Fill your boots! It’s the age of the bail-out.
Just as dozy lending to uncreditworthy borrowers was on the verge of bringing down the banking system (again), the world’s leaders locked themselves into a room over the weekend, and saved the bankers (again).
This time the dodgy creditor was Greece, and the bail-out was agreed by the European Union. Near enough $1 trillion this time – even bigger than the $700bn Tarp package that saved the banks after Lehman Brothers.
So – apart from a rampant rally in the euro and the wider stock markets, as they realise that no loss is too small to be socialised now – what does it all mean?
Why you can forget the euro as a hard currency
France’s president Nicholas Sarkozy must be feeling on top of the world right now. He’s managed to get one over on the Germans again. Forget a hard currency – Europe has now committed to the following:
1. The euro-area governments themselves (so this doesn’t include us here in Britain) have pledged €440bn in loans or guarantees.
2. A further €60bn in loans comes from the European Union’s budget (so that does include us).
3. And there could be as much as €250bn from the IMF (which again includes us, as well as all the American and Canadian taxpayers who might be wondering why their money is going on saving Greece).
Talking on Radio 4 this morning, Alistair Darling, who must surely have very mixed feelings about still being chancellor, said that Britain’s maximum liability is £8bn. We’ll see – I’m sure a lot of detail is still to emerge. But we’ll give that the benefit of the doubt for now. Britain, after all, has a couple of bigger problems to worry about than adding a further £8bn to our national debt.
On top of all this, the European Central Bank (ECB) has said, effectively, that it’ll step in as a lender of last resort, buying government and corporate bonds where it feels it’s necessary. This isn’t the same as the quantitative easing that the US and Britain have undertaken. It doesn’t yet involve money printing, in that the purchases are “sterilised”. In other words, for every cruddy Greek bond that it buys, it’ll sell a nice safe German bund to offset the new money. So it’s not pumping a load of free extra money into the system.
But there are other liquidity measures – the ECB will lend direct to banks over periods of three and six months, and there are new ‘swap’ lines with the Federal Reserve, to ensure a steady flow of dollars around Europe. These measures were all around during the last financial crisis, but they’ve been reactivated now after there were signs of panic last week in the inter-bank lending markets.
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The result of all this? Stock markets have taken off, of course. It’s a bail-out – what do you expect? And the euro has bounced sharply. Why? Because what the markets were worrying about on Friday was a complete disintegration of the currency. No wonder it’s up today.
This deal won’t save the euro
But in the longer run, this deal is not a solution. And it’s not good news for the euro. We’ll deal with the euro first. All of these moves, assuming they work, do not make for a ‘strong’ currency. As Marco Annunziata of UniCredit puts it, Europe has now decided that “member countries have to jointly put their resources at stake to support the weaker members.” In other words, the euro can now only ever be as strong as its weakest member.
And that will be pretty weak. Austerity programmes might be necessary, but they tend to stifle economic growth. Meanwhile, the ECB is likely to have to keep interest rates low for the long term as it shepherds all these weak economies through their hard times. That’s not a great recipe for currency strength, as Barclays’ currency trading team points out. The bank reckons that the euro will still fall to a $1.20 in time, and sees any bounce now as a good opportunity to get shorting again.
Then there’s the deal itself. The trouble is, there’s a fundamental problem which still hasn’t been addressed here. Greece probably cannot repay its debts. There is nothing about this package which makes repayment more likely, or which gives Greek trade unions any reason to give up industrial action alongside their pensions.
Good news for markets – bad news for taxpayers
The good news for markets (though not taxpayers) is that final responsibility for that debt is now being shifted from the private sector owners of that debt. Banks don’t have to worry about losing a pile of money because they can always dump this stuff on the ECB if they need to. But Greece may still default.
And the trouble is, that still poses a ‘contagion’ risk. As Robert Peston puts it on the BBC, the bail-out package is big, but it’s not that big: “€750bn is just over one-year’s new borrowing by eurozone members and a bit more than 10% of eurozone government debt. So it’s certainly not enough if investors were to start to lose confidence in the ability of some big countries – such as Spain or Italy – to honour their debts.”
Europe has bought some time. The best bet now is for it to look for realistic ways to restructure the debt of troubled eurozone nations, and get ahead of the problem, before the issue raises its ugly head again. Judging by past performance, I’m not hopeful.
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