Colm on the summit

This post was written by Kevin O’Rourke

In honor of the summit, I thought I’d post a link to Colm’s last piece in the Sunday Independent, which hasn’t yet had a thread of its own.

Summiteers, please remember: just because a particular “solution” seems politically necessary, that doesn’t mean that it makes any economic sense at all. If you really want to save the euro (as opposed to enabling it to hobble along for a few more weeks, months or years), then shouldn’t reforming the mandate of the ECB be at the top of your agenda?

And do please think about what constitutionalizing the equation

“Europe = austerity + unemployment”

will mean politically for the European project going forward.

77 Responses to “Colm on the summit”

  1. Kevin Donoghue Says:

    What is economically necessary is politically impossible and vice versa.

  2. Desmond Brennan Says:

    The ECB getting involved doesn’t distinguish as to whether crisis was one of solvency or liquidity, and doesn’t reduce toxicity of existing bonds held by banks.

    ECB involvement is a necessary condition to deal with a liquidity crisis, but not sufficient to deal with the overall crisis. Ultimately existing toxic debt needs to be split into 2,or perhaps 3 categories:

    A) Default: paid for either via private sector, fiscal transfers or monetization. Amount would vary per country (e.g. say Greece 70%, Irl 20%)
    B) Official buffer: if a swingeing default is not liked, an official source (e.g. EFSF etc) can take on some ’super junior’ debt, that will act as a buffer proving the rest is solvent
    C) Solvent debt: stuff that can be trusted

    Unless losses are recognized, there is no solution. Also, furthermore, the crisis is wider than one of mere sovereign debt.

  3. The Dork of Cork Says:

    Angela said countries should not be nationalistic or selfish or something along those lines when she was going in to the meeting.
    She is taking the piss , I like her sence of humour though - quite English.

    Nah - its over at least in my eyes - the crisis did us all a favour by exposing the bullshit - we should be grateful for that at least.
    But when we leave we will still have the 2 pillars extracting what little wealth remains - theres no escape from the priests either local or international.

    Anyhow another 10 years of this and there would be no escape at least from the international debt web - eject eject eject.
    I’m off to join the submarine force for the coming campaign in the North Atlantic - I hear the hot bunks are getting hotter.
    http://www.youtube.com/watch?v=nYoNubDZfnU

  4. ceterisparibus Says:

    “Raoul Ruparel, of think tank Open Europe, told the Telegraph:

    Rather than focusing their energies on the key issue at hand – avoiding immediate crisis – France and Germany have tried to secure another couple of changes which they are keen on, namely the harmonisation of corporate tax bases and the use of majority voting for ESM decisions.

    Unfortunately, this looks to have backfired by stoking the anger of Ireland and Finland respectively, another obstacle to forming a lasting agreement.”

    Apparently the law committee that advise the Finnish Government has said that the proposal to adapt majority voting is unconstitutional.
    So we have another dead proposal.
    Enda is angry..watch out Angela.

  5. ceterisparibus Says:

    “And do please think about what constitutionalizing the equation

    “Europe = austerity + unemployment”

    will mean politically for the European project going forward.”

    “Europe = austerity + unemployment” =http://ekathimerini.com/4dcgi/_w_articles_wsite2_1_08/12/2011_417826

  6. Ahura Mazda Says:

    I liked this article by Martin Wolf a couple of days back:
    http://www.ft.com/intl/cms/s/0/396ff020-1ffd-11e1-8662-00144feabdc0.html#axzz1fxcAUSrL

    I have little confidence that a solution will be found at this summit. Judging by the wishlist that appeared after the recent German/French talks it seems no progress is being made on the important issues. For example a move on corporation tax is on their wishlist but this has bugger all to do with the current crisis. It really gave me the impression that the French and Germans sat down and disagreed on LOLR and agreed to produce a wishlist that would appeal to voters in both countries.

  7. ceterisparibus Says:

    sorry, link does not appeared to have worked.

    here is the gist of the article…

    Data released by statistics service ELSTAT showed the annual pace of contraction in industrial output accelerated from a 1.7 percent drop in September, contracting 12.3 percent in October. Manufacturing production also declined 11.9 percent.

    “The big drop in the October industrial output year-on-year reading reflects depressed domestic demand and slowing export activity due to weakening conditions in main trading partners,» said EFG Eurobank economist Platon Monokroussos.

    Industrial production fell 5.8 percent in 2010 and has been in steady decline since at least January 2009.

    and worryingly…
    Young people — who have led protests against the government and austerity measures in recent months — continued to be the hardest hit, with the jobless rate in the 15-24 category worsening to 46.4 percent from 43.5 percent in August.

  8. The Dork of Cork Says:

    @Ceterisparibus
    They possibly could have made a mistake by exposing their plans before they had complete control.
    Surely thats a good thing ?
    Maybe we will not be assimilated , maybe

    Ernst Stavro always made that mistake - his arrogance was his weakness.
    He never just killed Bond in a conventional fashion with a quick bullet to the head but always talked about his plans to take over the world before a overly elaborate death sequence.
    Must have been a deep psycological guilt thingy that needed to be expressed.

  9. Kevin Donoghue Says:

    As I noted in another thread, Ezra Klein makes the point that German interests (as perceived by those who make policy) are quite well served by letting the problem fester.

    I’ve often felt that economists (with some exceptions and Kevin O’Rourke is one of them) pay insufficient attention to the fact that, when it comes to international relations, the power to inflict pain on other nations is something that politicians are quite happy to have and quite willing to use. So a lot of that stuff about welfare-maximization is simply beside the point. German policy may be explained in part by muddled thinking, but it does seem that it’s also partly a matter of not “letting a crisis go to waste”, as Rahm Emanuel put it.

