European Stabilisation Mechanism Announced

The European Union has announced an agreement among heads of state to address the mounting sovereign debt crisis. Here’s Commission President Barroso’s statement. The meat of the announcement is the following:

First the Commission will present a concrete proposal for a European Stabilisation Mechanism to preserve financial stability in Europe. This proposal the Commission will make will be presented to the ECOFIN meeting next Sunday, the day after tomorrow (9 May).

Much of the speculation about the content of this proposal revolves around the ECB. Some media stories (such as this one) are discussing an extension of the ECB’s liquidity operations, which is fine but doesn’t go to the heart of the soverign debt problems.

Other stories (such as this Reuters story carried by the Irish Times) point to the ECB purchasing sovereign bonds.

“You have this ‘no monetary financing’, but you are allowed to buy in the secondary market, so what’s the difference?” an official involved in European banking supervision told Reuters. “Buying in the secondary market, you take the pressure, and so you push people in the primary market.”

Analysts have estimated the ECB might buy some €200 to €300 billion of bonds, about 20 to 30 per cent of estimated annual new issuance in the euro zone.

This point that the ECB can actually do this is correct. The wording of the no monetary financing clause (article 123 clause 1 of the current version of the consolidated Treaty on the functioning of the EU) is as follows:

Overdraft facilities or any other type of credit facility with the ECB or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.

I suspect the direct purchase phrase was put in to make it clear that public debt instruments were fine for use in ECB repurchase agreements with banks. But the wording does not rule out secondary market purchases.

Exactly what effect this type of intervention would have would depend on how it was implemented. If it was simply a once off purchase of a load of Spanish, Portuguese or Irish debt, I can’t see how this would have much effect since the underlying stock of debt would remain the same.

If, however, the operation took the form of secondary market interventions right after primary market issues, then it would have an effect. For example, the Irish government could issue debt to some banks who could then immediately sell these bonds on to the ECB, perhaps for a small profit. the only risk for the banks being the small probability of being left with the hot potato at the moment of a default.

This would pretty much be breaking the spirit, if not the letter, of the Treaty. But, we’re in this territory already. The existing Greek bailout is being legally justified on the basis of this clause in Article 122:

Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, acting by a qualified majority on a proposal from the Commission, may grant, under certain conditions, Community financial assistance to the Member State concerned.

Greece, apparently, is suffering from a natural disaster or an exceptional occurence beyond its control.

Note the rumoured scale of this operation. If the rule of thumb relating to ECB capital subscription is applied again, Ireland would have to supply over €4 billion to this fund.

86 replies on “European Stabilisation Mechanism Announced”

Another major disruption to credit, and another set of emergency steps forced upon some of the word’s most powerful states. With respect for the unfortunate victims of last week, it looks like the fire in the European banks is spreading. The Germans won’t have forgotten what happened after Creditanstalt went down.

Hard to read this as anything other than the much predicted phase 2 of the 2008 eruption. Expediency is the only rule when the chips are down, so expect creative interpretation of statute.


purchases by ECB of Irish, Portugese or Spanish debt in the secondary market would have the very important impact of re-opening these markets, effectively closed on Friday. Primary issuance, perhaps to banks who will then repo with ECB, would then become possible.

Market-makers on Friday were quoting spreads so wide as to constitute market closure. This is worse than the position in the early months of 2009. Have there ever been bid-asked spreads of 500 bp for EU sovereign issuers?

Greece suffering from a natural disaster or exceptional event beyond it’s control????

Well, according to Fianna Fail, thats what happened to us too!!

The long term future of Monetary Union is under threat and no doubt we will soon be told that centralised Fiscal control is the only way to protect against this in future. How long will corporate tax rates in Ireland remain under sovereign control in that situation?

Our Smart economy plan will be very vunerable then!

@ Karl/Colm

Colm is right, the purchase of sovereign bonds (ex Greece) would be more to restore liquidity and reduce funding costs than to try and monetize the debt. On Thursday and Friday someone trying clips of more than €10mn of a Spanish or Irish bond would’ve pushed the market to a new price level. For countries like Spain, Ireland and Portugal, the situation is manageable and reversible if given a few years to get their houses in order, and thats what the ECB bond-buying plan would provide. The mere presence of the ECB in the market would also provide a huge boost in sentiment and confidence, with the market knowing that there was going to be a constant buyer of bonds to support the market, exactly as they have done in the covered bond market already.

Good points Colm and Eoin

The key element in the EC statement for me is “We also agreed to reinforce budgetary surveillance and to increase economic policy coordination. We will come with some proposals around these objectives next Wednesday”. That is the only genuine way out of this crisis in one piece. Coming up in each country with a credible plan, along with a real stick for the EU, however will be quite a challenge. Imagine the speed and depth of the measures needed in Ireland alone, all the more so with sterling again tottering.

Quantitative easing from the ECB is rightly called the “nuclear option”. A bit like injecting cortisone – an immediate and radical improvement, but at a very uncertain longer term cost. It’d buy tons more time. Ultimately QE will be in vain (like in Japan) if the underlying pathology is not eradicated.

