Mekon van Rompuy speaks


The ECB’s decision to offer banks unlimited three-year loans and the central bank’s purchase of sovereign bonds has helped grow the EU central bank’s balance sheet to $3.5 trillion. The Federal Reserve’s balance sheet has averaged $2.86 trillion since the end of the central bank’s latest asset purchase program in June. There is a growing feeling in Germany that the time has come to cut its losses.

For those understandably uninterested in the surreal accountancy that is banking, the bigger the balance sheet, the worse things are. Given the relative sizes of US and eurozone gdp, the numbers above and below are astonishing. I wrote briefly on the liabilities towards the end of a Sunday Slogpost, but a look in more detail rewards the investor.

The ECB’s balance sheet is now 30% of eurozone gdp. Imagine what that would mean in terms of the Bank of England’s balance sheet. Mervyn King would have a fit. A lot of the direct exposure of the Central Bank stems from the three-year tender last month at a generous 1% interest, upon which almost every bank in the zone fed until €489 billion of the central bank’s cash had disappeared in 36 hours. This may be stating the bleeding obvious, but what this means is that the ECB is now increasingly responsible for both Sovereign and private bank debt. Central Banks represent the citizen taxpayer: they’re not supposed to bail everyone and everything out.

This morning, Barclays released a staggeringly myopic note to say that ‘while the ECB would be hit for 50 billion euros by a Greek default, the effect of the same in Italy and Spain would be relatively benign’. This is utter bollocks. A year ago, the ECB wasn’t into Athens for anything like 50 billion. But gradually, as the bonds get junkier and the markets don’t want them at any price, Draghi the Italian Stallion will have to step in and hoover up the residue. In doing that, he will pay in euros; this will increase liquidity in the system, but must by definition corrode the currency….and keep on growing the ECB balance sheet.

“Folks keep saying this is nothing like QE,” said The Slog’s trusted New York mole late last night, “but that’s BS. Draghi has given the banks a green light to unload toxic sh*t onto the ECB, and my guess would be that’s exactly what they’ve done. Nobody believes any more that QE is about economic liquidity….it’s about banks dumping their bad bets at the taxpayer’s expense.”

Anyway, I’ve been doing some sums this morning. My back-of-Sunday-Times property section calculation is that if one adds ECB liabilities among ClubMed sovereigns to any collateral insurance stuff in the woodwork – and then does the same for its private banking interventions – that probably adds up to a total investment of around 1.25 trillion euros….which at today’s prices and taking account of currency fluctuations, is worth, oh – roughly, nothing.

In this context, leading Japanese nonsense poet and all-round alien MekonVan Rompuy added a brief moment of light, slapstick relief today. He gave a press conference after meeting Italian ‘Prime Minister’ Mario Monti this morning, in which he called for massive economic stimulation to pull the EU out of its current situation – viz, a vortex accelerating down towards total slump. The all-ruling Mekon did not, however, expand on how the ClubMed member States could be massively stimulated while at the same time being suicidally austere…or indeed what the source of all the money required so to do might be. But he did say this at the end of his address, and I quote it below word for word from the transcript:

“Market players and rating agencies sometimes see our responses as insufficient or incomplete. Yet real progress has been made on reshaping the euro area, whose fundamentals are on average sound”

Greece has been given up for dead by the IMF. The EFSF has not attracted a single external investor. Italy’s borrowing costs are described as ‘unsustainable’. 14 of the 17 eurozone countries have been credit-downgraded. The Athens haircut needs are now over 60%, with no takers. Spain’s entire property banking sector is hanging by a thread. Portugal is living from hand to mouth. France is massively exposed to Greek and Italian debt. Germany’s growth hit the buffers last month. S&P’s last FAQ release accompanying its downgrades described the Merkozy austerity diagnosis as wrong, and the eurozone structure as fatally flawed. EU State insurance liabilities exceed 30 trillion euros. The exposure of the ECB to EU sovereign debt – even without collateral insurance liabilities – is in excess of 700 billion euros. There is a wide strategic chasm between the two founding members of the bloc. It’s fourth biggest economy is in deep discord with both of them. And Hungary is on the verge of bankruptcy.

But it’s alright really, because Herman the Mekon says the fundamentals are on average sound. So let us leave the Belgian bard on his hovering space-platform now, and examine that recurring rumour which just will not go away: Germany’s return to the Mark.

In truth, I’m becoming increasingly convinced – a hint here, a wink there – that Berlin is up to something. But I doubt if what emerges will be a simple euro-exit followed the next day by lots of dusty Deutschmarks back in circulation. Second only to their hyper-inflation OCD is the Germans’ desire to retain their ‘Good European’ image. But the growing influence of Frankfurt and the CDU’s non-Merkelist leadership has convinced me that something will be done.

Far more likely, I fancy, is what some currency wags are increasingly referring to as ‘Mark II’. This would be the sometimes-dubbed ‘Nordeuro’, as part of a spin-relaunched eurozone to be strictly Anglo-Saxon Lutherans only. And no, the French would not be declared honorary Huguenots.

One of the reasons I think this, is the evidence of a flap going on among French diplomats to find out what (if any) internal Berlin-Bankfurt discussions are taking place behind closed doors – the Sarkozy Elysees has been paranoid on this subject for over six weeks now. But the main determinant in favour of a German quasi-defection is the shift in both the balance of Central Bank power, and position of the ‘guarantor of last resort’ spotlight since mid December.

The word coming back from both German bankers and CDUers is that they are intent on persuading the German Chancellor of their increasingly well-grounded fears….and so Germany must somehow avoid being in the existing eurozone when it goes bang in an exceedingly messy manner.

But certainly, at the moment nobody is leaking anything substantive on this front. All of which makes me even more suspicious that something big is being prepared.

The problem with the eurozone – and increasingly with the EU – is, as I’ve blogged before, there simply isn’t enough money to sort it out. And so whatever anyone tries, fails. Or put another way: whatever school of thought is in the ascendancy, their plan will be flawed.

‘ECB’s Tricks Won’t Solve the Crisis’ headlines Der Spiegel today. But the truth is that, be it Merkel’s Wagnerian morality number or Draghi’s let loose the dogs of QE, neither can succeed. The only solution – ever – was controlled lending and debt forgiveness in concert. But as nobody is interested in that one, Europe must continue its descent into that dark place where not even Japanese doggerel can relieve the horror.

I think the chances of German business, politics and banking allowing their Fatherland to wind up in that place are very slim to the point of non-existence. Something will happen. We must simply keep hunting out the signs.