  10. colm brazel Says:

    Its a curious piece I attribute to the fact the Irish are good at beginnings; we are good at middles; but we are not good at endings :)

    Colm presents lots of evidence for leaving the euro, but he can’t seem to draw upon the deductive conclusion implied by his own logic :-)

    For example,

    Whether Europe should proceed to fiscal union is rather a large question and it is not clear that such a project enjoys political legitimacy.

    Actually, its quite clear that it doesn’t. Fiscal union in the meaning implied above is not in Lisbon, or anywhere else. That’s why we are debating necessary treaty changes.

    Having argued well that the EMU is a zeppelin balloon poorly conceived and now catching fire, colm writes:

    The agenda for Friday’s summit should consist of just two items. First, deal swiftly with the immediate crisis. The ECB (not the IMF, China, or the Red Cross) should be instructed to do what central banks do in a financial panic, that is, mobilise the balance sheet decisively to restore confidence.

    Ahem, no, Colm, its time we got ready for exit, muddles can’t last forever, we can’t go back to 1999 and reconstruct it. You need to focus on a good ending rather than middle muddle mess.

    We are in the Zeppelin, its on fire and we need to get out of it.

    Hopefully, the whole matter will be sorted soon and I can dwell on more interesting topics, but while the game is on, I’ve been giving it a little thought, social responsibility, you know, followed later by, told you so, my opinion given earlier, eg

    http://www.irisheconomy.ie/index.php/2011/12/08/the-euro-summit/#comments

    11:31

    12:25

    12:53

    1:08

    nb

    1:50

    1:54

    nb

    http://wp.me/pBbF3-gp
    3:36

  11. colm brazel Says:

    Also ECB has attempted already to ‘mobilise the balance sheet’ within its current remit.

    ECB can’t pay for Italy, Greece, Spain, Portugal, inner core and peripheral sovereign troubled debt….it doesn’t have a big enough balance sheet!

    It has failed to do so, end of story.

  12. Ceterisparibus Says:

    @Colm
    Re…”The agenda for Friday’s summit should consist of just two items. First, deal swiftly with the immediate crisis. The ECB (not the IMF, China, or the Red Cross) should be instructed to do what central banks do in a financial panic, that is, mobilise the balance sheet decisively to restore confidence.”

    Simply wrong, as confirmed by Draghi today and constantly by Weidmann, Merkel and the Bundesbank.

  13. colm brazel Says:

    @ Desmond Brennan

    +1

  14. Incognito Says:

    Excellent summary from Colm McCarthy. I woud add one element however: the ECB has to intervene on the sovereign bond markets not only to stem the crisis, but simply to fulfil its primary mandate of price stability. This is probably the only way to counter the extremely severe monetary contraction that is taking place and that is leading the whole Euro Area into pure and simple deflation.

  15. DOCM Says:

    @ All

    FYI

    The problem is much bigger than just that of the euro which happens to be its proximate expression.

    http://www.ft.com/cms/s/0/fed87d52-20c3-11e1-816d-00144feabdc0.html#axzz1fZKVUZ2D

  16. DOCM Says:

    @ All

    The link may be behind the FT paywall. The title of the article is “Why banking works one big confidence trick” by Zoltan Pozsar.

  17. DOCM Says:

    @ All

    Meanwhile, back at the ranch!

    http://www.ft.com/intl/cms/s/0/178bef8c-21c3-11e1-8b93-00144feabdc0.html#axzz1fZKVUZ2D

    Notably, the following.

    “Mr Cameron intends to bring forward legislation to introduce the ESM – which has to be approved by all 27 member states – early in 2012; its passage had been expected to be relatively straightforward because Britain would not be involved in the fund”.

    This is a rather ironic situation as that brilliant strategist Merkel is the one that insisted on the need for a treaty change to allow Germany to ratify the ESM.

  18. The Dork of Cork Says:

    @DOCM
    I remember seeing a graph of total euro M3 on the FT maybe 2+ years ago now and Euro shadow bank(bank bonds etc etc) debt dwarfed “sovergin” debt back then which unlike bank bonds remained stable until 2008.

    It was clear to even Dorks that Europe could not afford to service this debt at the current value of the Euro and its remaining bits of productivity - but it chose to implode the system to secure a return for the real owners.
    It destroyed its economy by not doing a massive debt for equity swap on ALL BANK DEBT - depreciating real assets both human & physical to secure a return on this credit.
    We are dealing with highly connected criminal organisations - don’t people get it ?
    Peels bank act and its central flaw still has eternal relevance - The “authorties” new this in 2007 but gave the connected time to escape while they still could.
    It was all so predictable.
    At least the money destruction part was - up until recently I thought they would go for inflation but now it will come down to who owns the right kind of paper me thinks unless this is the greatest bluff of all time.
    These guys are good , real good - you always have to remind yourself of that fact.

