The Myth of Contagion

Another good article this morning from Ambrose Evans-Pritchard in the Telegraph. He actually seems to have a reasonably good grasp of what is going on in Europe at the moment, which makes a change from most of the commentary I read.

However, I want to specifically address the idea of "contagion", which anyone that has followed the Greek and Irish bailout stories will have heard as a key reason for the bailouts. Here is a good example, I have pulled out they key quote:

The problems of Ireland's banking system pose a risk of contagion to other Eurozone countries, European Central Bank Governing Council member Yves Mersch warned in a newspaper interview released Wednesday.

(...)

To banish this contagion risk, other governments must make the reforms needed "to gain market confidence," and appropriate structures must be set up for the Eurozone as whole, Mersch said.

This "contagion" is not something that can be averted with the application of more money. In reality, the bailouts are fuelling the crisis, because now the market knows that by exerting enough pressure on the bond market, credit spreads will widen to a point where the EU/IMF will intervene, pouring liquidity into that economy via the bond market.

This is not a malicious attack on a currency or economy, but rational behaviour. The fact is that the Greek, Irish, Portuguese and Spanish economies are all in serious trouble, and while Portugal might conceivably be saveable with a third bailout, you can forget it with Spain, it is FAR too big to bail. In fact, as Evans-Pritchard points out:

Saxo Bank said the EU's €440bn (£370bn) bail-out fund would lose its AAA credit rating if Spain needed serious help.

This would require Germany & France to put more money in, which for Merkel in particular would be very hard to explain to voters. She is already rowing hard in the other direction, with her insistence that Irish bondholders must pay for the Irish collapse. Morally she is right perhaps, but it is a very damaging thing to say and suggests to me that she has already given up on actually saving the Euro area as it stands, and is positioning Germany for the future.

The "contagion" is unavoidable, it is a consequence of a single currency and single monetary policy, neither suit any of the countries in the Euro. The bailouts, just like the whole Quantitative Easing debacle, are making everything much, much worse.

Negotiation, French Style

Le President de la Republique, Nicolas "I heart Carla" Sarkozy, apparently threatened to pull France out of the Euro during last week's negotiations on the EU rescue plan, if the other EU countries did not sign up to the deal. This was aimed particularly at Merkel, as German citizens are less than impressed at the idea of hurling yet more money into the black hole of the EU.

Sarkozy demanded "a compromise from everyone to support Greece ... or France would reconsider its position in the euro," according to one source cited by El País.
"Sarkozy went as far as banging his fist on the table and threatening to leave the euro," according to one unnamed Socialist leader quoted, who was at the meeting with Zapatero. "That obliged Angela Merkel to bend and reach an agreement."

Hmm, "bend and reach", hey? "Bend over and hold onto something" may have been a better description of how that situation unfolded.

Two comments:
1. The Euro really is not that stable. Even if it was just posturing, the fact he would say it all shows he feels it can be done. If France can, why not Greece, or indeed Germany.
2. Zealotry is alive and well in the Eurozone. Sarko was willing to sacrifice everything to save Greece, while Merkel sacrificed her political career by agreeing to these terms.

It strikes me that the Eurozone has a real problem at the moment. They believe they are "above the market", and should not bow to speculators. However, so many of the barometers they use are entirely market-driven - the strength of the Euro, the Bond markets, even the stock markets as an indicator of economic recovery. They seem to have forgotten that the "market" is just a bunch of people, many of whom are based within the Eurozone and thus are not disinterested, Soros-style investors crushing the Euro for personal gain.

Gold is now at over 1,000 Euros per ounce, an insane level, and if the Euro falls below 1.24 against the USD then it really could go all the way down to 1.00.

It's all very far from over.

"The guy can't even resign properly"

Unbelievable. Being as I am fairly busy in the evenings with a new baby, I didn't have the chance to watch or read any news last night. I did see something about Brown resigning that warmed my heart, but it was all too hectic to I thought I'd read it at my leisure at work.

So here I am. First warning sign is the pound below 1.48 against the USD. What's going on, I wondered? And then I opened my Google Reader. Fuck me, what a shitstorm this is! The egregiously unpleasant, power-obsessed fabian turd has actually managed to do the worst possible thing for the country, with a bizarre half resignation. And the frigging spineless, unfit for purpose Lib Dims are seriously getting into bed with Labour?

I said this a couple of days ago, and I'll say it again. What exactly do these fuckers have to do in order to stop people voting for them and working with them? Do Labour actually not only need to shit on the carpet of every voter in the country, but also the carpet of every single Lib Dim MP as well, just to make doubly sure that people get it?

I'm actually slightly despondent this morning about it all. I thought the result might be the death of British politics, but I was wrong. This is. The political classes are so out of touch with anything that, while the country's economy is melting down under a colossal debt mountain, they are stamping their feet about reforming the electoral system. It's just awful.

As the Clown said:

Watch the markets. This isn't going to be ugly.

This is going to be Greek.

We will be cap in hand to the IMF, it'll be the late 70s all over again, before we see the back of Brown. Every politician (and I do mean every single one), every Labour voter, every pathetic journalist incapable of doing any work, understanding economics or searching out the truth, hang your head in shame. The UK is going down the toilet, and it is your fault.

Interesting Facts About Greece

In the light of the bailout package being more or less confirmed, I thought I would share with you some interesting facts about Greece and its economy.

A little reminder about the 110 million Euro bailout package first here

Fact 1: Greece has the lowest retirement age of anywhere in the EU at 61, this will be increased to 63 by 2015 apparently.

Fact 2: Greece imports 13% of the arms exported by Germany. Not a lot of people know this, but after the US and Russia, Germany is the third-largest exporter of arms in the world, at 11%, so that's a pretty massive expenditure. Incidentally, Turkey imports 14% of German's arms exports, so make of that what you will.

Fact 3: 95 percent of taxpayers declare annual income of less than 30,000 Euros. That's tax evasion on an absolutely monstrous scale.

I could go on and on, but you get the idea. The austerity package the Greek Government are forcing through (see here) is both crippling and laughably inadequate. Furthermore, every other austerity package of this nature has been accompanied by a sharp devaluation in the currency, which helps to soften the blow. There are problems with devaluation, most notably the risk of inflation, but it does reduce the debt burden. Greece of course can't do this, so they really will be on the hook for the lot, which is ridiculous.

Either Spain or Portugal will be next, and the EU have set a very dangerous precedent with this bailout. The market is unimpressed, which is why the Euro is below 1.32 against the Dollar, and even falling a bit against the very weak Pound. If the market believed the bailout package was anything more than a finger in the dyke, we'd see the Euro higher, but it doesn't. Neither do I.

King Canute

There was much excitement in the financial world yesterday as the Euro collapsed following a relentless stream of negative news on Greece and Portugal. Things are a little brighter today (ish) after the IMF talked about increasing the bailout size, however Germany is clearly still not overly keen on helping the Greeks out, and who can blame them.

There is a monumental amount of denial going on here though. Even if Greece is bailed out, it won't solve any structural problems, but merely buy some time. This time will be used to spend the bailout money, and we'll be back in the same boat as before, but this time 60bn Euros poorer, and with Portugal and Spain also on the brink.

The whole thing looks to me like trying to push the tide back. Eventually, no matter what you do, you'll be like King Canute, up to your neck in it. Better not to spend the money in my view. It's actually quite hard to see how we're going to get out of this one really. I just hope there's some bailout money left for the UK!