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Timetable of the euro-showdown

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Paul Mason | 11:11 UK time, Friday, 7 January 2011

Barely has the non-drop Nordic Pine been dragged, threadbare, to the door, but the euro sovereign debt crisis revs up again - this time with Portugal and Spain in the firing line.

This is how I expect it to pan out.

First a primer: governments have to borrow to a) finance their overspend (aka deficit) and b) to roll-over old loans from years past, known as redemption. They borrow by issuing bonds. Those who buy the bonds are banks and investment funds, sometimes also other governments who are flush with cash - most notably in the Middle East and China. Usually these bonds last for 5, 10 or 20 years until maturity - but there are also short-term loans called Treasury Bills, which are repayable after one year.

Right. Overall Euro area governments are expected to issue €750bn this year. Of this, the markets expect Spain and Portugal alone to be borrowing €225bn.

The only Geiger Counter we have to judge whether it's going to be hard or easy for them to borrow is the effective cost. This is called the bond yield: it's the official interest rate on the bond divided by its current price as traded on the bond market. Here is what's been happening to Portugal's bond yield over the past 12 months (from

Portugese Bond Yield rises to 7% early in 2011

Portugal gets caught in the general panic around the Greek crisis and then hit again as confidence wanes over Ireland in November/December.

This year Portugal is on course to reduce its budget deficit from 9.3% of GDP to 7.3% - according to its finance minister. But its cost of borrowing is rising and is not far off the trigger point where investors will start refusing to buy. There are already reports today that the Swiss National Bank is refusing to take Portuguese bonds as collateral in short term financing deals.

Portugal got downgraded by the ratings agency Fitch before Christmas, and Moody's issued a downgrade warning. They were worried about a) the size of the overall debt and b) the possibility that Portugal will fall back into recession this year. The effect of the downgrade is to make some investment managers less likely to hold onto these bonds - because their investors, which could be your pension fund, demand they only hold ultra-safe debt.

In this crisis timing is important. Portugal needs to borrow €20bn this year, but €10bn falls in Q2. This rising cost of borrowing plus the short timescale is what made JP Morgan analysts last night warn their clients:

"In Portugal, €10bn of redemptions in Q2 do not leave the country much room for manoeuvre: we expect external aid to be requested."

So this is the market - not speculators but your pension fund guys - beginning to back off Portuguese debt and predict what no Euro politician is prepared to talk about: a final massive bailout process for the stricken periphery of the Eurozone.

The good news is Portugal can be sorted: there is plenty left in the pot of the two Euro bailout funds created in May 2010 to cover the €20bn, plus what it might need next year. But now look at Spain.

There are two Spanish bond auctions coming up, on 13 and 20 January. Spain needs to borrow about €38bn in new money this year, plus another €47bn to roll over. If you add in the Treasury Bills coming up for repayment (the short term loans) this rises to €225bn over 12 months (not three months as I mistakenly said in my report last night).

Now the T-bills should be less challenging, although there is an anecdote circulating of a big US investor deciding it will not roll-over Spanish T-bills. Likewise, market people estimate it should be able to renew €15bn plus €10bn in new borrowing this quarter.

The problem is the banks. The banks hover over this crisis as a constant wildcard.

The Spanish and Portuguese banks were largely given a clean bill of health by the very same tests that said the now busted Irish banks were OK. That's the problem. If the Spanish and Portuguese regulators decide to make their banks as safe as the Irish banks have been made, raising their requirement to hold capital to about 12%, then - because the government has guaranteed certain banks - that would add another €80bn to the borrowing requirement for both countries, bringing it to 300bn. (See Spain's current borrowing cost here, again, on Bloomberg).

The problem is the main Euro bailout fund, the EFSF, stands at 440bn. But in order to gain its own AAA credit rating, that fund has used the 440bn to guarantee only about - says BarCap analysts - 255bn of actual rescue funds. So the answer to those who've emailed me to ask: is there enough money to bail out Spain - the answer is, just about.

So the difference in this phase of the crisis is that what is driving the problem is not economic collapse and abject political mis-accounting (as per Greece) nor the collapse of a kleptocratic banking and property elite (as per Ireland), but collapsing confidence in the Eurozone's authorities.

I will blog - and report - separately on the deeper roots of this but basically they could - but will not - combine their sovereign debt issuance into a "Eurobond". Or they could double the size of the bailout fund - but have so far refused.

Or they could bite the bullet and impose losses on investors - ie when a country cannot borrow, it partially defaults, making the bondholders take a "haircut" - ie they get less money back, or get the same money back over a much longer timescale. But they will not countenance this. In fact, as our interview with Christine Lagarde last night showed, they will not countenance anything. Nor will they admit the possibility of the Euro breaking apart.

There is some support for the Euro authorities' view in the market. David Bloom - the forex wizard at HSBC's investment bank - has pinned his colours to the mast of Euro survival, and even to the pressure moving onto the dollar by the end of the year.

