is being hit with ever higher borrowing costs, so has Belgium, and Italy - bond yields which are again above the 7% level - and Portugal and so on. The markets have already assumed that France will lose its treasured AAA status. Then this morning contagion has hit the last man standing - the benchmark - Germany. 'A disaster' is what the German bond auction is being called (my emphasis):

LONDON, Nov 23 (Reuters) - German government bonds fell sharply on Wednesday after investors shunned the country's auction of new 10-year debt, signalling that the fast-spreading euro zone crisis was eroding the safe haven status of German debt.

Germany drew significantly less [sic] bids than the amount on offer for its Bunds, with investors deterred by very low yields. The euro zone powerhouse was caught between the best and worst possible scenarios on the euro zone crisis.

"It is a complete and utter disaster," said Marc Ostwald, strategist at Monument Securities in London. "If Germany can only manage a 0.65 cover in actual terms for what is going to be their next benchmark then what hope for everybody else?"

"It really tells you that the Bund yields are at the completely wrong level ... never mind that they are a safe haven. There's certainly a partial element of 'they (investors)would rather not have euros' in there."

The decisions by Germany are essential to the survival or otherwise of the Euro. As argued before on this blog, Germany faces an impossible position; it wants the survival of the Euro but is unable to take the steps necessary to ensure this. In a great piece Acting Man calls it An Intractable Problem.

The EU of course is arguing for more integration via Eurobonds as a solution:

The EC is launching a consultation to assess if the 17 eurozone countries can issue the bonds to raise cash.

Mr Barroso's 'stability bonds' plan would see much more investigation and control of the budgets of countries within the eurozone, to avoid a repeat of the bailouts and crises affecting the region.

But the EU must know that this would be illegal under German Constitutional Court rulings, it makes one wonder whether not only is this the last desperate throw of the dice for more integration but the laying of the groundwork for the blame game when it all goes pear shaped - that it was Germany's fault for not listening to the EC and its 'messiah' Barroso. The collapse of the Euro will cause enormous political ramifications and fallout.

The Financial Times has interesting piece that the markets have effectively 'smoked out' a stealth operation by the Bundesbank to try to control the German bond market, which spectacularly failed this morning:

That, alongside the fact that the Bundesbank is retaining an ever greater share of bonds from auction, suggests only one thing to the logical mind. It is the Bundesbank which is cornering the bund market on purpose. And it’s doing so to ensure that the one last repo rate in Europe that can be controlled remains suppressed.

The rate is important to suppress because almost all interbank funding is now done on a secured basis against the best quality collateral. Which implies two important points: 1) that the ECB itself has lost control and depends almost entirely on the Bundesbank to enforce its low rate policy target and 2) that the Bundesbank is having to retain more bunds from the market than ever before just to ensure the last functioning repo rate in Europe doesn’t spiral out of control.

That, we would say, is a big deal.

Whatever the case, Wednesday’s auction suggests the Bundesbank’s stealth operation has finally been outed. The question is, will the Bundesbank now be broken too?

One thing is for sure, though, now that Eurozone contagion has infected Germany, it's game over.

Another Warning

In this weekend's papers the Euro crisis rumbles on despite Cameron's attempts to try to change the narrative. Cameron wants to leave the EU issue alone, but the EU is not going to leave him alone any time soon. Christopher Booker writes that "the project is slowly heading for very messy and prolonged disintegration" and it won't do that quietly. Far from it.

So while Cameron and his merry band of Europlastics prattle on about 'repatriation of powers'; a complete non-starter as the ever excellent Richard North points out, the Euro crisis continues to pull the EU down a gurgling plug hole. And the consequences of a chaotic, yet increasingly inevitable, breakup will not be good as this piece by Liam Halligan in the Telegraph argues. Liam is unconvinced by the latest 'extend and pretend' bailout package:

Far from making the situation clearer, allowing investors to make considered assessments, this latest announcement made Western Europe's grotesque debt crisis even more acute, sowing further infectious spores of confusion.

By late Thursday...and certainly on Friday, the warning signs were there. Global bond markets, by character more sober and smarter than the excitable equity guys, were voting against the deal. This is alarming. For it is only by selling more bonds that the eurozone's deeply indebted governments can roll-over their enormous liabilities and keep the show on the road.

