So far, things have developed pretty much as anticipated – the euro-group's 'crisis summit' (not the first and surely not the last…) has delivered more or less what we thought it would – more can kicking. Also, the bond yields of the 'PIIGS' group have continued to pull back, while the 'safe haven' debt instruments like German bunds and UK gilts have sold off a bit. We believe that there is now a small time window ahead of us during which yields will consolidate and the panicked selling that marked the previous three weeks will give way to some short covering and quieter trading – until the next phase of the crisis begins, probably later this year.
We take a look at the official statement below and add our comments, i.e., we will translate the euro-group's bureaucratese into commonly understood language.
The complete statement can be seen in a Reuters article here.
Translation of the Communique
We reaffirm our commitment to the euro and to do whatever is needed to ensure the financial stability of the euro area as a whole and its Member States. We also reaffirm our determination to reinforce convergence, competitiveness and governance in the euro area.
We will keep throwing good money after bad as long as our electorates let us. The socialist Super-state project is not quite dead yet.
Since the beginning of the sovereign debt crisis, important measures have been taken to stabilize the euro area, reform the rules and develop new stabilization tools. The recovery in the euro area is well on track and the euro is based on sound economic fundamentals. But the challenges at hand have shown the need for more far reaching measures.
The patchwork of ad-hoc measures implemented thus far, while costing an arm and a leg, has gotten us exactly nowhere. Instead of admitting defeat, there will now be even more of what hasn't worked thus far. Although everybody knows that the recovery is actually going down the drain as we speak, we shall keep pretending that everything is fine. We will refer to that unholy mess as 'sound fundamentals' until we draw our last breath.
Today, we agreed on the following measures:
1.We welcome the measures undertaken by the Greek government to stabilize public finances and reform the economy as well as the new package of measures including privatisation recently adopted by the Greek Parliament. These are unprecedented, but necessary, efforts to bring the Greek economy back on a sustainable growth path. We are conscious of the efforts that the adjustment measures entail for the Greek citizens, and are convinced that these sacrifices are indispensable for economic recovery and will contribute to the future stability and welfare of the country.
Here are the next portions of our patchwork quilt.
1. We will continue to pretend that whatever the Greek government tells us is actually credible (please don't laugh). The ongoing molestation of Greek citizens and tax payers for the benefit of creditors who have taken unconscionable risks continues to meet with our approval. Sorry chaps, for you, it's sacrifice time. Rest assured that the eurocracy will remain completely untouched by your being ground into the dirt. Someday, you'll thank us for it.
2. We agree to support a new programme for Greece and, together with the IMF and the voluntary contribution of the private sector, to fully cover the financing gap. The total official financing will amount to an estimated 109 billion euro. This programme will be designed, notably through lower interest rates and extended maturities, to decisively improve the debt sustainability and refinancing profile of Greece. We call on the IMF to continue to contribute to the financing of the new Greek programme. We intend to use the EFSF as the financing vehicle for the next disbursement. We will monitor very closely the strict implementation of the programme based on the regular assessment by the Commission in liaison with the ECB and the IMF.
2. This is where we throw more good money after bad, an estimated € 109 billion of it this time. Creditors will actually have to drop a tiny bit of their claims, but not to worry, most of those have already been offloaded to the public sector anyway. This would be a good opportunity to apologize to the tax cows for this affront, which we shall let pass unheeded. Additional measures that will help us to keep pretending that the Greek government's debt mountain can actually be repaid one day have been implemented. We call on those other bureaucrats across the pond to keep throwing money at the problem as well. We shall keep a close eye on what's happening, just as last time (fat lot of good as that did).
3. We have decided to lengthen the maturity of future EFSF loans to Greece to the maximum extent possible from the current 7.5 years to a minimum of 15 years and up to 30 years with a grace period of 10 years. In this context, we will ensure adequate post programme monitoring. We will provide EFSF loans at lending rates equivalent to those of the Balance of Payments facility (currently approx. 3.5 percent), close to, without going below, the EFSF funding cost. We also decided to extend substantially the maturities of the existing Greek facility. This will be accompanied by a mechanism which ensures appropriate incentives to implement the programme.
3. Providing completely unrealistic funding costs for the bankrupt Greek government might do the trick, or so we hope. We stand ready to kick ass in case Greece deviates from our diktats. You may recall that our 'monitoring' and 'incentives' worked veritable miracles over the past year. Trust us, it'll work even better this time.
4. We call for a comprehensive strategy for growth and investment in Greece. We welcome the Commission's decision to create a Task Force which will work with the Greek authorities to target the structural funds on competitiveness and growth, job creation and training. We will mobilise EU funds and institutions such as the EIB towards this goal and relaunch the Greek economy. Member States and the Commission will immediately mobilize all resources necessary in order to provide exceptional technical assistance to help Greece implement its reforms. The Commission will report on progress in this respect in October.
