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December 18 2011: 2012 – The end -and the return- of Europe as we know it

Ilargi: 2012 may not bring the end of the world, but it will bring the end of the Eurozone and the European Union as we’ve known them. There are now too many things that can potentially go wrong, and some of them will.

The fact that the European Union counts 27 different constitutions, and the Eurozone 17, makes it either excruciatingly hard or downright impossible to swiftly adopt or change treaties or laws. Treaties such as the last one, agreed on December 9, can therefore far too easily be dragged down into various legal quagmires, and almost certainly will be.

Moreover, in all those European nations there are people willing to fight for their rights. And they will all fight their own fights. Which will not only tear at the seams of the Union, it will destabilize governments, overthrow governments, and not all of these can or will be replaced with technocrats. At the same time, any country that doesn’t move in lock step with Brussels can derail the process of changes for all others.

Even if the richer countries try very hard to get rid of the process of unanimous decision making. The entire EU institution has never been an overly democratic one, but the big boys will undoubtedly try to do themselves one better in this regard. Hardly anybody even complains about the unelected governments of Greece and Italy anymore. So they go for the next step in their doomed effort at dismantling representative democracy in Europe. Stephen Castle for the New York Times:

Only 9 Nations Will Be Needed To Ratify Europe’s Fiscal Treaty
A new treaty to impose tighter discipline among the 17 nations in the European Union that use the euro will come into force once nine countries approve it, according to a draft released Friday. That potentially reduces the threat that disapproval by one nation could scuttle the pact.

The treaty is intended to help improve confidence in the euro by tightening the coordination of the 17 euro zone economies, requiring nations to balance their budgets and cut debt.

The outline of the plan was agreed to by most European leaders a week ago, with the exception of Britain. European officials hope to reach agreement on the eight-page draft of the treaty within weeks, with Britain being offered observer status in discussions.

The treaty will enter into force "on the first day of the month following the deposit of the ninth instrument of ratification by a contracting party whose currency is the euro," the draft states.

That means that if one country held a referendum on the treaty and did not approve it, the decision would not block others from putting it in place once nine other nations ratified it. The terms of the treaty will, however, apply to each country only when the country ratifies it.

If a euro nation fails to ratify the treaty, it would be in an "uncomfortable position" politically, said one European official who spoke on condition of anonymity.

Ilargi: I’d say all Europeans need to think hard about this. The big boys are changing laws on the fly. It goes something like this: Only 9 nations are required to agree to the fact that only 9 nations are required to agree to … anything at all. And anyone who doesn’t follow suit, well, they "would be in an "uncomfortable position" politically".

In this fashion, the politics, especially with regards to the economy, of 17 different nations can be dictated by just a handful (some countries will blindly follow Germany and/or France).

Luckily for the rest of them, this clever scheme won’t go anywhere. Louise Armitstead and Philip Aldrick write for the Telegraph :

Brussels accord on the verge of collapse
Germany’s cherished European fiscal compact was unravelling as Hungary and the Czech Republic said it would be damaging, and protesters in Warsaw demanded Poland stands firm against Angela Merkel.

Amid fresh warnings that Europe is triggering a 1930s global depression, the German Chancellor faced open rebellion against the key plank of her Brussels accord.

The leaders of Hungary and the Czech Republic told a joint conference in Budapest they were ready to reject the planned treaty changes and implied plans for a centralised tax system. Czech Prime Minister Petr Necas said he was "convinced that tax harmonisation would not mean anything good for us".

Ilargi: Add to that the resistance in Finland, Britain, Sweden, Ireland, and you have a recipe for, if not outright "disaster", certainly long delays. And those delays will easily be long enough to change the focus from the problems of sovereigns to those of banks, as I indicated it would a while back.

Germany will need to bailout Commerzbank. Soon. Not all that big an issue, perhaps. But it has more troubled banks. Add them all up, and you’re talking major decisions to be made, as well as a bit of introspection: how to solve things at home instead of at the neighbors.

The largest of those neighbors, France, will face what we might label Commerzbank squared. In the past little while, the main French banks have made some pretty grave announcements, which were mostly snowed under in all the other bad news.

