First is the Spanish Design: Now we ALL know that Spain is suffering the effects of a property boom downslide and of course the Spanish banks suffer bad debts from this. Estimates on the amount of bad debt the Spanish banks hold differ widely but the first hints are given by the Bankia fiasco. Two weeks ago Bankia only needed €4.5bn of emergency funding. That was when I read it was 'nationalised'. Now however it seems it needs €23.5bn (additional €19bn). How on earth this 'hole' was 'overlooked' Spanish taxpayers surely have a right know. Well the Spanish 'contingency fund', the FROB, only has €4.4bn so where to find the other €19bn for Bankia? (let alone the banks with bad debt and the regions where Catalonia has €13m debt). Not from the open market as Spanish bonds are nearing 6.5% on 10 year gilts. So a bandage is needed; a 'bailout'.
The Spanish Prime Minister however rejects a bailout;“There will be no rescue of the Spanish banks.” (He means 'external rescue').Instead he proposes firstly a 'regional bond' so that all the endebted regions can, as it were pool the debts. Ok... but who is going to buy these 'regional bonds'? The markets don't trust the soveriegn; selling ANY Spanish debt is in any case a non starter until we have absolute clarity over how bad the bank situation is.
For the bank problem a 'cunning scheme' is proposed to avoid the dreaded bailout/external rescue which cannot be seen to happen politicaly. This is the issue of Spanish treasury bonds (for €19bn?) which are then 'swapped' with the banks for their bad debt. So the insolvent Bankia gets an IOU from the (fast becoming insolvent) Government which in theory it can then cash in at the ECB. But writing a cheque and getting it cashed are two very different matters. Firstly this would be a breach of ECB rules as it would be lending to a Government via one intermediary. Secondly even during it's LTRO 'splurge' the ECB demanded collateral and charged 1%. What has Bankia to offer? An IOU that devalues as the Spanish Government writes more IOUs for other bad banks... If the ECB 'honours this cheque' so to speak it is implicitly guaranteeing any cheque the Spanish Government may write. This is not about to happen. So much for 'Spanish bandages'.
The next one is the a German Design.b; the grandly named 'European Redemption Pact': I give it a 'b' because Mrs M has apparently already said "no" to this design. Under this plan all Euroland debts over 60% of GDP get pooled into one enourmous 'bad debt lake' amounting to €2.326 trillion. Each Euroland country would pledge contributions to reduce the 'debt lake' over 20 years. All debts under 60% GDP remain sovereign and presumably this is a 'one off' offer. So in the intervening 20 years until the debt lake (or 'sinking fund' in financial jargon) is syphoned up who stands as guarantor? I mean suppose you can't pay up? "The assets could be taken from the country’s currency and gold reserves. The collateral nominated would only be used in the event that a country does not meet its payment obligations" says the Redemption Pact/Bandage. Each country pledges 20% as 'collateral'... Now HOLD ON....
Firstly this is dangerous democraticly: The whole EZ would be pledge, nigh on to the point of death, to repayments for 20 years minimum; austerity for all as a rule no matter what the people vote? Then suppose one country does default - what then? A Greece in the future, under this plan, loses everything and has no option but default. What happens to an errant debtor that can't pay? Suppose a future Greek case country in this scheme repudiated all it's debts, refused to hand over the gold and currency in it's banks? Tanks? Shunned forever more?
Nor does this 'German bandage' suggest any way that debts that are due in the short term can be covered by the 'bad debt lake'. If the lake holds ONLY short term debts that countries cannot afford to pay back or would rather 'share' in the lake the banks of the lake may well burst. What happens if the lake 'floods'?
Mostly and again and again I find myself saying this: It does NOT solve the problem. The trade imbalance continues as does the productivity divergence. It buys times certainly and maybe 20 years is sufficient to coerce the people of Europe into an unwilling political union but I am not about to change my mind. I have to say though the sheer title of 'European Redemption Pact' makes me want to hang an 'too bent banana' on it.
The third is the EU Design: This concerns banks mostly but in essence every EU (not euroland) country has to set up a 'resolution fund' that would raise money from it's banks 'equivalent of 1 percent of covered bank deposits, using levies on banks or other means.'They get 10yrs to do this starting from 2014. Each 'National Resolution Fund' can then borrow from other nations 'Resolution Funds' under a 'European System of Financing Arrangements'. Various other safeguards toward ensuring 'good banking' are written in but essentianly EU run inter bank European wide lending scheme by 2024.
Well this begs the question what do they do until then? Unless the Comission hasn't noticed the roof is falling in over their heads as ponder dreamworlds where everything goes just fine and according to plan. Secondly doesn't 'Target 2' cover this already? Under Target 2 payments:
A Greek importer, for example, might place an order with a German company. Payments to and from the accounts of the buyer and seller are channeled via central banks, so the German exporter's bank gets a credit with the Bundesbank, which in turn has a claim on the ECB. The Greek importer's bank owes its local central bank, leaving the Bank of Greece with a debit at the ECB.
Now the banks get the money owed under 'Target 2' (though through too many hands). If a person withdraws money from a Greek banks and puts it in a German bank the 'Target 2' still applies so... Well the problem is in the 'claim'; the claim is only 'called in'. The Budesbank has €644bn+ 'claims' on Italian and Spanish banks via the ECB. So the scheme is essentialy about bailing out bad banks. Three problems with this: a. Doesn't this require a standardisation of banking regulation? A single regulatoratory authority? One would think so but this may have escaped notice so far: b. So you want us to prop up MORE bad banks? Did they realise this where we started after Lehmans? There is only so much of this the public will wear. Thirdly this amounts to a pan EU 'bank tax' starting in 2014. The banks are unstable enough and credit is hard to come by for the heralded 'growth plan'. Is taxing Greek banks (assuming they are within the EU in 2014) a wise policy for producing stimulus?
None of these plans have yet been 'approved' thank God. The 'German Design' is essentialy a way of bypassing the German Constitution, which in itself should be sufficient pause for the thought but it would lower borrowing for the weaker members as German borrowing rates are over 5% lower than Spains at present. Essentialy German rates would increase a little and others decrease, until someone defaulted; then we are back where we started but worse for the defaulter. The 'Spanish Design' is of course a back door 'bank trick' that would essiantialy involve the ECB supporting the debts of Spanish Government which it is prohibited to do. Clever 'trick' but not likely to fool investors any longer. The 'EU Comission Design' may have been fine 10 years ago if a single regulatorator had also been put in place but now amounts to castles in the sand with an incoming tide.
Looking on the Brighter Side
Cos I's a cheeful type mostly I shall introduce 'remedies' to the problems I discuss.
It still staggers my belief that 2 weeks ago Bankia needed €4.5bn and now needs another €19bn. I mean seriously how do you get your sums that badly wrong? And we pay you to look after our money? I therefore propose that the Spanish vote here for a person who they wish to 'count' (nudge nudge wink wink) the wages of Bankia's Chief Exective and his Board of Directors.
I further propose a European Carrot Tax. All European debts MUST be transferred into CARROTS within 10 years: All Banks shall cover their Governments and can redeem their carrots from the European Stability Carrot Fund. All accumulated 'bad carrots' will be dumped on Brussels where they can rot.The resulting European Compost Fund will mature in 10 years and be sold on the open market to fund the 'new carrot'.