4. We just noticed that Greece is actually in an economic depression. Our central economic planning facilities will be deployed in a futile attempt to redress this situation. More good money shall be thrown after bad in the process, but it might give our bureaucrats something to do. Socialism works, you just wait and see.
5. The financial sector has indicated its willingness to support Greece on a voluntary basis through a menu of options further strengthening overall sustainability. The net contribution of the private sector is estimated at 37 billion euro. Credit enhancement will be provided to underpin the quality of collateral so as to allow its continued use for access to Eurosystem liquidity operations by Greek banks. We will provide adequate resources to recapitalise Greek banks if needed.
5. The euro area banks have unloaded enough of their exposure to Greek debt on the ECB to be able to withstand a tiny haircut. After we put a gun against their metaphorical heads, they 'voluntarily' (please don't laugh) agreed to chip in. According to our calculations this amounts to € 37 billion, approximately the cost of a certain bridge in Brooklyn that is rumored to be for sale. Not surprisingly, we have found a way to get the ECB to continue to accept de facto defaulted debt as collateral. The insolvency of Greece's banks opens up yet another opportunity for us to throw good money after bad. Under no circumstances will any bankrupt banking entities be allowed to fail. These banks are way too precious.
Private sector involvement
6. As far as our general approach to private sector involvement in the euro area is concerned, we would like to make it clear that Greece requires an exceptional and unique solution.
7. All other euro countries solemnly reaffirm their inflexible determination to honour fully their own individual sovereign signature and all their commitments to sustainable fiscal conditions and structural reforms. The euro area Heads of State or Government fully support this determination as the credibility of all their sovereign signatures is a decisive element for ensuring financial stability in the euro area as a whole.
6. To continue with 'extend and pretend' has become extraordinarily difficult considering how deeply the cart has become stuck in the mud.
7. Everybody at the government level will keep pretending that the unpayable debts can actually be repaid. Against all historical precedent, we affirm that the promises of governments are actually worth more than the paper they are printed on. We should perhaps mention it, but won't, that there is always some or other 'emergency' that makes it possible for governments to renege on all previously made promises.
8. To improve the effectiveness of the EFSF and of the ESM and address contagion, we agree to increase their flexibility linked to appropriate conditionality, allowing them to:
- act on the basis of a precautionary programme;
- finance recapitalisation of financial institutions through loans to governments including in non programme countries;
- intervene in the secondary markets on the basis of an ECB analysis recognizing the existence of exceptional financial market circumstances and risks to financial stability and on the basis of a decision by mutual agreement of the EFSF/ESM Member States, to avoid contagion. We will initiate the necessary procedures for the implementation of these decisions as soon as possible.
9. Where appropriate, a collateral arrangement will be put in place so as to cover the risk arising to euro area Member States from their guarantees to the EFSF.
8. Just as your grand poobah across the pond, Ben Bernanke, we have a toolbox with tools in it. Here's how we will effect market manipulation in the future (let's hope it will work better than last time around, when the ECB tried it).
- try to head off selling in the bond markets at the pass
- try to shore up he rickety banking system of Europe by throwing more tax payer money at it. As mentioned before, our banks are far too precious – none will be allowed to go under.
- try to manipulate the bond markets just as the ECB did, using its Bloomberg screen to see when things threaten to become dicey, and as mentioned above, hope that market manipulation by the EFSF actually works better than that by the ECB. You never know, it might.
It'll take a while to shift the required bureaucratic resources into place.
9. “The whole thing will be set up like a CDO or SPV – designed to keep up the pretense that the risks can be wished away.”
Fiscal consolidation and growth in the euro area
10. We are determined to continue to provide support to countries under programmes until they have regained market access, provided they successfully implement those programmes. We welcome Ireland and Portugal's resolve to strictly implement their programmes and reiterate our strong commitment to the success of these programmes. The EFSF lending rates and maturities we agreed upon for Greece will be applied also for Portugal and Ireland. In this context, we note Ireland's willingness to participate constructively in the discussions on the Common Consolidated Corporate Tax Base draft directive (CCCTB) and in the structured discussions on tax policy issues in the framework of the Euro+ Pact framework.
10. “We're going to throw money at the bankrupt sovereigns until a miracle occurs and they can actually talk someone else into lending them money again. We're happy that the Irish and Portuguese governments are so eminently willing to jack-boot their citizenry into slaving away for the unpayable debt. In order to make it easier to keep up the pretense that the debts can be paid, they are henceforth going to enjoy financing at the same unrealistic interest rates as Greece. We are happy to report that we have finally blackmailed the Irish government into agreeing to the demands of the 'tax harmonizers', an important step toward the goal of closing off avenues of escape to those among us who actually create the wealth we are busy squandering in such generous dollops. As we said right at the beginning, the socialist Super-state remains the ultimate goal.”
