While Athens burns …

… Brussels fiddles on Road to Ruin 

From the outside looking in on the latest phase of the GFC (no it never ended) unfold the brain oscillates between utter disbelief and (when that is successfully suspended) mad hilarity – and then one realises it is actually all for real. One such transitional moment was the announcement by Tesco last week that it had decided to throw stg£5oom at (staple) grocery price cuts. Clearly Britain’s biggest bruiser in the grocery business had decided that its home market is in deep recession and home-makers’ budgets are seriously squeezed. It has said as much: reported consumerist web site bitterwallet,

Tesco top knob Richard Brasher said: “Across the country families are telling us the same thing: their budgets are under real pressure. They want more help today to afford everyday essentials. We have listened carefully and, for families facing hard times, the Big Price Drop will cut prices on the products they need to buy the most.

Another obviously, more recently, was the Rastani Moment (or RM as I’ve taken to call it). This truly was transformational – all the way from disbelief to hilarity and awakening reality. Watch it here (or if you’ve already seen it just pull the duvet over your head).

In the inevitable ensuing deluge of comment Felix Salmon got it right. First on the Yes Men issue (that this was a Yes Men stunt and caught out the Beeb),

it’s pretty clear that Alessio Rastani is, at least in part, who he says he is. The Yes Men do set up elaborate hoaxes, but they do so with respect to large institutions: they wouldn’t put this much effort into inventing “Alessio Rastani” out of whole cloth. Mostly because there are lots of genuine traders like Alessio Rastani floating around the internet already. They trade their own money, they sometimes win and they sometimes lose, and they aspire to getting famous on the internet and selling their own trading advice.

On the (obvious) related question, whether it is “possible that Rastani is both a trader and a member of the Yes Men” he concludes “the answer there, I think, is absolutely yes.” But then here’s the kicker:

I have no idea, then, whether Alessio Rastani is his real name, or whether he’s a member of the Yes Men. But here’s the thing: even if Rastani were a member of the Yes Men, that wouldn’t necessarily make his interview a hoax. Indeed, a trader who is hoping for a big stock-market crash is exactly the kind of person who might well put time and effort into undermining large corporations like Dow Chemical. Remember that the authors at Zero Hedge call themselves Tyler Durden, after the anarcho-nihilist character in Fight Club who wants to blow up the world.

It’s a common misconception that all traders are die-hard capitalists. But in fact many of them are quite the opposite. They still want to make money, of course. But that doesn’t mean they want the stock market to go up.

It does not matter whether the RM is hoax or not: it is the truth – and that’s the point. Nor is the question whether Rastani’s prediction (on the banks) will come to pass – it is where we are, it is contingent (possible with some probability).

At this stage what is in prospect is pretty clear. Actually it has been clear for a considerable time. First, Dr Merkel will get her majority on Thursday in the Bundestag: the German parliament will vote for the proposal of 21 July on the Greek bailout MkII and the enlargement of the EFSF. The majority is assured but what is not is a majority of coalition Bundestag members (i.e. of CDU, CSU and FDP members) favouring it. That though is a matter for internal German politics to contemplate; the rest of the EU and the commission will simply move on to further nonsense. In fact the commission has moved on. Wednesday saw ‘president’ Barroso present his latest ‘state of the union’ standup act address.

It was suitably full of those lighter moments necessary in these stressful times. Thus the fool ‘president’ at an early stage in his act opined suitably lightheartedly that

Greece is and will remain a member of the euro area. Greece must implement its commitments in full and on time. In turn, the other euro area members have pledged to support Greece and each other. [who writes these scripts?]

This was followed up with rapid-fire,

We do not have much room for a new fiscal stimulus

and then clinching it,

I think this is going to be a baptism of fire for a whole generation.

Yes, yes: it’s the way he tells ‘em.

