For the past two and a bit years Europe has surprised and shocked us with tales of greed, sloth and cupidity among the banks, politicians, unions and ordinary folk of countries from Greece, to Ireland and Spain, not to mention Portugal, France and Germany. The unthinkable has happened, countries have gone broke, but the euro has survived. So now the pressure seems to be off, do you think it will end the tales of greed, cupidity and good old-fashioned idiocy?

Nah, Europe still hasn’t lost its capacity to shock and amaze. Greece may have been bailed out (with a final accounting expected tonight), but don’t for a moment forget that Europe remains a basket case, with even solid Germany and Holland showing problems that terrify rational investors.

For example, Bloomberg reported at the weekend that the Italian government paid Morgan Stanley, the US investment bank, $US3.4 billion to unwind interest rates bets from the 1990s that has turned bad! Bloomberg said in January Morgan Stanley reported it had cut its “net exposure” to Italy by $US3.4 billion, it didn’t tell investors that Italian taxpayers paid that entire amount to the bank to exit a bet on interest rates.

“Italy, the second-most indebted nation in the European Union, paid the money to unwind derivative contracts from the 1990s that had backfired, said a person with direct knowledge of the Treasury’s payment. It was cheaper for Italy to cancel the transactions rather than to renew, said the person, who declined to be identified because the terms were private,” Bloomberg reported.

Don’t you think that that is a stunning story. The Australian at the head of Morgan Stanley, James Gorman, must be happy. No wonder the bank passed the US Fed’s stress tests. Morgan Stanley almost went bust in the GFC, but now its stronger, thanks to the “muppets” in the Italian Treasury. Just imagine the outrage if it had been Goldman Sachs and not Morgan Stanley involved in this story.

Then there’s the International Monetary Fund, which showed it hasn’t lost its touch for the bleedin’ obvious. In a report released late last week, the IMF said Greece is  “accident prone” and may require further debt restructuring or additional financing from euro countries if it struggles to implement measures attached to the latest €130 billion, IMF staff said in a report released on Friday.

“Accident prone”? How quaint. According to another report over the week, the head of Greece’s central bank said he informed the New Conservative Government and the Pasok opposition of the real state of the country’s financial position before the 2009 election, and both parties chose not to mention it in the campaign and expressed surprise afterwards. Pasok won the election and then revealed several months later that the previous government had been fiddling the figures all along! The rest is history. Incompetent is far more accurate.

And what about Cyprus, that sunny tax minimising conduit for wealthy Greek and Russian people, as well as being a holiday haven, and a source of tension with Turkey and the rest of Nato? (As well as giving former foreign minister Alexander Downer a reason for relevance). Well, last week saw Cyprus join its part owner in Athens on the edge of collapse and possible bailout.

The country’s finance minister quit last week because he couldn’t get on with the the island’s president, Demetris Christofias. That came after Moody’s cut Cyprus’ credit rating to junk (with a negative outlook, which is sort of like saying, default here we come). Moody’s said there were increased risk the Cypriot government would be shut out of international markets and would have to support the island’s banks, which are all but broke owing to their strong ties to Greece. Moody’s said the recapitalisation of the banks could take up 20% of the island’s GDP, which is money that is not available, from anywhere. The head of the country’s central bank looks like being replaced later this month when his term runs out, a move that may not please the European Central Bank, which remains Cyprus’s only possible saviour, for the time being.

Standard and Poor’s cut the republic’s credit ratings to BB+ from BBB in January saying the downgrade was a reflection of the island’s exposure to Greece. Then last Thursday, Moody’s returned to the headlines by cutting the ratings of the island state’s three main banks — citing the losses they had incurred in the recent restructuring of Greek debt. Cyprus another eurozone bailout waiting to happen. I wonder what happened to the tens of billions of euros moved out of Greece to the island’s banks in 2010 and 2011? I hope it managed to make it to Lichtenstein, Singapore/Switzerland/Nevada or those other safe havens for black money.

Further north, in the stable, cool climates of Norway a property bubble seems to be under way. As Bloomberg reported:

“Norway is moving closer to a housing bubble as the central bank’s strategy of cutting interest rates to weaken the krone spurs credit growth and bloats property values.

