Euro bailout. Now banking risk morphs into geo-political risk
The euro bailout deal consists of several massive moves and, as far as the eurozone is concerned, signals a fundamental change. But not the end of the global crisis. If 2008 transferred global risk from banking to state finances, this transfers instability from the sphere of state finances to the sphere of global and social politics
Here is my first shot at explaining what they have done. Pitch in if you think I have got bits wrong as we are all still struggling with the detail.
To counter the risk of the Greek crisis spreading to Spain, Portugal and Ireland the 27 EU countries have created an emergency loan facility of 60bn euros. That means that the debt markets no longer have them by the throat next time they need to go and issue bonds.
But 60bn euros would never be enough to counter the strategic problem. The strategic problem is that the eurozone authorities were not seen to stand behind their own currency under speculative attack and the danger of default. So they have created a complex loan facility coming to 440bn euros. On a "pro rata basis" the 16 eurozone governments have signed up to back this loan facility, which could completely swallow up the debts Spain, Ireland and Portugal.
The fact that this is called a "special purpose vehicle" - a term we all remember from Enron, Lehman and the London Tube PPP - gives the game away. Like all SPVs it is designed to make unclear who ultimately shoulders the risk. Since "Europe" does not have any money itself, the implication is that Germany, France and Italy now stand behind the rest of Europe. But the implication will be hidden behind bilateral deals, clauses etc.
On top of the 440bn euros, the International Monetary Fund (IMF) has pledged 220bn euros. It is clear where the IMF money comes from - its member states, which again include France, Germany, Italy - but more importantly here the USA, Canada, Britain, Japan etc.
Since the IMF is a lot less flaky an organisation than the European Union, and always demands strict conditions, I am assuming the IMF pledge is "senior" to the EU one. That is, the IMF gets its money back first.
Then, on top of all this, the European Central Bank (ECB) has decided, in effect to do quantitative easing: it will buy up government bonds - and it will accept rubbishy debt as collateral for borrowing clean, shiny euros. This reverses the entire course, and culture, of ECB policy since foundation.
However, I am not clear how much money the ECB will actually print. The key point is this is a massive policy reversal for the ECB and has political implications.
All this comes on top of the 110bn-euro bailout of Greece.
And there is more. The US Federal Reserve has re-activated the measures it used in the autumn of 2008, which allow banks to borrow in dollars without having to actually make the currency exchange, and therefore stop the global credit markets from retreating into national or continental fortresses.
Now - what is it designed to do and will it work? And how does it change the eurozone?
The core problem is the lack of credibility of the deficit reduction plans on the eurozone's periphery. Greece was the extreme example: no way could it borrow at manageable interest rates on the markets so the eurozone agreed to lend the money, giving it more time to cut its deficit but demanding tougher conditions.
But the markets did not believe the Greek people would ever accept these conditions; and they believed Greece would "restructure" its debt - so they would only get a percentage of their money back. So they ramped up the cost of lending to other eurozone governments.
This move knocks that problem on the head. The key weapon is not the 440bn-euro loan facility - which as I write only exists on paper. The weapon is quantitative easing - buying up debt to pump money into the system.
Why it is radical becomes clear if you compare it to the Bank of England's move to print £200bn. That £200bn shows up on the "balance sheet" of the Bank, not the British government. But the Bank of England is ultimately an arm of the British state - whatever its formal constitution says. Ditto the US Federal Reserve. However, the ECB is a central bank without a state to underpin it.
The move to printing money is a signal that the EU has to create something more like a state to back the ECB.
Not only is the EU now committed to much stronger fiscal - i.e. tax and spending - oversight. It is now implicitly committed to becoming an economic super-state.
Now, will it work? In the short term it should. The reason it seems to the European governments that "speculators" are attacking them is because we have created a huge economy of derivative financial instruments - the biggest being interest rate swaps - that are supposed to enhance market functionality but which in fact have an inbuilt tendency to punish stricken states.
But considering the scale of intervention, it has to work. The very scale of the action reveals that the eurozone crisis was at least as big as the Lehman-induced meltdown of 2008. We found that hard to grasp because instead of panic stricken bankers in Manhattan the signal was fighting in the streets of Athens.
But here is the problem. What we have been dealing with since September 2008 is, to put it really clearly, money lost. Half the value of the world's stock markets was wiped out; bank shareholders were wiped out and bank debtors lost a lot. That caused a mini-slump and a trade collapse which was only reversed by the massive injection of taxpayers' money into the economy, and by printing money, and by some countries devaluing their currency.
But mounting losses reduce growth. The actions of the G20 transferred the risks and losses from banks to states - but states cannot bear losses on this scale if their economies do not grow. The whole contagion risk - from Greece to Spain to the UK - lay in the fact that states were refusing to accept the level of budget cuts needed because they had agreed to assume the losses.
The overbearing risk to the global economy had always been a debt-deflation spiral, where the cost of meeting unpaid debts led to low growth, falling prices and wages, the collapse of state finances and the need for governments to then adopt policies which worsen the downturn. This is what happened in the early 1930s and is called "pro-cyclical" in economics.
Now, from Washington to London to Frankfurt all that stands in the way of debt-deflation is the state. In the form of massive money-printing exercises through central banks; and in the form of states underwriting the banking system; and in the form now of big states agreeing to stand behind small states.
Britain's maximum exposure, if all of the money was lost, is £8bn - says Alistair Darling. But our moral and political exposure is much larger.
For this massive, shock and awe style bailout does not make the risk disappear. It simply transfers the risk in southern Europe to the governments and taxpayers of northern Europe through the parallel mechanisms of the Lisbon Treaty (a 27 nation bloc) and the eurozone (a 16 nation bloc). And in fact once again the US Federal Reserve has assumed some of the global risk - its balance sheet will have to expand to do the currency swaps.
We are only beginning to get our heads around the detail of this deal but its geo-strategic and moral implications are clear. Big states have bailed out little states and will demand reforms that change the lifestyle of people in these states forever. Northern Europe has effectively seized control of southern Europe. The eurozone is on a path to becoming a supra-national state-like entity.
But because every step of the EU project has been taken by elites, with the populations left to work out what was happening months and years later, we can now trace very accurately where the risk has been transferred to. It has been transferred to politics: will the people of Europe accept the consolidation of the eurozone, with the loss of economic sovereignty that represents?
In short, in a matter of two years, we have transferred risk from the banking system to the state finances to the streets. And the risk is only partly dissipated by this transfer.
In looking for a metaphor to describe the anti-crisis measures, I am thinking of tank armour. It consists of layer upon layer of complicated material - ceramics, metals, fabrics - which diffuse impact. When a sabot round goes through one layer it loses energy, then the next, then the next. If you are lucky it never penetrates the final layer and the crew survives. But take a look at the armour: it is destroyed, mangled, defabricated. It can never be used again.