The failed Portuguese politician ‘president’ then followed up with what must be assured immortality,

The pace of our joint endeavour cannot be dictated by the slowest. A member state has the right not to move. But not the right to block the moves of others. Our willingness to envisage Treaty change will reinforce the credibility of our decisions now” only to be crowned by “It was an illusion to think that we could have a common currency and a single market with national approach43es to economic and budgetary policy, in the coming weeks the commission will … present a proposal for a single, coherent framework to deepen economic coordination and integration, in particular in the euro area. This will be done in a way that ensures the compatibility between the euro area and the European Union as a whole.

O ‘presidente’ also promised us a Tobin Tax (yes!) and it will raise around €55bn a year. Separately the commission has calculated the growth impact of such a move to be between 0.53 and 1.76 per cent of GNP. This on top of Barroso’s own statement that the European economy anyway is facing a “strong slowdown.” Oops! Who is this guy?

Just over a year ago Wolfgang Munchau writing in the FT memorably said of ‘presidente’ Barroso that he was “One of the few politicians whose vanity rivals that of the French leader [Sarkozy]”

Also more than a year ago the Autonomous Mind blog, quoting from the EurActive site, commented on commission (Barroso) vanity spending,

In the past … President Barroso has often been sidelined by his commissioners, at the risk of making the Commission’s message less coherent and less understandable to the average citizen.

“For example, Reding was considered to be the commissioner who introduced roaming. When she held a conference together with Barroso on the roaming regulation, the president appeared in just 2% of the press coverage of the event. This has to change,” Commission sources told EurActiv.

Mr 2% is obviously a tad sensitive about not being the centre of attention, so we are about to be hit by a concerted propaganda effort to remind us who really decides how we are governed.

And that about all we need to know about Barroso – Mister Two percent.

But to revert to Wolfgang Munchau’s column of a year ago, it is more than worth a re-read or first read as the case may be if only for this:

Another accident waiting to happen is for France to lose its triple-A status on its bonds, something I expect to happen eventually. Given Mr Sarkozy’s failure to consolidate fiscal policy before the crisis, a presidential election campaign ahead that is unlikely to be accompanied by austerity, and the lack of a medium or long-term fiscal framework, France can count itself lucky for each day it hangs on to its present rating. A downgrade would be a shock, financially but also politically. While I cannot predict when it will happen, I would expect the reaction to be fierce.

Read that again and then recall what has been the turmoil in French banking shares in recent months and weeks and also what has happened today on the fiscal front …

… it’s budget day and the government has unveiled its legislative proposal to don its austerity shirt unveiled on the catwalks a month ago. Main feature of the new garb is a spending plan that according to the FT and Reuters will for the first time since WWII cut public spending and suppressing 30,400 public service jobs; tax the rich more heavily; tweak corporate taxes and hike duties on fags and kiddies’ fizzy drinks. This in context of government having just lost control of the Senate and heading into an election year and growth at zero, nada, zilch in Q2. O Happy Days.

… and appreciate why Greece is going to get its money – in full and soon.

The troika’s auditors are back in Athens. Per DJ ex Athens

“The technical team will arrive today. The heads of the delegation will arrive over the next few days,” Ilias Plaskovitis, general secretary of the finance ministry, told SKAI television.
The arrival of inspectors from the International Monetary Fund, the European Union and the European Central Bank–the troika–comes just hours after Greece΄s parliament approved a new property tax that Greece had promised its international creditors.

It’s clear what the bean counters will find (have been sent to find) regardless of what the MoU states. The Hellenic Republic is ‘genuinely’ … ‘making strenuous efforts’ … amidst great ‘global difficulties’, … ‘unforeseen developments in world economy’ etc. etc. etc. So the cheque will be handed over shortly (and no, don’t even try getting the audit working papers). The visit is no more than the motions.

The German vote will of course go through although Merkel may have to depend on opposition votes (the magic defection figure is 20 from this point of view). Unless the vote is from this perspective a disaster for her she will stay on – if a disaster then government falls and will be replaced by Grand Coalition (despite SPD assurances to the contrary). Who then is chancellor who knows but it doesn’t matter.