And then comes the warning, that we are heading towards significant and serious civil unrest at the least:

Let's be clear – if global bond markets stop lending to a number of large Western economies, we are in the realms of unpaid state wages and pensions, transport chaos and closures of schools and hospitals – sparking the prospect of serious civil unrest. Forgive my intemperate tone, but these are the dangers we face. And I'm afraid the only rational response to Thursday's announcement is that the probability of such undesirable outcomes has just been increased.

Liam rightly argues that the only practical solution to the crisis is an orderly breakup of the Euro, but that ain't gonna happen (my emphasis):

The eurocrats, of course, lack the guts to trim back monetary union to a more manageable size. Too much face would be lost. So "euroquake" fears, once viewed as outlandish, are gaining pace. Despite Thursday's deal, and all the reassurances of a "durable solution", the Italian government on Friday paid 6.06pc for 10-year money, up from just 5.86pc a month ago and a euro-era high. Such borrowing costs are disastrous, given that Rome must roll-over €300bn of its €1,900bn debt in 2012 alone. A default by Italy...would make Lehman look like a picnic.

Gulp! In truth there's little in the piece that isn't anything that this, and many other blogs, haven't said for months if not years. But at least some sections of the MSM are starting to wake up, though almost certainly it's too little, too late.

Update: Just seen that Autonomous Mind has a piece on the make up of the next European War; between the politicians and the people. Warnings are coming in thick and fast.

It Didn't Even Last 2 Days

The latest EU 'deal', which agreed basically nothing, has succumbed to the law of diminishing returns. Designed to reassure the markets, it has failed to even last 2 days. Italy's bonds are still rising to dangerous levels - in short the markets are unconvinced by the EU package.

In a masterpiece of understatement, Annalisa Piazza, a fixed-income strategist at Newedge Group in London said:

“All in all, today’s [Italian bond] auction was not very satisfying,”

Then in a further twist:

A new obstacle to solving Europe's debt problems - already!

Germany's constitutional court has suspended the right of a small parliamentary committee to approve urgent actions required by the eurozone bail-out fund.

The court said it will investiagte whether using the small committee to decide EFSF matters infringed the rights of other politicians.

The nine-member group was set up to get decisions passed more quickly - however there is growing anger among German politicians and voters that they are being dragged into bailing out other nations with little or no consultation.

Reuters reports that the court's suspension of the smalll committee means the EFSF won't be able to start buying bonds in the secondary market because purchases must be agreed in secret, and the full German parliament can't meet in secret.

That leaves the ECB carrying the responsibility for buying Spanish and Italian bonds for a bit longer...

Oh and Portugal's buggered as well:

Monetary contraction in Portugal has intensified at an alarming pace and is mimicking the pattern seen in Greece before its economy spiralled out of control, raising concerns that the EU summit deal may soon washed over by fast-moving events.

Oh and Belgium:

Belgium’s economic expansion stalled in the third quarter as European leaders struggled to contain a worsening debt crisis amid signs the region is heading toward a recession.

And so on...

EU Criticises The Messenger

Apparently the Euro crisis is all the ratings agencies' fault:

European politicians accused credit rating agencies on Wednesday of anti-European bias after Moody's downgrade of Portugal's debt to "junk" cast new doubt on EU efforts to rescue distressed euro zone states without debt restructuring.

European Commission President Jose Manuel Barroso said the decision to cut Lisbon's rating by four notches so soon after it became the third country to receive an EU/IMF bailout was fuelling speculation in financial markets.

Greece is bust, Portugal will need a second bailout (it's only just received the first one) and Ireland is likely to need a second bailout also but no, apparently these ratings agencies are acting all a bit strange and with 'anti-European conspiracy' intentions:

"It seems strange that there is not a single rating agency coming from Europe. It shows there may be some bias in the markets when it comes to the evaluation of the specific issues of Europe," Barroso told reporters in the European Parliament.

Clearly the EU wants its own ratings agency so that it could try to circumnavigate the markets like it does with its own treaties - then everything in the EU garden would be rosy.

Greece And Portugal Debts Worse Than Expected

The Guardian reports that:

Greece and Portugal are deeper in debt than previously estimated, according to official figures that show attempts to contain their financial woes have so far failed.