BNP Paribas will leave the global mortgage market, Crédit Agricole will quit the commodities market and SocGen will shut down its U.S. gas and power trading desk. On top of that, even Crédit Mutuel, a credit union writ large, was downgraded.

For BNP to quit the mortgage market can mean only one thing. It’s desperate for cash. Ditto for Crédit Agricole’s move away from commodities. These are the very lifelines for banks of their size in good to moderately good times. They throw out their feet on the ground revenue streams, because they need all the cash they can gather.

Société Générale’s decision is indicative not only of that same principle, it also casts a major blinding light on another problem: financing for the energy industry. Andrew Peaple in the Wall Street Journal :

Oil Explorers Drill Deep for Project Funding
For oil and gas explorers, turning reserves into production isn’t a cheap business. Thanks to the European banking crisis, it’s about to get even more expensive.

French banks such as BNP Paribas, Crédit Agricole and Société Générale have long dominated the market for loans to oil companies secured against reserves. But these banks are now raising prices and cutting credit. For exploration and production companies, finding funds could soon get as hard as finding oil.

Reserve-based lending is predominantly a dollar-based business and already quite conservative. Loans, which can run into the billions of dollars, typically are made over three to seven years, shorter than for normal project-finance loans. Banks usually lend assuming long-term oil prices at $65 a barrel, well below current $100 prices.

But European banks have been starved of dollar funding since the summer, forcing them to retreat. The cost of reserve-based loans is now at about four to 4.5 percentage points over the London interbank offered rate, or Libor, compared with 2.5 to three points at the start of 2011, says the head of energy lending at one major French bank.

For companies that previously enjoyed low borrowing costs, that will come as a shock; the chief financial officer of one major exploration and production company says that next year he will need to refinance $2 billion of 2007 loans priced at less than one percentage point over Libor.

Banks from Japan and Australia have been stepping into the gap, some people in the industry say. But longer term their activity also could be hampered by Basel III rules, which force banks to set aside more capital for reserve-based lending.

Ilargi: None of this need be a surprise to longtime TAE readers: this is the credit crunch we’ve been talking about for years. And about which we’ve always said that it doesn’t matter what central banks do; they can’t prevent the crunch from happening. The credit must vanish, because its flipside is too much debt to service.

Mike ‘Mish’ Shedlock puts it like this:
The story of Credit Agricole is symbolic of the banking sector everywhere. Banks are shedding assets, not because they want to, but rather because they have to. The reason they have to is they are over-leveraged or need to raise capital for numerous reasons including new Basel requirements.

The unfortunate irony is banks may be shedding profitable organizations simply because there is still a bid for the assets.

Credit Crunch Math
In a credit crunch, banks, hedge funds, mutual funds, and other organizations sell what that can, not what they want to. In essence, distressed sellers weaken themselves by shedding profit centers to retain assets for which there is no bid.

Ilargi: So France tries to dictate, along with Germany, the conditions under which all of Europe must operate going forward. Now, you can try and pull that off if you’re big and healthy. But you can’t if you’re just big and bloated. Not at all unlike what happens to the US on the world scene.

Already, people like Sarkozy are appealing to their people to "buy French". No matter that any such idea contradicts the entire European project. But the more its banks are under threat, the more France will follow this line; it has little choice. The same goes for many, if not all, other EU countries.

France even made a foolhardy attempt to claim that Britain should be downgraded ahead of itself. Pot, kettle: I’d say don’t worry, you’ll all get your turn soon enough.

Thing is, the more this progresses, the less other EU nations are inclined to listen to France. Europe is still a gathering of highly divergent cultures trying to move together, something that works far better in times of plenty than it does in times of less than that.

If it were solely up to France, we would see a much larger EFSF, and an ECB that purchases a far bigger share of sovereign bonds; France deems it in its own interest to spread the risk around the whole Eurozone. Germany wants no part of this, because it realizes that all that spreading will eventually end up at the doorsteps of Berlin.

The German Bundesbank doesn’t like the idea of "stealth-funding" the IMF either, for similar reasons. Der Spiegel:

German Bundesbank Wary of IMF Help for Europe
The shock waves from last week’s European Union summit in Brussels were difficult to ignore, with Great Britain emerging as isolated and the rest of the bloc promising to take steps toward fiscal union.

