Not waiving but drowning.

"Q and A: How will the Spanish bailout work?"

From City AM:

Q: How does the bailout work?

A: The funds can only give money to governments, not banks. That means the Spanish government will take the bonds and pass them on to the banks. They will then pass them to the European Central Bank in return for liquidity, solving their current problems.

In case that's not clear, they add a helpful flowchart:
What's the point of that then? The EFSF/ESM and ECB are all more or less the same thing (they can pretend as much as they like that they aren't). So don't they just give the "liquidity" (whatever that is) straight to the Spanish banks?

Goldman Sachs: a bit like a monopoly supplier of unreliable cars which owns all the car repair workshops...

I commented as follows on a post at HPC about the Greek hair cut/bail out nonsense, which is "all paid into the mouths of the very same bankers who cooked Greece's books to get them into the Eurozone. It is one fraud after another with these folk.":

Yup.

1. I see it thusly - car manufacturers and car repair workshops are, let's assume, owned and operated by two completely separate groups. Car manufacturers want to make the most reliable cars so that people buy them, and workshops like unreliable cars because that's how they make money. As long as ownership of the two branches is completely separate, and there are competing car manufacturers and repair workshops, we get reliable cars and reasonably priced repairs.

2. But if the all car manufacturers consolidated into one corporation and owned all the workshops as well, then they have an interest in making cars which break down all the time, because that way they can build unreliable cars and earn money from repairing them. (The manufacturers do this in practice by wildly overcharging for spare parts, separate issue.)

3. So Goldman Sachs is like the monopoly car manufacturer who owns the repair shops. It has cornered every end of the market
- GS stampeded the EU into this single currency nonsense (earning massive great fees for itself during the set up) which was a pure vanity project;
- GS charged Greece a load of money to cook its books so that it would qualify for entry;
- GS made a shedload more money by then speculating against the Euro-zone;
- GS then charged the EU a load more money for sorting out the bail outs, the EFSF and so on;
- GS even appointed several of its own people (Monti, Draghi, Papademos) to run things (it's even worse in the USA - Tim Geithner springs to mind);
- GS, having made a shedload by selling 'credit default swaps' or 'credit default insurance', is now hoping to add insult to injury by getting Greece and its creditors to agree a voluntary debt reduction (see original article), which, according to their small print, is not a 'credit default event' and hence GS will not have to pay out to investors who paid the big premiums and suffer the big losses.

4. So GS had every interest in the launch of an inherently unstable monopoly currency, in the same way as a monopoly car manufacturer who owns all the repair workshops would have an interest in making unreliable cars. And GS' efforts have paid off handsomely, for them at least.

Here endeth.

Fun Online Polls: Suicide by train and Dave's veto

With a good turnout, the result in last week's Fun Online Poll was as follows:

Are people who commit suicide by throwing themselves in front of a train particularly inconsiderate?

Yes - 89%
No - 11%

So that's that settled, and Jeremy Clarkson vindicated. Thanks to everybody who took part.
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And lo, to The Big Topic of the weekend, Dave breaking with tradition of all previous British Prime Ministers* and exercising his/our veto. As Allister Heath concludes in today's City AM:

One argument that has been making the rounds is that the City is only attractive to global banks because of the UK’s membership of the EU. But then why does non-EU Switzerland have such a large financial and business sector, and why does everybody agree that non-EU Singapore, Dubai, New York and Hong Kong are London’s biggest rivals?

So far the prime minister has emerged as an accidental Eurosceptic; his dramatic shift in UK policy came about almost by chance and partly as a result of incompetent civil servants. But that doesn’t matter. History only remembers great decisions – it never asks why they were taken.

Correct. It is better to be right for the wrong reasons as it is to be wrong for the right reasons. What this whole Euro-bail out treaty is really all about is bailing out French and German banks (as The Guardian pointed out), and what seems to have been the deciding factor for Dave was the fact that Merkozy intended to part-finance this by clobbering UK banks with a Financial Transaction Tax.

In other words, the proposed EU Treaty changes have nothing to do with 'European solidarity' and will not solve the problems in the Euro-zone, this was just our Dave and Merkozy going in to battle on behalf of their respective banks, but hey.

Nonetheless, I am pleasantly surprised by all this, and I had I been in Dave's position, I would have done exactly the same. But how about you? Vote here or use the widget in the side bar.

* I'm probably wrong on this point, but given the ensuing hoo-ha, it certainly feels like it.

Didn't Robert Maxwell get into trouble for doing something like this?

From The Telegraph:

Europe's €1 trillion (£854bn) rescue fund has been forced to buy its own debt as outside investors become increasingly concerned about the worsening eurozone sovereign debt crisis.

The European Financial Stability Facility (EFSF) last week announced it had successfully sold a €3bn 10-year bond in support of Ireland. However, The Sunday Telegraph can reveal that target was only met after the EFSF resorted to buying up several hundred million euros worth of the bonds.

Sources said the EFSF had spent more than € 100m buying up its own bonds to help it achieve its funding target after the banks leading the deal were only able to find about €2.7bn of outside demand for the debt.

How people can still refer to the EFSF as a €1 trillion fund when it is quite clear that the 'fund' has no money of its own and struggles to raise €2.7 billion is a mystery to me.

Alistair Darling lets cat out of bag...

Spotted by Denis Cooper in Hansard, 2 November 2011, column 919:

Mr Alistair Darling (Edinburgh South West) (Lab): When the Prime Minister goes to the G20 meeting over the next couple of days, will he try to persuade his colleagues of the urgency of coming up with some detail on the eurozone settlement reached last week? It is not at all clear how on earth Greece will get out of its difficulties, even if the referendum passes. European banks will need shoring up well before next summer, and as for the new rescue fund, which may be needed sooner than we think, it does not actually exist.

