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Friday
Jun222012

The Extortion Racket Shifts To Italy

One thing Greek politicians have taught other European leaders: fear mongering for the purpose of extortion is the way to go. It might not work, and it might be counterproductive, and it might destroy confidence in the economy and give investors goose bumps and blow up markets, and it might cause spooked consumers to hold back on purchases and worried businesses to freeze hiring plans, thus exacerbating the situation, but it’s nevertheless the way to go.

Greek politicians learned it from Treasury Secretary Hank Paulson who'd walked into the Capitol in September 2008, threatening that the whole world would collapse if his demands weren’t met. Soon, they expertly issued a series of escalating threats to extort the maximum amount in bailout euros from the Troika. It didn’t work very well as the Greek economy continued to spiral out of control, and as the frustrated Troika halted bailout payments from time to time, and as tempers flared, and as the people in Greece became increasingly edgy. But it was the way to go. Then came Spain. And now Italian Prime Minister Mario Monti.

As always, timing is everything. And there was no better time than Thursday, the day before the meeting in Rome of the big four—Germany, France, Italy, and Spain—and a week before the European summit, which isn’t a run-of-the-mill summit, but the summit, the one that would have to save the Eurozone. And the world. Again.

Monti, the unelected technocrat who was supposed to be able to unite parliament, is losing support in Italy, which is mired in its fourth recession since 2001. His real estate tax is widely despised, though he’d picked up some brownie points in the foreign media as deficit fighter, and an imperceptible nod from German Chancellor Angela Merkel. And yields on Italy’s government bonds have spiked to levels where the resulting interest expense would eat Italy’s budget alive [Read.... Italy Trembling on the Brink].

If the summit next week doesn’t result in a grand plan to turn everything around, Monti said, the Eurozone would spiral into its political and economic demise. “There would be progressively greater speculative attacks on individual countries,” he said. And he mentioned Italy by name. A “large part of Europe” would suffocate under “very high interest rates” and would go into paralysis. The public would get frustrated with Europe. A vicious cycle would ensue: while the Eurozone would need greater integration to survive, the people, governments, and parliaments would “turn against that greater integration.” That process has already started, Monti said, “even in the Italian parliament, which has traditionally been pro-European and no longer is.”

Hence, no agreement by end of the summit next week, no Eurozone—though the breakup would be gradual. And he had a grand plan: more integration to where “markets are convinced” that the euro would be “indissoluble and irrevocable”; mechanisms to keep debt contagion from spreading (meaning massive and unlimited bailouts); a full-fledged banking union with unified supervision and European-wide deposit insurance; “new market-friendly policy mechanisms”; and the direct purchase of sovereign bonds that teetering member states could no longer bamboozle the markets into buying. Every item on his list would be funded by taxpayers in other countries, particularly in Germany. And so he also mentioned fiscal responsibility, to satisfy Germany.

That would be the “absolutely necessary” minimum to save the Eurozone. And it would have to be agreed to by next week—though he’d assured the rest of the anxious world less than a week ago that Italy wouldn’t even need a bailout.

But the fear-mongering didn’t sway the German Chancellor during the Rome meeting on Friday. In fact, she left early to fly to Poland to watch Germany’s soccer team demolish the Greeks—and the anti-Merkel triumvirate of Monti, Spanish Prime Minister Mariano Rajoy, and French President Francois Hollande could stew amongst themselves.

There was, however, a nugget of success that the triumvirate threw to the media: €130 billion would be dedicated to growth measures. A step away from Merkel’s austerity. Alas, it wouldn’t be new public money or additional public money, but the activation of private capital and a shuffling of funds within the existing EU budget. It was nothing.

And Merkel brushed off any hopes that the EFSF and ESM bailout funds could hand taxpayer money directly to the banks. Nein, Merkel said, the contracts clearly spell out that states are the partners, not banks. “It’s not that I don’t feel like it,” she said, “but the contracts aren’t made that way.”

Hollande again called for Eurobonds, like a child that doesn’t want to see reality; Germany’s refusal is nearly absolute, and it’s not just Merkel, but the population as a whole. Even the banking union that Merkel emphasized she’d be open to could not include any form of common liability; it could only have a common regulator, she said. And so, Monti’s threat has once again proven to be the way to go, though it didn’t work and might become counterproductive.

Meanwhile, Germany and Austria have plunged into public soul searching about the euro and the endlessly growing expense of maintaining it. Like so many things that appear useful, the euro has become dangerous. Read.... “The Euro Is Like a Knife in the Hands of a Child.”

George Dorgan, a macro-based fixed-income and currency portfolio manager based in Switzerland, writes that Germany won't, and can't, agree to most of the Eurozone bailout measures bandied about. Period. Regardless of what the FT and the Economist wish to believe. And hedge funds betting that Germany will pay in the end are wrong too. Read.... Eurobonds, Fiscal or Banking Union—They're All Pure Utopia.

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Reader Comments (2)

All of this goes to show that there was genuine purpose in having a gold standard and silver monetized as well. This is what acts as a brake on runaway spending by weak politicians who attempt to buy votes with money that they do not have and cannot possibly arrange to have repaid.

Yes, there is only so much gold and silver to go around and that is one of their best features. Unbacked paper currencies can, will, and always are printed to complete extinction. The 100 trillion Zimbabwe bank note is the ultimate expression of this and can be seen on-line via Google / images.

What we see in Europe today, we will see tomorrow in the UK, and next week in the USA. The western world is suffering from an over-dose of government. Runaway government leads to runaway spending, which is exactly what we have. Since gold and silver cannot be printed out of thin air, there is never too much of them. Inflation is not created by them since that is yet another function of printing unbacked paper money faster than the economy is growing and producing.

Too many people confuse money with wealth. They are not the same thing. Money is a symbol of wealth. It is how we keep score.

All too often we see media reports wherein the current "liquidity crisis" will be resolved via "reliquifying the banks". Unfortunately, we are not suffering from a lack of liquidity. The world is awash in paper currencies. What we are lacking is the intelligence to recognize that banking is an essentially conservative endeavor and it cannot work in any other manner, no matter how strongly some wish that it could. Giving bankers low cost or even free money is only enabling the same idiotic behavior that got us into this mess. Instead, any banks that need to be reliquified, really ought to be liquidated and any value contained therein distributed to their depositors, then their bond holders, then their creditors, and finally to their shareholders. Bank management should be liquidated as well. Fire them all and do not accept the lame excuse that they are "vital" to any sort of reorganization through bankruptcy. They are not. They are the ones who caused the problems from which their banks are suffering. More contributions from them are the last thing that an ailing bank needs.

Failing all that, any tax-payer money given to any bank must have some heavy duty requirements placed upon the bank and its management regarding how the bank invests, the salaries and benefits of the bankers, and bank stock given in return for the money they get. It is time to end the free ride that bankers have had for the past several years. We can no longer afford to support them in the style to which they have become accustomed.
June 23, 2012 | Unregistered CommenterEd_B
Ed - excellently put!
June 23, 2012 | Registered CommenterWolf Richter

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