“A day after Norway’s financial regulator said the biggest domestic threat to the economy comes from an overheated property market as borrowers bet rates will stay low, Norges Bank governor Oeystein Olsen on March 14 demonstrated he won’t allow further krone gains by cutting the bank’s main interest rate a quarter of a percentage point to 1.5%.”

But Norway is also home to the model for all that talk here about sovereign wealth funds. There are two Norwegian sovereign wealth funds and they control billions of dollars of investments, much of which is in Europe. 2011 wasn’t one to write home about, but the managers had to, reporting total losses of €15 billion (enough to bail out Cyprus). That’s equal to a fall of 2.5% (which was better than the Australian stockmarket in 2011, which fell 7.5%. (The Australian Future Fund made 1.6% over 2011, although the second half of the year saw a fall of 3.1%).

The fund’s stocks portfolio, half of which was invested in Europe, suffered an 8.8% loss, as European shares slumped. But fixed income investments made a 7% as bonds boomed. Due to currency fluctuations and additional contributions by the Norwegian state the value of the fund rose by around $US40 billion to to $US580 billion. Will having those sovereign wealth funds save Norway from a property crash? I doubt it.

For all the problems that the bailouts of Greece, Ireland and Portugal have exposed in Europe, along with the pressures on Spain and Italy, there is one problem that no one really wants to address in Europe, especially Germany, the European Central Bank, or other others from the north: That problem is the huge trade surpluses in Germany (and to a lesser extent, Holland and Ireland), which suck tens of billions of euros from other, less financial strong economies in Europe.

For all the moaning about China and before that, Japan, the one destabilising factor in Europe is Germany’s remorseless export machine. In 2011 it grabbed back the title of world’s biggest export from China with a trade surplus of €157 billion euros (US206 billion), against China’s €138 billion ($US181.1 billion). Holland was next with a surplus of €45 billion ($US59 billion). Ireland had a trade surplus of €43.7 billion. That has helped Ireland steady, but done little to spark a rapid recovery in the still depressed economy because most of the country’s exports are really goods that are imported and reprocessed and exported with low tax rates (12.5% corporate rate), the big driver, not actual demand for those goods.

Those big trade surplus are as destabilising as the problems in Greece et al. France, for example, has a trade deficit of €85 billion, or $US112 billion. If The US and Europe worries about China’s trade surpluses, surely they should be just as concerned about Germany’s.

And that good trade performance belies the fact that Holland is rapidly emerging as the next political headache for Europe (putting to one side the looming Irish vote on the new fiscal pact rules and a €3.1 billion promissory note that matures soon and will see the pact defeated if it’s added to Ireland’s debts, instead of being taken care of by the EU and ECB).

Holland’s budget deficit and national debt are rising as the country slides towards recession. In order to meet its pledge of complying with the 3% deficit next year (in the EU rules), it now needs to save a further €9 billion in the next year. The mild recession now looming will see the deficit rise to 4.5% of gross domestic product next year, two percentage points higher than previously projected .

And without a new round of cuts, Holland would still be above the eurozone deficit limit by 2015 and national debt will have risen from 65.4% of GDP last year to 75.8% in 2015, well above the 60% eurozone threshold. This is a case of the bitter bitten: during the past few weeks or argy bargy over the second Greek bailout, the Dutch government adopted a hardline approach to the deal, wanting Greece to be virtually controlled by its rescuers for years to come. The government and many Dutch people call southern European countries, “the garlic belt” and have called the Greeks, Italians et al “feckless”. Time for some self-administered medicine?

And finally tonight, the cost of the Greek bond swap and default will be set in Europe when the holders of credit default swaps (CDS) attempt to get their insurance money back from those who sold them. Estimates vary from $US2.5 billion to $US3.2 billion as the net cost of the default. That won’t break the bank anywhere bar Greece, Ireland or Portugal, and besides the risk will be spread across several countries and banks.

And, finally, and not in Europe. The tiny Caribbean island of St Kitts and Nevis has just finished a bond swap for its debt of $US1.1 billion (equal to 160% of GDP, worse than Greece is at the moment, before the second bailout). That took a year, achieved 100% success and was completely overshadowed by Greece’s wobbling. It’s not Europe, but its sunny, just like Cyprus, but without being an outrider of poor, broken Greece and therefore Europe. That’s a head start for rational behaviour these days.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey