The Slog’s Bankfurt ‘Maulwurf’ insisted late yesterday afternoon EST that “The money is pulling out of Europe so fast now, the ECB will have to act within days, or we will be cut off like a mediaeval plague village. The eurozone has endemic Black Death, and nobody beyond our borders wants to catch it.”
Surfing across a variety of columns and new items this morning, it’s hard to not to accept his opinion. Polish Foreign Minister Radoslaw Sikorski made a dramatic appeal to Germany in Berlin yesterday, calling for more leadership in the euro zone crisis, and insisting “You know full well that nobody else can do it”. On Sunday the world’s greatest europhile Wolfgang Munchau talked of liquidity in the EU ‘grinding to a halt’, and yesterday evening Ambrose Evans-Pritchard at the Telegraph =gave some terrifying figures in the same vein.
But otherwise, in the first chance I’ve had in ten days to pump the Frankfurt mole about the developing ‘zero bank haircut’ plan, the man was not for pumping. Some of what he had to say, however, was quite intriguing:
“I think there has been some shift in opinion in Germany, that it is time for Berlin to show some leadership. But the German public are being kept in the dark about much of this. If they knew how much commitment Angela Merkel is drifting towards right now, the situation there would be very different. [Finance Minister] Schauble is always one step ahead of the media….nobody can keep up – not even the Chancellor at times.”
Where, I asked, did he stand now?
“Where I have since late 2010 – we should leave the eurozone and move to another arrangement. Had we done so earlier, the markets would not now be able to hound us as they do. It is utterly ridiculous that Germany is being treated as if she had a pressing debt problem, and it is all down to the Merkel Government’s indecision.”
But is he representative of German banking?
“I know [Jens] Weidmann [at the German Bundesbank] is fully behind my viewpoint that no more debt should be bought by either our Central Bank or the ECB. I know of many people in senior positions in private banking who remain wary of what Merkel will end up doing. If we knew what this will be, mind you, it would be helpful. Schauble remains an unknown, but he is one for the big idea. This has many professionals deeply concerned in Germany.”
And the ‘zero bank haircut’ proposition?
“I can’t comment about that. What I can tell you is that this [ESM/EFSF Summit] session over the next two days is yet another waste of time. What other ideas are under the table, well, it wouldn’t be constructive to say right now”.
The Slog’s Maulwurf is, at the end of the day, a banker. But first and foremost he is a eurosceptic who thinks Germany should cut her losses. My own view – firming up as time goes on – is that the Summitry is at least partly designed to muddy the waters in relation to the Big Idea originally hatched by France’s Sorbonniers.
For those late into the game, the plan is ingenious – but very bad for EU taxpayers. Basically, if the banks agree to strict new eurobanking rules, higher minimal capital defences, (and importantly, call off the markets) the eurozone authorities will forgive ClubMed debt, and pay the banks back in lieu.
Now this ‘payback’ monetisation cannot be anywhere near fully achieved via the EFSF as it stands. Despite the grandiose claims being made at the Summit this morning, nobody wants to invest in it via the Spiv – not even the G20. The leveraging of the EFSF remains a fantasy. Equally, it cannot involve the ECB’s resources, because such would be way beyond its legal remit. Also it cannot come from the IMF, because the Fund’s articles do not allow it to ‘forgive’ debt. It can write off debt as 100% gone – but it has never had to do this in over 65 years.
This leaves only three sources: taxes on EU citizens, such monies as do wind up in the EFSF, and printing money.
All are possible, although the last is highly unlikely. Further, none of it is at all palatable to Angela Merkel. But further plans are developing (via Brussels, Paris and Wolfgang Schauble) to save her face by obfuscation of what’s really happening….what I referred to earlier as muddying the waters.
I understand that the following proposal has been prepared for private consideration today, and possible public airing tomorrow:
1. As further tax income-funded bailouts are politically unacceptable, the IMF will pile in with $500bn of ClubMed ‘bailout’ – widely rumoured in the mainstream press yesterday as earmarked for Italy, although whether it really is or not remains uncertain. The IMF’s funds (and all boosts) are taxpayer funded, but this will be rapidly skipped over….and probably ignored by the ignorant.
2. A ‘leveraged’ EFSF will then be used to back up the ‘Big Deal’ between the lenders and the eurozone. There is roughly $500bn in it at the moment: another, say, $350bn would be raised via a series of stealth taxes across the EU as a whole.
Although $850bn wouldn’t be enough to allow the banks a zero haircut, it would be if the following happened:
(a) Greece, Portugal and Ireland’s debts were reduced rather than completely forgiven; and
(b) The IMF’s $500bn input was positioned as being all for Italy, but then got partially siphoned off to buy up the remaining eurobank bad debt.
This is a further development of the ‘Big Idea’ reported by The Slog yesterday, but in principle it remains the same: partial forgiveness of sovereign debt, partial stinging of the citizen (again) and total forgiveness of banking recklessness (as always).
There are – as most technicians will recognise – some highly illegal, devious, and downright misleading elements in this package. But it wouldn’t be the first time that desperate EU, banking and national authorities had done such a thing in the last fifteen months. Perhaps it will be impossible for Schauble and friends to push it through. Perhaps the Bankfurt mole’s view will prevail.
As Bloomberg reports this afternoon GMT, Simon Derrick, head of currency research at Bank of New York Mellon in London, saw an ending in which Berlin voluntarily quits the euro in order to protect the credibility of its own sovereign debt. A revived German mark would rapidly increase in value, but in a note to Mellon clients, Derrick argued that German manufacturers had coped with a strong currency in the past. Berlin might find it more cost-effective to rescue its domestic lenders than to bail out the rest of the euro zone, he said. The Slog’s Frankfurt Maulwurf would agree 100%…..as would most German voters.