|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.
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 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.
Danger of dissolution
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
By Dimitris Kazakis