Daily Archives: October 21, 2011
In 1999, the euro became official. A year later, Greece joined up. The Big Shared Illusion was that once countries adopted the euro, they wouldn’t default. They would limit their deficits. Every country would become like Germany, where debt was highly secure. So Greek debt, Irish debt and Spanish debt began to trade as if they were super-safe German or French debt. Countries like Greece that had been considered dicey investments then became overconfident, based on this Big Shared Illusion (BSI). The European Central Bank would take care of inflation, investors thought. And surely no one could then go bankrupt. The Greeks, once forced to pay high interest rates (as high as 18 percent in 1994), could now borrow at low interest. Happy days were here again!
The second stage of folly, based on the BSI, was that the conservative Greek government went on a reckless borrowing spree, and the banks went on a reckless lending spree. Big European banks were delighted to lend Greece money. And, sinking deeply into the BSI — or was it just selective inattention? — more than a few banks eventually began helping the Greeks hide evidence that all was not well. With the evidence kept hidden, more bonds could be sold to more investors, and that meant more commissions. Alice had quite profitably stepped through the looking glass.
But then, as early as 2005, many of these big banks began to wake up — they began to realize that the Greeks wouldn’t be able to pay the money back. But so what, some of them said. It’s called moral hazard: you know your risky behavior is not going to be punished because somebody else is going to have to pay for it. That’s what the banksters counted on in the case of Greece, and accordingly they kept the rivers of money (generated from selling secretly-risky Greek bonds) flowing. They were just making too much money at it, and couldn’t stop themselves — not when they knew they could get off, in the end, with little more than a slap on the wrist, while others would take the real hit for them.
So the Greek government was given the green light to borrow boatloads of money for their Olympics, which cost twice as much as projected. Magician-bankers at Goldman Sachs obligingly helped the Greek government disguise the danger of the debt — we’re talking billions — with clever little financial instruments called derivatives. The public hadn’t a clue what was going on, but who cared? — Goldman was making commissions hand over fist on all these bond and derivatives sales. So, all the southern countries on the euro-teat continued to borrow heavily (by way of these bonds that were being sold like hotcakes with Goldman’s help) — and spend heavily — and for a while these little countries boomed, while all this newly borrowed money was being spent, and then spent again. God bless the multiplier effect, and God bless banks like Goldman Sachs for helping make all this magic happen! .
The sh*t hit the fan when the Greek government changed hands in October 2009. The books were opened to the light of day, and it became obvious to one and all that there was a much bigger deficit than anyone thought. Investors then ran for the hills. Interest rates shot up. In November, just three months before the Greeks became the epicenter of the European economic crisis, the wizards of Wall Street (a.k.a. banksters) were back on the scene in Athens, frantically trying to peddle still more derivatives deals, so that the appearance of the debt would magically vanish. The New York Times summed up the banksters’ role in the crisis this way:
“As in the American subprime crisis and the implosion of the American International Group, financial derivatives played a role in the run-up of Greek debt. Instruments developed by Goldman Sachs, JPMorgan Chase, and a wide range of other banks, enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere.”
In dozens of deals across the Continent, banks provided cash upfront (i.e. loans) in return for government “payments in the future,” with those liabilities then left off the books. Example: For big fat loans (i.e. bonds that were sold to investors), the Greek government traded away such things as the right to collect fees at airports, and the right to collect lottery proceeds (i.e. “payments in the future”) . . for years to come. In other words, Greece traded major sources of future government revenue, for big money NOW. And banksters like Goldman encouraged this foolhardy undertaking because they were making so much money off of keeping the Big Shared Illusion going. And damn the final outcome when the house of cards finally collapsed. Others would pay the price, not banks like Goldman.
But with potentially destructive financial winds gaining hurricane force, it became clear that Greece would need a whole lot of money if investors in their bonds were ever going to get paid back. So the government jumped on the austerity train to nowhere — making draconian cuts in services, pensions and wages, which only increased their deficits. And then they had to ask the EU for more money. Public workers were fired in order to pay the banks their pound of flesh. Then pensions were slashed to pay the banks still more. But there still wasn’t enough money to pay the banks all that they were owed.
If you’re a country that has your own sovereign currency — like the U.S. — then you have some options in such a situation. You can do monetary expansion to head off deflation, for example, and devalue your currency. But once Greece went on the euro, it said good-bye to such options. So it cut, cut, and cut, but is now going bankrupt anyway. The country is mired in falling incomes (that reduce consumer spending, thereby leading to layoffs and ever lower average incomes) and is also mired in rising deficits, and is therefore sinking ever further into what might be called the Herbert Hoover death spiral.
Meanwhile, members of the EU are flipping out. Contributions to the bailout agreed to in July . . are supposed to be proportional to a country’s economic status, and thus the Germans have the biggest chunk to fork over. But most Germans are not keen on the notion of doing this just so that the Greek and French banks can get paid. Hey, they’re thinking, wouldn’t it be cheaper to recapitalize our own banks directly?
The French are really flipping out, because after the Greek banks, their banks ended up holding the biggest hordes of Greek debt (i.e. bonds). So they’re worried about their credit rating once it is widely realized that the bonds they are holding are essentially “toxic waste” that’s worth maybe half of its nominal value, if that.
