CRASH 2: Merkel orders full sail towards the vortex

The pressure has proved too much for Angela Merkel. Her acceptance of leveraged funding alongside unilateral debt forgiveness represent more nails in the EU’s coffin.

At some indeterminate time last night, eurozone leaders agreed with lenders to Greece a simple quid pro quo: solvency fire-power to make lending safer, in return for a 50% haircut on Greek debt. This morning, the deal was confirmed with the usual delf-importance by those who somehow imagine we should thank them for mortgaging the next half-century. But it isn’t any kind of answer. For one thing, 50% isn’t enough for Greek survival. For another, this changes the game for Italy and Iberia: just as unilateral disarmament was always a mad idea, so too is a UDI forgiveness deal with Greece. The other ClubMeds will now want the same deal. As I’ve been saying for seven months, a global summit on real debt forgiveness across the planet is the only answer in the medium term.

So some form of EFSF leveraging will now be attempted by the EU. Even Merkel has been tempted by the madness, saying yesterday after the Bundestag vote that “the higher risk is justified”. She’s wrong of course, because no risk doomed to failure can ever be justified…..especially when gambling with citizens’ money. And she has volte-faced 180 degrees from three weeks ago, when she flatly rejected the idea of debt forgiveness for Greece…employing precisely the reason I did above. Frau Doktor Merkel has hoodwinked the German people, and when this latest nonsense falls apart, it will signal her Untergang.

In his first official statement since de facto ascendancy to the top ECB job, Mario Draghi  sided with the Central Bank hawks by enthusiastically agreeing to continuation of the junk-bond buying lunacy. Also emerging from the smoke and mirrors of the day before was an unfortunate acronym, the ‘SPIV’, or Special Purpose Investment Vehicle. This too spent some time being heralded as the relief of Mafeking, suggesting as it did that emerging nations like Brazil, India and China would surely have the hots for investment in an imploding EU ruling over a Europe heading for slump. Well, they don’t: China in particular seems confused as to what SPIV is, and why it might be interested in it.

Whatever happens during today and leading up to the weekend, nothing can change the stark reality facing France: it must relieve the pressure on its banks alone. This prospect was made worse by data suggesting that French exposure to Italian debt is almost as big as that to Greek insolvency.

If we imagine now a circle going in a clockwise direction, the inevitability of eurocrash becomes undeniable.

The EFSF will be leveraged, requiring at least some EU (not eurozone, mark you) commitment to further borrowing. But this addresses neither the Italian nor French problems.(It may not even address the IMF issue, on the subject of which Christine Lagarde remains suspiciously silent).

France will need to sell gold if it is to avoid a banking collapse there. Selling the gold will shatter its AAA status, and undermine the leveraged EFSF…which cannot cope with an Italian default. But now that 50% forgiveness is a precedent, Latin Europe and indeed Paris will be expecting the same…even though France, whose access to the EFSF is denied until it has sold other major assets, is in exactly the same position it was a week ago.

And so we return, full circle, to the problem we started with: an EFSF lacking in the firepower to stabilise debt mountains, and give the ClubMeds enough breathing space to recover economically. (That recovery itself is also looking increasingly beyond even Germany, let alone Italy and Iberia).

This is the vicious circle – the Vortex – that the EU cannot escape. And in terms of indebtedness in the West as a whole, most thinking realists now accept the mantra of ‘Today the EU, tomorrow the US’.

Debt-fuelled globalism is itself an even bigger Vortex. Without an acceptance right now that – following a degree of forgiveness – we must adjust our living standards and expectations down until the debts are gone, the entire construct of multinational business will shatter. Unfortunately, the central spine of that capitalist form is the need to consume our way out of recession: but consumption and personal debt reduction are antithetical. And bailouts must, in the end, lead to higher taxes to further depress spending.

In short – and, whether we like it or not, in conclusion – once Western debt has been paid off on sovereign, corporate and personal bases, we need a new form of capitalism in order to move forward. For me, this must be some form of internationally cooperative drive for a higher level of individual State self-sufficiency….not the mercantilist zero-sum game we’ve been playing for the last decade.