Markets are in crisis precisely because charity is being extended to Greece, not because Germany acted too late, as some commentators say. A “tough love” approach making it clear very early on that Greece – and others – would have to stand on its own two feet could have avoided today’s troubles. Ergo, extending more charity might buy some time. But will not per se address issues of solvency. And will not do much to restore confidence (and could still have quite the opposite effect).
It is unfair to speak of speculation, like many commentators talk about. The buyers (and sellers) of bonds are among the most prudent of any investors that can be found in markets. At this stage, their bigger preoccupation is the preservation of the capital of their members given the unstable political framework and ever poorer outlook for the economy and fiscal probity.
Rating agencies are coming in for a lot of stick. Some politicians say they should just be ignored. Easier said than done however. Ratings are important for several reasons, not least because banks are required (e.g. by Basel II) to use them in managing their. It now seems banks are being told to turn a blind eye to some of these regulations by the authorities. This schizophrenia is a recipe for confusion and a lack of confidence. And “don’t shoot the messenger” – rating agencies are just reacting to the grim reality (and most likely have been behind and are still behind the times).
Government in Europe (like Japan before it) is deluded in thinking that everything can be saved – pension benefits can be maintained, taxes can be kept low, wages can hold up, and jobs can be preserved in all the banks without fail. “Batten down the hatches” is an expression I remember using here before. It is ever more urgent that the incumbent government in Ireland takes measures to secure the financial integrity of the State, and that will only come at the cost of some hard choices.

@ Eoin

I can certainly see how the restoration of a secondary market would be a positive factor supporting new primary issues — obviously, you want to be able to sell these bonds should you need to. However, my point was just that if the principal reason a primary market is closing is concerns about the country already being too indebted then the ECB buying (but not writing off) a once-off chunk of debt doesn’t really change the situation.

Your reference to the ECB being a “constant buyer” is more like the second scenario outlined above, the one that I said would work.

I’ve read that traders are pricing Greek bonds at the assumption 100% risk of 50% default.

The assumption that this bailout will be free (or even profitable for some) is based on pricing Greek bonds of 0% risk of any default whatsoever.

I’m not sure which assumption is worse, I am sure that both are inaccurate.

Any bailout should involve a discount for the risk assumed. Or some form of factoring where the bailed out will be paid the final 25% as soon as Greece is paying back 100%.

Is the euro forcing political integration? No.

Euro lets countries decide which kind of country they want: High tax with high public spending or low tax with low public spending.

Greece want low tax? So be it, just as long as they remember that a choice of low tax means also chosing low public spending.

And let me add another point… Governments have not only undermined their own fiscal credentials, but also the solidity of their banking systems. And that is one of the reasons why there is so little depth to the bond markets. The banking system in Europe cannot just be a cash cow or a whipping target for regulatory reform. Banks actually perform essential roles in the economy – one of them is to facilitate the financing and refinancing of governments and many other public bodies. The tergiversations around Basel alone make task that ever more difficult. Now is payback time for the governments (and the taxpayer).
I certainly hope there are enough public servants and politicians that understand this and the other issues above. I fear not.

So because the market is failing to fund budget deficits in Ireland, Spain and Portugal, the ECB will monetise these budget deficits? Such a move will not be politically popular in some circles.

@ Karl

thats fair enough. However i would decribe the current markets as being closer to irrationally panniced rather than simply disliking of Irish or Spanish risk. The market is struggling to find buyers and sellers at ANY price level right now.

The other issue that needs to be considered is that if you no longer have a true risk-free rate of return (cos sovereigns are now considered “risky”), then it becomes very difficult to put true valuations on lots of other asset classes. The “risk free rate of return” is embedded in lots of economic formulae, for instance. Before someone says, “well just go buy Bunds”, they’re actually very difficult to source right now for the obvious reason that no one wants to sell them. The markets are so messed up right now that Swiss Franc overnight cash rates are trading at MINUS 1% at the moment (via swaps).

…and surely, Greece still needs to restructure its debt even if these measures are put in place?

Or will the wonderful transformation that is obviously going to take place in Greece now be able to support a debt of over 150% of GDP soon and still get things back to normal whilst reducing their deficit by 4% or so every year? How much of their income will they need to service a debt that size? Or now that they’ve slashed pensions, salaries, etc. are the EU/IMF under some delusion that there’s going to be a consumer-led recovery in Greece (or some other miracle/act of God)?

Why don’t they just admit the country is a busted flush and deal with it properly – now – instead of putting it on the long finger and ultimately making the situation worse? Surely politicians can’t be that thick? Can they?

“Your reference to the ECB being a “constant buyer” is more like the second scenario outlined above, the one that I said would work.”
I don’t believe this will be more than just a stopgap for the reason you gave in your first paragraph (“the principal reason a primary market is closing is concerns about the country already being too indebted then the ECB buying (but not writing off) a once-off chunk of debt doesn’t really change the situation. “).

To put it in mortgage terms. If you can borrow ten billion a year at 4% before you go bust in the next three years, you can borrow more than that at 2% before you go bust. Or you will go bust later. But you will still go bust if you don’t either improve your ability to pay or start to reduce the amount of debt you have outstanding.

We are in a position that is no different to the one we were in with Irish banks in 2008. As Ciaran O’Hagan says, this is not a liquidity crisis, it is a solvency one (yes, I am precising, I hope I am accurate). Greece is insolvent. It has sources of funding that it could tap, the grey market is suspected to be worth 30 bn a year (less multiplier effects one presumes), but there is some cash there. Nonetheless, Greece is on the road to hell.

Ireland is also running an unsustainable deficit. We are on the same road. The measures that have been taken are past; their effect has been to get us this far. The coming planned measures need to be taken to sustain that. We are not on the road to hell, but it is rising to meet us.

“Ratings are important for several reasons, not least because banks are required (e.g. by Basel II) to use them”
Ratings were important because the ECB used them to rate debt for eligibility for repo. It no longer does; they are no longer important.

If there is a big fund for sovereign/quasi-sovereign debt, with low long-term interest rates, then NAMA is a blinder of a move…

@ Joseph: “Surely politicians can’t be that thick? Can they?” No!