11. All euro area Member States will adhere strictly to the agreed fiscal targets, improve competitiveness and address macro-economic imbalances. Public deficits in all countries except those under a programme will be brought below 3 percent by 2013 at the latest. In this context, we welcome the budgetary package recently presented by the Italian government which will enable it to bring the deficit below 3 percent in 2012 and to achieve balance budget in 2014. We also welcome the ambitious reforms undertaken by Spain in the fiscal, financial and structural area. As a follow up to the results of bank stress tests, Member States will provide backstops to banks as appropriate.
11. “We will keep fantasizing about the ability and willingness of individual member nations to actually adhere to the fiscal debt criteria agreed upon in the euro area treaties, in spite of the fact that it has never been done and that the very same framework that created this 'tragedy of the commons' situation remains in place. Part of our fantasy is that this will actually be achieved by 2013 (please don't laugh). Allow us to briefly mention Italy, in the hope that this will keep its bonds from spiraling further into the abyss. Our specific Italy fantasy is that it will have a balanced budget by 2014. Bwahahahaha! You're excused if you can't help laughing at that one. Since the same trap door has recently opened underneath Spain, it also merits a mention. Don't worry, no bank shall be allowed to perish, not even in Spain. The banks are simply too precious.”
12. We will implement the recommendations adopted in June for reforms that will enhance our growth. We invite the Commission and the EIB to enhance the synergies between loan programmes and EU funds in all countries under EU/IMF assistance. We support all efforts to improve their capacity to absorb EU funds in order to stimulate growth and employment, including through a temporary increase in co-financing rates.
12. “More economic central planning is in train for the entire euro area. Never mind that central planning allegedly doesn't work. Didn't Marx teach us that socialism was a historical inevitability? Our bureaucrats are better than the market, you just wait and see.”
13. We call for the rapid finalization of the legislative package on the strengthening of the Stability and Growth Pact and the new macro economic surveillance. Euro area members will fully support the Polish Presidency in order to reach agreement with the European Parliament on voting rules in the preventive arm of the Pact.
13. “More rules and regulations and more bureaucratic assets will be deployed to ensure that adherence to the Maastricht treaty will actually work this time, in spite of all historical precedent and unchanged incentives. This time, we will prevent anything untoward from happening by introducing new voting rules. Never mind that at present, only five of 17 euro area members are within shouting distance of the public debt limits agreed to in the pact. And please don't laugh.”
14. We commit to introduce by the end of 2012 national fiscal frameworks as foreseen in the fiscal frameworks directive.
15. We agree that reliance on external credit ratings in the EU regulatory framework should be reduced, taking into account the Commission's recent proposals in that direction, and we look forward to the Commission proposals on credit ratings agencies.
14. “Something bureaucratic will happen in late 2012. Directives have been issued already.”
15. “Will someone please get those pesky credit rating agencies off our back? We're going to legislate them off our backs if necessary.”
16. We invite the President of the European Council, in close consultation with the President of the Commission and the President of the Eurogroup, to make concrete proposals by October on how to improve working methods and enhance crisis management in the euro area.
16. “The chief bureaucrats in the eurocracy are hereby called upon to take their sweet time to make any concrete proposals as to how to improve what we laughably refer to as our 'crisis management'. Well, let's all hope there's still a crisis worth managing by October and that the whole enchilada doesn't explode before then.”
There you have it. As far as we can tell, nothing has substantially changed. It is yet more interventionism designed to avoid acknowledging the facts on the ground, deeply steeped in the mistaken notion that wise bureaucratic planning of the economy is superior to letting the free market work.
As has been the case from the beginning, the fractional reserves banking system hasn't even been mentioned, except in the context that every bank will be saved, no matter what the cost to the rest of the economy.
Extend and pretend, until the very end.
From the hallowed halls of Brussels, there issueth forth a statement….more good money shall be thrown after bad. It's good to know that these debates take place in such a nice, relaxed setting. What a great location from whence to order more 'sacrifice' for the citizenry and the producers of wealth who make it all possible.
(Photo credit : Union Européenne)
A photo of the entire euro area heads-of-state gang.
(Photo credit : Union Européenne)
(Click chart to enlarge)
Via the Wall Street Journal – a chart showing how euro area bond yields have behaved over the past few days surrounding the summit. The yields of the 'PIIGS' have declined, while the yields on Germany's bunds have increased. As the WSJ remarked, 'Germany will bear the brunt of the costs', so it certainly makes sense that its bond yields should rise.