  19. DOCM Says:

    @ All

    FYI

    http://www.efsf.europa.eu/mediacentre/news/2011/2011-016-efsf-launches-short-term-funding-programme.htm

  20. David O'Donnell Says:

    Der Spiegel
    Taking on the Doubters
    Chancellor Merkel’s Difficult Battle in Brussels

    Britain wants concessions. The Czech Republic is concerned about referendums triggered by treaty changes. And top EU officials have reintroduced alternatives that German Chancellor Merkel has already rejected. On the eve of a crucial EU summit in Brussels, Berlin is not amused — and has made it clear that compromise is not an option.

    http://www.spiegel.de/international/europe/0,1518,802444,00.html#ref=nlint

    On an earlier thread, I noted the Arabic innovation of Zero; time to borrow Zero from Ibn Khaldoon/Avicenna’s digitized guthenberg press, and present both the ‘zero’ and the ‘press’ to the ECB with instructions that its independence will be maintained on condition that the debts of all EZ members have been reduced to Zero. And we can build again from there … have referenda even …

  21. Gregory Connor Says:

    I disagree with one part of Colm’s assessment, in this excerpt

    “Last week, yet another tortuous proposal emerged. It would see the European Central Bank, which is reluctant to buy government bonds, lend money to the IMF, which would in turn lend to the same European governments that the ECB supposedly serves.”

    I think that channeling the ECB support through the IMF might provide political cover and better bailout management, and is a good idea. Of course this assumes that the ECB realizes that it must be involved as a key source of medium-term liquidity support to the Euro sovereign bond system.

  22. Gregory Connor Says:

    To many posters

    Central Bank balance sheets, in the age of fiat money, are pretty fictional devices. The ECB pretends to have a standard corporate balance sheet to satisfy German sensibilities, but it is still a largely fictional device. Other, better-run central banks ignore the own “balance sheet” impact when making major policy choices.

  23. Bond. Eoin Bond... Says:

    @ Gregory

    Draghi seemed to shoot down IMF loan idea today unfortunately, which was one of the catalysts for the sell off in risk this afternoon.

  24. colm brazel Says:

    @DOCM

    DOCM tks re Pozcar link, Pozsar also here on Shadow Banking, since 1980’s grown to a $20 trillion rival to commercial banking system.

    Shadow Banking was what largely caused the 2008 meltdown. Reason is Shadow Banking occurs outside the control of the FED and is not subject to its regulatory functions.

    Its huge unstable cargo sloshing around the hold.

    Authors: Zoltan Pozsar, Tobias Adrian, Adam Ashcraft, and Hayley Boesky
    http://www.newyorkfed.org/research/staff_reports/sr458.pdf

    9 conclusions in it:

  25. colm brazel Says:

    Banks and shadow banks perform the same function, however, which will never change. Credit intermediation by banks, and past, present and future forms of shadow banks will always involve credit, maturity and liquidity transformation—the classic functions through which returns on credit intermediation are earned. Regulating these “timeless” functions of credit intermediation is a more potent, harder to arbitrage form of regulation than regulation by institutional form.

    Forget the regulation of banks and commercial institutions, they’ll find the loopholes around regulations, according to those authors. Regulate the transactions themselves of ” credit, maturity and liquidity transformation”

    Global transaction taxes and open declaration registration of all transactions, at least accessible by regulators on demand, made subject to global regulations….the way to go to bring shadow Banking under control.

    I recall Brooksley Borne encountering fierce opposition from bankers when she tried to highlight the activities/dangers of shadow Banking in the US.

  26. Joseph Ryan Says:

    @Gregory Connor

    Having watched Draghi speaking on Channel 4 news my view is that he has bottled it.
    He will try to support the banking system and is clearly preparing for collapse but he either will not or is not being allowed to go beyond his ‘brief’.

    I doubt that anybody at this summit will buy the fiscal austerity agenda. Deep down most people have a gut feel that the result is as per posted by Kevin O’Rourke: “Europe = austerity + unemployment” and there is zero confidence in Merkozy.
    Not only zero confidence but a deep suspicion that the ‘austerity’ focus is being used to take the spotlight off their own banks and of course as re-election rhetoric painting peripherals as wasters etc. The effects on Greece articulated very well by the communist lady MP are now devastating.
    If that is the best the EZ can come up with, we are better off without the EZ. Far better off.

    The solutions to the immediate crisis are simple.
    The ECB backstops the banks including forced resolution of bust banks and either imposes losses or makes the creditors whole, printing the losses for them.
    With the banks off the backs of the sovereigns that would allow breathing space for the sovereigns.
    But now that we have been driven to recession again by the very people who say they have a solution, the effects of that recession will make it difficult if not impossible for some sovereigns to pay their debts. In Ireland’s case of course the debts are an imposition. My view is that the bank potion of those debts are not legitimately the debts of the Irish State.

    It is impossible to see a proper resolution of this crisis this weekend. This can only mean the geezer is about to blow.

  27. The Dork of Cork Says:

    @Joseph
    Its deeper then that now - private money creation is a failure and a insiders racket.
    The entire post Napoleonic goverment bond market is a sick joke on us all.

  28. seafóid Says:

    Banking is one large, clever, and finely tuned, confidence trick.

    On the one hand are bank notes which are “legal tender for all debts, public and private”, trade at par and are referred to as money. They are liabilities of the sovereign. On the other are demand deposits – from savings to cheque accounts – which also trade at par and thus function as money. But, unlike bank notes, they are the liabilities of banks.

    As long as the public knows it can get bank notes for its deposits, it will not ask for them and banking works just fine. In other words, the genius of banking is the arbitrage of the public’s ex-ante and ex-post demand for instruments that trade on demand at par. This allows banks to conduct credit, maturity and liquidity transformation: holding assets that are riskier, longer dated and less liquid (and hence higher yielding) than its liabilities.

    But if confidence goes, bank runs ensue with the public demanding liquidity at par through the withdrawal of all deposits into bank notes at par. In such instances, the banking system is insolvent. This is because at its core the system promises something it cannot deliver.

