BUSTED FLUSH IN THE HOUSE OF CARDS
For some time now, The Slog has been pointing out the inevitability of Greek default next Spring unless there is a change in the stony-faced attitude of Brussels-am-Berlin. A week ago, a Merrill Lynch note at last started debating the ‘inconvenient truth about Greece’. Now it transpires that secret negotiations between Athens and the Troika are under way about the promised then unpromised debt relief, and whether a further bailout of banks will be possible.
Nobody as yet wants to acknowledge the stream of urine bursting forth from the elephant to drown everyone in this room: that the ‘recovery’ hype is exactly that, and under the terms of Bailout2 the Greek debt just keeps getting bigger. But that consideration becomes irrelevant once the inevitable repayment failure occurs. And despite the pressing nature of inevitability, frankly the eurozone powers are all over the place about what to do: the divisions are deeper than ever.
New data from the ECB shows that the ezone money-supply and general liquidity dropped catastrophically during October. The overall figure for loans to non-financial companies shrank by 3.7% overall, but it is the country by country ClubMed figures that spell disaster: Societe Generale says the total lending fall was 5.7% in Italy, 6.6% in Portugal, and a horrific 19.3% in Spain. I told you a year ago that the Spanish banks were empty, and guess what – they are.
Another recurrent Slog question has been “what about the capital flight data?” that was hidden by Mario Draghi’s ample bum for several months. But in reality, poor bank lending figures are just one symptom of that – plummeting economic activity being another.The circle is now so vicious, it’s getting hard to tell cause, disease and symptom apart.
The hawkish gung-ho faction on the ECB Board now wants all-out Zirp and QE to get things moving again. Even that would be far too little far too late – and anyway, I retain all of my original doubts about the strategy per se. But to make the lack of new ideas worse, Berlin’s ECB contingent remains implacably opposed to further compromising of the single currency.
Somebody now needs to sit Germany’s Grand Coalition down and say, “Time to get off the pot, guys: are you in for a cent, in for a euro….and if not, what exactly are you up for?” It could well be they’ll get an answer sooner than they think. Merkel and Schäuble lied on an industrial scale to get the German people behind the euro project in the recent General Election; but sitting now as they do – secure at the top of a Germany united behind the EU as never before – the shilly-shally nonsense will soon stop.
Two weeks ago, I noted: ‘this time [the decision] certainly isn’t going to be “nothing”: because Mario Draghi may have the ECB votes, but a strident Germany has far less cash at risk than before.’ At that time, ECB executive board member Peter Praet told the media, ““The balance-sheet capacity of the central bank can also be used. This includes outright purchases that any central bank can do.”
Well, now the hawks want to press ahead with it. The Germans have more than halved their exposure to Target2 money….and I predict they will now start the process of making no mean no, prior to a German-dominated banking union that will leave Draghi neutered.
Over at the IMF, meanwhile, Lagarde is distancing herself further still from Troika colleagues. There are hints in public, but in private Chrissy is pressing very hard for major-league debt relief for the Greeks. It’s not hard to see why: this would limit the scale of IMF losses more than any other single thing.
But Wolfie and Geli don’t give a monkey’s about the IMF: their mission remains the same – to fast-track banking union under German control, and let ClubMed suffer the consequences.
The Germans are about to light one of many fuses leading towards the global gunpowder barrel. If nothing else, they should look more closely at the state of Greek banks: despite the recapitalisation, large parts of the balance sheets in key institutions are as smelly as ever. You’d have thought the drop in Spanish bank lending would be more than enough for Berlin to rethink its position. But it hasn’t, and it won’t. We are all about to get yet another dose of the recurrent German disease: intransigence in the face of hard facts. Cue Triumph of the Will remake. Cue Götterdammerung.