That would involve a move away from notional paper banking, and a degree of return to domestic land for food – along with physically manufactured exports for revenue. But I do not see the faintest glimmer of any country even accepting this thesis, let alone planning to institute it.

Output, growth, exported imperialism and material consumption have had their day as measures of success. The new measures will be margin, survival, sweating the State assets, and social stability/contentment.

In the immediate term, however, the next reality to face is a European slump that has barely got into its stride yet….if slumps do actually stride. They should really roll over and have a kip, I suppose. Alarmingly, I’m fairly sure not a single senior europol has  given this a second’s thought as yet. So far, they have fudged, funked and finally failed to provide a brave, workable solution to notional sovereign debt in a poorly constructed Union. So you can imagine how effective they’ll be at re-energising the economy.

Failure to do that will produce another circle increasingly concentric with the fiscal one I described above. That is, firepower requires taxes and borrowing; this reduces consumption, which first halts and then shrinks output….and ability to pay off debt.

Until radical realism takes off, forcing leaders to face facts, this slowmo descent into the vortex of viscous slime will continue, with only pathetically waving hands visible…until they too are still, and then swallowed up. I wish I could be more up about this. But in general, history rewards incompetent cowardice on this level with overthrowal and chaos. I am at a loss to understand why anyone imagines this instance should represent an exception to that rigid rule.

55 thoughts on “CRASH 2: Merkel orders full sail towards the vortex

  1. The headline should read,’EU makes theft legal’.A democratic sovereign state,the original home of democracy,has obtained the permission of other EU governments NOT to have to repay its liabilities in full.So Euroland is no better than Uruguay, Paraguay,Argentina,Mexico,Indonesia,Russia and countless others.And now that it is legal,where will it stop(come in Spain,your Santander is failing to offload its dodgy property loans,and what about Italy).This is a joke, not a triumph.


  2. Can i take things back to basics please? Just because things are extremely difficult for Greece WHY SHOULD THEY BE GIVEN A UNIQUE FINANCIAL ADVANTAGE. I am quite sure that every government in the world would like to write down 50% of its debt. If the Greeks can do it why not us. No im not being flippant I really want to know why not?

    I have read millions of words on this subject and one basic point is stark staringly bleedin obvious. Governments should never ever be allowed to spend money that they they dont raise through taxation. That is not to say that they cant run socialist welfare states. if that is their choice fine, but there is absolutely nothing in sociaslist theory which suggests that welfare should be paid with borrowed money.



  3. JW
    whilst I applaud everything you say here, it will not change anything.

    I say this because the people who are dealing with the problem simply cannot understand the things of which you speak. It is, to put it a little nastily, beyond their comprehension. Their abilities to think are simply do not match yours. They can only think in straight lines, whilst you can see around corners, become aware of the noetic equivalent of the hard shoulder and the field that lies to the side of the road.

    If a university academic can dream up the concept of a neutrino, then you can understand how such meaningless nonsense as a leveraged EFSF has real credibility with these guys. If you persue a concept for long enough using strictly conceptual reasoning, you either end up with nonsense in the infinitessimal or nonsense in the infinite. Either way they are a long way from reality.

    When reality comes knocking on their doors in the form of a friendly private banker wanting their interest to be paid on the notional loan they gave you, then it will hit home. Then they will realize what was illusory and what real. The purest black alchemy.


  4. @Kevin
    your argument is entirely sound. There is no earthly reason for Greece to be treated in this manner. It simply deals with the issue as it is perceived by the politicians. The bankers are hugging themselves laughing at the money they will all take home through this nonsense.

    50% of haircuts for Greece is fine, but does not deal with the bigger problem.

    What is more, there is nothing wrong with a socialist state – Germany and the Netherlands are (or at least until recently) they are to all intensome purposes worker’s paradises. However, the difference is that they have developed these infrastructures carefully and over a long time. Further to that they also have very generous tax breaks for small businesses – in my case amounting to more than €20,000 over the financial year. A carefully structured socialist based economy is actually a very good thing.

