Europe’s €200 billion reverse wealth tax explained

“If you ask a frog to come up with a plan for draining a swamp, you are like to end up with a proposal for more flooding.”

Herr Hau gets it. And with the Spanish 10-year refusing to dip below 6% for any length of time, it’s pretty clear that the water is risng again.

Its clear to me the ECB has mounted a all out war against the various European nation states since its inception, starting with massive credit inflation and now not allowing the production of money to pay debt that should have been defaulted on anyway – picking off the people of Europe one by one.
They are using a ignorant Germany as a modern day Clan Campbell to locally enforce their new social construct.
We must break from this vice whatever the cost.

Most enjoyable pointer Mr Lane, commenting on the involvement of the banks in working out a soverign debt deal Herr Hau also gives us:

We would never ask the tobacco industry to work out a new public health policy.

In an Irish context how does one reconcile the eminent good sense in this article with the idea that our best path out of the crisis is to speed up the repayment of debts, debts that most outside the ECB or banking circles thinks we should not have incurred in the first place? Its a policy that sounds both self destructive and defeatist.

Harald Hau may be an excellent economist but he is very poor politician. If the issues were as black and white as he suggests, no politician would have survived the manner in which they have collectively been handled by them. Imposing losses and re-capitalising banks clearly makes a bad situation worse if it is adopted as a generalised solution within an inadequately structured monetary union where, as the economist Paul de Grauwe has persuasively argued, the absence of a clear lender of last resort (LOLR) makes the risk of contagion in bond markets inevitable.

The evidence is there to be seen in the case of Cyprus where the exposure of one of its major banks to Greek debt is about to push the country into the EFSF.

The leaders of the creditor countries are on the horns of a peculiarly sharp dilemma. Either they indicate political support for the ECB taking on the role of LOLR or they set up an alternative mechanism. Germany has trying to avoid both choices cf. the comments of Regling linked to on the other thread. Nobody wants to pay the bill. But as Hau points out, the guarantees now on offer have a monetary value, their big advantage being that they do not impact on the budgetary arithmetic of the countries contributing them (as Sarkozy was at pains to point out).

Herewith two contrasting and interesting links that address the criticism made made by Hau of the ECB.

http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000222630.pdf

http://www.irishtimes.com/newspaper/finance/2010/1126/1224284182197.html

An institution of the EU cannot invent its own rules and must live within them unless the states giving it its legal authority choose to change them. (This is a general point and not to be taken as a defence of the ECB which has simply made less mistakes – within its remit – than any of the other players in the crisis).

In short, Hau is stating the obvious and missing the point.

Summary of the position of Mr. Harald Hau: no bailouts whatever. That means that by now, Greece, Ireland and Portugal would simply have defaulted. In all 3 countries, most banks would be bankrupt too. Would that help these countries to recover more rapidly? And I leave contagion effects aside …

Hau says the private creditors’ contribution is therefore extremely modest compared to the €109bn in new public commitments.

The European Commission has put the likely net private sector contribution from bondholders to the Greek bailout at €93bn in the period 2011-2020, as per Philip’s PSI thread.

Hau is looking at the contribution to 2014.

Merkel was roundly criticised for insisting on private sector participation and as we know, the ECB only relented very reluctantly.

It’s easy for us all to recommend consequential decisions when we never have to make them.

@Michael Hennigan:

There has been a considerable amount of disagreement on the PSI involvement as being quoted by the ‘European Commission’ document.

You use a net figure of €93 billion (2011-2020) from the document. I cannot say that they are wrong but I suspect they are being very disingeneous.

I would refer you to comment of @BryanG in another thread.
http://www.irisheconomy.ie/index.php/2011/07/21/eu-council-statement-july-21/#comments.

It would be helpful if the EC document was put into a version of English that did not obscrue the reality in jargon. It also lacks definition on credit enhancement etc.

In short I think the document is designed to hide the thruth of the fact the PSI is risible.

@Incognito:

Summary of the position of Mr. Harald Hau: no bailouts whatever.