Pols are solely, absolutely and obsessively (aka: pathologically) concerned with power. They will do anything to obtain and retain power. They have two, watertight sets of moral principles: public and private. Shame, guilt or conscience are left at home when they go ‘to work’. Lying is good: the truth is death. Make no mistake about these bozos – they have no time for those who do not support them. Look to your own well-being.

“Greece is merely a sideshow. “Its the ‘global’ financial system silly!” What did the man ask … cui bono? Now you know.

B Peter

Had some experienced junk-bond traders been involved in this I think the scenario would be different. Then I expect they’d negotiated a restructuring and used provisions already made to cover as much as possible of the losses.

Now, we have bond traders who charged a risk premium but still didn’t bother with provisions for losses…… Their economic formulae somehow managed to square that circle 😉

Negative interest rate in one currency isn’t very strange. Carry trade has been going on for years based on expectations on movements in exchange rates. Though it might indicate there is sufficient liquidity in the system but the liquidity isn’t coming down where it is needed to businesses and consumers.

The EU’s underscoring of the need austerity, as mentioned above, is welcome, and as long as followed by action on Wednesday, as promised. Some of the other headlines remain quite worrying however.
Merkel’s Adviser Urges ECB to Buy Bonds, Euro am Sonntag { NSN L23GC01A1I4H } [unfortunate political pressure over a most serious decision and more confusion of the credit and monetary aspects]
Italy’s Berlusconi Considers Fund for Europe. The ECB could also, for example, buy bonds from countries in difficulty. { NSN L23KU50D9L35 }
Merkel Says Eurogroup Agrees to ‘Joint Measures’ to Defend Euro { NSN L22ONG6M62GW }
[this and other stories suggest confusion over the euro as a currency and credit issues + some politicians still actually seem to see euro currency strength as a desirable goal in itself]
*JUNCKER SAYS ECB BEING ASKED TO PARTICIPATE IN MECHANISM [further politicisation of monetary policy]
ECB’s Trichet Says Stability Mechanism Is EU’s Responsibility … said he won’t attend a special meeting of EU finance ministers on May 9 to work on the mechanism.
{ NSN L22NJP6M62GZ }
[… and the ECB is not happy about the politicisation]
[…as if rhetoric and action can diverge without a care ]
Poland Needs an IMF Loan to Protect Its Currency , citing Finance Minister Jacek Rostowski. An additional $20 billion would help the zloty { NSN L23REP0D9L35 } [Now everyone wants aid. . . exchange rate flexibility is in the collective interest]
[A central bank governor doesn’t see the folly of aid, and can’t keep quiet]
[partnership and fiscal convergence will be absolutely key, effectively, and the French authorities can be happiest till now]
Britain blamed for euro turmoil over hedge fund curbs block
[the elephants in the porcelain shop are still blaming the mice]

[finally some good news]
Portugal Cuts 2010 Deficit Goal to 7.3% From 8.3%, Socrates Says { NSN L23PSQ6LUTXH }
News from Bloomberg, with reference links

@yoganmahew. I said ratings are important for several reasons e.g. in calibrating risk for regulatory requirements. (The ECB “only” removed a floor that might be applicable at some future time.)

@ Ciaran/YM

ratings are important for all sorts of reasons – risk weightings in banks on certain assets, insurance companies/credit unions/etc can often only buy certain highly rated bonds, many investment mandates at AM’s would dicate that only investment grade securities be bought etc etc etc. The system may be flawed, but we still need ratings agencies to grade debt.

@ Jesper

negative interest rates are typcially an indication of extreme risk aversion or, as you said, liquidity not flowing correctly throughout the system. As i said, the markets are close to breaking down in many areas right now, and this is just one small symptom of this.

The important point common to all these agreed elements today is that we will defend the euro whatever it takes. We have several instruments at our disposal and we will use them. The European Institutions – Council, Commission, European Central Bank and of course the Euro area Member States. – – Barroso statement.

Trichet signalled a similar sentiment last Thursday.

It’s interesting to observe the begging of the banks and broker analysts for public protection from risks.

At the same time, the high bonus system remains sacrosanct.


It is clear that the risk averse people in charge are way out of their comfortzone and they are therefore panicking…..

& you’re right, what we are seeing is extreme risk aversion. By extreme I mean over the top & ignoring counterparty risk and the risk that the exchange rate will move the other way…..

But at least we now have banks willing to lend to each other and there is sufficient liquidity so I believe there is no more need to inject liquidity through banks 🙂

In other words: No need for the ECB to print more more money.

In fact:
Liquidity provided by the ECB is now used to put pressure on the euro (selling euro to buy other currencies). Time to remove some of the liquidity from the system. That is something the ECB can and should do.

Increase the value of the euro and then the return of lending to Greece will be better than getting negative interest from other currencies. How long can traders really afford negative interest rates before they finally let the liquidity flow to where it is needed? Consumer lending, business lending and possibly even lending to states 🙂

@ Ciaran

‘It is unfair to speak of speculation, like many commentators talk about. The buyers (and sellers) of bonds are among the most prudent of any investors that can be found in markets’

‘Governments have not only undermined their own fiscal credentials, but also the solidity of their banking systems. And that is one of the reasons why there is so little depth to the bond markets’

With the greatest respect to your professional expertise, and others commenting also, governments didn’t dig this hole all by themselves. The banks could not fail to have known that the so-called PIIGS were creating unsustainable fiscal imbalances.

Lending to corrupt, croneyist states was the equivalent of buying securitised subprime debt. Any reasonable enquiry would show that the borrower was unsound, but the profits were probably marked upfront and the bonuses followed. Chasing yield.

When the subprime market went belly up, the US banks sought a bailout.
Now that PIIGS debt is beginning to stink, we have the same pressure in Europe.