    It means that people whose aim and desires in life are limited does not impede their right to a home and a modest income. It also means that as a bus driver or street sweeper, their basic needs are met. I for one am willing to pay for that. But of course, as an entrepreneur, I get the advantages of a country that respects the fact that I am the kind of person that can create a business out of thin air and a good idea.


  5. If there is any likelihood of various BRICs being interested in the European SPIV then it will be down to the atrocious state of the dollar as much as the state of the eurozone.


  6. The can has moved on.
    I also believe that France has secured a good settlement. It will now be able to use the EFSF to pay it’s own banks debts (thanks also Alistair Darwin). Germany and to a lesser extend the UK banks (taxpayers) will now be on the hook. If China becomes involved with France then they should beware pickpockets!


  7. “In short – and, whether we like it or not, in conclusion – once Western debt has been paid off on sovereign, corporate and personal bases, we need a new form of capitalism in order to move forward. For me, this must be some form of internationally cooperative drive for a higher level of individual State self-sufficiency….not the mercantilist zero-sum game we’ve been playing for the last decade.”

    “Output, growth, exported imperialism and material consumption have had their day as measures of success. The new measures will be margin, survival, sweating the State assets, and social stability/contentment.”

    Brilliant! Agree wholeheartedly…
    it gets darkest before dawn, though.


  8. Gemma
    It’s perhaps not beyond their comprehension but more beyond the great majority of Europeans over who’s eyes they are pulling what ever is left

    We had the post yesterday about IQ levels diminishing


  9. At the very least Ireland and Portugal will want the same as Greece have received… they deserve more help as they have actually come close to hitting their targets.

    Italy and Spain are definately cheeky enough to try their luck as well…

    France has already tried its luck and been given a spanking by Merkel.

    Mismanagement and corruption is rewarded yet again…

    Greece GDP at 120% by 2020 how is that a solution… Greece is still bankrupt even with the haircut. That is assuming that the European leaders can force the haircut on investors, I can’t see investors just bending over for them.

    A 50% haircut will ruin most of the Greek pension funds and banks as they are stuffed full of Greek sovereign bonds, it must surely trigger CDS, if not then what use is the insurance anyway.

    Christine Lagarde has been very quiet and Italy is now effectively in Special Administration…

    Unless of course this is just another hot air deal (see July) which will have unravelled by January…


  10. Given that the EU and the euro is a giant socialist construct en route to a USE which represents the fascist dream of every card-carrying member of European Socialism, it’s not difficult to understand why Greece is being allowed a 50% soft-default on its sovereign debt. This is entirely consistent with socialist ideology “we’re all in this together”.
    Greece must not be held responsible for its malfeasance, at any cost.

    ISTM, short/medium term unknowns are:
    – Italy, Spain, Portugal, Ireland will also want to soft-default on their sovereign debts. Why shouldn’t they?
    – Nobody knows what the BRICs will demand in return for contributing to the SPIV subsidiary of EFSF.
    – The banking €100 billion haircut might cause a credit crunch or reduction in lending as they attempt to beef up capital ratios.

    The really really big issue is that this solution cannot work for long unless the EU constructs a new EU Finance Ministry which has total power over fiscal policy of all 17 e-zone members. That is not negotiable…without it, the e-zone will be in another crises because it is clear ClubMed see the e-zone as a socialist gravytrain run by its brothers in Brussels. Barroso has already commented on the need for this new EU expansion. It will spell the end of European democracy as we know it in favour of a new fascist takeover. And all achieved without a single shot being fired!


  11. “a European slump that has barely got into its stride yet …. I’m fairly sure not a single senior europol has given this a second’s thought as yet.”