Perhaps you were reading a different document. One could not possibly come to your conclusion from reading the article.
My read of his article is that people who loan money do so at the risk of not being paid back. And there should be no bailouts for bankers and financiers.

That ‘their demise is in nobody’s interest’ is a systemic problem that governments should start to address, not a reason to keep transferring wealth to them in perpetuity.

@Zhu De
I agree ,but as long as the systemic problem is not solved,it would not be prudent to act as if it had been.

The Lehman default destroyed a good part of the world wealth in just a few days.If there is a major default in Europe the time scale would be about the same.The only reason the governments are forced to agree to intervene is because they are acutely aware of that fact.
I am glad that they do ,even though there is plenty wrong in a system where a housing bubble in Ireland or false accounting by the Greek government can cost a lot to the French or German taxpayer.Practically no progress has been made since Lehman bankrupcy to make the financial system more robust or more fair.

@Overseas

A housing bubble in Ireland would have cost the French and German taxpayers nothing, if the citizens of those countries had deposited their savings in responsible bank that loand only to other responsible banks.

And if the Euro problems stopped with the single PIG, Portugal, Ireland, Greece, then the German and Frenck taxpayer would stand to lose very little.

And when it comes to seeing who is close to the edge, could I suggest that neither Germany nor France, more especially not Italy or Belgium are very far from the edge of the cliff.

Have a look at country debt stats in the attached link: This crisis is not just about rogue Irish bankers and lazy Greeks. It is a lot closer to home on mainland Europe.
That is why the German and French governments are trying to wage this war in the peripheral theatre.

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-26042011-AP/EN/2-26042011-AP-EN.PDF

@Overseas:

1. A EZ wide SRR (Special Resulution Regime) should have been put in place with bank depositors first in the queue and guaranteed.

2. The Greeks banks and the Irish banks and any other banks should have been put into administration. Bondholders should have been told to queue up.

3. The exact same principal should be applied to sovereign debt. If a lender gives money to somebody, he takes on risk. Otherwise keep the money in gold under his bed. That too is risky, because he could get robbed or indeed killed for the gold.
4. As for the ECB, the sooner that institution is posted into oblivion the better for all of Europe. It is a right wing, Chicago school, monetarist institution, hitched on to what once aspired to be a European social democratic experiment. It has infected the EU to such an extend that the not only is the EZ dying in its sick bed, but so too is the EU. From here on, the only route is backwards.

But, hey, cheers, the ECB might achieve price stability and it will of course coincidentally protect the wealthiest class of citizens in Europe and worldwide.
But it will have destroyed Europe. And a destroyed Europe has had devasting consequences in the past.

From Ireland’s point of view, the sooner we start to recognise this reality the better. We should realign with a semi detached UK and not tie ourselves to the new ‘uncouth beast that is slouching its way toward Bethlehem to be born again’.

@Michael Hennigan, @Joseph Ryan

The European Commission has put the likely net private sector contribution from bondholders to the Greek bailout at €93bn in the period 2011-2020, as per Philip’s PSI thread.

If someone interprets “contribution” as “willing to lend” then the statement is correct, if you’re looking at it from the point of view of the EFSF. If someone interprets “contribution” as “banks taking a haircut” from the point of view of Greece, then the statement totally misleads. I believe the language used in the various communiques was deliberately vague to allow for spin. And it worked. For example the Telegraph wrote (admittedly not known for its incisive and impartial reporting on EU affairs)

Greece is set to lead the eurozone’s first-ever default as European leaders agreed that the private holders of Greek debt will take a hit of €106bn over eight years. Here, we look at what the expanded EFSF is…

The English language versions of some European newspapers also had articles in the same vein (which must surely have pleased the relevant political leaders, assuming the native language versions were the same).

The reality is that the banks are willing to lend €121.5bn of new debt to Greece (in exchange for debt with a face value of €135bn) and the EFSF is willing to lend €42bn to Greece to enable this to happen (to collateralize to new debt).