As Michael Hennigan has said:

‘It’s interesting to observe the begging of the banks and broker analysts for public protection from risks. At the same time, the high bonus system remains sacrosanct’

Bankers, like politicians, are essential to our society, so this latest crisis has to be worked out patiently. No austerity without shared responsibility seems a reasonable principle …

@ calan
Excellent link article.
Same for this whole discussion.
No need to buy the papers tomorrow!

@Bond makes a very fair point re risk-free rates. The German bund market has gone totally dysfunctional in the last week or so, and is in a way an inverted image of the peripherals. Stock is near impossible to purchase in any reasonable size at indicated prices, and the repo market has dried up. There will be significant delivery failures in the coming weeks.

Referencing rates or spreads to a dysfunctionally expensive benchmark, still less forming policy based on the belief that the German curve (as presently valued and shaped) is a desideratum for all euro members, doesn’t make sense.

In the good old days of the BuBa, short-term rates were set with reference to what effect they might have on 10 year rates, which were seen as the more important to control in managing the economy. This even led on one occasion to the Buba, the day before they were due to auction 10 year debt (before Finanzagentur days), stating publicly that they believed 10 year rates were too low, and driving yields sharply higher into the auction.

I can’t believe the BuBa tendency in the ECB can be happy with 2 year German rates at 0.53%, nor with 10 year yields at 2.80% – certainly not unless they are more concerned with the German banking system, or are uber-bearish on the European economy.

We will see greater flexing of the enormous financial muscle that is the EU. But there will be many a “speculative attack”! Circuses for all!

Reading legalities will not aid comprehension. It is about money and the power of liquidity.

The point remains that devaluation is baked in. It will continue. There will be fees premia etc., but they are to partly compensate for the loss of capital caused by this devaluation. Since money can be created ad hoc and for little, in reality, there will be a stream of income to bond holders that can be stuffed into OPM funds.

So will the increase in sovereign debt. There is a bit of a contest between those who buy into debt now and those who get their existing debt paid off.

Ciaran O’Hagan
+1 except that “Government in Europe (like Japan before it) is deluded” is not true. They know well what is going to happen. They have known for a while!

Bond. Eoin Bond…
For once! Mirabile dictu!

paul quigley

“ratings are important for all sorts of reasons – risk weightings in banks on certain assets, insurance companies/credit unions/etc can often only buy certain highly rated bonds, many investment mandates at AM’s would dicate that only investment grade securities be bought etc etc etc. The system may be flawed, but we still need ratings agencies to grade debt.”
(Eoin’s comment)
I accept both that ratings are used for different purposes and that the ECB may reintroduce a floor (per Ciaran’s comment) at some future date. I don’t see a future date as being anytime soon and I don’t see an escape for the ECB should any eurozone sovereign debt be downgraded further. Would we end up with a situation where the ECB is accepting D? They cannot set any other lines in the sand as their credibility on this is shot. They were happily talking a year ago about raising the ‘quality’ (ratings) on eligible assets – requiring two ratings and pegging at the lower one. Should they have forseen low ratings for eurozone sovereigns? Probably. Should they have had a contingency in place even if they didn’t forsee it? For sure.

On the issue of other uses of ratings agencies, the agencies have become a substitute for buy-side analysis. They failed with structured finance. They fail routinely with corporate debt (particularly LBO debt). This was put down to sell-side payment and incentives to ‘buy’ a good rating. This excuse is not there with sovereign debt.

So where does that leave us? Indendent analysts have been warning about a sovereign debt crisis for two years (Mr. Roubini, Reinhart & Rogoff, for example, never mind the fringe). The ratings agencies are broken. The eurozone sovereign debt market is dysfunctional. The eurozone banking system is untrustworthy.

Euro bond rating strengths will have to be based on different criteria. There will have to be a permanent repo mechanism to ensure liquidity in times of crisis. There will have to be a bailout fund for fiscal collapse. Or at least a mechanism to action this. Some of the existing debt will have to be monetised. There will have to be a bank resolution mechanism that is eurozone wide. This will have to be paid by the banking sector across Europe.

As @Aiman says, ten year bund rates will have to get back to sustainable levels, otherwise we will see insurance and pension crises to come. Perhaps the ECB will have to become more like a bank and issue its own debt or guarantee existing packages of debt. It may be that the ECB has to become the buyer of last resort as well as the lender of last resort – buying assets at times of stress and selling them when credit is flowing too freely.

Force the euro to appreciate. That will suck in more liquidity from investors who are raising funds in weaker currencies. The printing of money in the US and the UK will make lots of liquidity available and expectations of falling exchange rates would push those funds into stable currencies.

Printing more euro will only force euro money manager to placed the extra money in assets outside of the euro-zone. They seem to think that a low negative interest rate in another currency is better than a positive interest rate that has some risks.

Sure, in the short term it would hurt exports but we’d get liquidity in the euro-zone flowing again.

Injecting liquidity had its time. That time is now over and it is time to continue with the cure and that is to stop printing money and eventually remove some of the extra money that has been created.

Bill Gross, founder of the $800bn bond fund maanger PIMCO, on ratings agencies:

Back in July of 2007 some of you will remember my description of their role in the subprime crisis. “Many of these good-looking girls are not high-class assets worth 100 cents on the dollar. You were wooed, Mr. Moody’s and Mr. Poor’s, by the makeup, those six-inch hooker heels and a ‘tramp stamp.’” Now, it seems, I was a little long on humor and a little short on the reality. Tramp stamp and hooker heels do not begin to describe the sordid, nonsensical role that the rating services performed in perpetrating and perpetuating the subprime craze, as well as reflecting the general deterioration of investment common sense during the past several decades.