    Exactly right, they are all wedded to the paradigm, just like Obama, Bernanke, Brown, Cameron, Osbourne, Clegg, Millipeed, Merkel and so on ad finitum that ‘growth’ is and always will be net positive in the medium and long term while recession is a short term hiccup of around a year in response to 10 – 15 year periods of sustained growth. Thus growth will always come to the rescue, it is just a question of hanging on until it does and chucking a few bucketfuls of tax money or a dollop of QE into the economy will help it restart all the quicker. They cling to this like a shipwrecked sailor clings to flotsam certain that a rescue ship will soon turn up. They will not accept any other possibility. There are none so deaf as he who will not hear, nor none so blind as he who will not see, springs to mind.

    Aside from that, we all know the depths of dishonesty politicians descend to, we have Cameron to relentlessly show us after all, but the depths of dishonesty plumbed by Merkel astounds even me.


  12. Kevin

    “but there is absolutely nothing in sociaslist theory which suggests that welfare should be paid with borrowed money.”

    They don’t care where the money comes from, taxes, stolen, misappropriated, or borrowed, as it all the same to them. Mrs T was 100% right when she said that: “They always run out of other peoples money”.

    As John has indicated, the EU is in a death spiral, but what he has not yet pointed out that this will inevitably lead to higher, and higher, and even higher taxes before it finally does the supernova thingy. They are not going to give up – ever.


  13. “…there is nothing wrong with a socialist state”

    That depends.

    On welfare states… they are by definition a socialist construct but even those of us who intensely dislike socialism because of its dishonesty, incompetence and corruption, support the kind of welfare state you describe. Meaning that I have no problem in supporting from taxation those who are unable to support themselves. And in fairness the welfare states in Germany/NL are run resonably well.
    But socialism as practiced usually goes way beyond this. The last century is littered with the corpses of failed socialist states. At the very least in Britain, the socialist Labour Party has always used the welfare state to buy votes and reward people for not contributing to their own existence.
    Much more…


  14. It is interesting to see to whom the haircut applies ( though at 50% this is more of a crew cut than a haircut). First, the ECB is exempt. Secondly, the IMF is exempt. Both institutions demand repayment in full for what they hold at the price that they acquired the debt.
    This leaves the private investors to take the haircut. Of these, while we focus on the French and German banks, the greatest hits will be taken by the Greek banks and Greek Pension funds.
    I cannot wait to see Mr. Pap explain to his voters how their pension funds have taken another crew cut!


  15. “As I’ve been saying for seven months, a global summit on real debt forgiveness across the planet is the only answer in the medium term.”

    Sorry, I’m a newbie to this blog, so maybe this has already been explained.

    Debt forgiveness across the world sounds nice, but how could this be done without further impacting the small savers and people who’ve really worked hard to put money aside for their pensions all these years. These small savers are already being forced to pay for other people’s reckless debts through the deadly combination of inflation and ridiculously low interest rates that ordinary people are being palmed off with by the Moneymen.

    Won’t “debt forgiveness” only be a green light for the banksters to simply pass even more of their losses down to ordinary mortals, before getting back to banking-insanity-as-usual, until they have stripped every last asset?


  16. Several weeks ago, several BRICs offered to stump up more cash to the IMF to aid the bailouts. That was because the current e-zone crises was costing them exports and GDP etc.
    In return, they want seats on higher tables in the IMF. The offer was declined by Geithner and others. But ISTM the new IMF subsidiary (the SPIV) has been created precisely to get round this dilemma: we want their money but we don’t want them on the top table.


  17. Well as I have guessed all along the dumbkoff hausfrau would cave in the end regardless of any legal hurdles in die Fatherland. As Keynes said in a different context ‘ the markets (in this case the EU) can stay irrational longer than we can stay solvent’.


  18. I guess Draghi will surface in due course and amend the Trichet doctrine for the ECB. One day that institution will be very important.


  19. ‘This is entirely consistent with socialist ideology “we’re all in this together”’.

    I seem to remember one of our notionally right wing politicians spouting this nonsense recently. Perhaps he really is a socialist!


