The Euro Crisis: Behind the Scenes

The WSJ has a long article today on some of the key episodes in the 2011 stage of the euro crisis – you can read it here.

Jamie Smyth provides an overview of the current state of the Irish banks in this FT article.

51 replies on “The Euro Crisis: Behind the Scenes”

The track record of Schaeuble, from PSI to redemption funds, is not very impressive. It seems unlikely to improve with his insistence on adoption of the Commission proposal on a financial services tax, intimating that he has the support of France to introduce it at the level of the Euro Area if there cannot be the necessary unanimity at EU27 level.

The UK, of course, takes a dim view of the proposal.

What is of concern is the failure on the part of Schaeuble to recognise the damage that an obstinate insistence on a proposal which has little chance of being negotiated quickly, and is likely to give rise to additional discord, may do to visibly very shaky market confidence.

There is the added consideration that the Commission has anchored its proposal in the context of the proceeds of the tax providing an additional Own Resource for the EU. This may have seemed like a good idea on the eve of the start of contentious negotiations on the next multi-annual financial framework. Not, however, if the UK remains both adamantly opposed to it and equally adamantly attached to its budget rebate (the bulk of the cost of which is borne by France, Italy and Spain).

Unless there is a change of direction by the leaders of Germany, France and the UK, it is difficult to see how major splits in the EU can be avoided.

Beatrice Weder di Mauro in Bild, perhaps less ‘behind the scenes’ than others:

There is undoubtedly panic behind the scenes in the EZ and they are choosing their words carefully and still making it sound gloomy! Sarkozy still to tell the French about how he’s going to deal with unemployment at an eight year high (and going higher) as well. I know. Let’s have a summit. We’ll call it a “jobs summit.”


The irony is that a FAT tax might be the only long lasting good thing to come out of all of this sorry mess.

re FT article from Jamie Smyth.

The Fairfax/Ross deal a vote of confidence in BOI and Ireland generally??
At a near 80% haircut on the State’s original investment in BOI, it was definitely good for BOI shareholders, Richie Boucher et al. And definitely bad for Ireland, unless an 80% loss is considered positive these days!!

Can anybody make sense of recent developments?
The ECB loans are being returned to the ECB as deposits instead of buying sov debt
Euro falling and gold falling too.
If you were a periphery bank and really feared break up of the Euro – is parking a load of Euros at the ECB the thing you would do? I just dont get any of this

The damning sentence

And then official Europe went on vacation: Ms. Merkel to the Italian Alps, Mr. Sarkozy to the French Riviera.

Makes the Brians’ decision to feck off on their holliers in summer 2010 a bit more understandable.

Greece, the country that triggered the euro-zone debt crisis, would need a much bigger bailout than planned, Mr. Strauss-Kahn said. Unless Europe coughed up extra cash, the IMF, which a year earlier had agreed to share the burden with European countries, wouldn’t release any more aid for Athens.

One month later, Mr. Strauss-Kahn was removed as head of the IMF by an invented sexual assault charge. One moth after that

IMF officials said they were satisfied that Europe would sort out some kind of new bailout, and wired Greece its summer aid payment on July 8.

I don’t normally believe in conspiracy theories, but when I do, I like to follow the money.

The machine is in stall mode and the pilots are frantically pulling all of the levers available to them. They know they should worry about landing the craft eventually, but right now, they can only think about pulling out of the nosedive. The problem is that the levers thwy pull today make the plane more vulnerable once the immdeiate crisis is resolved. it can only land safeley if, after the nosedive is resolved, there are favourable winds, zero turbulence and no queues for the runway. It is possible that all of these things will happen, but if any other problems show up, then there are no safeguards at all.

so when the ECB prints cash and that cash goes to deposits in the RCB, the machine is broken, but there are no levers to fix it yet… they can only be made by politicians and the politicians have tied themselves up with vested interests and nationalist conflicts.

From your post..
“There will certainly be some surprises and bouts of excitement along the way but we’re capable of managing the situation. I’d advise everyone to have a bit more serenity about it all.”

