ANOTHER SHAMEFUL DAY FOR EUROPE AS EMU CREDITOR STATES BETRAY SOUTH / THE TELEGRAPH

Another shameful day for Europe as EMU creditor states betray South

So much for the denials. The Cyprus "template" for banking crises is to be eurozone policy for other countries after all.

By Ambrose Evans-Pritchard

6:45PM BST 21 Jun 2013
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The creditor states of the North are still calling all the shots, and presumption remains that the countries in trouble are victims of their owns failures, fecklessness and folly Photo: Getty Images

 

Anybody with serious banking exposure to any EMU state on the front line of Europe's macro-economic crisis now knows what to expect.

The deal reached by EMU finance ministers on the use of the bail-out fund (ESM) to recapitalise distressed Banks makes clear who will in fact suffer the real losses: first shareholders, then bondholders and then deposit holders above €100,000. They stand to lose almost everything, as we saw with Laiki in Cyprus.
 

Officials from the European Central Bank and the European Commission warned during the Cyprus crisis that it would be dangerous to set such a precedent, fearing contagion. The Portuguese were openly alarmed.
 

So has that risk of contagion since dissipated? One should have thought quite the opposite, given the yield spike in Portugal, Spain, Italy et al since the Bernanke Fed dropped its taper bomb this week.
 

Furthermore, as Yanis Varoufakis points here, the deal resiles from the solemn agreement by EU leaders in June 2012 to break vicious circle between crippled banking systems and crippled sovereign states, each dragging the other down.

The states that are already in trouble will have to carry most of the burden of recapitalising banks, pushing them over the edge into actual insolvency. They will have to come up with the money needed to raise capital ratios to 4.5pc of assets.

Then come the private haircuts, which of course risk devastation for the host country, and the collapse of investor confidence. Only then does Europe step in to share part - not all - of any further recap needs.

The original promise of an ESM blanket to cover "legacy assets" has come to almost nothing. The vassal states may possibly get some relief later on the past losses from the EMU credit bubble, but only as a reward for good behaviour and on a case by case basis.

"Legacy losses will be used as a disciplinary device: Greece, Spain and Ireland will now have to tussle, beg and plead for debt relief regarding the funds already borrowed from the EFSF-ESM for their banks," said Dr Varoufakis.

"As the grand total for all bank recapitalisations, past and future, is to be limited to the puny sum of €60bn, Europe’s peripheral nations can only at best receive a tiny amount of debt relief; enough to ensure that Ireland, Greece and Spain are competing against one another as to which proud nation will be a better ‘model prisoner’ than the rest."

Indeed, it is an abject spectacle. Dr Varoufakis rightly calls it a "a truly shameful day for Europe".
The creditor states of the North are still calling all the shots, and presumption remains that the countries in trouble are victims of their owns failures, fecklessness and folly.

There is no recognition that this disaster was a joint venture, caused by the dysfunctional structure of monetary union; nor that Northern creditors and their banks share half the blame for flooding the South with cheap credit; nor that the ECB played a huge part in stoking unstable credit bubbles in Club Med and Ireland by gunning M3 money supply at double-digit rates to help nurse Germany through its slump. Nor is there even a sensible analysis of what is needed to solve the crisis.

One can understand why Germany, Holland, Finland and Austria do not wish to accept any mutualisation of EMU debt, or admit to their own taxpayers that the euro project costs real money.

But what sticks in the craw is the relentless propaganda by EU leaders that they will stand shoulder to shoulder in solidarity with fellow members of EMU, and that they will do whatever it takes to uphold a project upon which the peace of Europe allegedly depends. Quite obviously they will do no such thing.

What sticks, too, is the oft-repeated claim that Anglo-Saxon outsiders failed to understand the degree of pan-European political will behind the EMU project.

This cliche is the opposite of the truth. Anglo-Saxon investors believed so gullibly in the total sanctity of EMU that they were willing to buy Greek 10-year bonds for a wafer-thin margin of just 26 basis points (bps) over Bunds (and Spanish debt for just extra 4bps). They believed the dream, too.

The reason why the EMU crisis metastasized - when debt levels were lower than in the US or Japan - was the horrible discovery that Germany might not stand behind the project after all, and certainly would not stand behind Greece. Those who stayed to the end lost 75pc (de facto) in Greek haircuts.

As for Greece, it is getting uglier by the day - as Open Europe puts it here.

The Democratic Left has pulled out of the coalition in protest over the shutdown of the ERT public broadcaster, reducing the Samaras majority to three seats. The privatisation programme is ruins. The National Healthcare Provision has a funding gap of €1bn. Not nearly enough public employees have been sacked to meet the Troika demands.

And now the IMF is threatening to pull out altogether unless the eurozone comes up with the €3bn to €4bn needed by next month needed to comply with bail-out terms.

It may not really matter that Greek bond yields are back above 11pc, but it certainly does matter that Spanish yields are once again nearing 5pc. Given that Spain is in deflation (once you strip out tax levies), and given that its nominal GDP contracted by 1.8pc last year, and will contract by as much this year, you can see the lethal compound effects on the debt trajectory. Ditto for Italy.

"The yield increase in the peripherals is becoming alarming," said Peter Schaffrik from the Royal Bank of Canada.

Indeed so. Nothing has been solved. The eurozone's creditor powers are playing a cruel game, doing just enough to keep this wretched entreprise alive and to protect their own commercial interests, but not enough to solve the crisis. The torture is endless. The cynicism plain to see. And the willingness of victim states to accept their plight so lamely is simply staggering.