CRASH 2: Guess what? Nobody at the G20 knows where the Big Firepower money is coming from…

Trichet & Merkel…silent so far

….and the Germans aren’t onside, the Asians don’t buy the plan, the IMF is underfunded, Geithner’s assuming the taxpayer will have to cough up again, and Jean-Claude Trichet remains ominously silent.

Slog’s 2010 charge against IMF vindicated

Asia blew the Gobbledygook20 something of a raspberry in overnight trading: Thai shares fell to their lowest level in a year, after Indonesian shares plunged 11% last week. The Thai currency was down 5.2%, Malaysia’s KLCI shed 2.7%, Philippine shares fell 4.2% and Indonesian shares dropped 4.2%. The Nikkei Stock Average lost 1.8% as the Tokyo market caught up (Friday was a bank holiday), and South Korea’s Kospi Composite fell 0.9%. Hong Kong’s Hang Seng Index fell 1.8% to a more than two year low, while China’s Shanghai Composite was down 0.5%.

I was a little surprised to discover that the Asian markets didn’t respond more positively to Internal Rescue overnight. But then after more mature thought, I remembered that generally speaking, the Far Eastern markets are rather more earthbound than ours. (Dow futures are up 10 points this morning). “Participants really don’t know where to look at the moment; the market is continuing to be thrown around by headlines and rumours, with few ever transpiring into actual action,” Bell Potter, market strategist at IG Markets in Sydney told the Wall Street Journal this morning BST.

Hard to fault that analysis really. And in the cold light of a late-Autumn dawn here in Europe, quite a few holes are already appearing in The Big Plan. Biggest hole by far is the one where Angela Merkel used to be. She’s gone back into the attic to worry, as well she might: the G20 Geithner strategy has not gone down well in the Bundesrepublik.

“It is a cliche I know,” opined The Slog’s ultra-reliable German banking source, “But the leveraging idea gaining traction at the IMF conference over the weekend is nothing less than giving a binge of alcohol to an alcoholic. You ask ‘where is the money?’ but anyone who is analysing the proposals can see quite clearly it is just more borrowing. The German people don’t want even more debt. Merkel will struggle to sell the plan we’ve got, let alone this one”.

Wolfgang Schäuble is out there and making this abundantly clear – just in case anyone had any doubts. He told the media yesterday (Sunday) that he was open to the idea of leveraging Europe’s rescue fund, but said that did not necessarily mean the ECB should provide the extra firepower. A split is obviously developing on the issue of ‘where’ this enormous firepower is coming from: other delegates at the Conference averred that only the ECB could ‘scare’ the markets enough. This left me wondering why the EU would want to scare anyone: aren’t we all wearing brown trousers as it is?

Either way, the issue segues neatly into the second problem: the IMF, Christine Lagarde has told the G-men, has nowhere near enough money to be one of the Big Lenders in the Big Plan. For once, she’s right.

Return with me now to July 2010, when The Slog posted a blog stressing that the IMF was woefully underfunded. No other journalist I’m aware of tumbled the numbers to be found at the IMF site; but more importantly, nobody in the sovereign lending and global banking sectors has done anything about the shortfall since then. The plain truth is that the IMF was starved of funds for years by bankers and governments because, rather like the the builders of the Titanic, having lifeboats seemed pointless on a ship that was unsinkable.

At the time, I wrote:

‘There is powerful evidence in the IMF accounts that the lender is not crying wolf, but genuinely pointing out that, in a serious crisis, it would be as much use as a pin thrown at a steamroller.

Think for a second about, say, bailing out little Portugal. It’s debt to gdp ratio at 9% comes to a little under $2 trillion. Let’s say the EU asked the IMF to take up 30% of the slack on getting that in order: say, halving the debt. At $300 billion, that’s the IMF’s 2010 bailout budget gone. (It is already estimated to have lent Greece some $30 billion).

 The IMF’s total resource is $600 billion – which sources suggest it wants to up to $900 billion. Bailing out Spain (even if asked to pick up only 10% of the bust) would zip through the bigger figure. And bear in mind: this is just two probable examples employing very conservative scenarios.’

The scenarios we’re staring at now have become much worse. So neither the IMF nor the ECB have anywhere near enough money to get the show on the road. As I argued yesterday, the ‘magic trick’ of turning 440bn euros of EFSF funding into 2 trillion is a combo of emptying the ECB while borrowing money…..again.

And herein lies the third problem: I have yet to hear the ECB’s boss Jean-Claude Trichet give us the benefit of his wisdom in relation to this ‘let’s stick up the bank’ strategy. The old fox admits that the EU “is at the epicentre of the global crisis”, but as to his specific role in turning the European Central Bank into an overinflated political football, he remains silent. Obviously, he won’t be happy about it: he is a responsible monetary anal retentive who believes (probably rightly) that he is the incorruptible bulwark against insane politicians.

Last Friday, Tim Geithner told the IMF multitudes, “European governments should work alongside the ECB to demonstrate an unequivocal commitment to ensure sovereigns with sound fiscal policies have affordable financing, and to ensure that European banks have recourse to adequate capital and funding to win the full confidence of their depositors and creditors.” So it looks like the Fed Secretary is expecting a hefty chunk of this firepower to come from local Treasuries. If so, I would have to tell him that such an idea is unsaleable in Germany at the moment – and for the foreseeable future.

26 thoughts on “CRASH 2: Guess what? Nobody at the G20 knows where the Big Firepower money is coming from…

  1. I wish all these alleged financial geniuses would understand what Liam Byrne said “Sorry, there is no money left” and get on with the inevitable defaults, haircuts and rescheduling. Only then will anyone be able to move forward.