That’s it then….a bit more serenity will sort those hedgies.


Isn’t this deal with the ECB loaning money to the banks and then them giving that money back for safe keeping just the same as what the Japanese banks did (are doing?). Taking cheap money, not loaning it out to the general economy and then using it to improve their balance sheets. I may be wrong but wasn’t this what exactly led to their lost decade (2?)

@ Ceterisparibus

One of the major elements of the crisis has been the dysfunctional relationship between Merkel and Schaeuble (whom she defeated, as far as I can recall, in the CDU leadership contest). It is difficult to know what exactly either is trying to achieve as they have both blown hot and cold on various aspects of the crisis since the beginning.

But the key consideration at this stage is the breakdown in trust between the three capitals. Nothing could have been more likely to drive Cameron back into his kraal than the statement by Schaeuble on the financial transaction tax. However, Bloomberg is reporting that Merkel and Sarkozy may be meeting on 9 January. With any luck, there will be some effort to recover from the calamitous last summit.

@ Shaun
From my vantage point of ignorance I think you’ve hit the nail on the head. How do you make banks lend to businesses when those businesses will be operating in a recession/depression.
Europe is looking more and more like the “sick old man” of the global economy.

The kind of Europe that is acceptable to Thatcher or Cameron is not very appealing to continental Europeans .For most Frenchmen , Germans,Spaniards or Italians, Cameron going back into his kraal is rather good news .Let’s hope he stays there!

Some banks have more deposits than loans, usually they’d lend such money in the interbank market (potentially even as senior debt). Presently the are depositing that in the ECB for a paltry .25%

_Other_ banks have more loans than deposits, and so rely on the wholesale market for funding. It is these banks who are lending at ~1% from the ECB.

Afaik no bank is stupid enough to lend from ECB at ~1% and then deposit it at .25% . There’s no ‘ECB cash hoarding to improve balance sheet’

Re the WSJ article..

I can see merit for most of the different views…but those different views don’t gel to a viable solution. And different parties optimising in order to save small amounts isn’t helping. Also Trichet was a naughty player…he took actions that really couldn’t be linked to ‘price stability’..and perhaps his entreaties for an Ez Fin Min were a Freudian revelation of his own desire to be controlled – as he well knew he was gone rogue.

@Desmond Brennan
Or they have no needs now but expect to have some sometimes before the next ECB adjudication,in the meantime .25% is better tan 0%

@Overseas commentator
Potentially, given the ECB are virtually giving money away(esp if u consider inflation) …but no one has advanced proof that specific banks are borrowing, then depositing. People seem to be confusing that possibility, with the aggregate trend. Mind you…the Gruadian did it too today, though they’re a famous font of financial illiteracy.

@ Desmond Brennan
Thanks for that. So the ECB is acting as a middleman/guarantor in the interbank lending market? So the ECB can lend without having to print money and make some money in the meantime?
It’s ok but it seems like the money that is ding lent to the banks by the ECB is going somewhere other than the real economy. Where is it going?

@ Overseas commentator

I regret to have to say it but your comment reflects exactly what is wrong with Europe at the moment. Europeans do not have to like one another but they have to find an agreed repeat agreed basis on which to live together. Competing visions of how Europe should be are par for the course. Reconciling them is what European construction is all about.

Sarkozy’s vision is not one with which smaller Member States would agree. And I doubt very much if Italy and Spain agree with Merkel’s view of what it should be, especially when they come to consider the implications of a possible schism with the UK.

2012 promises to be an interesting year!

@ All

On the subject of visions of Europe, herewith a link to a comment in Le Monde on the implications, budgetary and political, of the near certainty of a loss by France of her
triple A status. (The markets are indicating a rating of BBB+).

There are also implications for Ireland because of the likely impact on the funding costs of the EFSF.

Well say if the monies lent by ECB = monies deposited, Then:

ECB is merely easing liquidity of interbank market, and keeping things going as they were. That said I doubt the monies nett, nor are they quite intended to (but this effective sterilization doubtless pleases some Bundesbank ppl)

Overall most Ez banks do need to deleverage…but that isn’t achieved by fiddling with funding.

