Eurozone: Rescuing the banks (again) or rescuing the people?

The failed and anti-popular austerity policies, along with the expensive recapitalization of European banks, bring the breaking down of the Eurozone even closer.
By: Dimitris Kazakis
Newspaper “to Xoni” (the funnel), June 3 2012“2012 summer brings an eerie echo of 2008. Markets signal worry for an important category of assets”, the president of World Bank and former executive of Goldman Sachs Robert Zeilik writes in the Financial Times. He refers to the state debt situation, which is out of control in the Eurozone. Hysterical austerity policies are not effective. So, the dilemma is even more pressing: rescuing the banks (again) or rescuing the people?
The answer for Zeilik is more than obvious, of course: There needs to be a new, even more costly rescuing of the banks. Since Eurozone state budgets already suffer from the cost of the previous rescue, amounting to over 3trillion euros in the past two years, this is what he suggests: “Countries should be ready to proceed

to recapitalization of their banks, with resources from the future European Stability Mechanism (ESM)”.

But, in the beginning of 2012, didn’t the ECB provide loans of over 1trillion euros to the banks, virtually interest-free? What happened to this money and how come they now need a new generous injection? This money went primarily into buying state bonds, in order to keep the borrowing costs for Italy and Spain down, so that it would not exceed 6,5% – 7%. The whole thing was a failure. A high-ranked executive of the ECB states in the “Financial Times” that a new round of nearly interest-free loans to strengthen banks’ liquidity, with over 1,7trillion euros , cannot be excluded. If this happens, it will take place in the summer of 2012.

Crisis deterioration
Why does this happen? Because ECB interventions in the Eurozone state bond market are not enough to contain the borrowing crisis and, therefore, banks have been involved. But, financing the banks, in order to buy state bonds, in order to keep countries like Italy and Spain within the markets, cannot but deteriorate the crisis.

This ECB approach (lending banks to buy state bonds), has been costing about 10% of the Eurozone’s yearly GDP. Since the ECB is not willing to print fresh money, like Fed does, the cash to the banks must be deduced from the monetary circulation of real economy. If we add to this, the feeding for the banks of Greece, Ireland and Portugal, with cash from the ELA mechanism, then the problem for the real economy becomes huge. These practices have gone out of control and they create conditions for a generalized recession in 2012, for the whole Eurozone, which will deteriorate the bank’s condition even further.

It is not surprising that all Eurozone staff, official or not, appear gloomy. The German newspaper ‘Bild’ (31/5) sees a nightmare ahead: “Spain does not manage to control her banking crisis. Greece faces default, and Italy can barely afford to borrow money. Italian and Spanish state bonds have reached the dangerous limit of 7% of risk cap, and markets respond nervously, sending the euro exchange rate to 1,24 dollars. Specialists warn of the possibility of a financial collapse within the summer”, the paper observes.

Dutch newspaper “NRC Handelsblatt” also shares the view of the euro crisis’ deepening, triggered by the Spanish banking crisis: “The Spanish prime minister Rahoy will have to take the humiliating step outwards, and this refers to the rest of Europe too. It is obvious that Spain will have to knock on the door of ESM stability mechanism, in order to rescue her banks. But this is not in accordance with the objectives of this particular fund, so it can only go ahead if stern Germany consents. So, before it even starts operating, the permanent stability mechanism is already under pressure. Rahoy, with his amateur maneurisms, accentuated the already existing Eurozone problems. The Eurocrisis deepens”, the article concludes.

Banks are the problem
The new deterioration is not due to politicians’ possible ‘amateurisms’ of course, but is due to the insistence to rescue a system, which cannot be rescued: The Euro banking system. All to date interventions, aiming to rescue banks and their currency, the euro, have deteriorated the crisis like never before.