I'm not sure who's doing the estimating but I think they need to get another job. It's pretty obvious Greece is essentially bankrupt and is, along with Spain, being less than honest about the depth of its financial situation. A default is on the cards for Greece in particular:

Most economists consider a Greek default a foregone conclusion, with either some debt forgiveness or a radically longer timetable of repayments. They argue only about the timing.

The Euro maybe a train crash in slow motion, but it's still a train crash.

Move Along, Nothing To See Here

The Boiling Frog's favourite EU Commissioner has decided that everything in the Euro garden is rosy, here's a selection of his latest quotes:

"While I cannot yet say ‘Mission accomplished', I am increasingly confident that we are entering into the endgame of the crisis management phase."

And:

"Preventing a European Lehman has not been a simple task, with 27 fiscal authorities and 11 central banks - we never had the genius of Alexander Hamilton to draw on, like you did, unless you count Jacques Delors for this too - but the task has nevertheless been accomplished."

And:

"The euro's critics are wrong to claim that [the crisis] will lead to its failure or break-up. The euro will not only survive but is coming out of the crisis stronger than before."

With Greece about to default, and Ireland and Portugal in the same boat plus Spain not being out of the woods yet, not to mention significant worries about Italy and Belgium (who currently hold the world record for not having a government - with implications on its credit rating), one might be tempted to beg to differ.

Although in fairness Mr Rehn wasn't wrong when he said the following:

He concluded by repeating the mantra EU leaders have chanted from the very beginning of the area's crisis that the bloc will do "whatever it takes" to save the single currency.

"The euro is not just a technical monetary arrangement, but rather the core political project of the European Union."

I suspect EU Commissioner Olli Rehn will come to regret his words, and I look forward to that day very much.

Another Day, Another Bailout

As widely expected, Portugal is in talks with the EU regarding a bail-out, so widely expected in fact that the markets this morning appear to have taken the news in their stride.

This was soon followed by an announcement that Spain is not seeking a similar bailout:

'Spain is not at risk at all after Portugal has asked for a rescue,' Finance Minister Elena Salgado told Spanish National Radio.

So Spain has now passed; 'nothing is true until officially denied' test. The UK will naturally be contributing to the bailout of Portugal, to the tune of around £6bn. Thankfully we're not in debt ourselves and have lots of cash to spare to help out our EU neighbours. Oh wait...

Portugal Downgraded Again

Portugal has now been downgraded twice in less than a week. Default looms unless there's a bailout:

LISBON/ATHENS, March 29 (Reuters) - Standard & Poor's downgraded Greece and Portugal on Tuesday, citing risks that the countries' debts could be subordinated to any future European bailout mechanism, and sending their bonds sharply lower.

Interestingly (my emphasis):

The downgrades left Portugal one notch above junk and Greece's creditworthiness below that of Egypt, deepening the debt troubles for two of the weakest countries in the euro zone.

When will this nonsense end?

Dear Portugal

A wonderfully caustic editorial from the Irish Independent today, I reproduce here in full:

Dear Portugal, this is Ireland here. I know we don't know each other very well, though I hear some of our developers are down with you riding out the recession.

They could be there for a while. Anyway, I don't mean to intrude but I've been reading about you in the papers and it strikes me that I might be able to offer you a bit of advice on where you are at and what lies ahead. As the joke now goes, what's the difference between Portugal and Ireland? Five letters and six months.

Anyway, I notice now that you are under pressure to accept a bailout but your politicians are claiming to be determined not to take it. It will, they say, be over their dead bodies. In my experience that means you'll be getting a bailout soon, probably on a Sunday. First let me give you a tip on the nuances of the English language. Given that English is your second language, you may think that the words 'bailout' and 'aid' imply that you will be getting help from our European brethren to get you out of your current difficulties. English is our first language and that's what we thought bailout and aid meant. Allow me to warn you, not only will this bailout, when it is inevit-ably forced on you, not get you out of your current troubles, it will actually prolong your troubles for generations to come.

For this you will be expected to be grateful. If you want to look up the proper Portuguese for bailout, I would suggest you get your English-Portuguese dictionary and look up words like: moneylending, usury, subprime mortgage, rip-off. This will give you a more accurate translation of what will be happening you.

I see also that you are going to change your government in the next couple of months. You will forgive me that I allowed myself a little smile about that. By all means do put a fresh coat of paint over the subsidence cracks in your economy. And by all means enjoy the smell of fresh paint for a while.

