As Soon As The First Nation Leaves, A Trickle Will Turn To A Cascade…

If enacting a levy on Cypriot depositors was a call for a bank run, then saying that the actions in Cyprus are a “template” for future recapitalisations in other Eurozone countries — as the Dutch Euro Group President Jeroen Djisselbloem did yesterday —  was screaming it from the rooftops awash in a demented stupour, drunk on bullshitty Smets-Wouters DSGE and the ridiculous notion that the Euro is sustainable.


This question, I think, needs answering:

Dijsselbloem is yet to respond to the question, other than to say that his claim that it was a “template” did not in fact mean that he meant that it was a template. 

Tyler Durden jokes that the only conceivable reason for this could be an insane pseudo-Keynesian conspiracy to trick people and businesses holding cash to go out and spend or invest it, thus raising aggregate demand and generating recovery:

Last week, when we commented on the absolutely idiotic Eurogroup proposal (now voted down and replaced by an equally idiotic “bank resolution” proposal which will see uninsured deposits virtually wiped out) to tax uninsured and insured deposits, we jokingly suggested that this may be merely the latest ploy by the legacy status quo to achieve one simple thing: force depositors across the continent (and soon, world) to pull their money out of a malevolent, hostile banking system and push that money into stocks, or simply to spend it.

Given the utter folly of the levy itself and the subsequent comments, this might as well be as good an explanation as any. The easiest and quickest way to destroy the fractional financial system is to convince depositors around Europe or the world that their deposits are under threat. The European policy elite has displayed a slavish tendency to protect bondholders from losses, but not depositors upon whom the banking system is utterly dependent. If bondholders do not buy bonds, then it becomes harder for governments to finance themselves (although it must be noted that around the world, interest rates are at all-time-lows in every developed country with its own currency, suggesting a run on bonds by bond vigilantes is a relatively small possibility). But if depositors withdraw their money en mass, the banking system collapses.

I believe that this slavish devotion to preventing losses is fundamentally unhealthy, as capitalism without the potential for loss is robbed of any internal stabilisation mechanism. If bondholders or depositors cannot lose their money, they have no incentive to be prudent with it. But with the danger of a Eurozone bank run looming putting bondholders ahead of depositors is unhealthier still. Protecting government borrowing at the expense of confidence in the banking system is a dire error.

And it is not like there is really a hard choice between the interests of bondholders and depositors. If the European policy elite would deal with the huge social upheaval that the Euro system has created — namely, very high unemployment, youth unemployment and slack resources following the burst housing bubble in the periphery — then both depositors and bondholders could sleep easier at night. All this would take is a firm, long-term commitment from domestic and supernational governments to lending, tax incentives and spending to support business growth. A Europe that is growing, producing additional goods, services, energy and resources that people want and need will be far more stable than one that is shrinking and weakened (in both supply and demand) by forced and centrally-planned fiscal consolidation imposed by the policy elite. People want jobs, contrary to the assumptions of certain neoclassical economists who believe that all unemployment is voluntary. People want business, not to be subject to humiliation and subjugation to meet an arbitrary debt target set by delusional central planners actively weakening economic activity. And, the only way for peripheral nations to get this is through leaving the Euro, which may very well soon start to happen. And once it does, a trickle will turn to a cascade as the leavers begin to quickly recover from their Merkel-inflicted wounds.

In the long run, 25% unemployment in Spain and Greece (as well as elevated unemployment throughout the periphery) will come back to hurt the core, whether that is through weak demand for core-produced goods and services, social unrest, Eurozone-rupture, etc. And Dijsellbloem may yet see how foolish his template was.

“Get Your Money Out While You Can”






Why Europe Is Still In Peril, In Two Charts

A lot of analysts, including myself, have given the European situation a rest since last year. There were certainly some signs that the ECB and IMF had slowed (if not stopped) the deterioration by providing liquidity backstops to the addled banking system. But perhaps that was just the calm before the storm.

In truth, things were still was probably just as perilous as ever up until yesterday when the ECB and IMF decided to start a banking panic by enforcing a haircut of up to 10% on bank depositors. That was literally the stupidest thing that anyone has done since the Euro crisis began, and while it may not lead to utter disaster, there is a significant chance that it will. Not only is it excruciatingly unjust (it’s theft!), it is also incredibly suicidal. Many, many Spaniards, Italians, Greeks and Portuguese will have looked at the Cyprus haircut in horror, and wondered “Am I next?” Some of those will withdraw their money from the bank and stuff it in a mattress or into tangible assets, furthering stressing the already-fragile and highly-leveraged European banking system. Even a 1% drop in European deposits would lead to over €100 billion of withdrawals.