    In the early 1900s, bank runs were frequent. Runs were ultimately solved by the creation of the Federal Reserve in 1913 and the Federal Deposit Insurance Corporation in 1933. These subsidiaries of the sovereign ensure public confidence in on demand liquidity at par and make banking a public-private partnership.

    Pre-crisis, only retail depositors had access to publicly guaranteed liquidity on demand and at par, however. Institutional cash investors – modern-day species of the financial ecosystem that include asset managers and global corporations – did not. This was because their size was above the FDIC’s pre-crisis insurance limit. Their alternative would have been to keep their cash in uninsured deposits. However, these were unsecured, undiversified and perceived as risky.

    Institutional-class money funds were the answer. Like banks, money funds promise on demand liquidity at par. However, unlike banks, which are backed by the sovereign, money funds are not. Still, they were perceived to be safer than uninsured deposits due to their diversified holdings of safe, short-term and liquid instruments.

    No matter their degree of diversification, however, the crisis proved that money funds can only provide on demand liquidity at par if they are backed by the sovereign. And backed they were during the crisis through a series of liquidity facilities from the Federal Reserve for both their secured assets (repos and asset-backed commercial paper) and even some unsecured assets (commercial paper), and guarantees from the US Treasury on their promises of on demand liquidity at par. It was a 360-degree backstop of the shadow banking system by the sovereign.

    An under-appreciated aspect of shadow banking is that it arose due to institutional cash investors’ demand for guaranteed liquidity on demand at par, and other safe, short-term, liquid instruments.

    Today uninsured institutional cash investors manage over $3,500bn in cash, up from $100bn in 1990. On an ecosystem level, the larger they grow, the more credit, liquidity and par value puts they demand from too big to fail institutions, which are expected to be backed by the sovereign.

    The balance sheet of the sovereign played into the emergence of the shadow banking system and the integrity of its money claims. Therefore, solutions for shadow banking – besides regulation – must also involve the balance sheet of the sovereign. Here are two.

    First, solutions for institutional demand for publicly guaranteed on demand liquidity at par could involve them undertaking repos, with central banks setting dynamic haircuts. Who has access to the central bank would need to be clarified in advance. Repos would serve as alternatives to money funds, which, as purely private money claims, defy the laws of banking. In their current circumstances, money funds should float their net asset values.

    Second, solutions for institutional demand for safe, short-term, liquid instruments could include the US Treasury increasing its supply of bills, an idea similar to the Treasury Borrowing Advisory Committee’s proposal of floating-rate notes. More bills would also complement regulatory efforts to design a smaller and simpler global banking system with less dependence on wholesale dollar funding. Treasury bills are as fit for the intermediation of institutional dollar cash balances as global wholesale banks.

    Paraphrasing Forrest Gump: money is as money does, and in a crisis, money is only money if the public knows the sovereign stands ready to make it trade at par.

    Zoltan Pozsar is a visiting scholar at the Global Interdependence Center and a former New York Fed economist. This piece was co-authored by Paul McCulley, Chair of the Society of Fellows of the Global Interdependence Center and a retired senior partner of Pimco

  29. Kevin Donoghue Says:

    @seafoid: better to post a link than cut-and-paste.

  30. Kevin Donoghue Says:

    @Ceterisparibus: “Simply wrong, as confirmed by Draghi today….”

    I hope you’re not making these guys the arbiters of right and wrong.

  31. The Dork of Cork Says:

    @Seafoid
    If you are to have a fractional system them the entire M1 should be on the CBs balance sheet.
    Term deposits would rightly be seen as risk / return vehicles via loans to the bank.
    We have a deeply dishonest & flawed banking system with its roots in the incomplete Peels bank act.
    “Nationalise money and not the banks” - Fisher

    The ECB have gone a step further however - their policies are quite something.

  32. Ger Says:

    It seems crazy to me that we are compensating for our one size fits all monetary policy by restricting the scope for future fiscal manouevres. This solution solves the symptoms of a few countries (public profligacy in Greece and Italy) without addressing the root problems which caused problems in those countries as well as causing private asset bubbles in Ireland and Spain.

    This solution is designed to solve the wrong problem and will make our situation even worse. It will avert future Greeces, but will give rise to multiple Irelands in the coming decades. Surely they can see this??

  33. Ceterisparibus Says:

    @Kevin
    For clarification….
    “Mario Draghi, the ECB’s president, said the bank had not agreed to any sort of “Grand Bargain” with EU leaders to act as lender of last resort for sovereign states, insisting that it does not have a legal mandate to rescue sovereign states in trouble.
    “We have a treaty and Article 123 prohibits financing of governments. It embodies the best tradition of the Bundesbank. We shouldn’t try to circumvent the spirit of the treaty,” he added, warning against the use of “legal tricks” to bend the bank’s mandate.
    The comments caused consternation on trading floors, where expectations for a “shock and awe” action by the ECB have been running ahead of reality. Mr Draghi had earlier hinted that the ECB might be willing to do more if politicians deliver on a “fiscal compact” to anchor budgetary discipline at today’s summit in Brussels.
    “This is big, he’s basically pulled the rug out from under the market,” said Brian Dolan at forex.com. “There’s a sense of shock right now because he previously suggested that if EU leaders got things together, the ECB would step up bond purchases.”

  34. Stephen Says:

    @Gregory, can you describe (or give a sense) which bits of the CB balance sheets are largely fictional and in what sense?