Their warnings were more than tardy when it came to the Enrons and the Worldcoms of ten years past, and most recently their blind faith in sovereign solvency has led to egregious excess in Greece and their southern neighbors. The result has been the foisting of AAA ratings on an unsuspecting (and ignorant) investment public who bought the rating service Kool-Aid that housing prices could never really go down or that countries don’t go bankrupt. Their quantitative models appeared to have a Mensa-like IQ of at least 160, but their common sense rating was closer to 60, resembling an idiot savant with a full command of the mathematics, but no idea of how to apply them.

“If I take seriously the statements made by Ms. Merkel, I have to conclude that she too is pretty much clueless about the fiat money system in which she is immersed as a major player. She blames the banks. The banks, as we have outlined above, are economic downstream players in this system. If she were alluding to the fact that the banks contribute to political campaigns, write legislation, and benefit from the central banking system, that would be one thing. They do help close the loop politically. But she seems to be complaining that they made too many loans:

“German Chancellor Angela Merkel accused the financial industry of playing dirty. ‘First the banks failed, forcing states to carry out rescue operations. They plunged the global economy over the precipice and we had to launch recovery packages, which increased our debts, and now they are speculating against these debts. That is very treacherous,’ she said. ‘Governments must regain supremacy. It is a fight against the markets and I am determined to win this fight'”.

If she believes that, all she has to do is make the central bank follow a monetary rule. It seems Germany could have done that on its own with the old German mark. It wanted to enter the EU and get some benefits from the euro. It seems bad form now to complain about the result of one’s own actions and blame the banks.”

This is what the Germans have been doing. Now it stops for a while. Probably a long while. Until the banks are liquid again. But as a recipe for waelth, you get 9 out of ten!


Exactly! Think it through. Then think that reputation is a comparative thing, as with all fiat currencies? You are very close. The ECB is bigger than a bank. We just haven’t had to use super powers yet! Outlook is very good long term but meanwhile, Ireland blew what would have been an amazing opportunity!

@Ciaran O’Hagan

I note your point about politicians confusing monetary and credit issues. Can you expand on that a little further? Also please correct me on what I may have wrong below.

It appears to me that the big worry is contagion from Greece to the other PIGS and from Greece to EU banks. This appears to me to be a credit issue but with huge implications.

Deploying monetary measures to cure the credit problems, i.e., quantitative easing through buying sovereign bonds on the secondary market, may solve the immediate contagion/systemic problem but does not solve the solvency problem. It also has uncertain consequences.

It appears to me that the only ways to solve a credit problem is through default (through failure to make payments or through inflation) and austerity.

It appears that austerity of itself will not be sufficient in Greece and some degree of default is needed. That being the case, de jure default through rescheduled payments seems to carry a risk of contagion. The degree nature of that contagion risk needs to be ascertained.

How much losses can the weakened banking/insurance/pensions industry sustain without there being a loss of confidence? That narrative has not been written for the markets consumption. It needs to be written.

Thereafter it appears that devaluation of the Euro and inflation offer the most efficient way of implementing limited default. (Please correct me if I have that wrong.) However, the quantative easing involved also needs to reduce debts. It is hard to see how this can be done. Is there a method of quantative easing that can achieve this and help solve the debt crisis? Or is trying quantative easing and inflation/devaluation a cul de sac we should avoid going down?

The brits being out as Z says , does that scupper it or does it just mean that the rest of us pay more?

Is this lose lose for us – will the ECB buying bonds have an upward effect on inflation and interest rates?

Bonds now are politicised IOUs… that is, they ever less a function of economic fundamentals. That is a key take for investors from the shenanigans of this weekend and the past days.
On ratings, the agencies have been put in near impossible situations. Financial analysis makes up their main inputs. But financial ratios mean little these days. In Europe, agencies now have to be soothsayers of politics, and are no more qualified than you or me. It’s easy and cheap to be tough on the agencies with hindsight. It is far harder to be constructive, and work out how rational and consistent yardsticks can be established (not impossible though – there are some alternatives to rating agencies that we make use of).
Hard as it is to come up with predictions for the economy and finance, politics introduces whole new uncertainties. Many of the major financial and economic upheavals over the years were politically driven (notably by wars). No reason to expect anything different this time round.
= = > Unfortunately, the politicisation of finance (it goes far beyond bonds) makes for very scared investors, and severely undermines confidence. Governments think investors should be impressed by their display of unity and purpose. They fail to see that public money is driving out private capital.
In its persistent calls for “solidarity” since its election, the Greek government evinced private capital, making the provision of public aid a necessity. European governments were drawn into the trap. The ECB in December tried to toughen its collateral rules in a “tough love” approach. But they were outshone by the well meaning European politicians (even some German ones) that somehow thought charity for sovereigns was the ultimate fix. Maybe, if it is not the ultimate farce.
Greece’s bonds are now in cold storage . . . for a year, two or three. What happens to secondary market bonds and its CDS is of no direct concern to the Greek authorities. That is unfortunate and dangerous, and all the more so if this state is allowed persist. The optimal time for a rational default is when external debt is large and the deficit is zero.
Elevated yields will raise fears that other sovereigns could follow. Hard to say – there is a clear imbalance in the market (too many sellers unable to sell, for a number of reasons). Yet at some stage the elevated yields should attract investors that are comforted by the firm resolve of Europe to buy time. At least I hope so, as there will be very big ramifications if this bet does not come off.

So we are in a fine mess now. The challenge for me has a policy maker would be to re-establish functioning markets again, to wean governments off their crutches, and to allow failures happen when entities have failed (beginning with some banks). We’ve just taken another major step in the opposite direction this weekend. So I can’t be optimistic the crutches will be removed anytime soon.
@ zhou_enlai I think you are on the right track. All bets are open!

