Swans Commentary » swans.com March 12, 2012  



Blips #124
 From The Martian Desk


by Gilles d'Aymery





"Most times, it's just a lot easier not to let the world know what's wrong."

—Chuck Palahniuk

"Everything touches everything."

—Jorge Luis Borges


(Swans - March 12, 2012)   SAVING THE EUROZONE: Just about one year ago the forces of nature destroyed an entire coastal region in Northern Japan. The tsunami and the nuclear power plant meltdown created unfathomable misery for the Japanese. It's no longer part of the news (like Katrina) but the misery will linger for years to come in spite of the tremendous efforts made by the public and the authorities (local and national) to clean up the mess and reconstruct. In Greece, the forces of nature did not create the misery. It's been human-made. Poverty, recession (in its fifth year), ever increasing unemployment (up to almost 50 pct for the youth), were due to decisions and choices that raked in huge profits for the few. A Bloomberg report highlighted that Goldman Sachs made $600 million in 2001 as the financial firm helped the Greek government play loose with the country's budget in order to join the eurozone. In the past year, it is humans that have done everything possible to destroy Greece and, in so doing, the entire eurozone. The currency war is far from over, but it's also far from being won. Europe is slowly responding to the mortal threat against its people. As demonstrated last week through the Greek government's actions, the eurozone does not intend to implode, whatever the forces in play and the naysayers would want to impose.

IN MY LAST Blips #123 I mentioned the Institute of International Finance (IFF), whose managing director warned that the present US financial situation "[was] a serious accident waiting to happen." The IFF, based in Washington, D.C., represents over 400 global financial institutions (banks, insurance companies, pension funds, investment firms, etc.). It has been negotiating the Greek debt restructuring with the troika (EU, ECB, IMF) on behalf of private creditors. On February 18, the IFF issued a report that it sent to European leaders. According to the report, a full, uncontrolled Greek default would cost over one trillion euros (about $1.3 trillion) to the world financial economy due to the destabilizing contagion of such default on countries like Ireland, Italy, Portugal, and Spain. At the time of this writing (March 3, 2012) the International Swaps and Derivatives Association (ISDA), which is a trade organization with over 800 members that deal in financial derivatives, has not called the Greek debt restructuring a "credit event" that would automatically trigger the payment of credit default swaps, those "financial weapons of mass destruction," according to Warren Buffett.

IF IT LOOKS complicated and confusing, this is because it is complicated and confusing. Private investors are being asked to take a hit (a haircut) on their short-term investments (about €100 billion) and get in exchange 30-year bonds at a much lower yield (I simplify greatly). Without getting into the human ordeal experienced by the Greeks (and other European people), the actual choice is to take an unpleasant hit or trigger a worldwide crisis. What is the extent of this potential crisis? Of late, Mervyn King, the governor of the Bank of England (Britain central bank), has quietly rung the alarm bell, saying that the world could be facing a recession that will be deeper than the one of the 1930s. Another financial executive and French civil servant, Jean-Pierre Jouyet, who is president of the French Financial Markets Authority (stock market regulator), has warned that the economic and financial system of the entire world is risking implosion.

MEANWHILE, all over Europe, nationalism is raising its ugly head again and demagogy is running rampant (as in the U.S.). Greeks are burning German flags, accusing Germans of willingly destroying their country. In Germany, neo-Nazi groups are on the ascendancy, and Germans are increasingly reluctant to support the ugly little duckling. In France, 20 percent of the population supports Marine Le Pen, the head of the National Front, who wants France to get out of the eurozone, throw immigrants out (read Muslims), and return to an old mythical France independent of the European construction. A recent French poll shows that 56% of the population wants more national decision making and less European control of their lives. In The Netherlands, the head of the Dutch right-wing populist Freedom Party, Geert Wilders, also advocates abandoning the euro and returning to the guilder. Right-wing parties all over the eurozone are expressing these sentiments. In Italy, South Tyrol wants to secede from the country, as its population is increasingly reluctant "to pay for the poor south." Even mainstream politicians (e.g., former French president Valéry Giscard d'Estaing or German interior minister Hans-Peter Friedrich) and pundits are calling for Greece to exit the eurozone, more national autonomy, and predicting the demise of the European single currency, or want to see "a radical change of course." This has led the 81-year-old former German chancellor, Helmut Kohl, one of the architects of the euro, to write an Op-Ed published in the German daily Bild on February 28, 2012. Here are excerpts in English I found on the Web site of Der Spiegel:

The current discussion in Europe and the crisis in Greece mustn't lead us to lose sight of or even question or retreat from the goal of a united Europe.
The evil spirits of the past have by no means been banished, they can always return. That means: Europe remains a question of war and peace and the desire for peace remains the driving force behind European integration.
For those who didn't live through this themselves and who especially now in the crisis are asking what benefits Europe's unity brings, the answer despite the unprecedented European period of peace lasting more than 65 years and despite the problems and difficulties we must still overcome is: peace.
Europe is our future. There is no alternative to Europe. We have every reason to be optimistic that our Europe will emerge strengthened from this current crisis -- if we want it to. Let us not be misled.

WAR AND PEACE have been on the minds of policy makers ever since the Schuman Declaration of May 9, 1950, which is considered as the date the European construct was born. The choice was made to proceed with an economic integration led politically by the strong Franco-German partnership. Looking at the history of this union and the multiple steps taken (see Wikipedia in French or in English), it has been nothing but an extraordinary process that began with six countries, then nine, ten, twelve, fifteen, until reaching 27 with 23 different official idioms -- in a very short time (about 60 years). It is worth noting that in 1972 Europeans chose the final movement of Beethoven's 9th symphony, "Ode to Joy," as the official anthem of the European Union and the Council of Europe -- a powerful symbol of what Helmut Kohl characterizes as the continuing aspiration: Peace.

THE EUROZONE is another step toward European integration, another brick added to the historical construct. Created in 1999, the euro engendered the formation of a powerful economic union containing 17 countries. It quickly grew in value and became the second reserve currency behind the US dollar until it was hit by the crises (American-generated subprime and financial crisis, economic crisis, and manufactured sovereign debt crisis). In an era of global competition in which powerful actors (the U.S., China, India, Brazil...) vie for supremacy, the implosion of the eurozone would lead to an economic disaster for the entire EU. But, whatever the forces at play and the efforts by some to destroy the union, I do not think it is going to happen. European policy makers are fully aware of the challenges and are responding accordingly.

UPDATE as of March 10: The Greek debt restructuring took place last Thursday and was largely successful -- about 85% of the private investors "voluntarily" accepted the deal offered by the Greek government. Somehow, however, something changed in the attitude of European decision makers. Moody's and Fitch downgraded Greece to selective default. Not only were the ratings utterly ignored, but the Papademos administration decided to force the recalcitrant creditors to take losses by invoking a legal clause known as "collective action clauses" (in short, a legal maneuver by a sovereign country to tell private investors to take a hike), which could not have been done without the green light from France, Germany, and the other governments of the eurozone. The International Swaps and Derivatives Association then declared that the happenstance was a "credit event" and, therefore, credit default swaps would have to be honored -- about €3 billion. The reaction of the Greek government and European authorities: "Be my guest." In other words, and for the first time, the recurring blackmail of the financial markets was simply disregarded.

MAYBE EUROZONE POLITICIANS are beginning to grow a spine. Maybe. I do not know. But what I do know is that in 2012 alone European banks have to pay back about €725 billion in debt (about $1 trillion) -- €280 billion by the end of March -- and that interbank market lending is frozen. This explains the decision by the European Central Bank to lend over €480 billion to the banks last December for three years at a 1% interest rate; an operation that was repeated in early February for over €580 billion (some 800 European banks participated). So perhaps the European political class has come to realize that the game was over and that it was time to let the private financial sector understand the scope of the trial facing Europe. Perhaps. Compared to the financial private sector's very fragile situation, the sovereign debt crisis that is so very much pumped in the news is a sideshow. Much more is in play.

The eurozone must be saved. It is not just about economics. It is indeed about war and peace. Even if the power of nature cannot be avoided, making the human condition mourn its losses and begin to reconstruct, the forces of human destruction can be defeated. It is to be hoped that the defeat of such destruction will begin in Greece, and that in the next two or three years, the eurozone will prevail. And so too will the global economy be forced to reject these destructive forces.

 . . . . .

C'est la vie...

And so it goes...


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Published March 12, 2012