    @KOR: Summiteers?

  35. Kevin Donoghue Says:

    @Ceterisparibus, I’ve no idea why that makes Colm McCarthy wrong.

  36. Joseph Ryan Says:

    @Stephen

    re : Summiteers

    +1 and two smileys.

  37. Kevin O’Rourke Says:

    http://oxforddictionaries.com/definition/summiteer

  38. anonym Says:

    @Kevin Donoghue

    It depends on how seriously one takes the rule of law and the question of democratic mandates, I suppose.

  39. Ceterisparibus Says:

    @Kevin
    The headline in the article says it all
    “ECB must step up to the plate and end this panic”

    The ECB does not have a mandate or the legal authority to do as he requests.

    “Mario Draghi, the ECB’s president, said the bank had not agreed to any sort of “Grand Bargain” with EU leaders to act as lender of last resort for sovereign states, insisting that it does not have a legal mandate to rescue sovereign states in trouble.
    “We have a treaty and Article 123 prohibits financing of governments. It embodies the best tradition of the Bundesbank. We shouldn’t try to circumvent the spirit of the treaty,” he added, warning against the use of “legal tricks” to bend the bank’s mandate.”

  40. anonym Says:

    @cet. par.

    Speaking of which, though, have you noticed how, amidst all the renewed zeal for Art. 123, we no longer hear anything about the ECB’s lack of any financial stability mandate*?

    * Apart from that thing about reserve requirements of course …

  41. Ceterisparibus Says:

    @Anoynm
    True. Surely the emphasis at this summit should be to change the mandate for the ECB and give it legal authority to act like a normal central bank. Even David Cameron would likely support this.

  42. ceterisparibus Says:

    its getting serious guys…..
    “Mr Kenny, like many other leaders, has been resisting the German-led clamour for treaty change.

    However, a consensus is emerging that there will be no way of spurning chancellor Angela Merkel.

    While the question is made more complex by Britain’s demand for an unspecified concession in return for its support, Dr Merkel said treaty change was essential to bolster the euro’s credibility.

    “The euro can only regain its credibility by changing treaties to such an extent that we are moving towards a stability union,” she said.

    Although core elements of the new rescue package are still subject to sharp dispute, EU leaders hope to achieve a definitive solution to the two-year crisis before they leave Brussels tonight.

    In advance of last night’s talks, French president Nicolas Sarkozy warned that the viability of the EU itself was at risk.

    “If we don’t have an agreement on Friday, there won’t be a second chance… Europe has never been closer to exploding,” he said.”

    From Arthur Beesley IT

  43. David O'Donnell Says:

    Interesting take from Madrid …

    Eurozone crisis
    Farewell sweet sovereignty…
    8 December 2011 El País Madrid

    The transfer of sovereignty will result in a fiscal union. But this will be imperfect, since it will be a union of budgetary stability and austerity and not a union of transfer, solidarity and growth. At least, not yet.

    http://www.presseurop.eu/en/content/article/1262391-farewell-sweet-sovereignty

  44. Ceterisparibus Says:

    Here’s the deal….really no deal…
    “The EU leaders, meeting in Brussels, agreed on automatic sanctions for euro area deficit offenders unless three-quarters of states vote against the move, and approved a new fiscal rule on balanced budgets to be written into national constitutions.

    “There is a deal between leaders on the new fiscal compact,” an EU official told reporters.

    After nearly 10 hours of talks running into the early hours of Friday morning, they also decided that the currency bloc’s future permanent bailout fund, the ESM, would be capped at 500 billion euros, as Germany had insisted.

    It will also not get a banking license, which would have allowed it to draw on European Central Bank funds to increase its firepower, another move Germany objected to.”

    So we have to have a referendum.

    Much ado about nothing.

  45. PR Guy Says:

    The meerkats won’t like it today. This is a fumble. Banks even worse than publicly acknowledged (and we still don’t know the truth), Europe unable to get its act together, not a big enough bazooka, etc. Obama must be tearing his hair out. The continental PR outpourings will try to blame it all on the UK.

    Let’s see how it’s all looking when the muddy waters clear later today.

  46. PR Guy Says:

    I wonder if that wholesale ratings downgrade of Europe will now go ahead?

  47. Bond. Eoin Bond... Says:

    @ PR guy

    i disagree. Knee jerk sell off will reverse to slow buying back in i reckon (already turning around). Its not a full on treaty level agreement, but that was never gonna happen in fairness. ECB now has political cover to get more involved, whilst still wielding a stick to keep things moving along (they will manage EFSF as well now). Draghi overnight reversing, very mildly, some of his comments from yesterdays presser. PSI is a thing of the past now, periphery bonds start looking cheap in the short to medium term (long term there will still be question marks).

  48. DOCM Says:

    @ All

    FYI

    http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/126658.pdf

    http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/126657.pdf

  49. Bryan G Says:

    Anyone know where the €150bn to be lent as bilateral loans by Member States to the IMF comes from? Reports say national central banks will lend the money, and that this is similar to an IMF scheme that has been in place for a couple of years (New Arrangements to Borrow (NAB)). Will the NCB’s print money (and if they do will it be sterilized?), or will they lend money they already have (e.g. money placed on deposit with them by commercial banks), or something else?

    If this is similar to the NAB. have central banks been printing money to give to the IMF all along?

  50. Kevin Donoghue Says:

    @Ceterisparibus: “the emphasis at this summit should be to change the mandate for the ECB and give it legal authority to act like a normal central bank.”

