Europe’s €200 billion reverse wealth tax explained

Harald Hau is an excellent German academic financial economist  (living in France) – his take on last week’s deal is available here.

54 replies on “Europe’s €200 billion reverse wealth tax explained”

One might add to this that some banks had already marked down some of their Greek debt holdings, so for them the real gains are quite substantial.

Overall I would also have preferred a solution that would deal with the fallout of the required restructuring in so far as it affects Europe, rather than the more blanket approach.

“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.

Incidentally I liked the reference to Lorenzo Bin Smaghi; presumably a Freudian slip. What devastation Osama Bin Laden have accomplished if he’d had a central bank!

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.

An excellent paper.
I have no idea who Harald Hau is but he is spot on.

On why Europe has ended up with this deal, you could not get a better explanation.

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.

Bankers were asked to come up with a plan for private-sector involvement under the leadership of Ackermann and the Institute for International Finance; what they came up with was a plan for more support.

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

And his conclusion. Correct I would say, but may take time to emerge.

The real peril for the euro may come from a taxpayer revolt against a financial elite that has betrayed the interests of the majority of citizens.

As I have commented elsewhere, the response will echo that of the Unionist Edward James Saunderson commenting on Home Rule in the House of Commons:
“Home Rule may pass this house but it will never pass the bridge at Portadown.”

There will be many such Portadown bridges in Europe to stop this deal.

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.

Ok the new social contract is that the nation gives up its remaining monetory & border control functions during the 1990s – then in the crisis phase it gives up its fiscal power to the monetory authorties
At the same time the Fiscal authorties bail out the monetory authorties , now the eurocentrics want to outsource fiscal authority directly into a European Black hole…… the future Europe it will be pointless even to protest.
If the entire Eurozone project is not a stitch up I don’t know what is.
We must break free from this giant geo political / economic cadaver before the remaining bits of European achievement becomes a animated Dr Frankestein created monster.
Have any of you guys been to Brussels lately…..

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.

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 …

You are trying to justify insanity – the entire ecosystem is at best a absurdity.
Its been tested and found wanting – its time to let it go.
I don’t even see why Germany is such a great example – it just exports gadgets & deflation to the rest of us , it seems incapable of generating internal wealth as its utilties are run down.
Its over.

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.

Sarkozy pointing out that off balance sheet liabilities are not on the balance sheet?

It is like NAMA liabilities are off Irelands balance sheet. Or even the Fannie Mae & Freddie Mac liabilities are off the US balance sheet. Guaranteeing the debt of an entity that is unlikely to meet its liabilities will sooner or later put the off balance sheet liabilities back on to the balance sheet.

The Fear Uncertainty Doubt on the Greek crisis is so far that a bank in Cyprus might need to be recapitalised. Is that a good reason to take on a contingent liability of +100bn EUR?

@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.

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.

“The banking sector is the weak spot of any restructuring plan involving sovereign default. Here, direct bank support through bank recapitalisation is a much more effective and cheaper solution than a full guarantee of sovereign debt.

The taxpayers could get bank equity in exchange for their money. If this crisis is like others, there is a chance that share values recover and taxpayers break even in the long run. The 2007-2009 crisis has shown that governments are indeed able to contain a banking crisis by resolute action like forced recapitalisation and temporary nationalisation of banks”

Couldn’t agree more


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.

If Mr Hau’s suggestions had been followed not a single Greek bank would have avoided bankrupcy .It is hard to imagine that Greece could avoid default in this case.If Greece defaulted all hell would break loose.

Nobody likes bankers but their demise is in nobody’s interest.

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.

Overseas commentator said : “If Mr Hau’s suggestions had been followed not a single Greek bank would have avoided bankrupcy .It is hard to imagine that Greece could avoid default in this case.If Greece defaulted all hell would break loose.
Nobody likes bankers but their demise is in nobody’s interest.”

A perfect example of what the banking lobby want us to think.

Banking needs to be reclaimed from the bankers. The demise of the present bunch of bankers is in everyone’s interest.

@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.

No, Overseas, you misunderstand the proposal. All the Greek banks that went bankrupt would be recapitalised – perhaps by the EFSF – but the European taxpayers would get an ownership stake in the banks in return.

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.


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.

@ Joseph Ryan

I am very well aware that the French and German governments are not examples of fiscal rectitude ;but more to the point: what do you propose? Do you want the Greek banks to sink? Do you think that a Greek default would be in any way favourable to Ireland?
It is true that the bail-out of the bankers is socially regressive ,but what is the alternative?