The background to this is soaring European unemployment:


The people running the European financial system and engineering the bailouts and austerity (ECB, EU, IMF, Germany) have ploughed on through with more and deeper austerity even as European countries (other, of course, than Germany) have run up to higher and higher unemployment levels. Spain and Greece are above 25%. Italy is above 10%, and Portugal above 15%. Hiking taxes and cutting spending is leading to more and more people in unemployment oblivion. That isn’t healthy. Let’s not forget what happened to Germany the last time when over 25% of its people found themselves unemployed:


If bank runs materialise across Europe next week, the unemployment situation is most likely to worsen even further. If that happens, expect more and more unemployed, underemployed and angry Europeans to start voting for increasingly radical political parties. This is suicidal. Europe needs to not only reverse the awful, stupid Cypriot haircut, but also to put fiscal consolidation on hold (it has, lest we forget, so far been counterproductive) and start worrying about unemployment levels.

Greeks Want to Stay in the Euro? Why Don’t They Move to Germany?

Above 80% of Greeks want to stay in the Euro:

About 80.9 percent of Greeks believe Greece should struggle to stay within the eurozone “at any cost,” fresh opinion polls showed on Wednesday.

Some 45.4 percent of respondents in a survey conducted by GPO firm for local private television Mega channel said that they regarded as most probable a Greek exit from the European common currency. And 48.4 percent of the respondents said that such a prospect was less likely.

But they don’t like the austerity measures that staying in the Euro entails:

About 77.8 percent expect the next government to emerge from the June 17 general elections to renegotiate the harsh austerity terms of the two bailout deals reached since May 2010 with international lenders to avoid a disorderly default

So the question is why don’t they leave Greece and move to the core where companies are hiring and public services aren’t being slashed, and where there is no overhanging threat of being thrown out of the euro?

Greeks claim that that’s exactly what they want to do:

Conducted in January by the Focus Bari company using a sample of 444 people aged between 18 and 24, the study shows 76% of interviewees believing that leaving Greece would be the best response to the effects of the economic crisis.

But they’re not doing it:

However, for most of them, the idea of leaving appears a dream that cannot come true. Half of those interviewed (53%) spoke of having thought about emigrating, while just 17% said that they had resolved to leave the country and that they had already undertaken preparatory actions.

A slightly lower percentage (14%) stated that they were forcing themselves quite consciously to stay in Greece, as it is their generation that has to bring about the changes that the country so desperately needs.

And it’s not even like they have to return home should recent immigrants become jobless — after twelve months working in another European state, Europeans are generally entitled to welfare:

Who can claim benefits in the European Economic Area (EEA)?

You may be able to get benefits and other financial support if any of the following apply:

  • you’ve lived, worked or studied (a recognised career qualification) in an EEA country
  • you’re a stateless person or refugee and you live in an EEA country
  • you’re a dependant or the widow or widower of anyone who was covered by the regulations (your nationality doesn’t matter)
  • you’re the widow, widower or child of someone who worked in an EEA country and was not an EEA national or a stateless person or refugee (but you must be a national of that country)
  • you’re not an EEA or Swiss national but legally resident in the UK
  • you’ve lived in the EEA country long enough to qualify

Just twelve months of work separates a jobless young Greek and austerity-free arbeitslosengeld

Yet this isn’t just a Greek issue. Labour mobility is much lower in Europe than the US:

The fact that labour mobility is low in Europe is indicative of a fundamental problem. In any currency union or integrated economy it is necessary that there is enough mobility that people can emigrate from places where there is excess labour (the periphery) to places where labour is in short supply.

Now, there is free movement in Europe, which is an essential prerequisite to a currency union. But the people themselves don’t seem to care for utilising it.

Why? I can theorise a few potential reasons people wouldn’t want to move — displacement from friends and family, moving costs, local attachment.  Yet none of those reasons are inapplicable to the United States. However there are two reasons which do not apply in the United States — language barriers and national loyalty. It is those reasons, I would suggest, that are preventing Europe from really functioning as a single economy with a higher rate of labour mobility.

The people who built the Euro realised that such problems existed, but decided to adopt a cross-that-bridge-when-we-come-to-it approach:


Romano Prodi, EU Commission President, December 2001

But long-term and deep-seated issues like language barriers and nationalistic sentiment cannot simply be eroded away in a day with an economic policy instrument. No bond-buying bazooka can smooth the underlying reality that Europe — unlike the United States — is not a single country.

