European Leaders Scrabble For Agreement

From the BBC:

The outline of a large and ambitious eurozone rescue plan is taking shape, reports from the International Monetary Fund (IMF) in Washington suggest.

It is expected to involve a 50% write-down of Greece’s massive government debt, the BBC’s business editor Robert Peston says.

The plan also envisages an increase in the size of the eurozone bailout fund to 2 trillion euros (£1.7tn; $2.7tn).

European governments hope to have measures agreed in five to six weeks.

The bizarre thing is that the real issue is not whether or not some agreement can be reached, but whether or not any agreement will really have any real effect on the state of the European financial system. I am extremely dubious that the thrifty Scandinavian and Germanic nations will commit huge swathes of their wealth to save the Mediterranean ones. But even if an expanded EFSF can be brought together to successfully bail out Greece and recapitalise European banks who have to write down significant chunks of Greek debt, there is no guarantee whatever that any of these measures will address the underlying fracture in European budgeting. Namely, that European governments are spending like they are monetarily sovereign — in other words, behaving as if they can print as much money as they want to cover debts — when they are not.

Of course, there is no real guarantee that Europe will even effectively stabilise its banking system.

From Bloomberg:

U.S. Treasury Secretary Timothy F. Geithner pressed European policy makers to intensify their efforts to end the 18-month sovereign debt crisis and avoid the “threat of cascading default, bank runs and catastrophic risk.”

In his strongest public push yet for Europe to step up its crisis-fighting, Geithner said strains in the euro-area’s budgets and banks are the “most serious risk now confronting the world economy.” He urged governments to unite with the European Central Bank to immediately “create a firewall against further contagion.”

All of this ignores the possibility that the hyper-connected, arbitrage-and-algorithm-driven, centrally-planned, globalised new world is fundamentally broken and — for lack of a better phrase — too big and too fragile not to fail. Why? It’s overstretched — one or two weak links in the economic food-chain can cause such a tidal wave of defaults as to imperil the entire system. We saw this in 2008, and we are seeing it emerge again now.

Even successfully recapitalising banks, creating a federal European budgetary mechanism, firewalling off American banks, and roping in BRIC nations to throw lots of cash at European bonds might not solve that problem.

4 thoughts on “European Leaders Scrabble For Agreement

  1. Your italicized point should be bolded too. Rhetorically speaking, can Greece even cover half its debt at this point? Are the banks that get bailed out after a 50% haircut going to buy new Greek debt after that?

    • They will do whatever it takes to preserve the zombies, however much capital needs to be pumped will be pumped. That’s what “flexible monetary policy” leads to: can-kicking. It lets policy-makers play for time without ever addressing the underlying problems. This crisis may be kicked down the road (watch the price of gold soar when it is) but it seems like the system itself is the problem. The crisis-to-crisis half life seems to be getting shorter. 1990… 2001… 2008… 2011… 2013?

  2. Pingback: The Emperor is Wearing No Clothes « azizonomics

  3. Pingback: The Greek Endgame « azizonomics

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s