But in the end all these upward-moving graphs demonstrate a divergence between the relative safety of lending to Germany and the relative riskiness of lending to Spain and Portugal, despite the fact that they are part of a single currency. Meanwhile the whole crisis takes its toll on Euro credibility in the wider world.

Right now the Chinese deputy PM is touring the stricken countries offering to lend 5bn here, 6bn there. That's fine - but if it came to much more we would be well and truly in the realms of "political economy": 5bn is a lot of money for Portugal - a quarter of its borrowing. It would give China a massive economic lever over Portuguese policy - on for example acquisition of transport and infrastructure assets and, as is the way of the world, all kinds of personal lines of communication might then open up, some of which might lead to what the French are currently calling, with disarming frankness, "economic war".

Before Christmas, Lord James told the British parliament that a mysterious group called Foundation X was prepared to lend Britain £22bn to get it out of its difficulties. The Treasury "decided not to pursue the matter further". For the same reasons it is unlikely that Europe is going to accept being bailed out by China.

So it's the good ol' capitalist bond market, the big gorilla whose strings are pulled by self-effacing men and women who manage the pension funds of coupon-clippers in the coastal retirement resorts of Europe and America who will have to lend the money.

And it's the unelected eurocracy around the Commission, the ECB and the EFSF that is going to have to get its act together and come up with a credible plan: to meet the eventuality of a Spanish crisis and the near-certainty of a Portuguese one - and then work out what to do about Greece, which is not improving.


  • Comment number 1.

    Keep an eye on the other side of the Atlantic as well.
    Why lend the US goverment money for such low rates of interest when they are debasing their currency?
    It seems that there are few profitable productive investments for all that printed money.
    Negative growth & double-digit inflation in the US by year-end?

  • Comment number 2.

    At the risk of sounding like a broken record, trade barriers will become trade war will become economic war will become killing war.

    This is the 1930s all over again.

    The route might be slightly different but the ultimate destination will tragically be the same.

  • Comment number 3.

    Buiter has suggested a 2000bn plan , a summary is blogged at Alphaville. It is typically long and complex but appears logical so no doubt will never see the light of day !

  • Comment number 4.

    the lack of moral hazard in current economic theory

    if countries take on bankers debt then they assume the moral hazard? thus risk going bust?

    the same people who refuse to buy bonds are the same people who are shareholders of the banks that let them carry out big bets with no stops funded by big bonuses ?

    it was on their behalf the govt took on the bankers debt?

    so we discover where the real power is in the financial economy. Anyone know any of their names? how many have been interviewed? Are the gods? Untouchable by mortals? who cannot even be even questioned about their 'no moral hazard for us' attitudes?

  • Comment number 5.

    This is like a snowball rolling down hill. It just gets bigger and I don't see a happy ending, especially since those who started it seem oblivious to its probable outcome.
    Regards, etc.

  • Comment number 6.

    still unresolved

    the cult of the market wizard e.g

    Europe starts confiscating private pension funds

    the breakdown of capital markets with regard to their proper function of raising capital

    ..."The capital raising stock market of the past hundred years has morphed in just the last 10 years into a casino,"..

  • Comment number 7.

    Madame Lagarde put up a good show last night. She is very much a class act which I for one appreciate just for the cool style.

    I did feel the entire article was a tad tendentious. We know there are these issues out there and they will arrive faster than a council rubbish truck in Birmingham but why do we have this belief that it will all go bad regardless?

    I am no friend of the European Commission but the concept of a Europe without borders has been with me most of my life and for others of this blood and bone who have now gone beyond the veil. I cannot look forward to any collapse of the EU at all and I found the presentation last night somewhat excited by the idea. Was this political pornography or was I watching a UKIP presentation for the BBC?

    The point that Madane Lagarde made was that European union is a political issue that has its roots in the dreadful events of 1945. In this country we can have a detached view of this as for us then the war was over, but having been in parts of France as a child in the Fifties and parts of Germany as a young man in the early Sixties I have a clear vision as to what the European political establishment does not want and will fight to the last sinecure to prevent. The hunger and the human depravity were the worst part of what happened and the European political elite will go toe to toe with the markets to ensure that such does not return.

    My view is that in the end it will be a draw and the markets and the EU will have to compromise somewhere. Both parties know that they need each other or hang separately. Yes, there will be some hair-cuts, there will be a lot of austerity, there will be big changes at the top and perhaps some moderation of the Commission but there will be no political or economic collapse as such would be the bitter end of the European project. That would be far too high a price for anyone to pay.

  • Comment number 8.


    so the eu is evidence that no one in europe is mature enough not to go to war unless encumbered by a load of nonsense that leads them to economic bankruptcy? basically its saying they are unreformable morally corrupt characters without any reason? As long as this crazed killer is given the mogadon of the eu it will be medicated to docility? So its a manifestation of political and philosophical failure?

    Those who play the fear card must use increasingly extreme measures to maintain that fear? Something held together only by fear of something has a negative emotional feedback. The 'i'm with you not because i like you but because i fear something else'?

    One might argue that the eu is more likely to lead to war if it leads to national bankruptcy?

    how can we trust the economic competence of anything that has never passed an audit? would we put money in such a bank?

    the eu/euro must have moral hazard for it to work. countries should pop in and out as and when their national circumstances demand? Otherwise you have a football league without relegation. which is the moral hazard problem all over again?

    the eu must become ever more authoritarian if it is to survive because few want to be in it and others must be coerced and manacled?

  • Comment number 9.

    Thanks Paul for your analysis of EuroLand - too big to fail?

    The risks to us here of UK banks being dragged down by their lending to EuroLand seem very real - and the situation with the dollar where countries like Brazil are getting restive about exchange rates plus the rising Chinese balance of payments surplus seems to me to point to real risks to the global financial system as well.

    Hopes in the US, UK & EuroLand that growth and jobs can happen organically seem to me to be very optimistic - too much damage has been done to the manufacturing base in most countries, with Germany being the notable exception.

    For me the issue is will governments sit back and wait for the trainwreck or whether they take concerted action - and if so, what?

    Globalised trade is at the heart of the problem and given the choice of a meltdown in N. America and in Europe, I'd say these economies will close ranks and put import tarriffs in place rather than see their currencies and economies implode.

    For the Chinese Communist Party, this would precipitate massive civil unrest that would threaten their monopoly of power, so they would need to divert attention - the traditional dictatorship solution has usually been to go to war - but who with?

    Meanwhile in the UK we sit outside the Euro, but are fundamentally exposed to its risks through our trade and banking links, but as a separate currency able to "wiggle" against the Euro. If as many suspect the coalition's plans for growth fail and we dip back into recession and go down a similar path the Irish underwent through their austerity plan, then we will be VERY exposed indeed if your predictions for EuroLand come to pass.

    We could well see a "Churchill Moment" - when the crisis come on us so suddenly and so profoundly that the nation turns against Cameron & Clegg so dramatically that they are hounded out of government by their own supporters, as Neville Chamberlain was having deluded himself that his policies were working - look at the vitriol heaped on the Irish government when the banking and financial system in Eire went off a cliff.

    Who will play the role of Churchill?

    We need a centre-left politician with the credibility to lead a new government - will this be Ed Milliband, or is someone else going to step up to the plate? Churchill's credentials for the job were his longstanding criticism of the government and his advocacy of a very different policy from Neville Chamberlain's appeasement - I don't hear anyone offering an alternative vision today.

    Pressure needs to be put on the opposition to explain what the alternative vision is - and this needs to go well beyond marginal changes in the level and pace of public spending cuts - we cannot grow our way out of the problem, neither can we cut our way out - we must move decisively to alter the root causes of our economy's problems - and they centre around trade imbalances, lack of investment in industry and too few "real" jobs in the UK.

    If there is another massive UK banking crisis caused by the EuroLand debt mountain, this will be the opportunity to step in and completely recast our financial system to end the greed culture and direct investment into UK PLC to replace globalised, offshore manfacturing with a sustainable model that will deliver the jobs and end the need to borrow to fund our trade gap, reduce the welfare bill and replenish the coffers to fund public spending.

    Cameron's increasingly desperate dashes abroad to try and cobble together ways to increase UK exports and hold the banking system together will be very reminiscent of Neville Chamberlain's strategy of shuttle diplomacy to try and stave off the gathering storm clouds in Europe, but his unwillingness to recognise that there is no free market solution to the problem leaves him in the same corner as Chamberlain painted himself into by ruling out confronting the dictators: Cameron is in effect appeasing the "economic war" that the Chinese Communist Party has started with the developed economies - it won't work.

  • Comment number 10.

    8 jaunty

    I am sorry but you are being incoherent.

    There is a lot wrong with the European Commission. In my view it is too legalistic and the political class in Europe are still endowed with the idea that politics is the grand declaration from the Town Hall steps.

    However, what about the idea of Europe, the dream of generations, the vision of a peaceful and industrious continent? Are we to chuck all this away because the markets tell us to?

    No: this is an opportunity for change just as it is in this country. However, we must not allow the baby to be chucked out with the bathwater otherwise the markets will be arranging it for us all to fight each other becuase they will make even more money out of our continued stupidity.

  • Comment number 11.

    Most economies seem to going for contraction to solve the debt problem and thus make matters worse both in respect of sovereign and private debt effectively strengthening the relationship between debt problems of both types. The Irish are leading the way and I am confident they will need another dollop of support within six months which will exacerbate any developing issues with Spain and Portugal. Controls and trade barriers/agreements will be necessary in the medium term.

  • Comment number 12.

    Timetable of the Euro slowdown, or timetable for implossion?
    The US Congress is certainly not going to reign in its 9 biggest investment banks who keep generating derivative bundles, credit default swaps and other financial, nefarious products. Add to this the fact that they cheat anyway by using front-end loading with computers faster than light.
    So I believe we can only look to the the political and economic leaders of Europe to tackle the uncertainty and the debt.
    Not wanting to endure another banking crisis, I congratulate the leaders of Europe. The PIIGS collectively owe over $2 trillion to European and US banks. German, French, British, Dutch, and Spanish banks are owed some $1.5 trillion of that by Portugal, Ireland, Spain, and Greece (as of June, 2010).
    This figure is down some $400B so far this year, which means that the ECB is taking on that debt, and assisting banks to push it off their balance sheets.
    The US holds, according to the Bank for International Settlements, about $353B, or 17%, of that debt. The BIS has broken out a new debt category termed ‘other exposures,’ which it defines as ‘the positive market value of derivative contracts, guarantees extended and credit commitments.’ These ‘other exposures’ is quite clearly meant to be abstruse because the financial products themselve are abstruce – amount to $668B of the $2 trillion in loans to the PIIGS.
    Solution: banks everywhere have got to cope with EVALUATING derivative contracts, credit default swaps, etc. that could expose lenders to losses on sovereign debt. But they seem more concerned about tackling deficits, which is a much lesser problem.
    Because the big American banks too big to fail have bet against soverign debt.
    That it is derivative exposure to European banks that is a very major concern for the world but (justice!) the US in particular. This time around, European banks present a similar if not greater risk TO THE UNITED STATES.
    The collapse of a major European bank could trigger all sorts of trouble in the US banking system, at least among the major investment banks. There is a solid reason to know that American financial reform was not real reform: We still have investment banks committing bank capital to derivatives, trading overseen by regulators WHO DON'T SEEM TO UNDERSTAND THE RISKS.
    Lehman looked good only a month before until it collapsed. On paper, I am sure that every one of our banks looks solid because they have their risks balanced on the balance sheets, but the risks are not accurate when it comes to derivative bundles or credit default swaps.
    I congratulate the ECB for stepping in and taking some risk off the table. Does anyone really think Jean-Claude Trichet willingly said: “Give me your soon-to-default sovereign debt?”
    Trichet was opposed to any ECB involvement in something that looked like a bailout. And then he U-turned: There was nowhere else to turn. There were no mechanisms in the Maastricht Treaty for dealing with this situation. This was and is a bailout for European banks in order to avoid a banking crisis. Many European banks, large and small, have bought massive sums on huge leverage of sovereign debt, on the theory that sovereign debt does not default.
    The ECB is still buying ever more debt off the books of banks, buying time for the banks to acquire enough capital, either through raising new money or making profits or reducing their private loan portfolios, to be able to deal with what will be inevitable write-downs (aka bundled derivatives essentially worth nothing).
    The ECB has chosen a different way, but it is not without consequences. Trichet has let it be known that dealing with sovereign-debt-default issues should not be the central bank’s problem, it should be a problem for the European Union as a whole.
    At first, the political types came up with the stabilization pact in conjunction with the IMF. But this was never a real solution, other than for the immediate case of Greece - and then Ireland. It has some real problems associated with it. It could deal with Portugal but is clearly not large enough for Spain. It is worth noting that the political leaders of both the latter countries have loudly denied they need any help.
    Ultimately, the EU has three options. But first, you have to understand what the problem is before you can attempt to solve it.
    More debt is NOT the Solution to Too Much Debt
    Greece is being forced into an austerity program in order to be able to continue to borrow money. But it has come with a cost. Unemployment is now at 13%, up from less than 7% just two years ago. And Greek GDP continues to slide. A declining GDP is just not good for the country, but it also makes it more difficult for Greece to get back into compliance with its EU fiscal deficit-to-GDP requirements. The problem is that GDP is declining faster than the deficit. Normally, a country would devalue its currency, maybe restructure its external debt (or default), and then try to grow its way out of the crisis.
    In Ireland, the boom in real estate prices triggered a massive borrowing binge, driving total private non-financial sector debt to almost 200% of GDP. The Irish economy has become stuck in a debt-deflation spiral. The government has lost all other options but to accept the E85 billion bailout package from the EU and the IMF. The big problem for Ireland is that fiscal austerity without a large currency devaluation is like financial suicide – without a cheapened currency to re-create nominal growth, fiscal austerity can only serve to crush demand and bring on an economic downward spiral.
    Greek five-year bonds are now paying 13%. It is hard to grow your way out of a problem when you are paying interest rates higher than your growth rate and you keep adding debt and increasing your burden.
    Each move to deepen government cuts in Greece will result in further short-term deterioration of GDP, which makes it even harder to dig out.
    It is the same melody but with ominous words for the rest of the countries in Europe that have problems. While Ireland is very different from Greece, assuming massive debt in a deflating economy will only turn Ireland into an ever-larger burden unless they can get on to significant growth.
    One country after another in Europe is coming under pressure. This week the debt of Belgium was downgraded, and the accompanying note from Standard and Poor’s observed that:
    “Belgian’s current caretaker government may be ill-equipped to respond to shocks to public finances. The federal government’s projected 2011 gross borrowing requirements of around 11% of GDP leaves it exposed to rising real interest rates.”
    At some point, if a country does not get its fiscal deficit below nominal GDP (and this is true for the US as well!) it will run into the financial wall. Credit markets will no longer lend. In Europe, the lender has become the ECB, but that may change with the establishment of a new authority for the European Union to sell bonds and use the proceeds to fund nations in crisis. Under the proposal, each nation would assume a portion of the total debt risk. Tough sell!
    It will also mean that countries that accept such help will endure a very stern hand in their fiscal affairs. This is a very real surrender of sovereignty. Some countries, on the funding side of the equation, may decide they have to “take one” for the good of the European Union.
    This fund is to be launched in 2013, which gives EU leaders some time to sell the idea.
    A second choice is for some countries to leave the euro but stay in the EU. Not all members of the EU participate in the eurozone. Leaving would be messy. It is hard to figure out how it could be done without serious collateral damage. Even if Germany were to decide to be the one to leave, which they actually could, as the new German currency would rise over time, it would also mean their exports would be less competitive inside Europe.
    A third choice (which could be combined with the first choice) is debt restructuring. Convert Greek bonds into 100-year low-interest bonds, giving the Greeks (or Irish or Portuguese) the time and ability to service the debt, along with real controls on their spending. Of course, that is default by another name.
    That choice too has political and economic consequences. Someone has to cover the losses on the mark-to-market for those bonds. Who takes the hit? Could the eurozone survive a wave of debt restructurings? Here the immediate point is that the crisis could be huge, since one restructuring seems sure to trigger others. In addition, at the end of 2009, for example, consolidated claims of French and German banks on the four most vulnerable members were 16% & 15% of their GDP, respectively. For European banks, as a group, the claims were 14% of GDP. Thus, any serious likelihood of sovereign restructuring would risk creating runs by creditors and...another global financial crisis.
    Yet even such a crisis would not entail dissolution of the monetary union. On the contrary, it is perfectly possible for monetary unions to survive financial crises and public sector defaults. The question is one of political will. What lies ahead is a mixture of fiscal transfers. This tension might be manageable if a swift return to normality were feasible, but it's not.
    There is a good chance that this situation will become long-lasting.
    Still worse, once a country has been forced to restructure its public debt and seen a substantial part of its financial system disappear as well, the additional costs of re-establishing its currency would seem small. This, too, must be clear to investors. Again, such fears increase the chances of runs from liabilities.
    The next crisis will be the biggest for about a century. Will the eurozone survive. My bet is that it has a much better chance than the United States of America.

  • Comment number 13.

    I have made a careful note of your comments and will review them with interest as events unfold this year. I found your unqualified forecast of the imminent demise of the euro quite extra-ordinary. Forgive me, but after 2008 I take the crystal ball gazing of economic correspondents with a pinch of salt. I would have thought a more qualified and nuanced approach was called for. Instead you seemed almost gleeful in your Euro=knocking. One small point - why, for a currency so patently at risk (according to you), has the value of the Euro held up so well against the Pound. Is the UK in a worse mess?

  • Comment number 14.

    That's all a bit doom and gloom for the new year Paul, did one of your rellys give you a rubbish present and when you went to take it back for an exchange the shop was boarded up ?

    Portugal next ?, oh yes.

    The ECB (aided unwittingly by the bond markets) will force a banking crisis in Portugal which will force the Portugese government to part nationalise and bail out the banks which will force the Portugese government to go cap in hand to the IMF and the ECB, the IMF will be cast as the bad guys (as usual) and the outcome will be that the ECB gains control of the Portugese CB and the banking system. (which is the object of the exercise and which requires what appears to be the current dithering from the EU)

    Spain will be next although I'm not sure what will happen to Santander, probably they will be allowed to escape like Barclays and HSBC in the UK but all the Cajas will be part nationalised and the Spanish CB will cede control to the ECB.

    All the EZ countries should have ceded CB control to the (EZ)ECB when they joined the single currency (but politically this probably couldn't be done at the time).

    The same will happen in Italy.
    France and Germany will cede control willingly as a gesture of good will to the EZ cause and the smaller EZ countries will cede control purely as a matter of survival

    By 2013 I expect the (EZ)ECB will have control of all of the EZ countries central banks, taxation systems will align and EZ countries will be issued grants to their governments which will be their public spending allowance (no deficits allowed).
    Fait acompli.

  • Comment number 15.

    This caught my eye on the news page

    'University fee plan for poorer students 'not workable''

    Of course it isn't workable, those MPs don't understand the need for the tuition fee rise.

    If they had suggested that the fees are £9000 per year for all students, all students get loans to cover those fees and that for poorer students the government/university will repay two years worth of loans (over say a 15 year period) then it would be workable.

    The fees are a bank bailout in another name.

    Student loans cannot be defaulted on by bankruptcy. They are good loans, an asset that any self-respecting bank would like to hold.

    The student loans company will sell the loans to other banks and take toxic assets in exchange, these toxic assets will be swapped with the CB for cash which will then be used to make more loans.
    The banks that have bought the loans will be able to use them as (good) security to raise capital on the market.

    This is probably bailout no.5 but I've lost count of the direct and indirect bailouts used so far.

  • Comment number 16.

    Here's good commentary from Nick Beams of wsws:

  • Comment number 17.

    Have you typed 'liquidity trap' into the BBC News search engine? There are a handful of results only, none related to the UK; one refers to the US apparently on the brink of going into a liquidity trap; and the remainder to Japan - and the definitions given of a 'liquidity trap' are all wrong. Why?

    Here is Paul Krugman from his blog March 17 2010: "How much of the world is currently in a liquidity trap? Almost all advanced countries. The US, obviously; Japan, even more obviously; the eurozone, because the ECB probably couldn’t engage in Fed-style quantitative easing even if it wanted to, given the lack of a single backing government; Britain. Not Australia, I guess. But still: essentially the whole advanced world, accounting for 70 percent of world GDP at market prices, is in a liquidity trap."

    Given the fawning perfomance I watched of Mark D'Arcy hanging off every myth uttered by Nigel Lawson on BOOKtalk, I just wondered if the BBC editorial policy can stretch to some intellectual debate, or whether it just wants to continue with its current 'National Trust' approach to history whilst the bombastic Lawson emotes his 'Great Man' historiography?

  • Comment number 18. the father of someone drowning in debt that he incurred in the misguided belief that we really wanted biochemists any more I am interested to explore your assertion that one can`t go bankrupt over a student loan.

    A few years back the BBC ran a programme centred on the plight of a young woman who was clearly owing a large amount of money some of which was incurred as a student."They kept offering me money so I
    spent it...tee-hee!" (sounds off of BBC "journalist" simpering gleefully sympathetic support)

    Needless to say a perfect example of the Beebs core was obvious that she couldn`t hope to successfully negotiate her way through a cycling proficiency course...but the Beeb trumpeted their success in getting her made bankrupt under new rules brought in by she could borrow the money to buy a house and walk away from around twenty thousand pounds of debt....while everyone else seems stuck with having to pay up!

    Did I dream all that?

  • Comment number 19.

  • Comment number 20.


    Bankruptcy at a personal level is the last tool in the box and should only be used when all other avenues have been exhausted, it is the so called 'nuclear' option.

    It is what you do after you have slashed the effective interest rates on the existing debt* and gained a second job and you still find you are floundering.

    It has implications outside of the financial arena.

    It is default

    QE is the last tool in the box and should only be used when all other avenues have been exhausted, it is the so called 'nuclear' option.

    It is what you do after you have slashed effective interest rates and issued fiscal stimulus and you still find your economy going down the pan.

    It has implications outside of the financial arena.

    It is default

    What would happen if you tried to default and the financial system didn't let you but instead forced you to accept usurious rates, what would that do to a personal or a national economy ?
    What eventually happens to the lender in this case after the debtor cannot service the debt and all the assets have been liquidated ?

    *you do this by amortising the loans as close to the lowest rate as possible and paying off the highest first

    Student loans are usually at the lowest interest rate and the term is flexible based on earnings so this can be considered as the default rate and is the only option that gives a fair chance to the debtor of being able to repay the debt, Commercial rate loans can be too high and the repayment schedules too inflexible to give any chance of repayment, default might be an option in this case.

  • Comment number 21.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 22.

    #21 Jim, re-post but take care of the house rules, your views are important to me

  • Comment number 23.

    That`s kind....but all I was doing was thanking you for the info/options which I will discuss with Maida Vale Garret Man when I see him next weekend.I suppose he must repay this money but I feel so incensed about blair going back on his word about student loans and allowing Wall Street to get us collectively and personally indebted in what I believe was a scam.

  • Comment number 24.

    #Jim, as private debt and student loans are not the topic of Pauls blog, I have posted some comments about this subject at

  • Comment number 25.

    @12 Bluesberry: "In Ireland, the boom in real estate prices triggered a massive borrowing binge, driving total private non-financial sector debt to almost 200% of GDP.

    Chicken-Egg-Chicken ... In Britain and Ireland property prices (we don't have "real estate" ;-D )have been determined largely by the availability of credit. That is, the banks have manufactured money out of nothing to fuel the boom. Of course, some who had property to sell benefited, but many ordinary people at the bottom paid ever larger proportions of their income to the banks in order to have a roof over their heads. The pill was sweetened by the Ponzi style false idol of "the property ladder" and wealth for nothing somewhere down the line. Now, as interest rates have fallen, they may be paying a bit less but they are also trapped in negative equity.

