Thursday, November 24, 2011

24/11/2011: Beggar thy citizens

Things are desperate on a new level across Euro area, folks. So desperate, the Euro leadership delusions have shifted up a notched from already feverish levels they reached before.

Until now, the talk was all about the miracle pills of first "The Firewall of EFSF" then "ECB rescue" + "Euro bonds", now the convoluted plans to underwrite the failures of the last decades are getting more esoteric and, oh so European, at the same time.

Recall the EFS 'Firewall' - launched at first with ca €275 billion in lending capacity, enlarged to €440 billion capacity, then planned for a 'leveraged' enlargement to €1 trillion capacity. Now, with realisation that (1) €1 trillion is no longer enough of a 'Firewall' once Italy caught fire and the rooftop of Chateau France is getting steamy too; and (2) There is no €1 trillion worth of international idiots (oops... err.. investors) willing to part with their money for the greater good of European 'solidarity' the EFSF 'solution' has fallen off the radar.

Next, enter the idea of the ECB rescue and Euro bonds. These too are largely problematic. The ECB 'rescue' option at this stage will have to involve €1.5-2.5 trillion worth of assets purchases - something that will be (a) costly (imagine what will happen to bonds prices if the ECB were to wade in with that sort of cash into the secondary markets) and (b) internecine to ECB's mandate and reputation (in other words, turning your Central Bank into the financial toxic waste warehouse will do to the Euro just what the PIIGS combined default can - destroy it). The Euro bonds option requires two impossible to achieve things: (1) finding idiots... err... investors willing to pony up even more cash than for the EFSF for an undertaking written against largely non-controllable borrowers with little prospect of achieving economic growth to sustain repayments of their debts, and (2) balancing the need to get another credit against the risk of destroying credit ratings (as Euro bond will in effect simply give Governments more debt and this debt will be senior to their own previously issued national debt). And, of course, the Euro bond idea requires much closer political integration first - something that will take years to deliver.

Smelling the rat... err... failure in the above magic bullets, some Governments are now desperate enough to resort to the classic European response to the crises: fleecing their own citizens to pay for their spending habits. Behold tax increases across Europe and Belgian plans to sell their unwanted bonds to their citizens (the story here). In the nutshell, the idea is that there are no idiots... err... investors out there willing to buy Belgian Government promissory notes (note: Belgium, of course doesn't even have a Government). So the solution - just as Joe Stalin did in the 1930s-1950s - is to sell these bonds to unsuspecting ordinary people of Belgium. To make the 'deal' even more egregious, the bonds are to be sold at a discount on the yields provided to banks purchasers. Not only will Belgian pople join the line of those who hold dodgy paper, cross-linked to their entire risk profile of living and working in Belgium and paying Belgian taxes, but they are expected to do so for less reward!

Priceless, really, folks. Comparable only to Irish Government 'Solidarity Bonds' and efforts to sell state junk to national pensions and insurance companies. In economics, there's a concept of policies that 'beggar thy neighbors' by shifting risks/costs/losses onto other countries via trade and investment restrictions, taxes and subsidies. In Europe, we are getting to the point of having 'beggar thy citizens' policies.
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