16 December 2011

When Banksters Eyes Are Smiling

My long time readers will remember that, for almost six months now, I have been maintaining that the Eurozone crisis was an artificial one, engineered by the bond holders to get all of their money regardless of the risk premiums they got for their investments.

Recent developments seem to confirm this notion.

If you remember, this whole idea began with Irish government underwriting some banking bonds at the urging of Merrill Lynch to restore "market confidence:" As Michael Lewis put it:
It would have been difficult for Merrill Lynch’s investment bankers not to know, at some level, that in a reckless market the Irish banks had acted with a recklessness all their own. But in the seven-page memo to Brian Lenihan—for which the Irish taxpayer forked over to Merrill Lynch seven million euros—they kept whatever reservations they may have had to themselves. “All of the Irish banks are profitable and well capitalised,” wrote the Merrill Lynch advisers, who then went on to suggest that the banks’ problem wasn’t at all the bad loans they had made but the panic in the market. The Merrill Lynch memo listed a number of possible responses the Irish government might have to any run on Irish banks. It refrained from explicitly recommending one course of action over another, but its analysis of the problem implied that the most sensible thing to do was guarantee the banks. After all, the banks were fundamentally sound. Promise to eat all losses, and markets would quickly settle down—and the Irish banks would go back to being in perfectly good shape. As there would be no losses, the promise would be free.
As I noted in July, this was both an amazing and an ironic development:
The bondholders didn’t even expect to be made whole by the Irish government. Not long ago I spoke with a former senior Merrill Lynch bond trader who, on September 29, 2008, owned a pile of bonds in one of the Irish banks. He’d already tried to sell them back to the bank for 50 cents on the dollar—that is, he’d offered to take a huge loss, just to get out of them. On the morning of September 30 he awakened to find his bonds worth 100 cents on the dollar. The Irish government had guaranteed them! He couldn’t believe his luck. Across the financial markets this episode repeated itself. People who had made a private bet that went bad, and didn’t expect to be repaid in full, were handed their money back—from the Irish taxpayer.
Incidentally, the title of Michael Lewis' article was "When Irish Eyes Are Crying."

Once the free market rule was broken, that is, if you are a bankster, you are now entitled to your gains but if you lose, we, the people, will take care of the bill, the sky was the limit. Banksters eyes were indeed smiling.

In July I wrote this:
(..) and now they are so emboldened that they demand that risk pricing should be ignored and they should be given everything they hoped for when they invested 
And to ensure their extortion works, they go beyond the Greek economy (which is something like 3% of the Eurozone) and threaten, Portugal, Spain, Ireland and Italy. 
The idea is to make EU leaders feel the pressure and do what the Irish did, that is, guarantee the Greek debt, perhaps by converting that into a Euro bond
 Then in August I wrote this:
Actually, it is more than just better financed bailout funds, bond holders want individual sovereign debts to be merged into Eurobonds that are backed by the entire EU. This is the only way they can avoid a painful haircut (and given current risk premiums they extort, a well-deserved one) as I suggested using the Irish example. They have been selectively attacking several European economies to force politicians realize that they will not let up until this goal is achieved. 
I am saying selectively on purpose. Simon Johnson, former IMF Chief Economist, wrote this more than a year ago: 
At the moment Germany and France are the safe havens. Bond yields in France fell sharply the last two weeks, while Spain’s yields rose, and would have increased much more were it not for ECB purchases.
But who is really safe in Europe? With France running an 8% GDP budget deficit (for 2010) and a debt/GDP ratio of 83.6%, should we be confident they are safe while Spain is not (with debt/GDP at 65%)? France’s thirty years of budget deficits do not bode well for anyone expecting an immediate strong fiscal response. In many ways Spain appears better placed to take tough actions than France. 
They started out with Ireland and hinted at Portugal. Then they hinted at Spain. Then they hinted at Italy, while allowing France to pretend to be Germany's economic equal (despite its weak fundamentals as the quote indicates). And now they are hinting at France. The endgame is that they will not stop until all European debt is collateralized by the entire EU.
I finished that post with the verdict that "My money is on bond holders."

You know that since then, they even threatened Germany.

Fast forward to early December:

Felix Salmon of Reuters quotes this Financial Times piece:
Ms Merkel agreed that private sector bondholders would not be asked to bear some of the losses in any future sovereign debt restructuring, as she had insisted this year in the case of Greece’s second bail-out. (...)
Ms Merkel said it was imperative to show that Europe was a “safe place to invest”.
In Salmon's opinion, the "commitment not to force private sector bondholders to take losses on any future eurozone bail-outs (...) will be one of the most fiscally insane derelictions of statesmanship the world has seen"

He says:
To understand just how stupid this is, all you need to do is go back and read Michael Lewis’s Ireland article. The fateful decision in Ireland was to take the insolvent banks and give them a blanket bailout, with the banks’ creditors all getting 100 cents on the euro. That only served to put a positively evil debt burden onto the Irish people, forcing a massive austerity program and causing untold billions of euros in foregone growth, while bailing out lenders who deserved no such thing. 
Are we really going to repeat — on a much larger scale — the very same mistake that Ireland made? Does no one in Europe realize that this is the single worst thing they can do?
Interestingly, this question was not posed by many people the following day.  Everyone was more captivated by the high drama of Cameron wielding the British veto (which, by the way, is meaningless) and the minutia coming out of late night meetings.

Very few people wondered why Germany who had been opposed to Eurobonds was now pushing for Germany to underwrite all European debts. And even fewer people noted how this new rule will encourage the banksters to take more risks and hide their shenanigans from the new fiscal regulations.

Personally, when confronted with this picture, I am unable to conclude that Merkozy, the Brangelina of political tabloids, could be just stupid. There is no way. Not after the Irish example.

Moreover, does it make sense to you that a politician like Merkel who was supposedly unable to sell the idea of  guaranteeing a few hundred billions euros to her taxpayers will now tell them to accept the ultimate ownership of a gigantic debt worth many trillions of euros?

Clearly, there is more to this than pundits are telling us.

I have some contrarian ideas.

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