So the bailout decision has been postponed until mid-November.
The realization is dawning that this sh*tstorm is too big, and that the Greeks can’t fix themselves. So they may have to go bust. And if Greece goes bust, that means the Greek debt will be written down, way down, to maybe half its initial value, or less. Which means the Greeks would then only owe half the money they currently owe to the banks and other bond holders. Thus all banks and other investors in these junk bonds will take it on the chin. Hard. And because these banks were in crappy shape anyway (despite their phony stress tests), the possibility of cascading bank defaults arises.
Thus the proposal to build a firewall around Greece, so that if it does go bust, everybody else will be protected. (Good luck with that.) And then wait “til the same thing happens in Portugal, Spain, and maybe Italy.
In a nutshell, Europe is in the process of deflating and collapsing, in order to protect banksters.
Sadly, this doesn’t have to happen. The big banks could be taken over by the government, recapitalized, and their management fired — FDR-style and S&L style. Admittedly, this is unthinkable in the world of bank-centric, neoliberal economics, in which the banks essentially own the governments. On the other hand, the anti-bank constituencies, on both the left and the right, are much bigger now than they were when the financial crisis began, and with the Occupy Wall Street movement spreading around the world by leaps and bounds, the banksters might be taken down after all. So, will the banksters prevail, or will their victims, who are building their forces at warp speed?
In a way, the Greek crisis is a chance to do things right: take the big banks into receivership, reorganize them, let their investors take a major haircut, and then sell them back into the private sector once their toxic assets are sold off. But that proly ain’t gonna happen. Therefore, because there’s not enough money in the EU for a bailout, the International Monetary Fund will likely have to step in. And guess who’s the major member of the IMF? The United States! That’s right, there will be smoke, and there will be mirrors, but there will be no one warning the American taxpayer to “Get ready to hand over some more money to the banksters.” Yet that’s what’s likely to happen: The bailout will come from the United States — even though right now Treasury Secretary Geithner is denying it.
What you have just read is my interpretation and synopsis of an article written by Lynn Parramore at Alternet.
- Greece’s Situation (by Daniel Jianu in Athens) (deindc.wordpress.com)
- EU Officials Said to See Risks Amid Call for Talks on Debt Swap (businessweek.com)
- Greek’s 2nd rescue deal not enough, creditors say (usatoday.com)
- Understanding the European debt crisis (theglobeandmail.com)
By Harald Uhlig
Oct. 21 (Bloomberg) — The euro area is burning and policy makers seem increasingly powerless to douse the flames. Meanwhile, we can only stand by and watch this nerve-wracking spectacle.
Yet the situation may not be utterly hopeless. In the last month or so, researchers have floated proposals for the creation of synthetic euro bonds that may offer a way out. The idea rests on three principles: No cross-subsidization between countries; safety; and the replacement of risky sovereign debt by synthetic bonds in European Central Bank repurchases.
I know what you are thinking: Are these people out of their minds? Collateralized debt obligations? Synthetic securities? That is what got us into this mess in the first place.
Let’s take a closer look. The proposals all start with some version of an open-ended mutual fund that would hold euro-area bonds. Ideally, the fund would hold these assets in proportion to the gross domestic product of each member country. It would then issue certificates that would be fully backed by these bonds. If there is a partial or full default on one of the securities (Greek 10-year bonds, say), then the mutual-fund certificates would lose some value.
In the case of a small country or a partial default, the losses would be small. So, the certificates would be reasonably safe.
The most important aspect, however, is that there would no mutual bailout guarantees, no cross-subsidization between countries and no need for high-level political brinkmanship. This is the core of the proposal I put forth with my colleagues Thorsten Beck and Wolf Wagner, of Tilburg University in the Netherlands.
We recognize that many people will say that reasonably safe isn’t safe enough when it comes to synthetic securities. We believe they could be made safer. Markus Brunnermeier and his fellow members of the Euro-nomics group propose to divide the mutual-fund certificates into tranches. The junior tranche would be hit first in case of a default. The senior tranche would be most protected and could be called “European safe bonds” or “ESBies.” Both tranches would be traded on markets.
This would slice a slightly risky investment into several parts, one of which is safe. It would be an important feature if the ECB can’t be persuaded to use the raw mutual-fund certificates directly for repurchasing transactions, or if the original certificates are still considered too risky on bank balance sheets.
The biggest disadvantage of this idea is that it is too reminiscent of the infamous alchemy of 2008. I think it can work if properly implemented.
Another proposal by two Italian economists, Angelo Baglioni and Umberto Cherubini would create the original mutual fund, but it would only buy senior debt from governments, which would be required to post cash collateral. That is less appealing because it would require too much political maneuvering, would too easily allow cross-subsidization, and would entail restructuring of current government debt to create securities of appropriate seniority.
But the main point is this: It would be feasible to fine- tune any proposal to ease particular concerns of participants regarding seniority and safety, as long as the three principles I outlined above are obeyed.
