The ABC’s Lateline (Australia’s flagship news and current affairs evening tv program) afforded me the opportunity to delve into the details (or lack thereof) of the latest European effort to combat the euro crisis. For the transcript and video (kindly provided by the Australian Broadcasting Corporation)…
Australian Broadcasting Corporation, Broadcast: 27/10/2011, Reporter: Tony Jones
Click here for the video
Introduction: Economist Professor Yanis Varoufakis says Europe’s recovery plan does not resemble reality but the markets are happy because the politicians have created such low expectations any action is cheered.
TONY JONES, PRESENTER: European leaders have finally agreed on a deal to try to ease Europe’s financial crisis, but is it, as the French president Nicolas Sarkozy described it, a credible and ambitious response?
Well, for his analysis I’m joined live now from Athens by Yanis Varoufakis, Professor of Economics at Athens University.
Thanks for being there.
YANIS VAROUFAKIS, PROFESSOR OF ECONOMICS, ATHENS UNIVERSITY: Thank you.
TONY JONES: Now, as expected, we’ve heard positive spin from European leaders, but your immediate response is that there has been no agreement to speak of. Why did you come to that conclusion?
YANIS VAROUFAKIS: Well, because I read very carefully every word that the communiqué included and I didn’t see anything other than a definition of the areas which the European Union considers to be important.
When it comes to their proclamations of what they’re going to do about these areas, about these problems that are threatening the euro system with imminent collapse, I saw nothing there which contained detail, and of course we know that it is in the detail that the devil resides.
The numbers that I saw were flimsy. They were not founded on anything that resembles the reality on the ground in the social economy of the eurozone, of Greece, of Germany, of any of the countries, or the banks for that matter.
Look, what I think has happened is this: our leaders now have committed, back a week ago when they met in the G20 to come up with a comprehensive solution to the euro crisis, they were locked in rooms and chambers for days on end.
At around four o’clock in the morning they hadn’t reached any serious agreement, so they decided to give George Orwell his latest triumph by describing their failure to agree, their impasse, as a success, as a triumph of convergence. And they’re hoping, I think, that in the next few weeks, probably months, something of a rational plan will emerge magically out of that mess that they found themselves in overnight.
TONY JONES: OK. Yanis, obviously a pretty sceptical approach.
Let’s start with the banks, which are expected to take this so-called haircut. How many of the banks and investors have actually agreed or signed up to this voluntary write-off of 50 per cent of Greek debt?
YANIS VAROUFAKIS: We do not know that yet. What we do know is that Mr Dallara, who is their representative, their shop steward if you want, was leaned upon by Mrs Merkel and the other European leaders to agree.
He has agreed, simply because he had a gun on his head. The gun took the form of a very clear ultimatum that unless he agrees then there will be 100 per cent haircut. Now, what this means when we come to the nitty-gritty negotiations on how this haircut will be actually implemented and which banks are going to participate and how they are going to be convinced by their own shop steward, Mr Dallara, to go along with this agreement that was snatched last night out of the jaws of complete failure, is something that we are going to have to watch.
TONY JONES: Yes, well, Greek banks are certainly going to have to take big losses, aren’t they? How is that not going to tip them over into insolvency and are we going to see a round of nationalisation of Greek banks as a result?
YANIS VAROUFAKIS: Greek banks have been insolvent for some time and so have a number of eurozone banks. The only thing that keeps them alive and the ATMs still churn euros out is the European Central Bank system, which is providing them with the liquidity which is necessary to keep functioning.
So, yes, this agreement is paving the ground for an effective Europeanization, not nationalisation, the transfer of a controlling chunk of their shares to the eurozone until they are cleansed and resold to the private sector.
But the problem is much more general than that. If you read the agreement very carefully you will see that the way that our European leaders are putting it is that the banks will be given first an opportunity to go to the private sector to seek more capital.
If that fails then they will go to their national governments to get assistance from them, and failing that, then they will go to the European Financial Stability Facility to be recapitalised.
The bankers are going to utilise that long process in order to avert loss of control of their banks, which means that their capitalisation – or recapitalisation of the European banks, which is essential and should have happened yesterday, is going to drag on and on. This creates serious systemic risks within the eurozone’s banking sector, and I’m afraid that this is possibly one of the worst outcomes of this negotiation.