    Since Colm McCarthy undoubtedly agrees, you leave me wondering why he is “simply wrong” — my best guess is that his error consists in taking Draghi’s protestations a little less seriously than you do.

  51. PR Guy Says:

    @Bond Eoin Bond

    Note the rider: Let’s see how it’s all looking when the muddy waters clear later etc. !

    There are always reactions to reactions. I still suspect things will be down by the end of the day though.

    How are periphery yields this morning? Italian 10y was on its way back up the last time I looked.

  52. DOCM Says:

    @ All

    Apart from market reaction, which is self-evidently going to be the real measure of success or failure, the implications for the relationship between the UK and the rest of the EU, and the possible follow-on consequences for Ireland, are of the utmost significance.

    The agreement states (page 7) “Considering the absence of unanimity among the EU Member States, they decide to adopt them through an international agreement to be signed in March or at an earlier date”.

    The footnote at page 6 with regrad to Finland needing to get the approval of its parliament for the 85% voting rule for the ESM will also be noted.

  53. Bond. Eoin Bond... Says:

    @ PR Guy

    Italian 10yr yield 9bps higher, 2yr 12bps lower. With PSI off the table for the medium term, short end periphery should tighten considerably. Long term issues remain, but potential for stabilisation in the short to medium term.

  54. anonym Says:

    @Kevin Donoghue

    The issue is what Lisbon says, not whether Draghi feels like adhering to it at any point in time.

  55. anonym Says:

    @cet. par.

    But even if all legal impediments were removed, the nature of the Euro means that the ECB can’t become a normal (Fed-like) central bank. Because monetary easing in the EZ means effective fiscal transfers from some EG members to the others, the overall balance between austerity and monetary stimulus is an inherently (though of course not solely) political question which needs to be decided by elected politicians. It can’t be delegated to a quango any more than a national budget can. And that would be true regardless of whether the (hypothetical, Article-123-free) ECB would opt for a little or a lot of monetisation, or whether you would approve of its choice or not. Of course there’s a “chicken match” between independent central banks and their governments all over the place, but the political problem seems to be inherently much more serious in the multi-member Euro setup. Explicit fiscal transfers (revoking Art. 125) would be better in that respect.

    Then there’s the problem, affecting both Art. 123 and Art. 125 revisions, of how the ECB, or the EU centre in any form, would be expected to hold the line on any chosen balance between austerity and money-printing.

  56. Gavin Kostick Says:

    Press release from Ms. Christine Lagarde.

    http://www.imf.org/external/np/sec/pr/2011/pr11455.htm

    So what are the IMF “priciples and practices” cited in the new accord?

    I found a general summary from the IMF here:

    http://www.imf.org/external/about/lending.htm

    Which contains the following:

    “Today, IMF lending serves three main purposes.

    “First, it can smooth adjustment to various shocks, helping a member country avoid disruptive economic adjustment or sovereign default, something that would be extremely costly, both for the country itself and possibly for other countries through economic and financial ripple effects (known as contagion).”

    But I’d be very interested if people could specify further what these “principles and practices” are.

  57. hari naidu Says:

    Finally Cameron and his Tories are doomed whether they succum to the will of the majority (17+6) or take EU to ECJ, as he said ,to protect EU Institutions.

    I’d dare him to challenge the majority now that the deal on a compact fiscal union is a done deal, and Finnish parliament has no alternative but to assent now.

    Sweden and Denmark arfe also in, me thinks.

  58. Kevin Donoghue Says:

    @Gavin Kostick
    Well in fairness, Ms Legarde could hardly be expected to say this is a crock of shit.

  59. Gavin Kostick Says:

    @ Kevin Donoghue

    It would be entertaining if she did.

    “C’est la merde. C’est un gros morceau de merde qui sent. Je ne veux pas manger cette merde.”

  60. zhou_enlai Says:

    The ECB cannot guarantee any kind of price stability for member states with a 2% inflation target, as it will likely lead to Euro break-up.

    This will not only cause price instability but will also do permanent damage to the ECB’s ability to control prices into the future.

    The ECB needs to set a target which will give greater price stability for ALL the citizens of the EZ. I suggest a target of 5% for 5 years reverting to 2% thereafter..

  61. Kevin Donoghue Says:

    Colm McCarthy: “The ECB (not the IMF, China, or the Red Cross) should be instructed to do what central banks do in a financial panic, that is, mobilise the balance sheet decisively to restore confidence.”

    anonym: “The issue is what Lisbon says, not whether Draghi feels like adhering to it at any point in time.”

    Lisbon is not generally regarded as a source of economic wisdom. It may define the issue for lawyers (actually I doubt it does, but IANAL) but it certainly doesn’t do so for sensible economists.

  62. Bond. Eoin Bond... Says:

    @ Gavin

    the ever kowledgeable Bryan G…

    IMF Level 1:

    In most cases, the involvement of the private sector therefore takes the form of maintaining exposure and/or providing additional financing on terms consistent with medium-term sustainability (either voluntarily or as a result of official moral suasion).

    IMF Level 2:

    In exceptional cases, the IMF may come to the conclusion that debt sustainability cannot be achieved through policy adjustment. If so, the IMF is precluded from providing further financing without assurances that the country is negotiating a comprehensive debt restructuring plan with its private creditors.

    http://www.irisheconomy.ie/index.php/2011/12/05/fiscal-union-in-the-1990s/#comment-204967

  63. Kevin Donoghue Says:

    @zhou_enlai
    Your suggestion is eminently sensible and supported by many fine economists. But you’ll never sell it to the ECB until Germany agrees, which won’t happen until hell freezes.

