There will be no haircuts in the hubris zone
As The Slog predicted throughout last week, this one’s Big Deal is going to involve letting the lenders off most of the hooks…however that might be disguised. This site’s endlessly identified jigsaw pieces are now falling more or less into place.
On Thursday in Toulon, Nicolas Sarkozy pledged that, once this crisis is over, no bondholder will ever again lose money in the eurozone. It wasn’t widely reported like that, but read the transcript – it is quite clearly what the bloke said: no more defaults – ergo, no more haircuts….no insurance backwash in the US, no banks ruined. Sorted.
Friday’s euro central-bank cash injection has given Lagarde holding money to stop Italy and Spain collapsing. And now – late Sunday evening EST – German diplomats are gradually leaking out the first elements of the Paris-Brussels-Schauble plan.
Reuters is first out of the blocks in the early hours GMT, quoting four (4) sources saying Germany will remove the overt haircut-compulsion wording drafted for the permanent rescue mechanism (the ESM, due to start in 2013). This effectively says to future eurozone bondholding lenders, “Fear not, you’re almost guaranteed not to lose your shirts”. The imputation in the briefings was also very clearly that, with the 17 newly bound ezone members all fiscally subservient to Brussels, a sovereign guarantor of last resort is not far away now.
The markets will make their own minds up about that. As Reuters puts it, ‘The argument being deployed is that if iron-clad fiscal rules are adopted by the 17 euro zone members, the threat of default should be negligible and so, therefore, should the threat to bondholders.’
If any of The Slog’s German fans are reading this, feel free to create awareness of it in your blogosphere: my informed guess is that this represents about the last thing Germany’s voters would want….if they realised this was what they were going to get…ie, the drift towards a central Sovereign guarantor. (In case you’re wondering by the way, the lenders still haven’t agreed to or delivered on the much-vaunted Greek-debt haircut).
I would guess that the next stage of this so far anally choreographed run-in to next Friday’s Salavation Fest will be a statement from ECB head Mario Draghi. National eurozone central banks having paved the way for laundering bailouts through the IMF, Signor Draghi will now observe that, as the Merkozy is clearly fulfilling his call for “an immediate compact” for fiscal unity, he can in turn relax the controls on ECB bond-buying, and coordination with the IMF. Et voila – we have a loaded bazooka.
But there are many ways in which the German-led waltz could rapidly turn into a drunken hokey-cokey. All observers should bear in mind that:
1. An as yet incalculable proportion of the German banking community will be very pissed off….as will the senior CDU debt hawks duped by Das MerkeSchauble.
2. An enormous can of highly inflammable and unstable liquid explosive would be kicked down the road if the Schauble plan succeeds. The problem – debt dependency – is about to get much bigger.
3. You and I would indirectly pay for the lenders’ haircuts.
4. Vast numbers of imodium-chewing lenders and insurers on Wall Street could well be celebrating by next weekend….or catatonic with fear if there’s a fudge/an event/ a default.
5. Prepare, nevertheless, for a major spike in equities on this first news…building if the week progresses without ‘an event’. Do yourself a favour unless you’re an MoU: stay out of it.
6. From next week onwards – if the plan reaches fruition – the UK would be effectively shut out of all serious debate on the nature, fiscal management and economy of the EU. Executive power will now pass de facto to the unelected Brussels body demanding total and final say on all the spending plans of eurozone countries. The Conservative Party will spiral into a major battle about whether we should be in or out of the Union as a whole.
7. Keep a sharp eye on any and all evidence of funny-money being siphoned into French banking majors. The orchestrators of this ezone/markets denouement will do whatever it takes now to try and ensure there are no bank collapses prior to Friday’s euphoria.
8. Don’t rule out these three wild cards: an attack by markets concerned that the degree of fiscal union winds up being too loose; and/or a rearguard action by German sceptics to wrestle Das MerkeSchauble to the ground; and/or a French AAA downgrade from one of the credit agencies.
9. Bear in mind the pressure on Sarkozy. It’s doubtful he can politically afford to subjugate France to Brussels overseers. But it’s doubtful if financially he can afford not to.
10. It is not inconceivable that the UK’s dirty-tricks axis might employ switch-gear muscle during the week in order to render bond-yield spikes critical – in, say, Spain…which is now, like Portugal, running on empty.
Stay tuned.
The Slog 