You have to accept the banks generally make more money from depletion rather then creation especially when there is a dire need for recaptilisation – by not producing money they can use credit to extract yet more through leverage.
Its pointless in the long run but these guys are not generally of a higher order – they are just located in their optimum envoirment.


I happen to like England a lot , it does not imply that I approve of Cameron’s politics,which I believe are very detrimental to the English people . As to reconciling opposite point of views,it reminds me of the definition of a camel:”a horse designed by a committee”.
Cameron policies defend the City whose interests are in no way aligned with the interests of the vast majority of the English people.
The conservative governments are constantly asking for a special treatment (including Thatcher check) and threatening to leave the union.It is time to call their bluff.

@Overseas commentator

Europe is made up of committees, from the European Council down, and they have designed many fine camels. To such an extent that there are still European countries that wish to join the exercise.

Calling bluffs is all very well in the movies but it tends to have unfortunate consequences in the real world.

I am no admirer of Conservative policies on Europe. But the way to deal with them is not to make Cameron a prisoner of the most euro sceptic elements in the party but to provide him with a basis to deal with them.

Potential dumb question but:
If the ECB is the only bank that is able to operate like a bank why doesn’t it open up branches on the High Street?
I know about mandate and all the rest but that can be changed – God knows they’re thinking of changing everything else anyway!
Point is that even with printing money European banking is so broken that it needs to be by-passed to kick-start the economy


In a full money economy you just produce more money that is SPENT at lets say at 2% a year.
However it must be spent on core capital creation given that the banks have decapitalised the physical envoirment on a truely massive scale.

I favour splitting atoms myself……in a controlled manner, oh and as a Provincial a tram for Cork NOW.

How can that be malinvestment given the nearly 100 billion spent on “fixed capital” here during 2005 & 06 ?
Hint consumer durables known as houses is not core capital – and roads that depend on the extraction of fossil fuel capital on a truely massive scale is not really capital.
Its a accounting error.


In a full money economy you just produce more money that is SPENT at lets say at 2% a year.
However it must be spent on core capital creation given that the banks have decapitalised the physical envoirment on a truely massive scale.

I favour splitting atoms myself……in a controlled manner, oh and as a Provincial a tram for Cork NOW.

How can that be malinvestment given the nearly 100 billion spent on “fixed capital” here during 2005 & 06 ?
Hint consumer durables known as houses is not core capital – and roads that depend on the extraction of fossil fuel capital on a truely massive scale is not really capital.
Its a accounting error.

The current organization of Europe results in total paralysis ,absence of democracy and more and more populist xenophobia .If you are happy with this state of affairs, I am not. I am old enough to remember being a student idealist when they were only six countries in Europe ,the Europe that we were hoping for then is very different from what it has become.
I do not think that Europe can survive the present crisis without a large dose of federalism which implies ,among other things an end to unanimity and an introduction of majority rule, common financial regulations and an end to fiscal rate competition between states .Great Britain will not accept any of this in the foreseeable future ,so it is better that it stays out of the way, as Cameron so obligingly proposed.

@ Overseas commentator

I would be in full agreement with you on the need for a wider application of the Community method (the sui generis EU version of federalism) but it is an illusion to imagine that the UK is alone, for example, in wishing to retain unanimity in matters relating to taxation cf. the FT report on the latest moves with regard to the new treaty to be agreed outside the framework of the EU treaties.

France is the country wishing to take the EU in the opposing inter-governmental direction, not the UK. Indeed, the latter has been meticulous in meeting its agreed legal treaty obligations which is more than can be said for other ostensibly European minded countries.

The general point, however, is that EU leaders should be striving for agreement and the restoration of confidence. The three most important are doing precisely the opposite.


Stephen Fidler in WSJ has a follow-up rumination ($) on the WSJ article. Conclusion:

And are there parallels in the fixed ideas that some influential figures hold about how to resolve the crisis, which, to the extent they have driven German policy, have done nothing at all to calm the storm and, in the eyes of quite a few analysts, have worsened it?