  20. If it really is only private investors that get burned I can’t see them rushing to buy any more bonds in the future…

    Unless they are mad…

    Oh dear…


  21. Gavin Hewitt (today)- “Only as a last resort will the banks be able to draw on the EFSF” This is the French get out!

    The EFSF fund is to be expanded, based on the original €440Bn
    The UK contribution was (via Ireland) some €4Bn so it’s likely that a direct contribution of €20Bn is possible.

    The question of Greek pension and bank debts – simples: nationalise them, then they will become EFSF debts.


  22. then turn the EFSF into a SPIV, get the Chinese to invest in the SPIV and et voila the European debt problem becomes a Chinese debt problem.


  23. Thanks Nigel.

    Still don’t see that the whole mess can be quite that simple though. If it were, one would have to start suspecting some darker purpose being hidden in the complex confusion behind the suffering that we’re all being put through.

    Also, even if you accept the figures as given, the debt swap scheme outlined still only seems to apply between European economies, so not looking at the issue from the globalised perspective we’re facing by any means. And where are the banks?

    So I’m still looking for answers on this one …


  24. Sadly William, it’s a joke at our expense! We need to dust down the tumbrels once again and get shot of the lot of them.


  25. Greece.When the penny drops,and the Greek pension funds(not the IMF),take the hit,will it be a rerun of Liverpool,1985,when the local lefties refused to set a budget,or Orange County,California,1994 when a Mr.Citron’s speculative activities brought that county to bankruptcy.The notion that Greece is somehow ‘solved’ is ludicrous.Meantime,note HMG is standing behind the depositors of the big 5,Barclays is not out of the proverbial yet,and granting a 12month call against their overpriced shares looks quite interesting…


  26. would anyone like to argue with me on this point which I believe to be True. Schools brightest and best kids go into economics and science, commerce and banking. The shit stirrers, the average, the ones who study social policy and those without a notable talent for anything other than taking issue with the rules and rights and wrongs. The ones who formed student committees instead of either learning hard or playing sport. The kids we mocked for having a political view while we were having fun. The kids who were ghastly busybodies at school are the ones who have somehow ended up in charge of countries while the truly bright and able are in charge of the worlds businesses. Being told how to act by kids who finally get some pay back for not being invited to the cool parties. Quick question, would you sooner have Branson round for dinner or Millibland?


  27. I hope Kevin won’t object if I restate his second paragraph, as I understood it

    “Governments should not spend money that they they don’t raise through taxation. It is legitimate for governments to provide social welfare services.”

    I think words such as socialist, capitalist and democracy have lost their meaning and are probably best avoided other than as invective slogans.


  28. Nope. ZH is confused. The €100 billion (50%) haircut has never been used to describe ‘a 50% cut in Greek debt’.

    It’s only used to describe the haircut to be taken by private bond holders and that remains at 50%, not 28% as ZH suggests.


  29. Gemma – Merkel a quantum physical chemist, on which she has a written and been cited considerably. And she’s married to a sometimes Planck Institute employed quantum physicist. I’m sure she understands the principles of uncertainty and relativity better than most – but maybe thats problem.

    Luke Johnson of the RSA has suggested the problem with employing particle physicists, mathematicians, aeronautical engineers etc in financial services is that they get bored and start inventing things [that do not and cannot exist]. He goes on to say something like bankers should be well paid, as reward for the boredom they have to endure [measured by the worktime to golftime index]

    Audio is available here


  30. South Korea and Indonesia have said they’re not interested in the Geithner/Legarde SPIV.

    The age of milking the colonies is coming to an end. In my script, Peru says to Spain, “Oi, where’s that mountain of silver you nicked, we want it repatriated please”

    Andrew Forest of Fortescue Metals has told African leaders attending Perth CHOGM that if they don’t sort out their governance issues soon then they’ll have an African Spring with which to contend. Forest is the sort who might start an African Spring,if he can see a quid in it.


  31. I agree with your analysis of how socialists actually operate ” They dont care where the money comes from”. However I am still baffled as to why in theory socialists are not more to the fore in arguing against government borrowing. For a start it is a complete negation of democracy.