Doktor Merkel has sought expert advice and is following it, the same can be said of Sarkozy. It would be very safe to assume that the leaders of Germany and France are not operating on the advice they got in a bar over a few drinks last night. The European Union and the Euro Zone are of immense value to all participants large and small. What is at stake now is the trust and credibility of the EU and Eurozone. Trust and credibility has to be maintained at any cost because the repercussions will be severe and long lasting if they are not. Greece could not be snubbed by the EU or the Eurozone without immediate and negative reaction on the other weak sisters. To put it in Irish political terms, culling the litter strengthens the remaining piglets without deleterious affects on the sow. Culling Greece would lead to severe malnutrition for the other PIIGS and drug resistant pneumonia for the sow.
The sooner we all realise that we are all in this together and our chances of success collectively are far greater than by taking that well worn irish route to long lasting disaster, namely ‘Ourselves Alone”. Political will spurred on by a well informed electorate is as important as sound economic decision making if not more so. We will see and hear lots of finger pointing in the coming months, all of it counter productive. Every time I hear complaints such as we were on the hook to the EU bailout fund for half a billion now we will be on the hook for four billion I think someone should point out to them that we could get back under Englands wing and rejoin the Bank of England. How soon we forget in this country noted for its long memory and harbouring grudges.

@ Zhou/Brian

the Brits were never “in” on this were they? Other than via their IMF exposure i mean. This was always a Eurozone solution rather than an EU one.

Anyone know when the statement is due this evening from the EU ministers meeting?
I presume they will need to get it out before the Asian markets open!

@Myself – according to the BBC “A news conference had been scheduled for 1700 BST but was delayed after the German Finance Minister Wolfgang Schaeuble was rushed to hospital. His ministry said he had an allergic reaction…”

Crikey! They have turned down the nuclear option and gone for the biologicial one instead? WMD: wads of massive debt.


Alistair Darling’s statement was reported as a major blow to the Euro by RTE radio news this afternoon. I wouldn’t have thought the UK were involved in the first place if I had not heard that report. It isn’t being reported in the same vein on the RTE website. Maybe there was a misunderstanding.

@southofdub – I suspect it was actually some kind of contagion.

I was trying to picture the Monty Python-type scene in ‘the markets’ tomorrow if they don’t get their finger out:

Trader: ‘Ello. I wish to register a complaint. This ‘ere sovereign debt you sold me. It’s dead.

Hans van EUofficial: Oh yes. The Western Balkans blue bond. It’s not dead sir. It’s just resting.

Trader: It’s dead I tell you (bangs certificates against wall a couple of times)……

It has ceased. It is no longer breathing. etc. etc.

For the real thing, go to

@ Zhou

i saw the whole interview on Sky News when he said it. Seems much ado about nothing imo. Think he was just reinforcing that this is a Eurozone problem rather than an EU problem, and that if the basis of any additional support measures were to ‘support or protect the Euro’, than the UK would not be a part of this. His quote (via the Guardian):

“What we will not do and what we can’t do is to provide support for the euro,” the Chancellor said. “That has got to be for those countries that use the euro, that are members of the euro group.”

@ Zhou

also, he mentioned that where the UK might be involved, as a member of the EU, would be in say Hungary or Romania (just as examples, dont think he was suggesting anything iminent), were they ever to require assistance, and that would be the difference between being an EU problem and an EZ one.

As a mechanism for monetising debt, is there that much difference between outright secondary-market purchases and the repos with overgenerous haircuts which the ECB has been relying on up to now?


What’s your position on debt restructuring? I’m presuming you don’t see it as viable (since I’m also presuming SG is exposed) but sooner or later doesn’t this option have to make it onto the table?

What are the long term advantages of this for die Deutche Leute? They had to swallow a hard pill to unite their country but that was understandable and worth it. In many ways, the Euro came about as a pay back for unification. The Germans, and I worked there,will think long and hard about this. This will fester. Let’s see the result of Merkel’s Westphalia election as an indication as to how the economic medicine is going down.

Their banks are exposed, but in order to save them, they are being told they must finance the whole caboodle. The ECB policy “must” be changed overnight to fund a raft of countries that could not keep their sovereign word, Ireland included and who do not have the political will or political stability to run their economies without borrowing massively for current consumption. All this is the relult of failed political, social and economic systems who’s modus operandi is to pass debt to the next generation. Germany, will have to live with a seriously weaker Euro as well as the prospect of igniting inflation (higher interest rates, eventually) does not sound very enticing does it? It is the quantitative easing option Greece has become the Eurozone’s Lehman moment.

Anyone that thinks they will live with this long term is grievously mistaken. They will already be considering their back door options. The ECB has already given us our NAMA SPV money now they have to fund us again nobody else will.

@Mr. Bond

qualitatively no, quantitatively yes.

In what sense? I know that the ECB is rumoured to be preparing a bigger intervention this time (though the previous ones were no joke). Or do you mean something else?

The raggedy-haired wooly mammoth of our government’s credibility will soon be extinct. With each new revelation it is sinking deeper and deeper into the Anglo tarpit. They say they had NO idea how our banks were operating. No one believes them. So when they said they had NO idea of the scale of the losses they were putting us on the hook for when they nationalised Anglo no one believed them either.

But now we have the PROOF:
“The Department of Finance advised Anglo Irish Bank’s chairman not to express concern in his 2008 annual report that it could require billions of euros in emergency funding.