  64. PR Guy Says:

    Ignoring the UK veto noise, the big question for me is still: “Has this summit fixed the crisis?”

    Answers to Tim Geithner please.

    No doubt there will be some hammering out of detail today as the summit continues to put the best spin it can on what’s been agreed so far (press conference at 3pm I think) but that will also be dressed up with a large dose of damage limitation.

    Any views out there on whether the downgrade of French banks will speed up the downgrade of AAA for France? Did I hear that one of the ratings agencies (moody Moody?) suggests that Soc Gen desperately needs government assistance? Quelle surprise.

    Show me the bazooka!

  65. BeeCeeTee Says:

    There’s not much evidence that the markets think the summit has fixed the crisis, though they may conceivably think differently after the next announcement. Theirs is the only view that really matters.

    I very much hope that our government is prepared to split the eurozone, rather than concede on the Corporation Tax issue.

  66. colm brazel Says:

    Overall, I find the 126658 and 126657 docs above to be a bit of a pantomine and a sell out to the banking sector.

    You know how children at a pantomine enjoy the part when Goldilocks is speaking to them from the front of the stage but sneaking up behind Goldilocks is the wicked witch or some other danger Goldilocks is unaware of…

    Well, Goldilocks was the content of those docs above.

    But the wicked witch was the hidden agenda we are not fully briefed about:

    EG

    5. Steps and sanctions proposed or recommended by the Commission will be adopted unless a qualified majority of the euro area Member States is opposed.

    Ominous that. We should fear the eject button. We should fear tax harmonisation, steps re CT, we may not have a vote upon. We should fear
    the absence of a veto and loss of sovereignty.

    Bilateral loans….need a lot more detail on this to evaluate where this money is coming from and even more curiously how and where this will be targeted?

    14…………”• euro area and other Member States will consider, and confirm within 10 days, the provision of additional resources for the IMF of up to EUR 200 billion (USD 270 billion), in the form of bilateral loans, to ensure that the IMF has adequate resources to deal with the crisis. We
    are looking forward to parallel contributions from the international community.”

    We should have walked out on this one as it endorses the position there will be no debt forgiveness for Ireland.

    15…..We clearly reaffirm that the decisions taken on 21 July and 26/27
    October concerning Greek debt are unique and exceptional;

    Qualified majority voting for the ESM is to replace mutual agreement further erodes our position and influence.

    The summit should have dealt with three pillar solutions to three problems:

    1) what to do with debt:

    but whether the firepower above can be raised instead of aspirated for is an entirely different question.

    2) enhancement of ECB with Treaty changes

    but proposed new powers for ECB are minimal, other changes are empty aspirations to do better in the future with vague threats of undetermined future action against transgressors.

    But here’s where the above watered down proposals are really a pantomine. They do not address the real problems faced by the euro. There are no rules to cover reforms to rein in shadow banking, that brought about the 2008 crash. No rules to force bank recapitalisation, no rules for stress testing banks across the eurozone. No rules for debt forgiveness, in fact a joint proposal against debt forgiveness. No eurobonds in any shape or form.

    We are left with the prospect of a much weaker EMU borrowing hundreds of billions that wont go to taxpayers, but will be poured into the shadow banking sector, to pay off the debts of blackHole Anglos across the EMU. This will result in the further impoverishment of taxpayers across the EMU.

    All good pantomimes should have a good laugh. The joke is the Brits were unable to get assurances to guarantee their financial sector and have refused to agree to above changes because of this. We have signed on because our financial sector and the matter of tax harmonisation are left out of the agreement.

    My fiver is on the Brits; I don’t bet on donkey coyotes :-) None of the above faint hearted mess will assure the markets! Morgan Stanley et al in the US will be assured the hidden black holes in France and Germany will be borrowing more money from them. They expect to be paid back their previous OTC’s and other unwise investments that lie festering in their vaults along with sovereign debt borrowings of course :-)

  67. colm brazel Says:

    3) What to do about the shadow banking sector including rules for recapitalisation, liquidation of dodgy derivatives, stress testing.

    Naught about that:

    bankers 1 summiteers 0

  68. Joseph Ryan Says:

    How does one interpret point 15

    Concerning the involvement of the private sector, we will strictly adhere to the well established IMF principles and practices. This will be unambiguously reflected in the preamble of the treaty. We clearly reaffirm that the decisions taken on 21 July and 26/27 October concerning Greek debt are unique and exceptional; standardised and identical Collective Action Clauses will be included, in such a way as to preserve market liquidity, in the terms and conditions of all new euro government bonds.

    I understood IMF principle was to invoke PSI. How then can Greece be a once off?

    What are standardised and identical collective actions clauses in Govt bonds?

    Overall the agreement is full of aspiration.
    It is also much more Dickensian than Keynesian:Point 4.

    General government budgets shall be balanced or in surplus; this principle shall be deemed respected if, as a rule, the annual structural deficit does not exceed 0.5% of nominal GDP.

    So each country will have to keep within the Micawber thresholds:

    “Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

    I wonder how many countries (incl Germany) have managed that kind of discipline over the course of a fifty year period.

  69. DOCM Says:

    @ PR Guy

    There is rather a lot of detail already and the die is largely cast. It would appear impossible for Cameron to reverse engines. He is now reduced to playing dog in the manger by saying that the new treaty, being outside the EU treaties, cannot have access to the institutions established under them, notably the Commission and the ECJ. That is to play an exceptionally weak hand even more badly.