A closer look at the fine print, however, revealed that the 27 heads of state and government really only emerged from the summit with one concrete pledge aimed at dampening the most immediate effects of the debt crisis currently battering Europe. They vowed to loan up to €200 billion ($260 billion) to the International Monetary Fund so that the IMF could step up its aid to European countries in need.

Now, though, with Germany’s central bank showing increasing doubts about the fund and others demonstrating an unwillingness to participate, even that measure may now be in doubt. Bundesbank head Jens Weidmann has insisted that before Germany sends its €45 billion share to the IMF, it needs assurances that other fund members outside of Europe are also willing to help out.

Russia indicated its willingness to play along on Thursday. There are indications, however, that the United States will not help out. According to Bloomberg, Federal Reserve Chairman Ben Bernanke told Senate Republicans on Wednesday that the Fed would not devote more money to the IMF.

US President Barack Obama has also said that the IMF has sufficient resources. Canada too has shown no interest in the IMF plan. And Japan has insisted that Europe do more on its own.

Increasingly Unrealistic
But there are problems in Europe too. British Prime Minister David Cameron on Wednesday made it clear that his country would only contribute €10 billion, far lower than the €30 billion EU leaders had expected, according to the Financial Times.

The Czech Republic, for its part, has said it will chip in its share of €3.5 billion if all EU countries participate. Furthermore, it wants to take its time to thoroughly examine the plan — making next Monday’s envisioned deadline for collecting European funds look increasingly unrealistic.

The agreement on the €200 billion IMF fund is essentially an admission that the current euro bailout fund, the European Financial Security Facility (EFSF), is likely not large enough to handle Italy’s — or even Spain’s — refinancing needs should they run into trouble.

Plans are afoot to leverage the EFSF, but the fund’s spending power is likely to max out at €750 billion. The current consensus, voiced most recently by European Central Bank governing council member Klaas Knot, holds however that at least €1 trillion is necessary to stabilize the euro.

IMF Managing Director Christine Lagarde on Thursday underlined the severity of the crisis in comments during a conference at the US State Department. She said that the global economy is faced with threats similar to those which triggered the Great Depression in the 1930s. "It’s not a crisis that will be resolved by one group of countries taking action," she said. "It’s going to hopefully be resolved by all countries, all regions, all categories of countries actually taking action."

Still, it is Germany’s central bank which is causing the most consternation. Weidmann has said that, despite the Bundesbank’s independence, he would like parliamentary backing for the measure. Furthermore, he is against earmarking the proposed €200 billion IMF fund solely for European use, saying it should be used to strengthen the IMF as a whole.

‘Back on Course’
According to a report in the Financial Times Deutschland newspaper on Friday, Weidmann has also highlighted the dangers the IMF fund poses to Germany’s €211 billion share of the EFSF.

Because of the IMF’s "preferred creditor status," debts to the IMF are paid back first, meaning that should a country where both the IMF and the EFSF are involved becomes insolvent, the EFSF — and thus Germany — stands to lose at least a portion, if not all, of its contribution. According to the paper, Weidmann warned German Finance Minister Wolfgang Schäuble of the dangers on the day of the summit last week.

Ilargi: Too many things that can potentially go wrong, and some of them will. Too many different cultures and languages. Too many different and divergent interests. That’s Europe’s history, and it will be its future.

Looking at the war of words surrounding Britain’s decision not to comply with the December 9 treaty changes, and the subsequent war of words between France and David Cameron, one gets to wonder how much longer it will take before Sarkozy and Merkel start referring to each other as frogs and krauts, respectively.

Still, the first real cracks in the EU will likely start to show up in the periphery. Like Hungary, an EU member, though with its own currency. Boris Groendahl and Edith Balazs report some interesting developments for Bloomberg:

Austrian Banks Facing Payback as Hungary’s $22 Billion Debt Slaves Revolt
When Hungary’s former central bank governor was buying a house two months before Lehman Brothers Holdings Inc. collapsed and the country sought an emergency bailout, he received an offer he couldn’t refuse.