    Sadly it is not only parties of the right who borrow money. Look Nixon and Bush. Both bogeymen to the left but both massively expanded the US national debt. There has to be an absolutey massive shift in thinking. Politicians of all hues have to be punished if they borrow money!!


  32. I think you are right. The old terms to describe politics and economics are defunct. Rendered useless by politicians who not to put to fine a point on it ” Have kicked the S**t out of the various systems that they were meant to safeguard. I live in the UK. Words fail me to adequately sum up what it is that we live under. but ultimately there are some more important truths. Whatever it actually is,

    1) We dont like it.
    2) It in no way resembles democracy
    3) It needs to be swept away.


  33. The “dumbkoff hausfrau” with a PhD in quantum physics, was left as lonely shag as on rock (wonderful Aussie expression), she was the least worst hope for radical realism – but she did at least try. Which is more than can be said for rest of the sorry shower who, cheered on by the likes of Cameron, Geithner, Lagarde etc, held the blowtorch to her feet.


  34. Lets not forget the media, They bear responsibility for being too partisan and not shining a light into ALL the shadows & dark spaces in which cowards lurk. They need to channel Jonathan Swift.

    And the NGOs are no better watchdogs, more interested in competing amongst themselves than telling the truth – looking at you Amnesty and Human Rights Watch, amongst others.


  35. “South Korea and Indonesia have said they’re not interested in the Geithner/Legarde SPIV.”

    Well, neither are BRICs.

    “Peru says to Spain, “Oi, where’s that mountain of silver you nicked, we want it repatriated please””

    And as Brazilians say: “Portugal stole our gold and left us wth favelas.”

    Africa? A lost cause IMHO. Time to start over…


  36. “deal was confirmed with the usual delf-importance by those who somehow imagine we should thank them”

    ‘delf’ – sideways swipe at Sarkozy :lol:


  37. Ed, so I can slip him a mickey, Dave & Nick can come on Saturday.

    I don’t much like Branson, but he does me no harm, so he’s not invited.

    See my reply to Gemma’s early JW post re employing “best & brightest” in banking etc.


  38. “I am still baffled as to why in theory socialists are not more to the fore in arguing against government borrowing.”

    Simple. Most socialists are innumerate (Brown certainly was) and unable to manage any economy. But their obsession with building ever more temples to socialism isn’t affected by their lack of skills. That almost always results in taxing/borrowing & spending to satisfy their agendas.
    They don’t care where the money comes from.

    “For a start it is a complete negation of democracy.”

    Although socialists often use the democracy route to get into power, they have little interest in it because “they know best”. Once into power, they often become increasingly authoritarian as we saw under Blair/Brown. Many other socialists bypass the democratic system altogether and simply take over using a coup or revolution.


  39. Ahhh. I assumed they must be clever because theyve trousered the worlds money and instead of being in stocks they get large bonuses. My simplistic view is that the worlds Markets and therefore economy are run by greedy men endeavouring to make enormous pots of cash for themselves by gambling with other peoples money. Or have I missed something


  40. What else else could he be with his “Big Society” line. Does anyone know what that was about, does he still talk about it,

    I got fed up paying for repairs to kicked in windows & walls so i stopped listening to him and reading his drivel,


  41. @Kevin: “Words fail me to adequately sum up what it is that we live under”

    In Britain, that would be an “elected quasi-fascist dictatorship”. Slightly to the Right under the Conservatives and shifted towards Marxism under New/Old Labour.

    You are requested to vote for the dictator you want to govern once every 4-5 years. Then you are required to F*** OFF until the next time.


  42. No mate you’ve not missed anything, but you don’t have to clever to be greedy.

    Luke Johnson’s says that because banking is inherently boring it’s dangerous to employ clever people because, when they get bored they invent things that do not and cannot exist in the real world; whereas unclever people play golf. Basically he’s saying bankers should be rewarded according to their ability to endure boredom, not according to their creativity.


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