    The markets clearly do not know which we to hop. But they must be able to read. Notably;

    “we stand ready to accelerate payments of capital in order to maintain a minimum 15% ratio between paid-in capital and the outstanding amount of ESM issuances and to ensure a combined effective lending capacity of EUR 500 billion”.

  70. BeeCeeTee Says:

    @Joseph,
    Greek PSI seemed to be planned to operate on the basis of giving what would be known, in normal commercial terms, as fraudulent preference to ECB holdings of Greek debt over private sector holdings of identical debt. The text may amount to a commitment not to do that again.

  71. colm brazel Says:

    Those interested in regulations re the Shadow Banking Sector should note the major reforms in this sector that were subject of the US response to its crisis.

    Note the singular lack of regulatory proposals for this sector proposed by the summiteers:

    Background inf:

    Glass-Steasgall Act 1933

    Gramm-Leach-Bliley Act 1956

    November of 1999 Congress repealed the GSA with the establishment of the Gramm-Leach-Bliley Act, which eliminated the GSA restrictions against affiliations between commercial and investment banks. Furthermore, the Gramm-Leach-Bliley Act allows banking institutions to provide a broader range of services, including underwriting and other dealing activities.

    Read more: http://www.investopedia.com/articles/03/071603.asp#ixzz1g2ONayZV

    Dodd–Frank Wall Street Reform and Consumer Protection Act
    http://en.wikipedia.org/wiki/Dodd%E2%80%93Frank_Wall_Street_Reform_and_Consumer_Protection_Act

    Plus links given by seafoid et al above eg Pozsar, also references to him re transaction tax/transparency/ floating net assets in these funds:

    Zoltan Pozsar is a visiting scholar at the Global Interdependence Center and a former New York Fed economist. This piece was co-authored by Paul McCulley, Chair of the Society of Fellows of the Global Interdependence Center and a retired senior partner of Pimco

    So, when are we going to get out of the euro blackhole and return to Sterling :-)

  72. colm brazel Says:

    @ Joseph Ryan,

    :-) right on, it should be renamed the Micawber Summit

  73. anonym Says:

    @Kevin Donoghue

    It ought to go without saying that no-one is putting forward Lisbon as a manual of economic wisdom. (Though frankly I think you could do worse.) What it does do is partly stipulate the laws the ECB lives under. Statements of the form “the ECB should immediately do X” or “the ECB should immediately be instructed to do X” aren’t simply statements about economics; in fact they’re statements about economics only in the second instance, at best. Here is a hypothetical question. “Bureaucrat D runs EU agency E. D would like E to follow policy M. M is very good policy and excellent economics. Unfortunately it is against the law for E to do M. Should D instruct E to do M?” Never mind a moment how well this describes the actual situation. You do accept that the answer to the question is “No.”?

  74. Kevin Donoghue Says:

    @anonym
    No, I don’t. To see why, let M = refrain from shutting down bank H (known to be insolvent) until markets close. (Assume that the law requires that insolvent banks be shut down promptly.) This is not an example I just invented, but I won’t go into the history here.

    But even if your view is that central banks should always follow the letter of the law, which is certainly not the unanimous view of ECB officials, it’s nonsense to say that Colm McCarthy is “simply wrong” because he rejects that strait-laced approach.

  75. Gavin Kostick Says:

    @ Mr Bond and Bryan G by proxy.

    Thanks for that.

    Then I agree with Joseph Ryan, that this bit remains cloudy, if not contradictory.

    “Concerning the involvement of the private sector, we will strictly adhere to the well established IMF principles and practices. This will be unambiguously reflected in the preamble of the treaty. We clearly reaffirm that the decisions taken on 21 July and 26/27 October concerning Greek debt are unique and exceptional; standardised and identical Collective Action Clauses will be included, in such a way as to preserve market liquidity, in the terms and conditions of all new euro government bonds.”

    As noted elsehwere, “in the preamble” means “not in the legally binding bit”.

    Hmm, how’s this for a paraphrase?

    “In general terms we go with the IMF, but we won’t sign that into a legally binding document, and anyway, no other EZ sovereign will default (I tried to keep my special sovereign pen, but that Czech bloked nabbed it), notwithstanding this: terms and conditions apply to all bonds.”

  76. Bryan G Says:

    @Gavin K

    I’d go along with that paraphrase. The can has been kicked down the road for maybe 3 years or so. Given that there now appears to be a synchronized bloc of 26 countries, all pursuing contractionary pro-cyclical policies, and all with deleveraging banks, the chances of growth exceeding Italy’s funding costs, for example, seem miniscule. So the debt/GDP ratio will get worse each year - 130%, 140% 150%, 160% and at some point the IMF will say - OK now it’s getting ridiculous.

    In the short term though there’s no problem. In fact it now appears that a bank can borrow for three years at next to nothing from the ECB, and with the money buy 3-year Italian bonds at 6% to 7%, and pocket the difference. Looks like free money for the banks, and a way to keep up demand for Italian bonds.

  77. PR Guy Says:

    @Bryan G

    “it now appears that a bank can borrow for three years at next to nothing from the ECB, and with the money buy 3-year Italian bonds at 6% to 7%, and pocket the difference. Looks like free money for the banks”

    Banks need support from governments and institutions to fill some big black holes so looking for opportunity to make money where they can, including writing CDS on their own sovereign knowing that it’s a totally no lose bet with certain ‘guarantees’ they will have been given. Must be nice to be given money and assurances to go off and make a few bob. Wish I had that facility.

Leave a Reply