TONY JONES: Let’s go then to the fund which, as you say, is the last resort, the stability fund, which is now being talked about as being a trillion-euro stability fund, but of course it isn’t. What it is a fund which can potentially be leveraged up to that amount. How does that work exactly, that leveraging system?
YANIS VAROUFAKIS: Well we’ve seen it all before, haven’t we? It’s what Wall Street used to be doing prior to 2008. So for every dollar or euro that the European Financial Stability Facility has received from member states, it’s going to seek to expand it by borrowing from the private sector.
The problem is – however is that whereas the private banks in the pre-2008 era in Wall Street for instance were doing that knowing that there is a backstop behind them if it all goes belly up, the central bank, the Federal Reserve in the United States.
The rumour here is that the EFSF is going to be turbo-charged through leverage, but there will be no-one behind it.
And let’s not forget that the major haircut which is being touted for Greek debt is now being followed by a very aggressive campaign by the European leaders to insist that this should not go down as a credit event. In other words, the CDS’s are not going to be triggered, which means that no-one is going to have any confidence now in the checks and balances within the financial system that are there in order to provide a backstop in case something goes wrong.
So we are turbo-charging what I consider to be a toxic financial stability fund and we do not provide a safety net in case it all goes wrong. So it is as if the European Union is deciding to go down the road of Lehman Brothers without a Federal Reserve system to back it up.
TONY JONES: Yes, the irony of this of course is that one of the instruments they’re talking about is using this stability fund to create insurance for investors to buy European bonds. Now, if the – first of all, how much does that insurance cost? Is the insurance really based upon anything, or is it simply based on this leveraged system that doesn’t really exist? In other words, as you say, a Wall Street scenario?
YANIS VAROUFAKIS: Absolutely. Look, this is what happens when desperate people are concocting desperate solutions.
The initial idea that was proposed by Tim Geithner, the US treasury secretary, to the Europeans was that the FSF is leveraged by the ECB, the European Central Bank. In other words, they’ve been quite straightforward.
The Germans didn’t like that, so they sought private funds in order to leverage the EFSF, and, instead of having the EFSF actually lend to Italy and to Spain, what they are coming up with is this idea in order to avert having to say to their electorate that there is going to be a kind of fiscal union – fiscal transfer to the countries that are indebted like Italy and Spain, that, “Look, we’re not going to give them money. What we’re going to do is we’re going to insure their debt,” which creates more problems than it solves, because it raises the question of what happens with the old debt which is uninsured? Who’s going to buy that? You can imagine what will happen to the yields of the old bonds.
And there’s about three trillion worth of those bonds doing the rounds in the financial markets. Look, let’s just be very clear on this: it is a mess, and it is a mess of our politicians’ making, and the more they’re trying to wriggle their way out of this mess, the more mess they are creating.
TONY JONES: Do you think the markets are going to come to the same conclusion as you inevitably? And – because there doesn’t seem to be a great deal here, as you’ve just pointed out, to help Italy and Spain out of the impending crises that they’re both facing.
YANIS VAROUFAKIS: The only good thing one can say about our politicians is that they’ve created such low expectations in the markets over the last weeks and months that it’s very hard to surprise negatively the markets now. So, even if the news is bad as opposed to atrocious, the markets are going to receive a little bit of a boost today.
But I think that once investors pore over the details of what’s happening, they will realise that nothing much has happened, so it would be back to business as usual as of the – in the next two or three days.
TONY JONES: OK. A final question because there is another arm to this giant fund and that is a special investment vehicle, as it’s called, for public and private investors, and there seems to be a wish, if not a dream, that the Chinese will sort of rush into the void here and create a huge sum of money that’ll help pull Europe out of its crisis. Is that going to happen? Is there any sign that it could happen?
YANIS VAROUFAKIS: I have no doubt that the Chinese leadership would be willing to participate in Europe if what they are being presented is a national plan which has a serious chance of dealing with this crisis because China has many interests in the European Union. It’s a major trading partner, it has lot of investments in Europe, especially in public debt, and it would – I’m sure the Chinese would like to help.
But the problem is that the plan that they are being presented with by the Europeans, by president Sarkozy, by the head of the EFSF and so on, is such a shoddy plan that the best intentions of Beijing are going to come to naught.
TONY JONES: Yanis Varoufakis, pretty pessimistic view. Probably the first we’ve heard actually to be quite as pessimistic since this deal was struck, but it’s a bit of a reality check for us to hear from you. We thank you very much.
YANIS VAROUFAKIS: Thank you.