This will keep the show on the road (doing anything serious is not an option – or not an option in politics if it can at all be avoided).

In this Martin Feldstein has it exactly right in his Reuters column. first he restates the obvious: the markets expect default, have priced it in, have decided what it will entail and so on. Further, the Greeks need default, devaluation and so on if they are ever to have a chance of making their way back. But Merkozy has decided otherwise (more Merk than Ozy actually). He continues,

Why, then, are political leaders in France and Germany trying so hard to prevent – or, more accurately, to postpone – the inevitable? There are two reasons.

First, the banks and other financial institutions in Germany and France have large exposures to Greek government debt, both directly and through the credit that they have extended to Greek and other eurozone banks. Postponing a default gives the French and German financial institutions time to build up their capital, reduce their exposure to Greek banks by not renewing credit when loans come due, and sell Greek bonds to the European Central Bank.

The second, and more important, reason for the Franco-German struggle to postpone a Greek default is the risk that a Greek default would induce sovereign defaults in other countries and runs on other banking systems, particularly in Spain and Italy. This risk was highlighted by the recent downgrade of Italy’s credit rating by Standard & Poor’s.

A default by either of those large countries would have disastrous implications for the banks and other financial institutions in France and Germany. The European Financial Stability Fund is large enough to cover Greece’s financing needs but not large enough to finance Italy and Spain if they lose access to private markets. So European politicians hope that by showing that even Greece can avoid default, private markets will gain enough confidence in the viability of Italy and Spain to continue lending to their governments at reasonable rates and financing their banks.

This course will ensure Greece goes down the plughole socially, economically, politically. However caring about such is not really a matter of concern (who cares? They’re only Greeks and they’re largely just ordinary people i.e. Too Small to Worry About (TSTWA).

The policy will also (the politicians they pray hopefully) put off any decision for ever – which is to say it may become a formula for repeating ad infinitum over coming months (if it works this time). As Feldstein correctly posits, Europe is playing a long (and high-wire) game:

If Greece is allowed to default in the coming weeks, financial markets will indeed regard defaults by Spain and Italy as much more likely. That could cause their interest rates to spike upward and their national debts to rise rapidly, thus making them effectively insolvent. By postponing a Greek default for two years, Europe’s politicians hope to give Spain and Italy time to prove that they are financially viable.

The play book is to kick the can out to 2013 when the ESF kicks in and senior debt becomes fair game. But also,

Two years could allow markets to see whether Spain’s banks can handle the decline of local real-estate prices, or whether mortgage defaults will lead to widespread bank failures, requiring the Spanish government to finance large deposit guarantees…


Likewise, two years could provide time for Italy to demonstrate whether it can achieve a balanced budget. The Berlusconi government recently passed a budget bill designed to raise tax revenue and to bring the economy to a balanced budget by 2013 … Those two years would also indicate whether Italian banks are in better shape than many now fear.

If Spain and Italy do look sound enough at the end of two years, European political leaders can allow Greece to default without fear of dangerous contagion. Portugal might follow Greece in a sovereign default and in leaving the eurozone. But the larger countries would be able to fund themselves at reasonable interest rates, and the current eurozone system could continue.

On this game plan there is to be no enlargement of EFSF. Nor is the ESM start-up date to be brought forward and fiscal co-ordination can be safely kept in the cellar.

The policy will of course bugger up the global economy – but again why should politicians (governments) care about that? It only affects little people – and they don’t matter, again TSTWA.

The euro will survive, Germany will chug along even thrive. Portugal may have to be sacrificed (a second bail-out) – and Ireland can only hope there will be enough fizz left in global demand to keep its exporters above water sufficiently to enable its exchequer to return to the capital markets in 2013/14 and so avoid Portugal’s likely fate, a second bailout.


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