Mme Lagarde points to confirm location of thinking equipment

There’s a remarkable piece in the FT this morning – the gist of which is that Christine Lagarde is causing every which way kind of panic and confusion within the Troika. This gets more and more interesting.

Unusually for me, I posted very early this morning (at 5.30 am, having been woken by the US at 4.10) and opined as follows:

‘….while Mario Draghi clearly knows what he’s doing, the disagreement I highlighted yesterday between the Troika members about eurobonds, ESM firepower and ECB liquidity-pumping remain as serious as ever. (And as always, at least 70% of the proposed ‘funds’ to tackle the problem are Regler-Lagarde fantasies).’

The phone-call was to tell me that Lagarde is not ‘in the loop’ as regards calling the lenders’ bluff…or at the very least, doesn’t want to be in it: perhaps ‘outside the tent’ might have been nearer to what the source was saying. But he did confirm that “the Troika is all over the place now, and the lenders are genuinely confused”. This source is financial – a heavy-hitter. You never know what the motive might be. I now think I owe the bloke an apology: I think he was right, and I think I know why.

You have to pay attention for this next bit – it’s complicated.

According to the FT, Lagarde is ‘pressing the European Central Bank to take a hit on its €40bn in Greek bond holdings’. In the middle of last week, the ECB had taken a decision to accept a bigger hit on its Greek bonds than the more hawkish private lenders. Now Lagarde wants it to take an even bigger one. This being our direct taxpayers’ money (as opposed to IMF money) the French boss of the Fund is more than happy to press the matter. Draghi, by contrast, is furious.

The problem is that Lagarde isn’t in the loop of the EU plan to flex some muscles against the markets….she too wants the lenders to take a bigger hit. What she doesn’t want is any of this to cost the IMF too much more of its money: and she sure as hell doesn’t want the Greeks to default. For while the IMF being bad-debted for the first time in its history could be seen as entirely predictable (having hired Christine as MD) the lady herself isn’t up for it: ‘not on my watch’ and all that. Hence the frantic speeches being stepped up of late about more firepower, keeping both the ESM and the EFSF, bigger contributions from other eurozone sovereigns, and so forth.

A slightly bewildered Charles Dallara said yesterday he looked to “all parties to honour the commitments made”, but the central problem remains that the IMF has chosen now – of all times – to decide that the Greek economy has got so much worse, the bondholders cannot expect to get the deal they thought they’d signed in October. This is very bureaucratic thinking and, as we know, Mme. Lagarde is a bureaucrat through and through.

The summary is this: mad Berlin/Brussels austerity policies made the Greek economy even worse, so now the IMF (which did a volte-face on this strategy the minute Lagarde joined) thinks the ECB – itself in the odd position of being both creditor and potential saviour – and Berlin should cough up more…and those who loaned Greece money should take the biggest hit of the lot. No wonder the lenders are confused.

What we’re seeing here is the obvious consequence of a European Union in which there are three camps: the French, the Germans, and the Central Bank. It has been like this for nearly eighteen months now, and it took only the addition of Christine Cerveau d’un Oiseau Lagarde to turn the whole farce into an improv play along the lines of Spike Milligan’s The Bed-Sitting Room.

I don’t know what it would take for the British Establishment to decide this is a circus in which they have no desire to be either clown or trapeze-artist. But I wish it would happen – and soon.


  1. OT, but I had to share this with fellow followers of J W;s
    his quote is from “The Wit and Wisdom of Winston Churchill” by James C. Humes in 1995:

    Late in his life, Sir Winston took a cruise on an Italian ship. A journalist from a New York newspaper approached the former prime minister to ask him why he chose to travel on an Italian line when the Queen Elizabeth under the British flag was available.

    Churchill gave the question his consideration and then gravely replied: “There are three things I like about Italian ships. First, their cuisine, which is unsurpassed. Second, their service, which is quite superb. And then — in time of emergency — there is none of this nonsense about women and children first.” This is from which is a brilliant site especially if you look under humour.