    In general, this crisis has been largely caused by the fact that the supply of credit has not been tied to the productive capacity of the real economy, and exacerbated by the financial trader parasites who produce nothing of value but extract massive revenue from the real economy.

  • Comment number 26.

    24...thank you very much Bob...will bring this to his attention and no doubt use the commenting facility on the seperate Democratic Britain website from here on in.

  • Comment number 27.

    #25 Sasha Clarkson

    "In general, this crisis has been largely caused by the fact that the supply of credit has not been tied to the productive capacity of the real economy, and exacerbated by the financial trader parasites who produce nothing of value but extract massive revenue from the real economy."

    And why has the supply of credit not been tied to the productive capacity of the real economy?

    Wasn't it the Keynesians especially who wanted to free the capitalist system from the monetary anchor of gold?
    By freeing token (& credit money) from commodity money (gold) the trade cycle could be abolished by following the right monetary & fiscal policies to smooth aggregate demand - or so the Keynesians argued.

    By what has the era of fiat money achieved?
    It has enabled capitalists to artifically inflate their profit rates by increases in asset prices (shares, property, etc) - i.e. fictitious capital not productive capital.

    The result is unsustainable debts - in the private & public sectors.

    Keynesians should wake up to the fact that capitalism cannot be stablised.

  • Comment number 28.

    If you are right DVR and "Keynsians must face the fact that capitalism cannot be stabilised" then surely this has major global consequences for the political and economic architecture of our world?

    As a complete economic ignoramus I can`t understand why we persist in trying to alchemise a fair and just world from an unstable cocktail of piracy and theft and economic imperialism that in fact rewards those who have no investment in creating a fair and just world.

  • Comment number 29.

    #28 worcesterjim

    Part of the reason we still persist will the notion that capitalism can be reformed is due to the Labour Party.

    Even before Keynesianism their leaders heads were turned by the notion that capitalism could evolve into socialism.
    Keynesianism reaffirmed that position post world war II.
    And when Keynesianism feel out of favour they embraced the 'third way' nonsense.

    The Labour Party have let down the workers time after time because they don't understand the economics.

  • Comment number 30.

    The workers were always let down by Labour DVR...even when they kicked Churchill`s behind so resoundingly after the war.

    But we were by then Keynes himself knew very well.. and reliant on the USA for our continued existence as a fraudulent fantasy democracy in which politics was and remains an empty conjouring trick by ALL parties...unless they completely went along with Washington and Wall Street and quietly handed over the empire into CIA control.

    Now we are stuck in a CIA/Sorsos/Wall Street run EU that expands to suit the USA`s desire to take over the Soviet Union territories and pour cash into corrupt basket-case Southern Europe for the benefit of Wall Street and at our ruinous expense.

    Why are we in Afghanistan just yards from China and India...when they should be picking up the cost of subduing whatever we are fruitlessly chasing?

    Yes...once again it`s the USA Behemoth wasting our precious diminishing resourse.

  • Comment number 31.

    "The Labour Party have let down the workers time after time because they don't understand the economics."

    Indeed. It's a pretty big slate, but the least the Labour Party could do is to master the role which labour plays. They've unfortunately also lost their understanding of the role which land plays and hence have kicked away a very simple economic fix.

    And it shows dreadfully. Exactly what policies has EdM and the gang come up with lately?

    I think it's time to turn the show over to the kids.

  • Comment number 32.

    @Sash Clarkson

    "... In Britain and Ireland property prices (we don't have "real estate" ;-D )have been determined largely by the availability of credit. That is, the banks have manufactured money out of nothing to fuel the boom."

    Time to read Michael Hudson. The banks have been collecting the (land) rent whilst the speculators have pocketed the capital gain. We should be collecting the rent - all of it - for public benefit.

  • Comment number 33.

    @27 duvinrouge

    You aren't really arguing for a gold standard are you? Its greatest advocates last century abandoned it, very reluctantly, because it was unworkable. Also, your description of what Keynesians are alleged to stand for is nonsense - you really shouldn't put words into other peoples mouths!

    Unlike you, I'm not an anythingist, as I don't subscribe to economic theology any more than I subscribe to religous theology. In that sense Keynes would not have been a Keynesian, as his approach to economics was empirical - more akin to engineering than to physics. However, such of Keynes' remedies as were applied worked quite well during and after the second world war, but some of his crucial ideas were ignored, particularly monetary and banking reform and the need to neuter the speculative nature of markets - as discussed in the General Theory.

    Actually, I agree with you that capitalism in its present form cannot be stabilised, but that does not mean that old Marxist dogma is the answer. Thinking Marxists may well contibute constructively to the debate - I always have time for Eric Hobsbawm for example.

    There needs to be a new progressive post-Marxist post-Keynesian analysis which looks at cause and effect, including environmental, in the new realities of the complex economic social and world of the 21st century. Despite its urgency, it won't be easy - at all!

  • Comment number 34.


    I agree about the importance of the environment, often neglected or tagged on by Marxists.