One of the problems with the reporting of the bailout terms is that all figures need to be interpreted from the perspective of a particular party (i.e Greece, EFSF, Banks), but this is frequently not done. For example

The EFSF can say, “Without PSI we would be lending an additional €135bn to Greece; with PSI we’re only lending an additional €42bn, so we’re saving €93bn in what we have to lend – This is good”

Greece can say “Without PSI we would be borrowing an additional €135bn at 3.5% from the EFSF to redeem our bonds; with PSI we’re borrowing an additional €163.5bn (from EFSF and banks) to exchange our bonds, with the rates on various tranches ranging from 3.5% to 6.8%. – This is not so good”.

It is the EFSF, not Greece, that benefits from the PSI, i.e. it is the EFSF, not Greece, that is ‘saving’ €93bn. Greece won’t be ‘subtracting’ the collateral loans from the new bank bonds in their calculations, but will be ‘adding them together’ to figure out their annual cashflows and interest payments.

The article Greek rescue bizarrely increases its debtshas more on this.

@Bryan G.

“The problem is that this isn’t argumentation, it’s sloganeering.”

The problem is that everyone has different views of the same territory I guess.

I heard a nasty rumour the some bankers might just be willing to demonstrate what can happen in a worst case scenario by letting Cyprus go to the wall for a few days (Massive run on deposits, ATM’s stop working, riots, soup kitchens, etc.). Then they will be able to go
“…. Lehmans ….. nuclear meltdown …. Cyprus….. Lehmans ….. collapse of the Euro …… Lehmans …… armageddon …. Cyprus….. Lehmans… ”

Nothing would surprise me over the next few days….. and I also wonder how that debt ceiling thing is working out for the USA. We seem to be lurching from one crisis to another.

@Bryan G

Actually, Michelle Bachmann did come out in favour of tax increases on the low paid, so Tea Partiers aren’t necessarily anti-tax in all circumstances.

This is an excellent article which pinpoints the transfer of wealth to the wealthy, and further sets out the EU’s political institutions’ inability (compared with the USA) to stand up to the powerful banking lobby.

I would be interested to know wht proportion of the wealthiest people in the world are in the EU and to what extent it is in our interest to keep it that way. In circumstances where capital respects no boundaries it appears the benefits of subsidising this position are greatly diminished in the modern era of globalisation.

@Kevin Walsh

Indeed. I stand corrected!

@Bryan G
There is a deposit insurance in several European countries ,including France since WWII.
I agree with you that there should be a resolution process like the Dodd-Frank provisions in Europe ,but there is none ,right now. Even if there was one ,the system would not cope with the default of Deutsche Bank or BNP, for example, they are too big (maybe they should be broken down in several pieces, but this is another story).
The process you are describing would take months, the contagion from a generalized default of Greek banks would take hours, or less. Paulson will go down in history as the Treasury Secretary foolish enough to let Lehman default.

Looking at the USA’s debt problems, I wonder if having debt backed up ny the whole of Europe might not eventually lead us into more trouble!

As somebody said about Greece (paraphrasing): “When conditionality didn’t work we said we needed a crisis to get Greece in line, now we have a crisis and we are talking about controlling the situation through conditionality again.”

The USA is going to extend its debts ceiling because it simply has to. At least the EU is allowing some sort of default, even if it does feel like we have been mugged by the banks yet again.

@ Jesper

I am arguing, and have done so consistently and repeatedly, as a non-economist but, shall we say, as an informed observer, that the “joint production of confidence”, to take the title of the paper by Winkler, requires that there be a credible lender of last resort in the euro system and this cannot be the ECB because it is not the creation of a state running a national currency.

As Lombardi puts it (the wording could have been more precise): “The package represents a sensible compromise: eurozone countries will provide some sort of guarantee for the collateral provided by Greek banks, which has been downgraded to default status. In turn, this will allow the European Central Bank to continue to refinance the Greek banking system, in keeping with its de facto role as lender of last resort which has led it to fill an institutional and political vacuum since the onset of the crisis”.