“Wooden-headedness, the source of self-deception, is a factor that plays a remarkably large role in government,” Tuchman wrote.

“It consists in assessing a situation in terms of preconceived fixed notions while ignoring or rejecting any contrary signs. It is acting according to wish while not allowing oneself to be deflected by the facts.

“It is epitomized by a historian’s statement about Philip II of Spain, the most wooden-headed of all sovereigns: ‘No experience of the failure of his policy could shake his belief in its essential excellence.'”

@ Desmond/Eureka

Some banks are definitely doing a negative carry circle with the ECB (borrowing and then depositing), but this is for a variety of reasons:

1. Liquidity buffer in case of another banking system shock
2. Taking the LTRO money now and buying sovereign assets in H1 2012
3. Using LTRO to refinance maturing funding in 2012

75bps on a small portion of the balance sheet for a relatively small amount of time (LTRO can be cancelled after a year) is a small price to pay for either the option value or insurance of having the cash at hand (and some of this may also end up in the now set-to-be mega bid 1wk fixed term deposit usually meant for the SMP sterilisation @ 1%)

@Bond Eoin Bond

I would suggest that politicians are hoping for 2 and bankers are expecting to do 3. Could you imagine the panic if a major French bank were unable to roll some debt over… heaven forbid.

Italian bonds stay just under 7% but don’t sell too well.

“Euro sinks as Italian bond auction misses target”

“In Rome, Italy’s prime minister, Mario Monti, used a traditional end of year press conference to call for “significantly greater” resources to be committed to the eurozone’s bailout fund. Buoyed by US jobless data, share prices nevertheless rose on both sides of the Atlantic.

“The auction in Italy divided analysts. It saw the yields on bonds with maturities ranging from three- to 10-years all fall below last month’s record highs. But the average return demanded for the 10-year bonds, at 6.979%, was still within a whisker of the 7% level that has triggered bailouts elsewhere in the eurozone. And overall the offer was undersubscribed.

“The treasury had hoped to find buyers for €8.5bn of its debt, but only managed to place slightly more than €7bn.”

@ Bond
The Italian auction seems to indicate that the appetite for govt debt is poorer than Mario would have liked.
Hungary could be a bit interesting. Austria is in the firing line from default there – would have interesting ripple effects in terms of banking. Might weaken it sufficiently to make it very vulnerable to Greece.
This c**p just keeps getting worse. Soon the only people with money to lend will be a select few private entities. Hope Ireland can position itself well in that eventuality

@ Frank Galton

The description fits Schaeuble to perfection. (The WSJ picked up on this by using the pejorative “irascible” in describing him).

@ Gavin Kostick

At the most recent auction of Danish sovereign debt, the rate was negative i.e. investors are paying the Danes to allow them to buy their bonds.

@ Eureka

bit of a crazy time to have their auction in fairness. Half the market is out, and the other half doesnt want to do anything this side of year end. First two weeks in Jan are critical for whether the “wall of money” really exists out there for high yielding periphery debt.

@Frank Galton/DOCM

An aside
“Wooden-headedness, the source of self-deception, is a factor that plays a remarkably large role in government,” Tuchman wrote.

Frank Aiken ,Minister for the Coordination of Defensive Measures (1939–45), was dubbed
‘The iron man with the wooden head’ by a British diplomat during the war.

Seems like a description that would fit Schauble.

I presume the auction is to allow Italian banks to buy zero risk weighted assets for their year end balance sheets – plonk some stuff in ECB LTRO, buy as little as you need, deposit the rest. As such, it probably should neither surprise that it happened nor that the maximum wasn’t reached (since the maximum would be pegged at a high level to allow all who needed to buy).

It would be interesting to know if it was specific banks that required this, supposing it is a valid interpretation of events.

WSJ today ($)

The International Monetary Fund recently told the Greek government that a worsening economic outlook suggests the beleaguered nation may be unable to reduce its debt to sustainable levels even with a planned 50% write down in privately-held Greek government bonds, according to two officials familiar with the conversations.