Greeks who want to stay in the euro in the long run would do well to move to the core.

The Welfare Kings of Europe











Will Tsipras Blow Up Europe?












The New European Serfdom

So let’s assume Greece is going to leave the Eurozone and suffer the consequences of default, exit, capital controls, a deposit freeze, the drachmatization of euro claims, and depreciation.

It’s going to be a painful time for the Greek people. But what about for Greece’s highly-leveraged creditors, who must now bite the bullet of a disorderly default? Surely the ramifications of a Greek exit will be worse for the international financial system?

J.P. Morgan — fresh from putting an LTCM alumnus in charge of a $70 trillion derivatives book (good luck with that) — is upping the fear about Europe and its impact on global finance:

The main direct losses correspond to the €240bn of Greek debt in official hands (EU/IMF), to €130bn of Eurosystem’s exposure to Greece via TARGET2 and a potential loss of around €25bn for European banks. This is the cross-border claims (i.e. not matched by local liabilities) that European banks (mostly French) have on Greece’s public and non-bank private sector. These immediate losses add up to €400bn. This is a big amount but let’s assume that, as several people suggested this week, these immediate/direct losses are manageable. What are the indirect consequences of a Greek exit for the rest?

The wildcard is obviously contagion to Spain or Italy? Could a Greek exit create a capital and deposit flight from Spain and Italy which becomes difficult to contain? It is admittedly true that European policymakers have tried over the past year to convince markets that Greece is a special case and its problems are rather unique. We see little evidence that their efforts have paid off.

The steady selling of Spanish and Italian government bonds by non-domestic investors over the past nine months (€200bn for Italy and €80bn for Spain) suggests that markets see Greece more as a precedent for other peripherals rather than a special case. And it is not only the €800bn of Italian and Spanish government bonds still held by non-domestic investors that are likely at risk. It is also the €500bn of Italian and Spanish bank and corporate bonds and the €300bn of quoted Italian and Spanish shares held by nonresidents. And the numbers balloon if one starts looking beyond portfolio/quoted assets. Of course, the €1.4tr of Italian and €1.6tr of Spanish bank domestic deposits is the elephant in the room which a Greek exit and the introduction of capital controls by Greece has the potential to destabilize.

A multi-trillion € shock — far bigger than the fallout from Lehman — has the potential to trigger a default cascade wherein busted leveraged Greek creditors themselves end up in a fire sale to raise collateral as they struggle to maintain cash flow, and face the prospect of downgrades and margin calls and may themselves default on their obligations, setting off a cascade of illiquidity and default. Very simply, such an event has the potential to dwarf 2008 and 1929, and possibly even bring the entire global financial system to a juddering halt (just as Paulson fear-mongered in 2008).

Which is why I am certain that it will not be allowed to happen, and that J.P. Morgan’s histrionics are just a ponying up toward the next round of crony-“capitalist” bailouts. Here’s the status quo today:

Greece no longer wants to play along with the game?

Okay, fine — cut them out of the equation. In the interests of “long-term financial stability”, let’s stop pretending that we are bailing out Greece and just hand the cash over to the banks.

Schäuble and Merkel might have demanded tough fiscal action from European governments, but they have never questioned the precept that creditors must get their pound of flesh. Merkel has insisted that authorities show that Europe is a “safe place to invest” by avoiding haircuts.

Here’s my expected new normal in Europe:

After all — if the establishment is to be believed — it’s in the interests of “long-term financial stability” that creditors who stupidly bought unrepayable debt don’t get a big haircut like they would in a free market.  And it’s in the interests of “long-term financial stability” that bad companies who made bad decisions don’t go out of business like they would in a free market, but instead become suckling zombies attached to the taxpayer teat. And apparently it is also in the interests of “long-term financial stability” that a broken market and broken system doesn’t liquidate, so that people learn their lesson. Apparently our “long-term financial stability” depends on producing even greater moral hazard by handing more money out to the negligent.

The only real question (beyond whether or not the European public’s patience with shooting off money to banks will snap, as has happened in Greece) is whether or not it will just be the IMF and the EU institutions, or whether Bernanke at the Fed will get involved beyond the inevitable QE3 (please do it Bernanke! I have some crummy equities I want to offload to a greater fool!).

As I asked last month:


And will the inevitable 2012-13 bailouts of European finance cement this aristocracy even deeper and wider?