Documents obtained by The Sunday Times give an account by Donal O’Connor, Anglo’s former executive chairman, of how the Department of Finance watered down a statement he intended to make to stakeholders. In minutes of a meeting signed and dated by O’Connor on February 18, 2009, the former chairman said the Department of Finance told him that the letter was “too negative” and “should not refer to emergency funding”.
(Courtesy of Newsy on another forum)

Many people now commenting that while the Greek government deliberately mislead everyone regarding its national deficit, our government deliberately mislead everyone on the losses of Anglo, Nationwide, AIB etc.

@ Sarah, the options for governments, including Greece, are narrowing as the crisis deepens. Restructuring can still be avoided with good policy making and government. There are quite a number of options open to governments still, and the capacity for surprise remains strong. For example, we have already seen IOUs and some public credits trade well apart from bonds, from California to Europe, for some time. This creates a kind of dual currency. Some imaginative thinking in this and other areas by the authorities over the coming years could keep us on edge.

@ MickeyHickey
Government has “sought expert advice and is following it”. Doubtless. Politicians make choices all the time, and they are driven by much more than the technicals. The sovereign “charity” vs “tough love” approach has won out, much to my surprise. Investment decisions are somewhat rational as driven by obvious goals, politics far less so. Unfortunately, this politicisation of finance in Europe scares investors, and severely undermines confidence.

@ All

what im hearing now is the following:

it’ll be €60bn in loans, €440bn in guarantees and €100bn from the IMF for a total of EUR600bn. The loans will actually be granted by the EU Commission, while the guarantees would be granted by the national governments. As such, it probably doesn’t require new legislation. There would also be additional liquidity from the ECB for the banking sector. This is pretty real and big.

Also, @ Zhou, i think ur earlier feeling about the UK looking to back out may be true (ie they were expected to join in), and while its a bit of a problem, it wont be a deal breaker, more an annoyance.

@ Ciaran et al

‘Bonds now are politicised IOUs… that is, they ever less a function of economic fundamentals. That is a key take for investors from the shenanigans of this weekend and the past days’

The F

@ Anonym

well the “subsidy” given to the banks via the ECB repo is probably worth a maybe 5-10bn to the entire banking sector this year (lets say 1% on 700bn). As such, its not a particularly large amount given the size of total EZ GDP or EZ banking balance sheets. So yes, its QE by stealth, but not at a massive level, as opposed to the 600bn plan outlined above which quite clearly falls under the tag of “massive”.

it appears a two (maybe 3) part plan
1. An extension of the fund set up to help countries in short-term difficulty, currently available to non -euro zone members. An added 60 billion, on top of the 50 billion there now.
2. Loan guarantees/support from bigger and stronger member states to ones in trouble. It appears that this will be similar in some respects to what was done with Greece. The sums being mentioned are 440 billion. Added to the 60 billion this will allow it to be presented as a 500 billion programme. There is talk of extra cash on top of this from the IMF. Countries would have to agree to an IMF style programme. In return it appears they would be assisted in getting access to cash. Not sure of precise mechanism ie will bigger countries underwrite bond issues in some way or source funds to lend on. It also seems unclear whether EU commission will be in the middle of this–possibly not say latest reports.
3. Possibly some ECB move into the secondary bond market, though Trichet is reportedly not best pleased at being put under pressure.

Also talk of Spain and Portugal being asked/told to commit to further fiscal “consolidation.”

What I find most frustrating in all of this is that Ireland is doing what Greece should have done yet we’re still suffering. So yes, we’re working on the solvency problem, but in the meantime the liquidity issue is killing us.
Anyway, it seems to be all about sitting tight, making the cuts, and hope the bond traders are convinced long enough for this storm to pass. We don’t have to raise money for a while, right?

ECB policy : can everyone keep the head please? That’s what we need!

btw, I think talk of the euro breaking up is overstated. We’re going to end up with more integration, not less, when this is over.

@ Sarah

One thing that we need to wake up to is the nature of international economics and canabalisitic profit seeking.

Our national notions that once we arrive there on paddys day with a bowl of shamrock, sure, wont they think were grand!!!

When/If the current test on the euro passes, surely it will head east to test the pre euro EU states??


‘Nuclear option’, a la Sarkozy.
“It is an absolute general mobilization: we have decided to give the eurozone a veritable economic government….
if the early reports are near true, the accord profoundly alters the character of the European Union”.-Evans-Pritchard.
The meeting is still going on and Merkel has yet to speak, yet…

@ Ciaran et al

Many thanks for the mighty debate:

‘Bonds now are politicised IOUs… that is, they ever less a function of economic fundamentals. That is a key take for investors from the shenanigans of this weekend and the past days’

‘Economic fundamentals’ is a useful concept, but it can serve to obscure the facts of history. The global economy is mostly an imposed, rather than an agreed order. Creditor nations, and their banking institutions are defenders of a polarised global system.

The reality is that ‘haute finance’ has always has been political. Financial institutions have power, and governments have power, so pragmatic accommodations have usually been reached. That’s what’s needed here, with less finger pointing at ‘profligate governments’. People will learn.

Part of this story is that European debtor nations are export markets for the centre. ‘Backward’ populations are sold lifestyle and aspirations which are not compatible with the level of their economic development. Serious money is made in lending and in exporting on that flawed (maybe even cynical) basis.

Now that sovereign default is on the horizon, the big European banks are naturally looking to the centre for rescue. As others have pointed out, this is a test for the European project. Fair enough.

Lets hope that the traditional divide between the ‘savage’ periphery and the ‘civiilised’ centre is seen, by bankers and politicians alike, for the nonsense that it is. There is only one economy and we are all in it.

