Europe is cracking


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The eurozone is increasingly becoming a one for each and none for all zone which is understandable from the point of view of virtous Europe. Finland is firing the first shot with a private bi-lateral agreement with Greece to guarantee its share in the Greek bailout n°2. The meeting between Sarkozy and Merkel was a farce aimed at their own internal political corners and the banking sector is getting really shattered today.

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Europe is cracking

  1. 1. Europe is crackingAn article published in the Greek newspaper Ekathimerini reports a bi-lateral dealbetween Finland and Greece; this is of course not widely spread in the media: take a sip,read and have fun! “Austria kicks up fuss about Finnish collateral dealAustrian minister suggests his country might ask for same agreement with Greece.Austria opposes Finlands deal with Greece on collateral for loans and will demandcollateral as well if eurozone countries approve Finlands deal, a spokesman from Austrianfinance ministry was quoted in a newspaper report as saying."The collateral model has to be open to all the euro zone countries. We will figure out ifthats the case,» Harald Waiglein from the finance ministry told Finlands biggestnewspaper Helsingin Sanomat in a phone interview.Earlier this week Finland reached a deal with Greece on collateral, its key condition forjoining to help the debt-burdened country.The agreement between Finland and Greece will allow the southern European nation todeposit cash in a state account that Finland will invest in AAA rated bonds. The interestgenerated will raise the amount to match the required collateral. Finland will return themoney, plus interest, once the bailout loan is repaid, Finance Minister Jutta Urpilainensaid.If Greece is unable to pay back its loans to the temporary stability mechanism, Finlandwould take possession of the capital put up by Greece following a procedure agreed uponin advance.If Greece pays off its debt, it would get back the money that it put up as collateral, as wellas the income derived from it.Details on the timing and exact amount are still to be determined after the extent ofprivate participation in the bailout has been hammered out on the European level,Urpilainen said, likening the timeframe to the 15 to 30 years discussed for the privatesector’s role.”“The collateral will be invested to bring the highest possible return,” she said. “We willhave a central role, as this arrangement will take place under Finnish law. We will consultGreece on deciding which securities the funds will be invested in.”Financial stocks in Europe took a hammer today: the FTSE 350 banks (graph below) isdown 6.7% and 20% in less than 2 weeks. I guess some banks are finding it very difficult tofinance in the interbank market and are increasingly turning towards the ECB, with OISspreads up. 1
  2. 2. the way, one will notice that the short selling ban on financial implemented in severalEuropean countries is ineffective; maybe, just maybe, the main sellers are not the ugly so-called speculators, just investors taking cover. It just exemplifies how far away from realityis the European leaders are and how much dogmatism is leading to blindness.I have unfortunately not had much time to write for the past 2-3 months whilst there is somuch to say about this ongoing tragedy that will have implication well beyond theeconomy and finance. We are living moments of historical (biblical?) proportion that willshape the world balance of power and the future of our children and grand children who, Iam afraid, will have much lower standard of living. The endgame is approaching (we willnot have to wait for an other 3 years) and the poor quality of the European leadership, theabsence of European Statesmen/women does not make me optimistic for the outcome.Finally the meeting between Sarkozy and Merkel was merely intended for domesticpolitical battering and is just adding incredulity. The three measures announced (well tobe discussed with other European countries after the summer) are pitiful: 2
  3. 3. • By 2012 summer, all 17 Eurozone countries to adopt in their constitution a golden rule by which budget should be balanced (thank you Germany did so just after the 2008 crisis). Hold on, isn’t in the Maastricht Treaty that a maximum of 3% budget deficit and 60% debt ceiling were included and that nearly no country abided by (France no the least)? So, if countries do not enforce an international Treaty (which to my knowledge is superior to any single country law, constitution included) why should politicians do so with their own Constitution which anyway can be modified at will when one gets the majority required (and examples are numreous). • Taxing financial transactions from September onwards has no chance to get off the ground if it is not a worldwide agreement of the major financial centers. And there is nothing new as it has been already discussed for years (Tobin tax). • Creating an economic government with a President elected for two years headed by Van Rompuy (this is adding credibility) and a Council of the eurozone with two meetings a year. The looser? Juncker (what about the Eurogroup in all this?)! Sarkozy is too happy to once again slap Juncker.Conclusion:Virtuous countries do not want to pay for profligate ones (who can blame themparticularly since Germany already paid war damages until the mid-nineties, then for itsreunification without the help of anybody, and still found the strength and discipline todramatically improve productivity): so forget the Eurobonds (they will come back infurther discussions, believe me by threatening to collapse of the eurozone; the Club Medwants Germany to pay).The ECB continues eating its hat and buys junk Club Med/PIIGS bonds in the secondarymarket (when in the primary one, FED style?) and is insolvent.The wall of worry is getting bigger by the day and inflation will finally be the solution oflast resort with the middle-class heavily hammered as usual. I hope this time they will nothave short memories…Source:Ekathimerini: 3