The last of the three principles may be the most critical: These certificates must replace risky sovereign debt in ECB repurchasing transactions. One objection to this is that there is no particular reason now, for, say, a Greek bank to hold Greek debt or for a Spanish bank to hold Spanish debt, when they could all hold much safer German bonds.
‘Hold to Maturity’
The banks that can still afford to mark their sovereign debt to market, rather than “hold to maturity” and pretend all is well, can do this now. They can ensure their safety by selling the debt of Portugal, Ireland, Italy, Greece and Spain, and buying German bonds.
The trouble with that scenario is that if all banks were to act this way, the prices of those bonds might plummet. That would mean far deeper trouble for Portugal, Ireland, Italy, Greece and Spain the next time they try to issue new debt. It would cause problems for the banks, too, as they would get even less than what they currently think the bonds are worth.
The ECB has danced around this issue by repurchasing risky sovereign debt, buying it outright in the open market, supporting these prices through intervention, and trying to unwind again. The ECB is ultimately backed by the euro area’s taxpayers, who either get more inflation or a depreciation of their currency, if things turn south.
In addition, the central bank’s actions have had the unintended effect of encouraging private banks to hold the risky assets, rather than discouraging them from doing so. This makes sense: These bonds get higher returns, are still usable as collateral with the ECB, and are implicitly guaranteed by government bailouts if things go wrong. The real loser is the taxpayer.
The mutual-fund construction removes much of this moral hazard. It can buy a sizeable fraction of the risky debt, taking it off the books of the ECB and the commercial banks. Yes, it may still need to buy German, Dutch and Finnish bonds on the market, but the banks, in turn, would buy these certificates. And, importantly, the ECB uses the mutual-fund certificates or their ESB-safe versions for its repo- and open-market transactions, while gradually phasing out its support of individual risky sovereign debt.
Who can create these certificates? A savvy market participant could probably pull this off in a few days. But it would be better to have a public institution do it instead. Competition among several such funds may even be better, with the ECB deciding which ones to accept and which ones to phase out. In any case, this can be done quickly, if decision makers in government and the financial-market institutions can be persuaded to act.
This isn’t a glamorous, magic solution. Nor is it a sexy proposal for politicians to sell in speeches. This is a simple step forward that wouldn’t cost much, but is easy and effective. Most of all, it is what the euro area needs right now.
(Harald Uhlig is chairman of the economics department at the University of Chicago and a contributor to Business Class. The opinions expressed are his own.)
- The Eurozone Crisis For Dummies (businessinsider.com)
- Franco-German deadlock over ECB’s role in rescue fund (jhaines6.wordpress.com)
- Italy Picks Surprise Central Bank Chief (online.wsj.com)
- EU Said to Consider Wielding $1.3 Trillion to Break Impasse (businessweek.com)
Helix Energy Solutions Group is talking to US officials about providing a capping stack to Repsol to respond to any blowout and spill from its deepwater well off Cuba‘s coast, the company confirmed Friday.
Helix would have to secure special licenses from the Commerce Department to export technology to Cuba as well as permission from the Treasury Department for its personnel to travel to Cuban waters to assist in responding to a blowout.
While the company would not specifically say it had applied for those licenses, spokesman Cameron Wallace did say that Helix was “currently engaged with relevant US regulatory agencies regarding the possibility of providing spill containment solutions for use in Cuban waters. The ultimate scope of services to be offered is still under consideration, and no firm commitments have yet been made,” Wallace said.
The Commerce Department’s Bureau of Industry and Security has already issued licenses for the use of some equipment, including booms and skimmers, by US companies in Cuban waters, Michael Bromwich, director of the Bureau of Safety and Environmental Enforcement told a Senate committee on Tuesday.
Bromwich told the Senate Energy and Natural Resources Committee that the Treasury and Commerce departments are reviewing applications for licenses to provide a subsea well containment system, remotely operated vehicles and intervention vessels in case of a massive blowout and spill.
Helix already owns a deepwater capping stack, one of two that are part of the Helix Well Containment Group, a consortium of companies drilling in the US Gulf of Mexico. The two stacks, one of which is owned by HWCG, are rated to a depth of 10,000 feet and are staged for use by any of the member companies in case of a major oil spill.
Wallace said Helix would build a third capping stack, designed to meet the specific parameters of Repsol’s Cuban well, if it secures the necessary permissions.
“The goal of the operation is to protect the nation’s coastlines,” Wallace said. “We need to be able to act in the event that our coasts are threatened and this is one means of doing that.”
While the capping stack would initially be designed and built for the Repsol well, it would be available for other projects in the future, Wallace said.
- UK: Well Enhancer Helps in Testing of Well Cap Deployment (mb50.wordpress.com)
- USA: HWCG Chooses Sonardyne Acoustics for New GoM Well Containment Response System (mb50.wordpress.com)
- Chinese-made drilling rig to be in Cuba by year’s end (mb50.wordpress.com)
- Would U.S. Export Laws Hinder Efforts To Mitigate Cuban Oil Spills? (mb50.wordpress.com)
- U.S. Legislators Want Repsol to Leave Cuba (mb50.wordpress.com)
- Want to drill in Cuban waters ? (uwtreasures.wordpress.com)