Dear reader,
it is not the intention of the author to spoil the joy of those who considered the summit last Wednesday as THE solution of the crisis of the eurozone. That is what the politicians involved would like us to believe in order to show a capacity they don't have in reality.
It was a big show for their electorate much more than for the international markets or better those who are familiar or even in charge of those like the guardsmen of state funds of Norway, Brazil ,China, Russia , the gulf states or any individuals who they considered to be saviors from outside the eurozone to inject the much needed cash to go on "stabilizing" the eurozone. I must admit to have omitted India because so far i haven't found any article of the world press what had any information of whether Europe was intending to "take" from them or they are are willing to "contribute" something to the European rescue effort.
As to the approach of the summit on Wednesday it was only a scarcely reported item THEN that Klaus Regling, CEO of the EFSF located in Luxembourg was about to be on his way to seek physical contact to leading Chinese statesmen on Friday in order to "offer" the latest European "bazooka" decided on along with the expansion of the EFSF by giving it a (4-5 times?) leveraged insurance model which was named special purpose investment vehicle or SPIV short. Basically it was thought to be an especially attractive offer for investment of large institutions such as the state run funds mentioned above. Giving them priority in security (all risk insurance) should attract more big spenders outside the zone looking for a safe haven for their large quantities of NOK, CNY ,RUB , USD or whatever. At least so they (politicians) thought it would contribute to their big plan on the solution of their (yes their politicians !) crisis.
Well today Sunday Oct 30th it looks rather bleak with their would be enhanced EFSF and SPIV which both couldn't work so far to calm investors sorrows over the all out prospects of declining industry production, inflation, jobless figures and long term prospects of pensions and loss of working population because of declining population figures (due to low birthrates of 1,3 children per couple in some countries)
Another "fear factor" could have been the very event also to be solved at this last summit which is the so called haircut on Greek debt , on which several different stories are circulating ... stating that only those debts are to be cut in half of the private banking sector whereas German newspaper sources also claim that e.g. FMS Wertmanagement (former Hypo Real Estate or HRE, now 100% bad bank owned by German finance ministry) would also take a hit by those haircuts decided on. Such a haircut on Greek debts which was 2010 considered out of the question (for some at least) and just on July 21st this year a 21 pct cut was negotiated with the banks and the very same politicians in charge (or what is left of it) of the eurozone. Well this deal lasted some 3 month and ever faster declining of Greek economy makes all projections of sustainability of remain debt vs payments from Greece on the background of no concrete plans for economic stimulus for Greece (although some consideration is given to this there is lack of sums, methods and means to implement them) So when the last deal had a life span of 3 month so what good is a leveraged EFSF for bonds with nominal 5 or 10 years ? Who would guarantee this investment then when prospects of European economy aren't looking rosy and some of the problems haven't even started to materialize by now ... One of them the shift of industrial production to BRIC and other countries .. another is the constant rise in energy costs ...and then the one future strain on public finances which is called pensions ...not only a problem for just Greece or Italy but also for Germany (the lender of last resort in eurozone) and also Britain. So the SPIV could turn out to be a gigantic wheelchair in the end, when no change of mind of wealthy states is due to take place. Another game changer is the general reluctance also in purchase of normal state bonds to be seen in ever rising spreads from PIIGS state bonds to e.g. those of the core of eurozone. Or even a complete failure of bond auctions while investors are not being tempted to get those recently "polished" papers. Another disappointment might result from the prospects that even the much advertised great debt reduction scheme (haircut) might after all be nothing than a well advertised balloon by European politicians in order to put some sand into the eyes of there electorate as it is indicted by a recent article by the daily mail citing WSJ on watching Mr. Dallara in good spirits when he jetted off Brussels after being forced to "hard compromises". We shall see ..I recommend to everyone to sit back and watch for more details coming out next days/weeks on real write offs of major creditors to Greece.
Another constraint of last Wednesdays decisions might arise from the elevated requirements on equity of banks to 9% by June 2012 ... Some analysts suspect that some banks could reduce their willingness or capacity to give loans to industrial needs thereby reducing outlooks on economic growth even further. Of course another novum is that bonds from member states are no longer considered entirely save from default and that's why banks across the board complain, that it is not their fault when states are in risk of default and therefore put strains on banks equity. Whoever is primarily responsible for the lack of equity to prevent to risky lending or selling whatever creative derivatives this step reduces risk of collapsing of banks and therefore domino into the final abyss on the one hand but will contribute to some points of economic shrinkage that will put much more strains on individual member states and their ability to reduce debt overloaded budgets.
All in all the aspect of economic GROWTH (in contrast to austerity which was the inflated term around summit days) was very much understated since it is the other side of the coin leading to reduced levels of debt for all member states of the monetary union not only the ones with worst figures to be of the others main cause for severe headaches. While growth in Greece remains extra problematic because of historic low tendency to convert low interest rates in other "useful" things rather then to consumer spending and perhaps filling pockets of some politicians and their friends. A protected climate of investment has to be created there without the prospect of politicians or whatever corrupt local bureaucrats blocking or delaying such (foreign) investments. To my knowledge confidence in Greek politicians and institutions is shattered not only in other countries dealing with the mess there but also with common Greeks whose daily life is effected by ever growing numbers of unemployment and foreclosures of homes & businesses.
The agenda for follow up action of those mostly talking & acting (in the sense of being actors) is already set and depends on the welcoming of last weeks decisions by the markets and its players. So far some improvements have been seen but that short term effect was also to be observed on earlier occasions.
Productivity and growth however remain the big problem solvers which are in short supply. If no economic step forward is taken in Europe it will become a union of distributed OLD wealth only (from north to south) and can not arise to its claims to be one of the worlds economic superpowers.
More on that story: (eng/ger)
Regling: EFSF-Anleihen könnten in Yuan aufgelegt werden
UPDATE: Kremlin Initially Reacts Coolly To New EFSF Investment Vehicle
UPDATE: Kremlin Initially Reacts Coolly To New EFSF Investment Vehicle
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