The “institutional and political vacuum” to which he refers is being filled in a fatally flawed manner and if the faults inherent in the EFSF/ESM as presently constructed are not corrected – in the manner which he outlines – the euro will collapse.

The issue that you are referring to is quite different. Had such a facility such as that described by Lombardi existed, Ireland would not be in the pickle that it is but pending its creation, the country will remain almost totally responsible for getting itself out of said pickle. Sinn féin! This is as it should be as it was a government elected not once but twice that was responsible, especially in jumping blindly into the blanket guarantee.

But there is a more than residual responsibilty linked to the collective responsibility for the euro which is now being met – in arther haphazard manner – not because the creditor countries involved want to do it but because they have no choice. Either that or they pull the house down and put Europe into a deep economic depression (if the Tea Party does not beat them to it).

@ Jesper

I suggest that you read the Deutsche Bank study on the LOLR issue to which I posted a link. The problem is that there is confusion in the management of the euro with regard to the distinction to be drawn between the liquidity and solvency issue. The responsibility for the solvency of the national banking system – not individual banks – lies ultimately with the governments of the EZ. As Philip Lane points out, this becomes an unreasonable burden for some in the context of a monetary union. This is the problem that has to be resolved collectively. Guaranteeing the solvency of the sytem does not imply what you suggest. A common bank resolution regime would also be required and, indeed, the Commission has tabled a proposal in this regard.

I have no problem with the German executive being limited in its actions by German courts. But I do have a problem if these courts, and especially the Constitutional Court, take it upon themselves to assume to limit the actions of the executives of other countries. If the CT in Germany decides that one of the country’s democratically made EU commitments is incompatible with the constitution, the solutions are simple. Change the constitution or renege on the commitment! Not being given to doing the second, Ireland has had to do the first on several occasions.

One of the executive functions of any government is to conduct the foreign relations of a state. As long as it has the confidence of its parliament, there is no problem. If the executive takes an action which causes it to lose the confidence of the parliament, the solution is also simple in any democracy. Hold an election! It is not that parliament, and many in the EU are trying to do it, notably the German Bundestag, should attempt to usurp the role of the executive.

@Bryan G
There is a deposit insurance in France,on the same model as the American one.

@DOCM,

might I suggest you read something more than the FT and papers issued by banks? You talk about realpolitik but as far as I can tell you’ve not even read Macchiavelli.

You’re confusing liquidity with solvency.

You’re are arguing for dictatorship in another country.

An executive can lose a vote without there being a need for a re-election. It happens in democracies.

Countries can become illiquid and loans to countries can be written down without the world ending.

Banks can face equity losses without the world ending

I’d also add that after 4 years of financial turmoil, I cannot imagine that any truly fragile financial institution is still holding onto greek paper. Surely they will have traded them away to those with greater risk appetites, who can absorb the costs of burden sharing. I have no figures or even commentary to cite, but it seems like a natural result of all this turmoil.

http://outside-of-the-walls.blogspot.com/2011/07/plan-to-save-euros.html

@Ger
It was not so much cheap credit but a very large ratio of credit to the base.
Central banks first started to target interest rates rather then the base to “tackle inflation” in the late 60s – this period led to a long slow run down of capital resourses to feed interest income.
Beginning in the early 80s under Volckers Fed he instigated a policey of hyper inflating credit to feed very high interest income on treasuries and thus defend the dollar in the short to medium term.
The long slow fall in interest rates since then reflect a destruction of capital resourses to feed this monster as people with capital aggregated a higher & higher amount of capital but with less & less return on a % basis.
Its been a 40 year old car crash.
The redirection of interest income back to their respective treasuries in the Anglo-saxon world is a form of recaptilisation but perhaps too late.
The ECB perhaps feel that their is more wealth to pick so they want to re wild the periphery much like Volcker destroyed American industry.
Its all very sad really.

The ECB might achieve price stability and it will of course coincidentally protect the wealthiest class of citizens in Europe and worldwide.