Peter Akos Bod, now an economics professor at Corvinus University in Budapest, was given a choice of mortgages by his bank. The 60 year-old could select a loan in Hungary’s currency, the forint, at 13 percent interest, or one in Swiss francs at less than 6 percent. After crunching the numbers on a spreadsheet, he picked the cheaper franc loan. "It was rational," he said of his 2008 decision in an interview in the Hungarian capital. "I put it into a model."

Three years later, Bod and about one million compatriots who took mortgages in francs are faced with a debt pile that has swelled to 4.9 trillion forint ($22 billion). The currency’s 40 percent slump against the franc has raised repayment costs, pushing mortgage arrears to a two-decade high and prompting Prime Minister Viktor Orban’s government to brand the loans "debt slavery."

To help homeowners, Orban imposed currency losses on banks including Erste Group Bank AG and Raiffeisen Bank International AG (RBI) that may total 900 million euros ($1.2 billion), according to Cristina Marzea, an analyst at Barclays Capital. Faced with the risk Orban would impose further measures, lenders have offered to accept $2.2 billion of additional losses if the government promised to take no further action. If it doesn’t, banks are threatening they may withdraw from the country.

‘Too Risky’
"Against the backdrop of a potential western European financial crisis, this raises the risk that western lenders will just pull out of Hungary because it’s just too risky, which would be disastrous," Neil Shearing, senior emerging markets analyst at Capital Economics Ltd. in London, said in an interview. "Hungarian banks are incredibly dependent on their western European parents for short-term credit lines. At the very least it means credit is going to remain very tight."

Six of Hungary’s seven biggest banks have foreign parents, including Italy’s Intesa Sanpaolo SpA and UniCredit SpA (UCG) and Germany’s BayernLB. Only OTP Bank Nyrt., the country’s largest lender, is still domestically owned.

‘Free of Debt’
Almost 18 months after Orban was elected in April 2010, he passed a law allowing Hungarians to repay mortgages denominated in foreign currencies at discount of about 25 percent to today’s exchange rate. As long as a client applies before Dec. 31 and repays the entire loan before Feb. 28, the banks have to make up the difference.

"I paid it back last week," Bod said. "I’m free of debt slavery," said the former industry minister. The plan "is easy to explain from a political viewpoint. It’s cheap for the government, expensive for the banks, good for voters."

Ilargi: Hungary, in effect, makes the banks pay; good for voters. It’s interesting to see how little attention this has gotten in the press. Predictably, the EU and IMF are now a-huffin’ and a-puffin’ in Budapest, as Gordon Fairclough describes in the Wall Street Journal:

EU and IMF Break Off Talks With Hungary
European Union and International Monetary Fund officials broke off preliminary talks with Hungary over new financial backing because of fears the government is trying to limit central bank independence and lock in fiscal policies before any loan agreement can be negotiated, people familiar with the situation said.

Heavily indebted Hungary—under threat from rising borrowing costs and a sharply depreciating currency as global markets shudder—said last month it would seek cooperation with the IMF and EU for a "safety net" that would reassure investors about the country’s stability and credit-worthiness.

EU monetary-affairs spokesman Amadeu Altafaj-Tardio said Friday the EU, along with the IMF, "decided to interrupt the preparatory mission" in Hungary because of concern about "the intention of the Hungarian authorities to push forward with the adoption of laws that can potentially undermine the independence of the central bank." [..]

Ilargi: But Hungary for now remains defiant:

In their public statements, Hungarian Prime Minister Viktor Orban and his aides have stressed they want a precautionary agreement with the IMF and EU. Because they don’t intend to draw on any credit line, they have said, they expect the strings attached to the money to be limited.

On Friday morning, Mr. Orban said in a radio interview that once formal talks begin, "the government doesn’t wish to discuss its economic policies with the IMF." He said the talks were, in effect, "Hungary negotiating with its own bank," since it is a member of the IMF.

Ilargi: And has a somewhat different view of its domestic financial situation:

In an interview Friday, Zoltan Csefalvay, a state secretary in the Economy Ministry, expressed openness to other types of deal. "We’ll see what the IMF offers," Mr. Csefalvay said. He stressed that Hungary is in much better shape than it was in 2008, when it became the first European country to be bailed out by the EU and IMF when global credit markets froze after the collapse of U.S. investment bank Lehman Brothers.