The crisis of debt and of the political interventions from central banks have degraded the quality and value of debt markets and signify a ‘potential breaking point’ in global economy, stated Bill Gross, manager of the biggest bond fund in the world. Gross continued that ‘Political responses by the tax and monetary authorities managed to avoid the essential haircut of the 200 trillion dollar financial assets, comprising the global credit system, but, by doing so, they increased the risk and reduced the yield of the state values at their core”. This exactly where the problem lies. In order to avoid cutting banks’ assets, central banks and governments allocated tens of trillions to them. The result is that, today, they need even more. No-one knows when this merry-go-round of injections of trllions into the banks will stop.
So , the problem lies with the banks, not the states. State debts have catapulted as a result of this banking monstrosity, which (in the Eurozone) has gone completely out of control, because it was designed right from the start in such a way, so that banks form a unified system beyond any control, with the ECB being the central guardian of their interests. This is why the euro has turned into a mechanism for the bankruptcy of states and economies.

Danger of dissolution
Oli Rehn, the European Comissioner stated that the 17 members of the Eurozone are under a real danger of dissolution, unless they re-organize the tax and financial ties within the bloc. “The way things are going, within the framework of today’s structures, the Eurozone is under serious danger of dissolution”, Rehn said during a meeting of the European Commission in Helsinki. “We are heading, either towards the Eurozone’s dissolution or towards a gradual reinforcement of the European Union”. Performance divergence among the dominant Eurozone countries shows that market betting against the integrity of the 17 Eurozone increases. Yields for German two-year bonds fell below zero this week, for the first time, while yields for similar Spanish bonds increased by 11,8 base units, i.e. to 5,11% on Friday (1.6.2012)

Below zero yield means that, when their bonds mature, investors will receive a return smaller than the amount they put in to buy the debt. Spanish 10year yield exceeded 6,5% for a third day, reaching the level at which Greece, Ireland and Portugal resorted to the rescue mechanism, being excluded from markets financing. The euro receded 7,3% against the dollar in the past two months. Within last week, it touched the lowest point for almost two years, as investors are certain that the Eurozone will crack. The monetary union has “exceptionally tough decisions ahead and it is important to face the truth”, said Rehn.”We must continue with measures to balance public finances, while at the same time we need structural reforms and actions promoting growth”.

The common currency is unsustainable
Austerity measures prove not only unpopular, but stifle growth in the supervised countries, like Greece, Spain and Portugal. The economy of the monetary union will shrink by 0,3% this year, while a growth of 3% is expected in 2013. Unemployment reached 11% in the Eurozone in March, the highest ever recorded by the EU statistics authorities in Luxemburg. Spain, whose government tries in every way to avert the banking crisis, fermenting for the past two years, had the highest unemployment rate in the bloc at 24,3%, higher than the March figure of 24,1%. The president of the European Central Bank Mario Draghi, declared on Thurdsay that the euro is unsustainable, unless “further actions are taken”. Which actions? The usual ones:” More austerity which will ensure more money for liquidity injections into the banks. Many, including the ECB president Draghi, support issuing eurobonds and printing additional fresh money. And, of course, further reinforcement of the role of Eurozone factors at the expense of states’ sovereignity. Merkel, for the first time, did not object these by principle. Will these stop the process of the euro’s crumbling and default? No way. They will only add more fuel to an already volatile situation. The collapse of the euro and the Eurozone is not so much related to the situation in Greece and other Eurozone economies, but to the deepening of the crisis of the currency itself, which, by its nature, is unsustainable. As unsustainable as the banking system it represents. Objectively, two are the options for the Eurozone staff: either drastic haircut of banks to a degree that the eurosystem cannot withstand or, break down and dissolution of the Eurozone. The more some political and economic guardians insist on a “European solution to the problem”, the more they prepare for the collapse of their economies with such crashing noise and victims that only war times show.

Photo: Eurozone: Rescuing the banks (again) or rescuing the people

By Dimitris Kazakis
Newspaper “to Xoni” (the funnel), June 6 2012

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