The German and French taxpayer will,in the best case ,see their sovereign debt increase,even if they do not pay the interests, they will bear the risk,which they could certainly do without.


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’.

@Joseph Ryan on the ECB

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.

I think German Bundesbank monetarism might be its own, slightly less crazy, school, but otherwise, I agree.

Part of me wonders whether the intention of the EZ was always much like Margaret Thatcher’s council house sales initiative, designed to inevitably change the political pallor of the EU to a more self centred, less social democratic, way of thinking, leaving nations no choice but to be selfish as they competed ever more intensely for the favours of capital.

Perhaps not though, never ascribe to malice…

@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.

@Overseas commentator

If Mr Hau’s suggestions had been followed not a single Greek bank would have avoided bankrupcy .It is hard to imagine that Greece could avoid default in this case.If Greece defaulted all hell would break loose.

Nobody likes bankers but their demise is in nobody’s interest.

This statement just shows how right Hau was when he said in his article

Bankers and many journalists convey the impression that we face a choice between a full sovereign bailout and a catastrophic banking crisis

It is a false dichotomy, endlessly promoted by the ECB and the financial establishment in general. The argument usually involves lots of handwaving and “…. Lehmans ….. nuclear meltdown …. Lehmans ….. collapse of the Euro …… Lehmans …… armageddon …. Lehmans… ” The problem is that this isn’t argumentation, it’s sloganeering.

For a start Lehmans and Greece are very different as this EU Parliament paper shows (section 4.2.2).

With the right political will and leadership there are many ways that could have been found to ensure that private investors were not 100% bailed out by taxpayers, e.g. as outlined by Joseph Ryan. The Brady Bond program is an existence-proof that this can be done.

Also waiting for your answer to The Dork’s pertinent question….

@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.

@PR Guy

I do see some similarities with the black and white fundamentalist thinking of the ECB and the Tea Partiers…

ECB: No haircuts, of any type, in any circumstances, not even for zombie non-systemic banks…

Tea Party: No tax increases, of any type, in any circumstances, not even to remove tax breaks for the very highest earners…

In the US, the debt limit and the budget debate are two things that should be, and in the past have been, separate issues. Now however they are interlinked in a debate that is the start of the 2012 election. I think there’s still a chance of a 1-line bill introduced at 11.55pm on Aug 1 that raises the debt limit, but you never know – there are some real nutters in the Republican Party now, whose economic views make Ireland’s ‘Loony Left’ look like Nobel prize-winning economists.

@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.

@Bryan G
Like M.Hau you affirm a lot and you demonstrate nothing.If you believe that the failure of the entire Greek banking system could be without consequences for the outside world ,yo are definetly in a minority position.

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.

@Overseas commentator

You are again confirming your all-or-nothing mindset. Also you are attacking a strawman.

I do not advocate a disorderly collapse of the Greek banking system. Liquidity and payment systems need to be preserved. If the banks are insolvent then they need to be recapitalized unless they are non-systemic and can be wound down. This recapitalization can be done with public funds, but not to the exclusion of any losses on bondholders, who should take losses also, proportionate to the degree of insolvency. This requires a SRR, but almost 3 years after the initial crisis the fact that there is not one in place reflects the fact that there was no will to do it, not that it could not be done. There are still big problems with moral hazard and accountability in the financial system in the USA, but they are way ahead of Europe in this regard. Depositor preference was introduced 20 years ago for example, and Dodd-Frank introduced a new resolution regime a year ago. There is plenty of precedent there to use as a basis.

@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.

@ All

Herewith an FT economist blog link contribution which addresses the core difficulty: that of organising a “pan-Eurozone” authority that would guarantee the solvency of the euro banking system.

Everything else is simply fiddling with the “system in development” which is set to crash if decisive action is not taken. The attempt by Schaeuble to convince his reluctant party and coalition colleagues that Germany retains a veto under the current system, and could pull the rug from under it at any point, is but the most recent example of how anything involving unanimous intergovernmental decision-making carries within it the seeds of its destruction.

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.


Ireland guaranteed the solvency of Irish banks and the result is plain to see, yet you argue that the EU should set up an authority to guarantee the solvency of the euro-zone banks?

Socialising the losses, privatising the gains. Or are you arguing for a socialising of the gains as well (nationalising all the banks)?

