Bank or insurance? Instead of at the EU summit, a decision is to be made again at a special summit because of the german-french dispute
No sign of agreement. Allegedly, berlin and paris had already agreed on a line how to definitely convert the temporary bailout fund EFSF via a lever into an insurance for banks in order to be able to increase the total amount up to 2 trillion euros (… And leveraged to 2 trillion euros). But far from it, at the secret meeting in frankfurt on wednesday, the german chancellor angela merkel and the french president nicolas sarkozy could not reach an agreement. If they wanted to pose as EU heads of government once again in their bilateral talks, they only exacerbated the situation by bargaining for national interests.
How merkel and sarkozy want to save their "euro bailout", as even the financial times deutschland now points out, is open to question. In order not to have to cancel another EU summit, as was the case after the break-up of the dexia bank, the summit is to take place on sunday after all. But in brussels there is only palaver to be heard. There will be no resolutions. That is why merkel has also canceled her government declaration scheduled for today, in which she wanted to declare what was to be printed through from paris and berlin on sunday in brussels.
But because there is no agreement even between the nationalists merkel and sarkozy, which could not be reached even in a telephone conversation on thursday, they agreed to meet again on saturday evening in brussel. The actual EU summit, at which a decision is to be made, is to take place next week. Thus, as expected, after the heiben euro summer, the hectic activities in the fall are back again. That it would come to those was clear, given the inability to face the facts and make real decisions that address the problems. The crisis has only been postponed to the fall and thus only made worse again at a high cost. Because two euro heavyweights, italy and spain, have long been on the brink of the abyss.
Since even EU commission president jose manuel barroso no longer wants to rule out the possibility that alongside greece, ireland and portugal "other countries also benefit from the european rescue package", levers and licenses are being eagerly screwed with which the european financial stability facility (EFSF) is to be bored out of shape. The fact that merkel and sarkozy, after having delayed the greek crisis and the necessary debt cut for almost two years and the urgently needed regulation of the financial markets for even longer, now want to implement the postulated "provide a comprehensive and ambitious response to the crisis that the euro area is currently experiencing", may be doubted. For example, the international monetary fund (IMF) was once right when it warned in the spring that this would sow the seeds of the next crisis "the seeds of the next crisis" which has now been put on the agenda.
Bank or insurance?
The fact that merkel and sarkozy declare that they are in complete "in complete agreement", is in fact an admission that they are in complete disagreement on essential ies. The only thing they agree on is that they want to turn the EFSF into a comprehensive bank bailout fund with a budget of up to 2 trillion euros. But berlin, led by finance minister wolfgang schauble, opposes the idea of giving the EFSF its own banking license, as paris wants. This would have the key advantage that the EFSF could borrow money directly from the european central bank (ECB) at low interest rates. But this meant that the banks lost enormous business and earnings opportunities. And that is not provided in berlin.
Germany, on the other hand, is whittling away at the lever that falsely likes to be called the "partial cover insurance" for which is designated to buy bonds of troubled countries. Bank partial coverage is wrong because even a partial coverage insurance pays the full amount in case of failure (for example, the theft of the car). It is rather a fully comprehensive insurance with an excess. Because any kind of failure should be insured, but a deductible should be built in. Since part of the sum (20-30%) is to be hedged, it is hoped that investors will rather be found for the risk bonds, with which the size of at most 440 billion euros could be significantly increased. However, a good part of the 440 billion has already been allocated to ireland and portugal and for the greek emergency aid 2.0.
Therefore, schauble ames only a total amount of about 1 trillion euros, to which the EFSF could be leveraged. However, this sum will not be enough if italy also suffers a setback. And the danger is, given the chaos government and the economic data currently even higher than a crash of spain. Whereas the overall economic data there are still significantly worse, as a rising record unemployment rate of more than 21 percent and rampant credit defaults make clear.
In addition, the insurance lottery offers other rough problem areas. Why should investors buy the bonds when they are hedged to a maximum of 30%?. So far, the banks obviously cannot even cope with a 50% debt cut in greece without having to rely on taxpayers’ money for recapitalization again. This leads to two conclusions: either you do not buy the bonds because you have to calculate a real default of 70-80% and cannot cope with it. And this, the grunens are right, increases the risk that the german bailouts of 211 billion euros will also have to be paid out.
If investors buy them anyway, even though they cannot cope with a debt cut of 70 to 80%, they are only buying them because they continue to see themselves as "systemic" view. Thus, as the IMF had criticized, they have become even rougher in the crisis, which is why the leverage from the bank side must also become stronger in order to beat them out with taxpayers’ money after all if the worst comes to the worst. Instead of comprehensive insurance with an excess, the all-round carefree package was once again offered in the event of a claim. That is so, because "only the symptoms of the meltdown in the global financial system have been dealt with". The IMF had criticized that one of the "rare opportunities" to tackle the problem of "too big to fail" problem.
Everything is heading for the merkel crash?
In addition, there is another problem: A country that benefits from the jerk insurance becomes more attractive and less attractive at the same time. Because the EFSF reinsurance means that the EU officially rates the country to junk status, without even having a rating agency for it. In addition, the crash countries become less attractive for investors who do not get a hedge or do not want one for political reasons. For example, if only the existing EFSF countries greece, ireland and portugal receive the reinsurance, bonds from italy or spain will become even less attractive and interest rates for them will be allowed to rise further. But if they are taken on board, this is a good opportunity for further rating downgrades, since even the EU officially ames a possible crash. Now to want to ban ratings in such situations, when the child has been in the well for a long time, is more of an embarrassing show of a visibly overburdened EU internal market commissioner michel barnier.
But if only spain was taken under the insurance umbrella, then spain could perhaps be saved from the crash in real terms, but italy’s bonds, which have long had to offer higher interest rates than spanish bonds, will become even less attractive. So interest rates continue to rise and italy is allowed to slip. But italy cannot be taken under this umbrella of up to 1 trillion, because it cannot be credibly secured for a country that is carrying 2 trillion euros in public debt.
You could drive the game further. But it is clear that the leverage disadvantages are rough. Without a debt cut for greece this approach would be completely absurd. Obviously one does not understand in berlin, what one actually proposes in the stucco politics there. You don’t have to be a soothsayer to predict that the insurance lever will only buy more time and we will soon have the problem on the table with new ies, thanks to merkel. This is actually the only constant of berlin’s lurching course in the greek crisis, which has grown enormously expensive to the euro crisis. One must now really suspect that merkel will go down in the history books with this policy with the merkel crash, because it buries the euro and perhaps even the EU.