After a brief weekend break, following a fortnight’s hard work, the eurozone crisis resumed this week, with a new lurch into crisis. Doubtless the wonks are assessing the bond spreads, etc, etc, further down the bus of this issue, but let’s give a brief summary:
- Last week Germany failed to sell out a €12 billion bond issue, selling only two-thirds of them, and seeing yields rise 10%, from 1.8% to 2.1%.
- Fitch downgraded Portugal’s rating to BBB-, junk status, on the day that its workers held a general strike, even though the country has met the austerity targets imposed upon it.
- Italian bonds, held to be in the crisis zone at 6.7% before the accession of Mario Monti, briefly hit 7.7%, before falling back to 7.2%, as the government launched a WW2-style “buy bonds” drive among its populace.
- Belgium’s latest bond auction was oversubscribed, but yields went to 5.6%, up from 4.5%, putting the country in the problematic category, which now includes six of the 12 principle members of the eurozone.
- Ireland’s PM said that the country would be borrowing on the open-market again by 2013, an assertion that was widely mocked, as 10-year yields headed towards 10%.
- France’s bonds headed above 5%, and the country was announced to be “our next target”, by US short investors.
- Outside the eurozone, the UK foreshadowed economic results that will indicate the country is back in recession, and rumours that the Coalition government will make a reverse in their cuts-led economic strategy.
The significance of these individual set-backs was collective — they were occurring in northern and southern Europe, to healthy and unhealthy states alike.
Indeed, it’s a measure of the times that the failure of the German bond auction occasioned more disquiet than the quiet process by which the entire country of Portugal became a junk investment — for it was essentially a judgment on the whole eurozone, with Germany standing as proxy. The week may well go down in history as the moment that world markets gave up on the euro.
Indeed, it may mark the moment of future disaster, for the individual failure of national bond markets has undermined the ability of the eurozone to save itself collectively, via the issuing of ECB bonds.
Had some form of collective response been made earlier, such bonds would have launched with a greater chance of success. Having been left so late, and still with no consent by Germany to a collective approach, any ECB bonds are now afflicted with the universal loss of confidence in Europe as a whole.
Now that route of escape is cut off — but more alarmingly, so too was the immediate recourse for the eurozone, dodged up last month, the expansion of the EFSF, the stability fund, to a €1 trillion special bailout fund.
The actual process of national contribution to this is now in doubt, and the EFSF’s credibility was further undermined when reports suggested that it had bought its own bods to fill out a 3 billion issue for Ireland. The EFSF denied this, but the damage appears to have been done – another measure of how absurdly arbitrary the whole process is.
A second rumour skewing the process was that Italy had made an informal request for €600 billion from the EU over the weekend — an amount that would wipe out the EFSF funds that the EU doesn’t have.
If true, it would settle the argument as to whether Italy is genuinely in crisis or not — some say it has ample scope to refinance its debt over the next two years, others that there is no possibility that it could fill out the €320 billion it requires in 2012.
There is another factor added to this — a developing proxy war between the US and France waged through the ratings agencies Fitch — which is mostly French-owned — and the US Standard & Poor’s. Fitch has recently switched its outlook on the US to “negative”, ahead of reports that S&P is about to do the same to France.
In Europe the process has become perfectly Escheresque. Belgium’s rates blowout is partly due to the bailout of Franco-Belgian bank Dexia, which took a disproportionate toll on the latter annoying pseudo-nation.
Dexia is failing because of its exposure to eurozone national debt, mainly that of Greece. The resultant further squeeze makes it more likely that Greece will not get the EFSF bailout it needs, beyond bare survival. Soak and repeat.
It wasn’t all bad news. For a few hours, the euro rallied on word that a series of “elite bonds” would be issued, and that the IMF would participate in a stabilisation pact. Then Germany announced that it would not support the plan, and that was that.
In the past two weeks the possibility of a eurozone default, collapse and disarray, has gone from formally possible, to actually possible, to a real and imminent danger.
What can we take from this unfolding disaster, an extraordinary collapse in real time? Whatever comes out of it, there will be one growth industry — another tranche of books, like those that came out after the 2008 crash in the US.
When they do emerge, we’ll have a clearer idea as to why this situation was allowed to develop, by people whose stated intention was to hold the eurozone together. In the preceding weeks, a culturalist interpretation has grown up — that the Germans are so wary of the political dangers of inflation that they would do anything to avoid it.
Such a theory is near-Pavlovian and I don’t buy it — since what most mimics the feeling of near-panic and powerlessness that we are told was the precursor of fascism, is the slow collapse we are living with now, the sense that someone is speculating on failure.
At the other extreme is a story that complements this — that what the eurozone is going through is purely a product of the bankers, who are performing the biggest short in history. By this account, at the national and European level, large institutions — the largest of which is Goldman Sachs — are driving the continent to disaster in order to pick up bankrupt assets at a huge markdown.
In this version, the large, surviving financial institutions work hand in glove to destabilise each country, inexorably driving the whole zone to failure. But though that is unquestionably occurring, it cannot really explain whole layers of intransigence, in the German government, in the EU and elsewhere.
Some of it can be attributed to Angela Merkel’s wariness of her own electorate, but for the most part this crisis would appear to be the crowning triumph of neoliberal ideology, and it various predecessors — economic rationalism, monetarism, etc.
Surely the final act in this long show was the imposition of austerity across Europe — including Britain — right at the moment when it needed to expand its capacity to pay?
That would not solve the underlying problems of capitalism — and we could be happy perhaps, that the neoliberals have been so keen to ramrod a crisis that might otherwise lay dormant — but it would not have refused the farce we are watching now.