@ 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).


a lender of last resort provides liquidity.

A guarantor of solvency guarantees debts.

You are arguing for a guarantee of the solvency of the euro-zone banks, doing that will leave the profits with the private sector and the losses to be socialised.

You seem to have a problem with the German executive being limited in its actions by German courts. Are you saying that the executive do not have to follow the law?

You seem to have a problem with the German executive being held to account by the German parliament. Are you saying that the executive should be allowed to override an elected parliament?

An executive not constrained by law nor limited in its power by a parliament is commonly known as a dictator.

@ 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.

@Overseas commentator

“Deposit preference” is not deposit insurance – it is the legal seniority of deposits over bonds. This was introduced in the early 90s after the Savings and Loan crisis. This gives the legal framework to impose losses on bondholders while protecting depositors, as was done in the case of the failure of WaMu, for example.

To move to the topic of sovereign exposures of BNP, DB etc it needs to be remembered that EU banks have €1.8trn in capital, but under the current power structures in the EU, this is “off limits” and must not be touched (notwithstanding the fact that the whole point of the equity is to buffer against poor investment/lending decisions) – instead taxpayers must fill all gaps. Nomura estimated that with a 40% haircut of all sovereign Greek, Portugese and Irish debt combined, the losses in German banks would be 3.6% of capital, in French banks 2.7%, and about 1% elsewhere. Hardly a catastrophe.

I would argue that by not addressing the fundamental issue of Greece’s solvency, the EU left the door wide open for the focus to move to Italy and Spain. There is huge uncertainty since the basic problem of how Greece’s massive debt will be handled remains, but the institutional changes and mechanisms needed as part of an overall fix have not been put in place, and the current setup is clearly unworkable – e.g. as shown with some of the latest problems.

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

@Overseas commentator

Deposit insurance is mandatory in all EU countries, with minimum standards set by the EU Commission.


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

The worst part of the Euro-deal, was the loosening of the rules around the EFSF/ESM. -even worse than the soft language around private involvement.

The document spoke of allowing EZ states access EFSF funding without entering onto a programme. This is madness.

A programme of reform to revive the economic performance of bailout countries is essential for any state to state lending. These programmes should be seen as the exit strategy from emergency lending. Without one, we are simply providing more cheap money -the source of all of our problems.

For bailed out countries to continue with business as usual is utterly unacceptable. The first step to kicking any habit is to admit that the way you have been doing things was wrong. By fudging this issue, EZ leaders are opening the way to disastrous transfers to unreformed deficit states. I feel sure that this tool will not be used however, because surely the leaders realise the inevitable failure such an approach would result in.

@ Bryan G

In your reply to Overseas Commentator above, you state “I would argue that by not addressing the fundamental issue of Greece’s solvency, the EU left the door wide open for the focus to move to Italy and Spain. There is huge uncertainty since the basic problem of how Greece’s massive debt will be handled remains, but the institutional changes and mechanisms needed as part of an overall fix have not been put in place, and the current setup is clearly unworkable”.

I would agree with this assessment and, more importantly, of course, so do the markets.

This raises an interesting question is to what the major capitals may now be trying to agree. There was a little remarked but very grave spat between the two main players during the week which was only rectified by the joint article by the two finance ministers in the FT yesterday. Link herewith for ease of reference.

But what exactly have the authors in mind regarding “evolving the institutions” of the EZ and do they seriously think that this will stop the crisis?

Italy has cancelled a bond auction due in August.

Merkel has led the EZ merrily up the garden path over the past eighteen months and it is now politically impossible for her to retrace her steps. The juggernaut of the ratification of the changes to the EFSF and the ESM will continue on its way. But simply stating that France and Germany will do “everything necessary” to protect the euro no longer cuts any ice when it is self-evident that there is no agreement on what this means. The solution, being adverted more and more openly, lies in agreement to issue E-bonds and the creation of a European Debt Agency. (The references to a European Monentary Fund seem totally – if deliberately – misplaced to me).

This raises the fundamental policy dilemma for France of whether such a step will help protect or put at risk to the country’s AAA rating. But the choice can hardly any longer be avoided. It is also worth noting that any objective reading of Article 125 of the Treaty on the Functioning of the EU does not preclude immediate action, as Juncker and Tremonti suggested in December of last year. The pending decision of the German constitutional court on the EFSF should make for interesting reading (whenever it emerges).

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.

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