    But the important point is Marx & Marxists showed that capitalism isn't stable & cannot be reformed.
    Keynes & Keynesians believe capitalism can be reformed.

    As regards gold, in a world where the means of production are commonly controlled, there is no commodity production & no commodity money.
    Whether capitalists free token money from commodity money is up to them.
    Whilst it can prevent a recession from becoming a depression it runs the risk of debasing the currency.
    Which is just what appears to be going on today.

  • Comment number 35.

    Over on Mark Mardell`s blog I notice that Soros` ideas are seen as representing "the left" of their politics and one chap mutters darkly about exposing his connections with leftwards leaning organisations and his alleged failure to pay enough in tax.

    As a student of the EU and all its works I see him popping up everywhere and trying to create what he calls open societies based around the ideas of Karl Popper...which his critics see as an expression of Marxism.

    My attempts to understand Popper`s writings forty years ago came to nothing as he just made no sense to me.....and I fail to grasp the theory behind what Soros is doing...though it`s obvious that he`s spreading the power of global capitalism...but is he liberating the man in the streets of Bratislava?

  • Comment number 36.

    Saw Mme Lagarde last week, indeed a class act Stanilic.
    (Expecting Gideon to appear on TF1 anytime soon parler le francais? thought not).
    Thought it was telling that she agreed to appear on NN at all.(commented as much to her indoors).
    Surprised that KW got the interview - then I guess Mme Lagarde probably prefers the tame scotswoman to you Paul, you ask too many awkward questions.
    I also thought telling that Mme. L invoked the reasons why the EU was set up (World War and its aftermath, agreed Stanilic). This will become an existential crisis for the EU. Most under 40 have not a clue what this is all about and it bears repeating to remind everyone why we have this politico-economic compact.
    I still maintain that some sort of consensus must be reached on a plan. One still feels we are in a massive firefight that awaits every twitch of the market. Is it that our leaders really do not comprehend the scale of the problems? Can they not publicly expose the depth of the problems? This is not the crisis for old men to solve (the past certainties have gone). Neither is it for the inexperienced young politicians now coming to power to solve. Many I talk to just see this crisis as one that will unwind over time (10 years or so) and it's just a matter of surviving until then.
    For now, let's see whether Mme. Lagarde (who, to her credit, agreed to appear on serious English TV in the first week of the New Year) can make a difference.

  • Comment number 37.

    33. At 9:17pm on 09 Jan 2011, Sasha Clarkson wrote:
    There needs to be a new progressive post-Marxist post-Keynesian analysis which looks at cause and effect, including environmental, in the new realities of the complex economic social and world of the 21st century. Despite its urgency, it won't be easy - at all!

    Reality is reality is reality. It does not change.

    Perception, relative importance, fashion and the self interests of today do change. These lead to selective choice of aspects of reality. There must exist a "holy grail" of a perfect economic model but even if found, self interest will never allow for it to be implemented.

  • Comment number 38.

    I think the real question is why none of this stuff is discussed on Eastenders!?

    I'll get my coat.

  • Comment number 39.

    The BBC today used the word 'cheaper' to describe house prices in the UK today than at the start of 2010.

    Cheaper petrol = good

    Cheaper food = good

    Cheaper clothes = good

    Cheaper houses = good

    I think BBC journos are finally cottoning on to the fact that it is bad for the country when house prices rise just as it is bad for the country when the price of food, fuel, clothes rise.

    One more time...

    More expensive houses = bad

    Cheaper houses = good

    Now all we have to do is get all the property porn programmes stopped.

  • Comment number 40.


    Since the crisis began a little over two years ago, I found myself intrigued about what is happening and how did we get here. Mainly with a view of "where is all this going?".

    I spent the first year looking for the holy grail. I'd say the closest economic model to reality was Nicholas Georgescu-Roegen. This link gives a good flavour:

    The second year was spent trying to understand why weren't people like Roegen listened to. The only conclusion I can now reach is self-interest by the power-elite. Aggregate wealth can't increase in an era of declining cheap energy so the dominant strategy is "take from your neighbour":

  • Comment number 41.

    #40 Hawkeye_Pierce

    not sure Roengen had it right, entropy as I see it is the degradation of light (the highest form of energy) into heat (the lowest form)

    I see artificial scarcity as the last bastion of capitalism

    The power-elite was built in a time of expensive energy, cheap energy devalues their holdings, imagine a world where (usable) energy was as available as water or air (or even sunlight).
    Where is their power now.
    (power, a means of control or the energy needed to drive a process)

    Oil and coal are stored sunlight, sunlight itself is no respecter of class or creed, it falls upon all of us, it is abundant and as such it has no value in the capitalist world.

    When the sun shines on the capitalists they will all become socialists.

  • Comment number 42.

    The life cycle of the Euro is surely about to reach its end time. Aren't the Germans already re-minting their Deutschmark currency coins, and notes?

  • Comment number 43.


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