Mr. Csefalvay said Hungary’s economy expanded in 2011, its budget deficit is below 3% of gross domestic product as required by the EU, and its current account—a measure of international trade and payment flows—is in surplus.

Ilargi: The press may not have much attention for Hungary’s unilateral decisions that benefit its citizens at the cost of foreign banks, but you can be sure other eastern European nations do. Nations which, while they welcome any favorable aspects of EU membership, don’t want to leave any doubts about their independence.

Issues such as tax harmonization, and fiscal union in general, don’t necessarily rhyme with that independence. And if Sarkozy is loudly promoting "Buy French", why would these other countries not do the same? In the process loosening the ties between nations, not strengthening them.

And the people who live in these nations, while appreciative of a government that seems to stand up for them against big banks and larger nations, will still be opportunistic. We’re seeing the first signs of what might be called a run-up to a bank run in Greece and Latvia. Citizens in other countries will follow suit. Jesse Westbrook and Saijel Kishan for Bloomberg:

Peripheral Europe May Face a Run on Banks in Coming Months, Kyle Bass Says
Michael Platt, founder of the $30 billion hedge fund BlueCrest Capital Management LLP, said most of the banks in Europe are insolvent and the situation will worsen in 2012 as the region’s debt crisis accelerates.

Kyle Bass, the Dallas-based hedge-fund manager who said in 2009 there would be sovereign defaults within three years, said Greek, Portuguese and Spanish depositors will withdraw money from banks in the coming months. [..]

‘Destabilizing Latvia’
Latvians pulled about $54 million from local Swedbank AB automatic teller machines on Dec. 11 and 12 on speculation customers wouldn’t be able to access their funds. "The rumors were knowingly distributed with the goal of destabilizing the situation in Latvia," Prime Minister Valdis Dombrovskis said, according to the Leta newswire.

Ilargi: And Helena Smith for the Guardian:

Greeks fearing collapse of eurozone bailout pulled record sums from bank
An unprecedented exodus of capital from Greece – peaking in a record number of withdrawals from banks in recent months – has exacerbated the liquidity crisis now wracking the recession-hit country.

The latest figures released by the Bank of Greece reveal that in September and October alone investors pulled €12.3bn (£10.3bn) from domestic banks, spurred by fears of political uncertainty and economic collapse.

Overall, outflows have reached a record 25% since September 2009 – when household and corporate deposits stood at a peak of €237.5bn, the data showed.

Theodore Pelagidis, an economics professor at the University of Piraeus, said: "This is part of the death spiral of the recession as a result of austerity measures. People realise that contagion has come to banks and they are very afraid of losing their deposits. On average around €4bn-€5bn in capital flees the banking system every month."

Ilargi: 2012 will be a year in which we’ll see sovereign defaults, bank defaults, bank runs, banks preying on each other and each other’s depositors, the end of the EU and Eurozone as we know them, and more, increasingly desperate and violent, street protests than we have to date been capable of imagining. All simply a culmination of developments long in the pipeline.

And the biggest and most severe credit crunch in human history will have devastating consequences that will be felt for years to come. At Marketwatch, Matthew Lynn allows a peak into his upcoming book:

This slump won’t end until 2031
In retrospect, it wasn’t hard to see that the markets were becoming dangerously unstable. Germany had just adopted a new monetary system, and Europe was being flooded with cheap German money. Greece had signed up to a monetary union with Italy and France but was struggling to hold it together.

Financial markets had been deregulated. New technologies were transforming production and communications, allowing money to move across borders at lightening speed. And a massive new industrial power was flooding the world with cheap manufactured goods, blowing apart old industries. When it all fell apart in an almighty crash, it was only to be expected.

A prophesy for London, New York or Berlin in 2012? Not exactly. It is a description of Vienna in 1873. In that year, in one of the great crashes of all time, the Austrian markets triggered collapses across Europe, swiftly followed by an equally spectacular collapse in New York.

It was the start of what economic historians call the Long Depression, a prolonged period of volatility, unemployment and slumps that lasted an epic 23 years, only coming to an end in 1896.

