This really bugged the crap out of me. What am I talking about? The statement from Swedish finance minister Anders Borg (wonder if he’s related to Bjorn):
“We need to make progress today because in the night when markets are opening we cannot afford disappointments,” Borg told journalists as he arrived for the meeting. “We now see herd behavior in the markets which are wolfpack behaviours and if we will not stop these packs they will tear the weaker countries apart,” he warned.
Ah, yes. It’s all because these roving “wolfpacks” are around. What does he think this is? World War II with the Germans roaming about sinking Allied shipping?
It’s amazing what folks in his position do in reaction to market events. To me, it’s very clear that the market isn’t looking to take the Euro down, or as he put it “tear the weaker countries apart.” What the market wants is for Brussels to show they have some guts and draw a line in the sand with respect to their mantras of fiscal responsibility. Not just pay it lip service.
So what do they do? Pucker up and give it even more lip service.
Let’s get something straight: the loan package and guarantees are essentially a first step to what amount to private placements for sovereign debt. Greece, Portugal, etc. will be able to take advantage of favorable rates that they can’t get in the bond market, so the only other avenue that is left is asking the European banks to underwrite sovereign credit and take it out of the public market. You can rest assured that if any country “takes advantage” of this mechanism those loans won’t be priced in the secondary market, credit ratings might be something slightly more than useless (but not much) because they’re “guaranteed” after all. If anything, this is a mechanism to keep bailouts of European banks in play that much longer.
Why? Because the rates will be below market and the credit quality will not be commensurate with the credit risk because GDP will probably continue missing to the downside. Plus, as current account balances go more negative (some of these countries run habitual trade deficits, after all), there will be less and less capital in country to pay down the debt. Deteriorating macro fundamentals and no reductions in consumption and government transfer payments? Where can I find such a great deal? Plus, countries that will riot at the slightest hint of a budget cut? As Kenny Banya used to say “That’s gold, Jerry! Gold!”
So in the meantime, banks will have to take a write-down of some magnitude for doing these deals.
Which the government will use as another cue to bailout banks. Again.
If they’re not careful, leaders in European countries won’t just destroy the continent’s banks and whole countries economies.
They’ll destroy the idea – the very concept – of credit…