The calm before the storm

I just watched a talking head on CNBC, clearly somehow connected to the European Commission, suggesting that 2011 will be a better year for the euro given the new institutions for managing the debt ‘crisis’. New institutions? Could he be referring to the European Financial Stability Facility, the EFSF and its successor ESM? I am
speechless. It seems to me that we have learnt nothing from the Crash of 2008. For the ESFS/ESM is the outfit that has been given the unenviable task of raising truckloads of money using financial instruments with the structure of CDOs – yes, the very weapons of mass destruction that gave us the miracle of Lehman Brothers. (See here and here for the comparison of the EFSF bonds with CDOs.)

2010 was an awful year for the euro.

2011 promises to be worse, unless of course European leaders stop beating about the bush, with ludicrous synthetic ‘vehicles’ like the EFSF, and do what they were voted in to do: Govern on behalf of the collective European interest. Why will 2011 be worse? Because Europe will need to borrow more from private investors who begin the year completely spooked by Europe’s diminishing grasp of reality and its insistence of placing an increasing portion of its collective debt burden to its weakest members (call me Ireland, Greece, Portugal next…)

Indeed, in 2011 the governments of Greece, Ireland, Portugal and Spain will need to raise (either directly or through the EFSF) €320 billion just to keep their public sectors going. If one adds Italy to the mix, the sum rises to €720 billion. And if that is not enough, private corporations and banks will draw another €1.1 trillion from the same market, at the same time and under the same cloud of the interconnected insolvency crisis of the states and the banks.

So, back to the CNBC talking head. His ‘calming’ argument was that Ireland, Greece and Portugal have nothing to worry about until 2013, since they have secured financing through the EFSF till then. What he neglected to say was that if, in the meantime, Spain goes to the wall, and if Italy follows before te end of 2013, there will be no EFSF, perhaps even no euro, left by the end of 2013. Markets know that from today to the end of 2013, our debt-stricken states will have to repay $2.85 trillion of debt, of which ‘only’ €500 billion involve Ireland, Greece, Spain and Portugal. Add to this explosive brew the certainty that the IMF-EU conditions on the Greek and Irish bonds will not be met month in month out (due to the inability of austerity to curtail debt ratios), the foreshadowed further downgradings by the
credit rating agencies, political instability and, last but not least, the continuing meltdown in the banking sector, and what you get is the Mother of All Crises for 2011/12.

Only fools would be lulled into a false sense of tranquility by soothing voices like the CNBC talking head’s this morning. Non-fools get down to campaigning for rational solutions. In my
next post I shall be offering an updated version of our Modest Proposal.


  • Mr. Varoufakis,

    Until now the only noteworthy doubt for the Proposal is that saying that the Eurobond you suggest implies the Federational Union of Europe. The next step for Intergration in stangle and embarrassing conditions for E.U..

    Concentration of fiscal policy in E.U. bodies entails a definitely different approach of that the Treaties say. So, is there any need of amendment?

    • No, not really. Nothing in the Lisbon Treaty is stopping the ECB from making its continuing support for private banks conditional on their accepting to swap the bonds of Greece, Irelan,d Portugal etc. they hold for new ones issued by the same countries but of a lower face value. Nothing in the either the Lisbon Treaty of in its own chapter stops the ECB from issuing its own bonds and floating them internationally (and if a small addition to the ECB’s Charter is deemed necessary, it would be quite simple to effect). And, lastly, nothing stop the European Investment Bank from accepting these ECB-issued bonds in lieu of the part of large scale investment projects that should be covered by the member state in which the project will be carried out (with the member state owning that sum to the ECB). In short, the Modest Proposal offers a way of running the eurozone as a de facto federation without any need to change the Treaty or, equivalently, to enter into some protracted political process involving 27 Parliaments…

  • Thank you for your prompt reply.

    Given the well-founded Proposal and after reading your articles about the social, let’s say, complexes of German society (meaning the Post-War remnants), I reach the conclusion that European people pay the Political Cost (term borrowed by Greek) and indirectly the financial cost.

    The willingness of Mrs. Merkel to stay on cathedra and the fact that the other minority governments of Europe still maintain postponing the final solution, plunge Greek State and future generations in a severe debt burden.

    Everybody talks about Domino effect. There are whispers for Boomerang effect back to the German face.
    The pressure on euro accelerated the export-led German economy. But, there is any border to that? God bless us (America as well)!

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