“A 50% haircut may no longer be enough” to bring Greece’s debt to sustainable levels given the new IMF economic forecasts, said one of the officials.

An official at the IMF confirmed staff are working on starker economic assessment than outlined last month in its loan-program review for the country. Some IMF officials think “the debt sustainability analysis is not valid anymore” under the new economic forecasts, the official said. For Greece’s debt to be sustainable now “requires either a deeper haircut or additional loans from Europe,” he said.

@ Hogan

“I presume the auction is to allow Italian banks to buy zero risk weighted assets for their year end balance sheets”

Why? No Italian govvies on offer in the market these days, bid only? 😛

Surely would’ve been shorter dated stuff that was auctioned if needed just for balance sheet jiggery pokery?

@ All

whats the Spanish for “quelle suprise”?

” Dec. 30 (Bloomberg) — Spain’s budget deficit will reach 8 percent of gross domestic product this year, more than the previous government’s forecast of 6 percent. “We have found a deficit figure which is much higher than what the former government had targeted,” said government spokeswoman Soraya Saenz de Santamaria at a press conference in Madrid.

Looking at this it looks like Mario’s plan won’t work. IMF sounding troubled re Greece needing greater haircuts too. To be honest I was slightly optimistic last week but the conditions are deteriorating even in past few days.
There seems to be only one solution – to allow the ECB buy more bonds on the primary market. Germans will want more austerity in return. Interesting times

WSJ Quote:
“Greece would be pushed into a historic default—the first time in nearly 60 years that a developed, Western country wouldn’t honor its debts.”

Who was that, nearly 6 decades past. Jaaa, it was Deutschland in 1953, but today everyone is too polite to say so. A 50% haircut and lots of cheap loans from everyone else. More or less what Ireland needed in 2008?


The naughties will be written of as the Pinnochio decade. The Americans thought it didn’t matter if people lied on their mortgage applications – it did. The British and the Irish thought it didn’t matter if banks lied about the risks they were carrying on their balance sheets – it did. The EZ thought it didn’t matter if governments lied about their balance sheets in order to join – it did. At this point in the tale the principal actors have grown long ears and are braying away. The only difference in this story is that there ain’t no fairy godmother,

Yours Aye,



“whats the Spanish for “quelle suprise”?”

Maybe, “Ole!” would do it. That’s how absurd the whole thing has become.

As people like Wolfgang Schauble retain the power to more or less dictate the policies, we are steadily and quickly approaching the realm of insanity that Albert Einstein so clearly defined.

Speaking of Schauble, he hasn’t changed or revised an iota of his stance regarding the crisis, despite all the facts, including the fact that his narrative has nothing to do with Ireland.

Profligate governments and low competitiveness caused everything according to him. It is a temporary setback for a currency union which should work extremely well if everyone behaves like a German, according to him. And naturally, austerity is the answer for all the problems no matter what. The ESM will save all of us, because… well, I don’t even know. Maybe I need to study advanced mathematics to understand his optimism, because my basic arithmetic can’t make it work.

Seriously, I don’t know what to do with these religious fanatics.

@Bond Eoin Bond

“We have found a deficit figure which is much higher than what the former government had targeted,” said government spokeswoman Soraya Saenz de Santamaria at a press conference in Madrid.

That’s what their Senor PR Guys would advise them to say, particularly if it isn’t true. Makes it look like they did a better job in a years time. It seems to be the usual MO for an incoming government to tell all and sundry that the situation they’ve inherited is much worse than people thought.

Whether it’s six or eight is probably neither here nor there for the vast army of unemployed people in Spain. Personally, I think Spain is toast in 2012 and there’s going to be a lot of social unrest over there. That’s based on talking to real Spanish people and not some ill-informed opinion. The electorate wants the new government to deal with things quickly and decisively and demonstrate that things will get better soon. I would say those expectations are unrealistic and they’re in for a disappointement.

We’ve got Greece to blow up before then though….

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