I have been researching that episode for my new e-book "The Long Depression: The Slump of 2008 to 2031." The parallels with our own time are fascinating. German unification, and the adoption of the gold standard, had led to a boom in that country, and cheap German money had flooded Europe.

Greece had just joined the Latin Currency Union, an ill-fated attempt to merge currencies across Europe. Banking had been deregulated, which was partly why so much German money was invested on the Vienna bourse. The telegraph created instant communications, allowing the European crash to spread to New York.

The U.S. was industrializing, transforming the global economy as much as China has transformed the present era’s economy in the past decade.

All those factors came together to create an almighty bubble, followed by an even worse crash. The slump that followed — although it is hard to measure these things precisely — lasted more than two decades. If the slump following the crash of 2008 is anything like that one, then this one is going to last until 2031.

Ilargi: The IMF has a message eerily similar to Matthew Lynn’s, if you listen well, as Larry Elliott, Heather Stewart and Nicholas Watt write for the Guardian. Just that where Lynn refers to the 1870′s, Christine Lagarde sticks with the 1930′s.

IMF warns that world risks sliding into a 1930s-style slump
The world risks sliding into a 1930s-style slump unless countries settle their differences and work together to tackle Europe’s deepening debt crisis, the head of the International Monetary Fund has warned.

On a day that saw an escalation in the tit-for-tat trade battle between China and the United States and a deepening of the diplomatic rift between Britain and France, Christine Lagarde issued her strongest warning yet about the health of the global economy and said if the international community failed to co-operate the risk was of "retraction, rising protectionism, isolation".

She added: "This is exactly the description of what happened in the 1930s, and what followed is not something we are looking forward to."

The IMF managing director’s call came amid growing concern that 2012 will see Europe slide into a double-dip recession, with knock-on effects for the rest of the global economy. "The world economic outlook at the moment is not particularly rosy. It is quite gloomy," she said. [..]

Speaking at the State Department in Washington, Lagarde said: "There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super-advanced economies, that will be immune to the crisis that we see not only unfolding but escalating.

"It is not a crisis that will be resolved by one group of countries taking action. It is going to be hopefully resolved by all countries, all regions, all categories of countries actually taking some action."

Ilargi: Yeah, unity. Sure. Later in the same article, reality bites back:

As Lagarde called for unity, there were strong attacks on Britain from both the French finance minister, Francois Baroin, and the governor of the French central bank, Christian Noyer, in what appeared to be a concerted attempt by Paris to escalate a war of words with London in the wake of Britain’s decision to veto a new EU treaty.

Noyer, speaking amid financial market speculation that the Standard & Poor’s ratings agency was about to strip France of its coveted AAA rating, said Britain’s credit rating should be downgraded first.

He said a downgrade for France (which would drive up the interest Paris pays to borrow, and make loans in the wider economy more expensive) "doesn’t strike me as justified based on economic fundamentals.

"If it is, they should start by downgrading the UK, which has a bigger deficit, as much debt, more inflation, weaker growth, and where bank lending is collapsing."

In strikingly similar language, Baroin poked fun at David Cameron in a speech to the French parliament. "Great Britain is in a very difficult economic situation: a deficit close to the level of Greece, debt equivalent to our own, much higher inflation prospects, and growth forecasts well under the eurozone average. It is an audacious choice the UK government has made." [..]

John Bryson, the US commerce secretary, signalled that Washington would retaliate against Beijing’s decision to put tariffs on high-performance US cars imported into China. "The United States has reached a point where we cannot quietly accept China ignoring many of the trade rules. China still substantially subsidises its own companies, discriminates against foreign companies, and has poor intellectual property protections," he said.

Ilargi: Of course, all of the above takes place against the backdrop of a global financial and banking system that seeks to preserve and grow its riches and political and military dominance. In order to preserve its privileges, the financial system will increasingly attempt to take away people’s sovereign and democratic rights along with their wealth. And that in turn guarantees much more violent protests going forward, since increasing inequality will become increasingly and glaringly obvious.

Not a pretty picture. A union divided upon itself.

The center cannot hold. The center cannot even hold itself.

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Statistics: Posted by yoda — Sun Dec 18, 2011 9:31 am