  2. As I always suspected the whole “leverage” plan is a game of smoke and mirrors. At the end of the day it will mean more borrowing with taxpayers being the guarantor of last resort.

    I wonder what the comparative costs are between going down this endless bailout route -vs- allowing bad banks to go belly up and sovereigns invoking their deposit protection schemes?

    @TRT – any ideas?


  3. These are supposedly intelligent people who seem unable to understand that lending more and more money to countries which are hopelessly run doesn’t solve things, it makes them worse and only defers the final day of accounting. Either that or they don’t care … I don’t really like to think about that too much. Or they are following some hidden agenda from which we, the riff raff, are excluded.

    It is like watching a lemming-like wave hurtling toward the cliff edge and being utterly powerless to deflect it. We – the observers who have managed to fight to the edge and seek higher ground – can observe this and analyse that, point out to each other individual acts of particular stupidity in the masses, but the end result will be the same. What a pity that the principal players will be towards the rear rather than the van when they run out of road.


  4. How does their plan to get from €440 to €2 trillion using “leveraging” actually work? Is it as simple as e-zone sovereigns borrowing more to enable bigger contributions?


  5. They don’t have a clue. The idea of Geithner giving the EU advice is a joke. What ever happened to bankruptcy? Why not just pack it in and get it over with? The agony is getting ridiculous.


  6. This summer we were driving past a nearby house that had just gone on the market. My eight-year-old granddaughter said:
    “Mummy, why don’t you buy that house so that we can live near Gran and Grandad?”
    “I can’t afford it Darling, it costs a lot of money.”
    “Mummy, just write a cheque.”

    A politician in the making, don’t you think?


  7. Which is where it all sort of falls apart isnt it……

    My understanding was that the EFSF would be given E440bn by the EU sovereigns, it would then borrow a further E1500bn to E2000bn from, a conveniently located rich idiot.
    The problem is of course, who would lend money to the rescue fund?
    Germany wont lend money to it, why should Quatar?


  8. These so called leaders of nations are not the dumbos that they portray themselves to be, they know exactly what they are doing, just as Gordon Brown knew exactly what he was doing. Orchestrated chaos!


  9. No one has the money so they will have to print it… good luck with that Germany.

    This last week or so Merkozy have been very quiet indeed, Sarkozy is crapping himself over the French banks and Merkel is terrified that Germany is going to have to pay to save them.

    I guess it was always going to end up like this with Germany on the line for the lions share of bailing out the entire Eurozone, none of the other Euro members are in a position to do it.

    I still can’t see how Merkel is going to get around the German Supreme Court ruling, it was very clear on debt transfers and further bailouts.


  10. Trichet just has to kick the can for another month then it’s ‘didn’t happen on my watch’. Merkel may have to form a Grand Coalition and then be an ex politician come next year. Letr’s hope Sarko goes to live in the hell holes around le periphique where he threatened to Karcher them. Perhaps they can return the favour.


  11. The longer they try to avoid the default by Greece the greater the damage to all of the other Euro members especially Spain and Italy.

    All they have done so far for Greece is lend them more money and drive up the total debt owed, nothing has been resolved by it.


  12. We should have taken the bust at the start instead of allowing the political class to interfere and mismanage what is really a natural occurrence. Their attempts at mitigating the effects have actually worsened the results! We are now stuck in a destructive loop and the sooner we break the chains the less worse off we will be.


  13. “No one has the money so they will have to print it… ”
    That’s been in the back of my mind for some time now…

    “…it was always going to end up like this with Germany on the line for the lions share of bailing out the entire Eurozone”
    True. When the euro was first introduced I saw the gaping whole of Germany losing control of its hitherto successful monetary policy which drove the DM higher and forced German manufacturers to invest heavily in R&D and productivity. It worked.
    The euro and ECB took all that away from the Bundesbank and handed it to a bunch of empire-building EU-crats with totally different objectives who never understood the Latin countries and who saw the euro as a free-ride political gravytrain. And that is what’s happened.
    Now the EU-crats want to hide their shame by bailing them out for their irresponsible profligacy.


  14. Indeed, Tim Geihtner wants the Europeans to do it the American way that is: throw (unlimited & printed) money at the problem, stand back, hope for the best, stick fingers in ears and go ‘la la la’.


  15. Mark
    The big problem is, of Greece is allowed to default down to 60% Debt/GDP, the other weak states will demand the same treatment.
    Germany and France are above 60%…


  16. OK, it looks like the Troika plot envisages the EFSF doing the leveraging. That sounds about right. But a very dangerous gameplan methinks with taxpayers forced to wait in the wings to pick up the tab…


  17. The bottom line is that the Eurozone institutions are going to mount a bailout. Germany will have to choose whether to support it or leave the Euro. Neither choice is palatable for the Germans, who have been in denial about how this situation is resolved.


  18. @james c: For sure, Germany should exit the euro and re-instate a real currency, not the Monoply euro which has been subject to deliberate monetary expansion by the politicised ECB-crats, since its inception.

    The other option is for Greece/Italy/Spain/Portugal to be thrown out of the e-zone for irresponsible profligacy.

    And without Germany supporting the latest heavily trailed rescue plan, it cannot fly. Lagarde & Co can give as many press conferences as they like telling us what they want to do…


  19. Clearly the fact that the UK electorate managed to vote back Labour three times means that on balance they support Dr Brown’s approach. Or they were bamboozled by the grinning Blair and his focus groups. Either way it is not encouraging.


  20. Carrot O’Curse
    Bizarrely, it’s a question of keeping Greece alive until the banks are ready to survive a hurricane of their own creation.
    For they are the Masters of the Universe, and must be saved.



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