  2. ‘But I wish it would happen-and soon’.JW,your running commentary is spot on,the politicos have no clothes,and the markets will decide WHEN the equivalent of Rolls Royce or Burmah Oil going bust takes place,as regards sovereign debt of the usual suspects.At some stage,the precarious position of UK public finances will come into play,but until then we can continue to monitor the Eurotitanic,SS Costa Cruises on her fateful sail by of a small island,with the odd outcrop of rocks that did for the Torrey Canyon.


  3. Markets must know a default is possible, so what will happen to Greece with vultures circling? Share markets sell new Greek Commodity of Tourism. BBC for all their faults have just shown a brilliant progam of our frozen planet.. The part where the wolves after a long hard winter were circling bisons for food brought home to me our planet. As I watched the program , to me, the bisons were countries and the wolves were the markets. The most amazing thing was watching one adult bison standing back behind the wolves that had isolated a baby bison and as the baby was isolated the adult ran and felled the baby for the wolves.


  4. Could one explanation be that she wants the extra money to support Greece after they leave the EU/Z? She would then want the amount of support required to be minimal? This could be a fall back position with Greek agreement.


  5. Sorry J.W. but I am missing something – the troika is playing chicken with the hedgies right, but surely if no agreement is reache and greece defaults then the hedgies get their money back (and the rest) from their CDS, and then, the French banks collapse as a result – how can the troika possibly accept that?

    Apols for being thick!


  6. I do wish that Britain had a real government. One that stood up for what it believed in, rather than what its lobbyists keep pushing for. In reading what you say above and wanting a cessation to this nonsense – as do many of us here – it seems to me that Britain is actually in the position to do some real good. Or was.

    You guys, independent in the way of the IMF but in a political manner not financial, could have stepped in and sorted out the squabbling rabble. Britain would not profit directly, but its status in the EU would be greatly enhanced.

    Instead you are seen as cowering on the fringes and hiding behind your hedgefunds and banks. Is that to be Cameron’s legacy? What a shame.

    This was posted today on Kastner’s blog – he analyzes the effect of cash withdrawals on the current situation. Worth a look if you have the time:
    What is the news from Britain on cash withdrawals? There was some talk of this last year. Any updates?


  7. Sorry, I made a mistake in my text. Too much copywriting in Dutch.

    The following statement “rather than what its lobbyists keep pushing for” was incorrect and should have read “rather than what its lobbyists keep paying for” ;-) ;-) ;-)


  8. Cuffley Burger
    the problem with CDSs is that there are countless derivatives on them which have not been traded on the open markets. That they are off-balance sheet does not mean that they are any less dangerous. London would be hit very hard if these needed paying out on.


  9. At least someone is seeing what they consider benefits from the ECB actions but I worry about the unforeseen circumstances firing this bazooka will result in for be for the ordinary citizens who have the misfortune to be caught up in this increasingly dysfunctional euro system.

    The so called “solutions” the politicians, bureaucrats and bankers keep coming up with will never succeed in the long term because the focus is solely on short term liquidity, they have to take into account solvency and also future productivity but because if they do that it’s immediate curtains for Greece and probably Portugal, plus that route also brings into focus larger countries and larger problems not that far down the road, so obviously it’ll never happen but this under the counter QE that is happening now makes a total nonsense of the ECB mission statement.

    “The primary objective of the ESCB shall be to maintain price stability”.

    I would expect this currency devaluation by fair means or foul from the governments of Greece, Italy, Portugal and the other usual suspects but where are the German sound currency storm troopers when you need them?


  10. Cuberger
    Just try collecting off a CD provider if the world is going tits-up: much cheaper to simply go bankrupt.
    I think the point here is that both sides have a lot to lose, but the eurocrats have a lot less to lose than they did six months ago. It’s a power-play.
    I hate what the EU has become, and I hate the Hedgies’ complete psychopathy. But in a way, I applaud Merkel’s desire to stuff the lenders.
    I feel a bit like I imagine democrats felt about the Nazi-Soviet pact in 1939: a plague on both of them.


