What Will Happen When Ireland’s Guarantors Need a Bailout?
It is often said that a definition of insanity is to do the same action over and over again, each time expecting a different result. In that case, the European Financial Stability Facility (EFSF), Ireland’s single-largest creditor, is a 21st century Bedlam.
Originally set up as a temporary measure, the EFSF was created in June 2010 in order to preserve the financial stability of the euro area by providing financial assistance to member states who found themselves in difficulty. It does this by selling bonds, and from the money raised it provides funds (with interest) to the financially-distressed states.
The EFSF takes bad loans, and by putting them together, turns them into good loans. It uses a financial instrument similar to that used by institutions in the run-up to the 2008 financial meltdown - whereby subprime mortgages were bundled together with other loans and sold as one good loan. These instruments are known as collateralised debt obligations.
In February 2011 the Financial Times explained that, technically, the EFSF is not a collateralised debt obligation ‘but a special purpose vehicle that essentially pools guarantees and loans from stronger euro members to give it a top triple A credit rating.’ The difference, however, is in definition, not in usage.
The economist Nouriel Roubini wrote in January 2011 that the EFSF was an instrument whereby ‘you take a bunch of dodgy less than AAA sovereigns (& some semi-insolvent) and try to package a vehicle that gets [an] AAA rating’. And it is this process of bundling bad debt into bonds which are guaranteed by good lenders which makes it akin to the ‘financial weapons of mass destruction’ which almost brought down the US and European banking systems.
The loans are still bad, the sovereign states are still distressed - it is only the guarantee that has changed. The bonds are valued not so much on the loans themselves, but on the guarantee which comes with them.
The risk has not gone away. It has merely shifted from one place to another, from bad lenders onto good.
The reasons why the sovereign states find themselves distressed in the first place are not addressed in any shape or form.
In Ireland’s case, the transfer of private banking debt into sovereign debt, alongside three years of deflationary budgets, has left the economy in statis, while debt obligations are transformed into triple-A bonds via the EFSF – making the EFSF a profit in the meantime.
The Greek economist, Yanis Varoufakis, explained the procedure in a blog post in March 2011. With Ireland and Greece frozen out of the money markets, ‘the EFSF loans for Ireland were raised from the money markets by the EFSF on the strength of guarantees issued by the remaining 15 eurozone states, in proportion to their GDP.’ The total raised was then ‘cut up in small packets, each containing a slice that was guaranteed by Germany, another by France, another by Portugal’ and so on.
Given that each country had different degrees of creditworthiness, each was charged a different interest rate, before the packets were sold off as bonds, ‘mostly to Asian investors and to Europe’s own quasi-bankrupted banks’.
This means that Portugal, already on the verge of a bailout, had to borrow, at high interest rates, on Ireland’s behalf, thus adding to that country’s already strained debt obligations.
If Portugal is forced to leave the money markets, as has happened to Greece and Ireland, ’the EFSF would then have to issue new debt on behalf of the remaining eurozone countries, to help Portugal’.
In other words, 14 countries raising money for three, until another defaults, then it’s 13 countries raising for four, and so on ‘until the bank of nations within the EFSF is so small that they cannot bear the burden of total debt on their shoulders.’
The complete lack of engagement with the problems facing Europe – deflationary policies, falling tax returns, unemployment and increased cost of living – in lieu of a credit solution for its bankrupt banking system, reveals a certain truth about the EFSF.
In Ireland’s case, the purpose of the bailout is not to help the Irish economy to recover – these are not investment loans, after all – but to ensure that European financial institutions are guaranteed a return on their loans to Irish banks: those private loans which are now part of Irish sovereign debt and which the present government is determined to protect, to the detriment of us all.
However, because new debt is being created for the sole purpose of servicing old debt, it is only a matter of time before another financial crash befalls Europe.
It is not possible to repeat the same action and arrive at a different outcome.
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EU Should Admit Greece is Bankrupt | Christian Rickens
The unvarnished truth - the second Greek Bailout should not have happened.
The mistake isn’t the size, but the construction of the bailout package. It isn’t geared to the requirements of the people of Greece but to the needs of the international financial markets, meaning the banks.
How else can one explain the fact that around a quarter of the package won’t even arrive in Athens but will flow directly to the country’s international creditors? The holders of Greek government bonds are to get some €30 billion as an incentive to convert their old paper into new bonds. The aim is to keep alive the illusion that Greece isn’t bankrupt — after all, the creditors are voluntarily forgiving part of the debt. The financial sector is cleverly manipulating the fear that a Greek bankruptcy would trigger a fatal chain reaction.
That leaves €100 billion. But that too isn’t geared to what Greece needs in order to get back on its feet. It’s linked to an estimate of how much debt the Greek economy can bear without collapsing. International technocrats agree that with debts amounting to 120 percent of gross domestic product, the country can just about go on servicing its debt. That’s the level at which the cow can go on supplying milk without dying of exhaustion. So 120 percent became the goal.
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The post Collaboration, with our European partners by Richard of Cunning Hired Knaves summed up in one sentence. For much better sentences and many more urgent points read the post.
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[...]
During the Cold War, opponents of communism routinely, and not entirely wrongly, claimed to be champions of liberty. Freedom for capitalists and freedom of speech and thought go together, it was claimed. “Freedom is indivisible” wrote Bruce Winton Knight in 1952. “Economic freedom is…an indispensable means toward the achievement of political freedom“ wrote Milton Friedman in Capitalism and Freedom. And back in 1944 Friedrich Hayek complained that “We have progressively abandoned that freedom in economic affairs without which personal and political freedom has never existed in the past.”
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In The Observer, Sunday 12 February 2012
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In a Eurozone that is unwilling to share its surplus with weaker, hardest hit economies there is no other option for those economies but default. Despite the agreement of Greek politicians to shorten their political life and accept the deal all that they have done is simply postpone this eventuality once again. However, even that postponement might be shortened by the Greek elections in April where the smaller leftist parties outside the coalition currently have 40% of the vote. Or so says Michael Roberts:
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The trouble with historical metaphors is that they can obscure the present: what’s really at stake here is not Greece’s identity but Europe’s. All eyes are fixed on Athens, but the way out of the crisis requires a choice about what kind of Europe we want. The one we have now, with its deep structural inequalities and its rigid adherence to a failed economic ideology, protects neither democracy nor human rights. Stiff-necked and punitive, it prefers to eat its children.
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