We got ourselves a new Government too and it is a nice diversion for a few weeks. What you will find is that the new government will come in amidst a slight euphoria from the people. The new government will have made all kinds of promises during the election campaign about burning bondholders and whatnot and the EU will smile benignly on while all that loose talk goes on.

Then, when your government gets in, they will initially go out to Europe and throw some shapes. You might even win a few sports games against your old enemy, whoever that is, and you may attract visits from foreign dignitaries like the Pope and that. There will be a real feel-good vibe in the air as everyone takes refuge in a bit of delusion for a while.

And enjoy all that while you can, Portugal. Because reality will be waiting to intrude again when all the fun dies down. The upside of it all is that the price of a game of golf has become very competitive here. Hopefully the same happens down there and we look forward to seeing you then.

Love, Ireland.

Sunday Independent

Open Your Wallets (Again)

On budget day here when, laughably, we have had a so-called "budget for growth", the Portuguese Prime Minister Jose Socrates has resigned after the country's parliament rejected an austerity budget:

Britain is facing another multi-billion euro bail-out bill as Portugal followed Ireland into debt crisis when the country's government on Wednesday night lost a confidence vote on austerity measures.

The prospect of a new Portugal crisis and a potential bail-out worth up to £61 billion will overshadow Thursday's EU summit, a meeting aimed at repairing the damage done to the euro by Irish and Greek bailouts last year.

Portugal is about to be bailed out - with our money.

The Euro Problems Still Haven't Gone Away

Whilst attention is focused elsewhere, the euroland problems continue to stack up. Last week almost unnoticed a further 15 billion euros was given to Greece:

The experts were on their third mission to the country prior to releasing the fourth 15b-euro tranche of the 110b-euro bailout loan Greece received last May.

And today:

The European Central Bank is being forced to print money to bolster banks in bailed-out Greece and Ireland, leaving the region’s taxpayers on the hook as the final guarantors of those nations’ debts.

And this bit must really delight German taxpayers:

“What you have here is micro-quantitative easing, or money printing,” said Cathal O’Leary, head of fixed-income sales at NCB Stockbrokers in Dublin. “The banks are issuing unsecured loans to themselves.”

And now the problems with Portugal have resurfaced; it is heading for a double-dip recession and a bailout now looks ever more likely amongst the political blame game (my emphasis):

A solution to the euro debt crisis has to be reached at the European level and does not just depend on Portugal, Treasury Secretary Carlos Pina said on Wednesday, adding that Europe has been dragging its feet. " Portugal is continuing to do its work," Pina told Reuters in an emailed response to questions. "Europe has fallen short."

And the consequences are:

The cost of insuring Portuguese sovereign debt against default rose again Wednesday after an auction of 12-month treasury bills and a €250 million debt buyback earlier in the day. Ten-year Portuguese bond yields were trading at 7.304%, well above the benchmark German bund yield of 3.225%.

Some analysts said the sale was lackluster, noting the cost of funding for the Portuguese was higher than in a previous auction.

The Euro is so obviously doomed, sadly though it is a political project not an economic one, therefore it is vital for the EU that they prop it up at all costs even at the disastrous economic costs to the peoples of Europe. In the words of Dr Richard North:

I have found that there is one constant in life: a bureaucracy is a means by which good men do evil.

Amen to that.

Déjà Vu Again

A new year, but the same old problems. The Euro continues to beg to be put out of its misery:

Portugal is resisting pressure to become the next eurozone nation forced into a massive financial bailout.

Perhaps worryingly for the Portuguese people, the noises out of Lisbon match those Ireland made in the days leading up to its own European Union/International Monetary Fund bailout worth £72bn.

But there is a growing belief that Portugal may also have to climb down in its opposition to a rescue package, which some commentators estimate could reach £66bn.

And guess what?

Under any deal, Britain is committed to making a contribution.

Bailing out Portugal is to save the Euro by trying to protect Spain - whose banks are massively exposed to Portuguese debt. Spain is too big to be bailed out. This is desperation to protect contagion spreading to Spain, which may or may not work. Naturally, during the processes of the euroslime protecting their own interests, the question of Portuguese democracy, and voter's wishes, will trampled on, burnt gleefully and buried six foot under:

It’s believed that Portugal is negotiating a private placement. Their objective is to take some pressure off, rather than rely solely on the market and having to defend her sovereignty in the press.

