There were yawns of boredom across the world of currency and debt management yesterday as Eurocrats lined up to explain why Portugal was different to Ireland, and Spain was not only different to both, but also in much better shape. In all honesty, they needn’t have bothered: none of it washes any more among the market movers who matter.
Interestingly, Angela Merkel – still for many the villain of this piece, although a large part of me likes what she has to say – has dropped much of the upbeat bollocks since last weekend’s Irish bailout. She openly admitted to being “gravely concerned” about the outlook for the Eurozone –a braver and more enlightened response than I’d expected: perhaps she has more reality left in her tank than most politicians in 2010.
Even more telling was the statement made by Spain’s Central Bank chief Miguel Angel Fernandez Ordonez on Tuesday last. He told the media:
“The outlook for a gradual recovery is surrounded by uncertainties….in an environment where financing conditions must remain restrictive, and in which the public and the private sector have a pressing need to pay off huge debt, we can expect the pace of recovery in household consumption to slow versus the first half of the year.”
Coming from a banker, that’s as near as you’ll get to “It’s a fair cop Guv and I’ll come quiet like”. The statement is especially significant given one of the many realities overlooked by even very bright journalists: Eurozone bailout commitments, as things stand today, will not apply after Autumn 2013. After that date, Germany in particular is insisting that any future bond issues must contain burden-sharing provisions between the Sovereign and the lender.
But even in the most optimistic scenarios on offer, Greek and Irish debt ratios will be higher by 2013; so if Berlin’s ‘sharing’ demands bear fruit, these two countries at least will be treated as lepers by the lenders. My own view remains that long before then, the Spanish situation will have become one of crisis proportions – with (I still insist) Italy a wild card, simply because I don’t believe their figures any more than I believed those of the Greeks.
As and when Spain gets to the Irish stage of hitting the wall, two key factors will come into play:
1. Exposure to Spanish debt among EU banks is far higher than that to any other troubled EU Sovereign. There is around €460 billion (£390 billion) of bank assets tied up in Spain. Shoring up the banking system by giving financial aid to Spain on top of the €80-90 billion loan currently being negotiated with Ireland and around €50-75 billion that Portugal would need would easily polish off the €440 billion European Financial Stabilisation Facility set up following the Greek crisis..
2. Forgetting the banking exposure, the cost of bailing it out – a sum probably in excess of a trillion euros – is unaffordable under current arrangements….and unacceptable to Germany. Spain’s economy is bigger than Greece, Ireland and Portugal combined, representing in the region of 12% of the Eurozone’s GDP.
So the European Union will be left with two less than desirable options. The first would be a full fiscal union under which everyone would be severally and separately responsible for all EU Sovereign debt. Not only does that have absolutely no chance of being accepted by member States, it would (a) be contrary to existing European Union treaties, and (b) be almost certainly unconstitutional in the Bundesrepublik.
The second – far more likely option – would be letting member states default. This might well cause a much broader crisis, under which risk spreads would yawn ever wider between EU States. Its effect on the euro’s value would be catastrophic– on paper, exactly what the ‘peripheral’ member countries want – a cheap Euro via which to export. Individual country fiscal positions could however become dire very quickly. And an awful lot of Eurozone banks would be up a very tall gum tree. Once again, the banks turn out to be at the heart of the matter.
The banking exposure gets forgotten far too quickly by commentators on the EU scene. It is the central reason why the recent stress tests were so deliberately obfuscated by German, French and Dutch banks: the fact is, they are up to their necks in Spanish property junk. And protecting their viability is the chief motive behind the 24/7 lying in which every bureaucrat and banker in the region is currently engaged.
Sharp ears among you may have noticed Wee Georgie Osborne rushing to Ireland’s side as things got out of hand last week. This is not Old Etonian philanthropy, but rather a recognition that British banks could very easily be sucked under as the allegedly unsinkable Eurozone heads for the sea bed. RBS and Lloyds (who else would it be?) are hugely exposed to very bad property debts in the Irish Republic: if provisions against bad loans start to soar, both of these taxpayer-saved banks will be revisiting intensive care in short order.
What’s more, we are – it now emerges – quite high up the creditors list when it comes to Spain….as well as Italy, where Barclays in particular face some highly embarrassing losses.
All this gives our Chancellor the tricky tightrope-walk of explaining to a nervous bordering on truculent electorate why we need to stump up for whatever EU bailout schemes are on offer. You can almost hear it now: “Ah yes, well you see…erm, even though we stayed out of the euro, our banks – those fine pillars of respectable prudence – took full advantage of a market opportunity and lent lots of money to swarthy Iberian property developers…and of course, what happened next was completely unforeseen by everyone, especially me.”
If it wanted to, Labour could have a field day with this. But it won’t, because such an avowedly corporatist Party would much rather stir up national Trade Union problems for the Coalition than say anything against its beloved EUSSR. Instead, I suspect the grubby little men and women behind Mr Ed will portray the inevitably worsening UK debt situation as an indictment of The Cuts – rather than what it will really be: yet another dung heap left behind by Trichet’s ECB largesse, and greedy banker bonusing based on targets.
But is the likelihood of Spanish rain that high? Well, Spain needs to refinance around €300 billion of borrowing by 2013 – and a whopping €192 billion in 2011 alone. And there remains that very odd self-fulfilling anxiety Sovereign lenders always display: ‘the interest rates we need to lend money safely to both Portugal and Spain have leapt in recent weeks. So of course we fear that these countries will not be able to stick to planned debt reduction targets, and may need international aid’. Er….yes well, I suppose if you push them into a tunnel, they will get claustrophobic.
One respected financial house pointed out that “this latest wave of the sovereign debt crisis has crippled the eurozone further. We expect at least one more wave in the coming months. It will test the political sustainability of austerity measures, and probably highlight the vulnerability of Spain.”
My own view is that it will render Spain’s financial nakedness public before next Spring. The markets will wear a bailout to Portugal, because of its tiny size in the greater EU scheme of things. They won’t feel that way about a Spanish insolvency. But by then, they will have begun to worry about the fate of at least five European banks.
The obvious conclusion from all this is that without bankers and markets, none of this would be happening.
Hold that thought.