  11. Rui
    From the link:
    ‘…Those who doubt the sustainability of the ECB’s policies are entirely correct when they argue that hurling liquidity at the Eurozone debt crisis does nothing to solve the structural problems at the heart of the Eurozone. If you put lipstick on a zombie sovereign or zombie bank, it’s still a zombie…’
    Spot on. Also, re yr question about SS troops, I think they’ve been out-maneouvred by the Italian stallion at the ECB.


  12. re ‘both sides’ – I’m fairly sure La Birdbrain has recently remembered she has some duty of care to the IMF. What price now the advance from the Chinese to the IMF of a couple of years back, which was rebuffed, to stump up for some SDR’s?

    BTW I read that Bretton Woods was for 60 years. If that is correct – and I’d expect mucho smoke and mirrors propelled by hand-waving on this question – where exactly would that leave the IMF?


  13. – can’ remember the details exactly, but one of the big german car companies did a manoeuvre a couple of years ago, where they turned the tables on speculators by secretly arranging some deal behind the scenes, while deliberately sucker punching the markets – some details here –,1518,730911,00.html
    (worth remembering next time Merkozy criticises evil ‘anglo-saxon’ casino capitalism across the water). Rather than re-inventing the wheel, I’d say the German leaders tend to keep hammering away at the same plans – I like the Germans I’ve met actually, same impression from most people I know, I just wish their leaders would stop pursuing some Stockholm-Syndrome transferred vendetta against us, when it’s the French that caused/continue to cause all their problems. Anyway, my guess is the German leadership are trying to lead the hedge funds into a prepared over-exposure trap – ‘rope a dope’ like Porsche did – while secretly building up a safety net for their system. The plan I guess is to let Greece collapse, taking a large number of the most threatening (to Germany/France) hedgies with them – while putting the blame on London, so that miraculously in the aftermath a paper appears and is unanimously passed in euroland whereby evil London is taxed to pay for the bailout (‘friends’ of german/french politicos simultaneously launching all-out attack on sterling probably). Zero hedge has mentioned a few times how bad the hedge funds are doing, a third I think haven’t even made a profit for last year or something like that. I can’t say I’d cry myself to sleep if the biggest of the hedgies were caught short, I just don’t want the UK to be suckered too into paying for all the mess via french-dwarf-designed ‘financial tax’. Did anyone else notice the comment by Barnier too, about how the agricultural sector has needed far more ‘bailing out’ than the financial sector….time for a wine tax?


  14. I mean, she’s right, in that there are some pretty negative implications from the ECB getting carved out of a deal. That said, the timing is atrocious and this is not something Frau Kanzlerin will relent on. The CDS problem is irrelevant (the net impact would probably be <2bn EUR across all the counterparties) but the real issue is that creditors now know where they stand- behind the ECB. More on this here:


  15. @Sd,
    No problem, the ECB will buy the Portuguese bonds by using one of the eurobanks its lent money to at 1% and offering a nods as good as a wink to a blind man underwriting of any losses the bank incurs on the deal.

    Why have the borrowing costs for the Italian government bonds plummeted of late, certainly not because the market has suddenly decided Italy no longer has any problems, when discussions on bond websites are using phrases like ” nobody with two joined up brain cells is in the sovereign bond market at the moment “, a comment that inevitably leads one to a buyer without two joined up brain cells, the ECB.

    As mentioned on this blog a few of days ago the ECB balance sheet has gone up by over 30% since July 2011 against the U.S. Feds balance sheet rise of 1%, over the same period.

    I wonder what those new ECB assets could be ?


  16. I think this is an acute observation – we tend to forget about counter party risk. If the world turns to sh*t then all the CDS insurnace and a whole lot else will be worth nothing.

    I read today about investing in products that short EZ banks. Sounds great until you try to collect.

    The EZ should just pay them off – alas guess who has bought Portugeuse and Spanish and Italian debt….

    The hedgies better have armoured limos….

    Or false passports



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