This is precisely the mechanism that Paddy Lynch boasted of in the mid 1960s. He claimed he had ingeniously got around the prohibition on the Central Bank lending to Government. I said it sounded like the same thing to me and he took my head off.

Plus ça change …

@ Sarah Carey

ECB policy : can everyone keep the head please? That’s what we need!

My mother used to say about types who loved bad news: “God, he’d frighten a horse from a feed of oats!”

Thomas Freidman has an interesting column in the NYT on the end of the Tooth Fairy:

We baby boomers in America and Western Europe were raised to believe there really was a Tooth Fairy, whose magic would allow conservatives to cut taxes without cutting services and liberals to expand services without raising taxes. The Tooth Fairy did it by printing money, by bogus accounting and by deluding us into thinking that by borrowing from China or Germany, or against our rising home values, or by creating exotic financial instruments to trade with each other, we were actually creating wealth.

Greece, for instance, became the General Motors of countries. Like G.M.’s management, Greek politicians used the easy money and subsidies that came with European Union membership not to make themselves more competitive in a flat world, but more corrupt, less willing to collect taxes and uncompetitive. Under Greek law, anyone in certain “hazardous” jobs could retire with full pension at 50 for women and 55 for men — including hairdressers who use a lot of chemical dyes and shampoos. In Britain, everyone over 60 gets an annual allowance to pay heating bills and can ride any local bus for free. That’s really sweet — if you can afford it. But Britain, where 25 percent of the government’s budget is now borrowed, can’t anymore.

Most politicians and commentators are in denial about the challenges ahead.

Yes. I note no one responded to my suggestions to abolish the “armed forces”. The longer we have these pointless wastes of money, the deeper in debt we become.

Use the internet for schooling, saving fuel, building etc. All saving is deflationary. Tough! As one parent, sadly often two, will be at home, abolish support for childcare. More women than men may be employed in ten years time anyway! No longer a sex equality issue? Reinstating the family may win votes too!

paul quigley
Of course! But for the purposes of internal stability etc TPTB in localities everywhere identify with the goodness of that stability. Stifling novelty in thought is always top of the agenda. The depression will damage that for a while.

@ All

the 440bn in ‘loan guarantees’ is actually going to come via a SPV formed by the national governments and managed by the EU Commission. Lenny, you’ve done it again…

The dramatic decisions announced in Brussels and Frankfurt are not a surprise.

They may surprise American commentators that so-called sclerotic Europe could make bold decisions and anyone else who aches for a return to confetti currency chaos, that the EMU has a powerful central bank.

The talks in Brussels had been delayed Sunday when German Finance Minister Wolfgang Schäuble was hospitalised, after an apparent allergic reaction to a medication. The wheelchair-bound Schäuble, survived an assassination attempt in 1990.

ECB is already using its new mandate. Aggressively buying PIIGS this morning. Greek 2yr 1400bps tighter this morning already! Ireland in 175bps, Portugal 150bps, Spain 70bps, Italy 80bps. SHOCK and AWE from the EU and ECB here.

The key to the fund is that IMF style cuts are made on condition of accessing the fund.

Civil service pensioners glory days have to end.

Sarah Carey
“Civil service pensioners glory days have to end.”
What a stupid comment! Divisive and tendentious. What a pity.

Ireland’s rep
Alan Kohler on the ABC news, did not mention Ireland, in relation to the big bailout, but pointed out that the Beer drinkers were bailing out the Wine drinkers. Ireland was in neither group, but were called whiskey drinkers.

Sarah Carey wrote “What I find most frustrating in all of this is that Ireland is doing what Greece should have done yet we’re still suffering.” I’m afraid we’ll have to prepare for a lot more suffering.

Even after savage tax increases and brutal spending cuts, the gap between Irish government revenue and spending remains larger than that of Greece which has yet to see serious austerity measures.

According to the government’s budget figures, the deficit will equal 15% of national income (GNP) this year. Our budgetary adjustments have already reduced the deficit by about 12% of national income. Without those adjustments our deficit would have been a monstrous 27% of national income. And that is before the cost of bank bailouts!

Bottom line: we’re still suffering but if we hadn’t taken the actions we have already undertaken, we’d be suffering much more.


Agree. But we had started…


Divisive? Oh c’mon. Colm McCarthy observed during the week on Newstalk (?) that so far the PS pensioners have hardly been hit (remember the pension levy was designed specifically so that the pensions would be spared). Meanwhile the lower paid public sector workers, the very ones saddled with negative equity mortgages are taking the biggest hits. Cormac’s point on the suffering is bang on – there is more to come – and so far those most protected, and least deserving in my view – are the benchmarked retired civil servants.
Cuts must be across the board. That’s not stupid.

Taxes are really all that is left…… as we have been saying for months…..

Those would be the Fabians and the illuminati banker friends! Insider trading is to be banned soon in US Congress …. no more champagne there, I don’t think!

Sarah the C
Retired people have contracts that are one sided. They do not hope for continued employment, promotion etc. They are more likely to test what may be unlawful. The Government will use taxation, rather than have to backtrack and handover billions to those whom they have frightened into submission. Power, Sarah.

My ol buddy Facthna, Falklands to some, shouted at this minions recently. Why? Illusions becoming thin? How many people are killed in Ireland ‘cos they are in gangs? The Irish act as gangs in all things. The government and loud aggressive would be journos are pushing the largest gangs. I don’t think they will, but ya never know? The government gangs can get a new leader if required. Go gang!

Frightened into submission? I think it’s the government who are frightened by the angry grey vote descending into Kildare St waving their free travel passes. Go gang indeed.

@ Pat
Getting defensive on the ould pension there!
It is time this all contribute!
Delinking the existing pension from future wage increases would also assist in keeping inflation at bay

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