It simply can't continue like this.

Update: from the Guardian:

"A bailout for Portugal is inevitable – foreigners own 80% of Portuguese debt and they have decided to stop lending to Portugal," said Jonathan Tepper, chief editor at Variant Perception, a research firm in London.

UK Will Bail Out Portugal

Osborne confirms, what we already knew, in the Commons today (my emphasis in the text):

Mr Tobias Ellwood (Bournemouth East) (Con): What will happen if another eurozone country requires a bail-out? Will Britain’s involvement be kept to a minimum?

Mr Osborne: I say this about any future action that we may or may not have to take. On the bilateral loan, I said last week that there were some very specific—I stress the words “very specific”—circumstances that would lead us to support Ireland because of the interconnectedness of our economies. I also said that the European financial stability mechanism, the EU fund, was something that the previous Government had signed up to, and that the UK could not block its use because it operated under qualified majority voting.

...and Spain and Italy and Belgium.

Can we leave yet please?

Yes You Do, No We Don't,

Portugal is now entering the first step of being bailed-out by denying that it needs one:

Portugal insisted this morning that it was under no pressure from its European Union partners to accept a multimillion euro bailout that could prevent the crisis in the eurozone spreading to its neighbour Spain.

After Financial Times Deutschland reported eurozone nations and the European Central Bank were urging Portugal to follow Ireland and capitulate to financial aid, the office of the Portuguese prime minister José Sócrates said it was "totally false" that the country was under such pressure.

Which has done nothing to lessen the markets fears:

LONDON (Dow Jones)--Denials by the Portuguese and Spanish governments that Portugal is under pressure to seek financial aid failed to prevent another sell-off in both countries' sovereign bonds Friday.

The yield premium that investors demand to hold 10-year Portuguese sovereign bonds rather than German bunds rose 12 basis points to 444 basis points, according to Tradeweb.

Spain's 10-year bund spread rose 15 basis points to a fresh euro-era record high of 267 basis points.

The contagion is gathering momentum and spreading:

"[Talk of Portugal being forced to accept aid] all looks like papering over the cracks and will not lead to any confidence in the single currency," Citigroup said in a note. "It seems that factors are lining up now to conspire against the euro. No amount of jawboning from various officials will lessen the chance of contagion spreading."

One wonders how long the EU can keep putting off the inevitable.

Update: Spain are doing the denying bit now:

MADRID (Reuters) - Spain flatly ruled out needing a bailout and said results of extra health checks on its ailing savings banks would be published next spring, as its government and central bank stepped up efforts to calm uneasy investors.

Prime Minister Jose Luis Rodriguez Zapatero said there was "absolutely" no chance Spain would need to seek outside help to manage its finances..

That's "flatly ruled out"...and..."absolutely no chance".

Meanwhile...

...amidst the Irish bail-out news, Portugal's ten-year bonds are still increasing this morning:

Tick-tock, tick-tock

Next Stop Portugal

John Redwood has a good post today on why the Euro was always doomed:

...there isn’t one interest rate that is right for Manchester and Marseilles, nor is there one exchange rate that is right for Lisbon and London. “You cannot have a single economic policy without a single budget”. “There will be endless disagreements about how much European government should spend and where.” “The poorer and richer regions are different. The poorer ones will lose out”. “There is no single political system to take decisions and explain them to electors”.

Unfortunately the EU will cling onto their sacred currency for as long as practically possible, regardless of the economic consequences, but it's obvious where this is all going to end up.

Ireland will be bailed-out despite the reluctance of Irish politicians, such as Ireland's Minister for European Affairs, Dick Roche, to use that term; the pretence is all but over bar the bluffing. All we wait for now is details of the price that Ireland will have to pay for the money. Taoiseach Brian Cowen claims that Ireland's sovereignty is unaffected (was he Heath in another life?), the reality is a little different.

So the situation will return to 'normal' and plenty of spin that the Euro will have been saved. But not quite. Any relief would be short-lived as the focus will then turn to the next-weakest peripheral nation; Portugal, Italy and particularly Spain. And when this happens it's game over for the Euro.