Well, duh!

From City AM:

THE FIRST bond issue by Europe’s bailout fund since it was given new powers was postponed yesterday on fears that there is not enough investor appetite for its debt.

Initially the fund, the European Financial Stability Facility (EFSF), had planned to raise €5bn (£4.3bn), before cutting the size of the issue to €3bn earlier this week and then postponing it entirely yesterday.

A banker close to the deal told City A.M. that the EFSF feared there was too little interest from investors, despite a spokesman blaming "market conditions"...

This will hardly be a surprise to anybody who's bothered to look at the numbers. That much vaunted €440 billion (or €1 trillion or whatever) is still a long way off, eh?

Γιώργος Παπανδρέου

€440 billion bail out fund actually has less than €3.5 billion

Compiled by Denis Cooper, lengthy but worth a read:
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The EFSF "bail-out fund" does not actually have anything like the €440 billion which the media keep describing as its "firepower", its "reserves" or its "funds" as Robert Peston pretends here.

The EFSF operates by borrowing money and lending it on. Its subscribed share capital was minimal - less than €29 million, and I do mean million not billion, as can be checked on page 4 of the Articles of Incorporation.

So far it has borrowed a total of €13 billion through three bond issues (you may have to go click 'I agree' to get to that screen) and it has disbursed a total of €9.5 billion to Portugal and Ireland, on which basis it will presently have less than €3.5 billion to hand.

It's not an EU body; in fact it's a Special Purpose Vehicle, a private company, as explained in here

A1 - What is the EFSF?

The European Financial Stability Facility (EFSF) is a company which was agreed by the countries that share the euro on May 9th 2010 and incorporated in Luxembourg under Luxembourgish law on June 7th 2010. The EFSF’s objective is to preserve financial stability of Europe’s monetary union by providing temporary financial assistance to euro area Member States if needed.

On June 24, the Head of Government and State agreed to increase EFSF’s scope of activity and increase its guarantee commitments from €440 billion to €780 billion which corresponds to a lending capacity of €440 billion and on July 21, the Heads of Government and State agreed to further increase EFSF’s scope of activity.

Describing the EFSF as SPV1, one of the two options being considered is to set up a second SPV, call it SPV2, as explained in this official factsheet.

Under this model, a special purpose vehicle (SPV) would be created centrally or in the beneficiary member state, combining public and private capital and funding for extending loans for bank recapitalisation (via a Member State) and/or for buying bonds in the primary and secondary market.

The SPV structure would be set up so as to attract a broad class of international public and private investors with different risk/return appetites. The EFSF would provide the equity tranche of the vehicle and hence absorb the first proportion of losses incurred by the vehicle.

So SPV2 would also operate by borrowing money with SPV1 in effect indemnifying those "international public and private investors" against losses if SPV2 loses money on its business of "extending loans for bank recapitalisation ... and/or for buying bonds in the primary and secondary market", but with SPV1 only indemnifying the SPV2 investors for consequential losses on their investments up to maybe 20%.

As investors are already becoming wary of the bonds issued by SPV1, when it has only borrowed €13 billion so far - which have lost between 3% and 5% in value as at a couple weeks ago - how likely is that they'll believe that if they lent SPV2 say €1 trillion to keep Italy, Spain etc afloat, and if/when that bail-out attempt failed SPV2 suffered losses of say €200 billion, nevertheless SPV1 could then borrow €200 billion from investors to make sure that the SPV2 investors were paid on time and in full?

And given the 50% losses on Greek bonds, how likely is it that under those circumstances the losses incurred by SPV2 would exceed the 20% guaranteed by SPV1, even if it could borrow enough to meet that guarantee? On the whole I think I'll keep my money in the building society, rather than investing any of it in either SPV1 or SPV2.

Bloody Hell, that was quick...

From The Telegraph:

"Slovakia's lawmakers have rejected a revamp of the eurozone's European Financial Stability Facility (EFSF) rescue fund* in a crunch vote..."

Splendid news, so what happens next..?

"... that also toppled the country's centre-right government which had staked its future on the motion."

Aha, so that's how it works. Fail to nod through what the EU wants, and your government falls. See also: try to push through a tax on mineral extraction rights (for the benefit of the whole economy) and you'll lose your job as Prime Minister; your successor will then water the tax down to very little indeed.

* If I understand these matters correctly, what the Slovak Parliament actually did was to refuse to ratify a change to the EU Treaty (aka Constitution). As Denis Cooper explained it to me, to cut a long story, the EFSF has no legal base in the EU treaties anyway, and its proposed permanent successor the ESM cannot be set up until the EU Treaty is amended (which requires UK consent). Our MPs (or for that matter, Slovak MPs) could stop the ESM coming into force by blocking the forthcoming Bill to approve the amendment (as proposed by Decision 2011/199/EU). With that EU treaty change killed off, it couldn't be used for any other purposes, including agreeing to a Tobin tax in the eurozone (or imposing it on UK banks, for that matter).
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UPDATE: ignore that last paragraph, the Slovaks were indeed voting on a different amendment to the whole EFSF mechanism, and it's only Euro-zone countries which get to vote on this. That doesn't affect the fact that the whole ESM/EFSF is quite illegal under the EU treaty, and all EU Member States (including UK and other non-Euro- zone countries) have to ratify this.

"Investors Losing Money on EFSF Bailout Bonds"

Denis Cooper spotted the headline at Bloomberg, where the article been hastily replaced with something completely different (but the url gives us a clue as to the original content).

He finally tracked down the article in the San Francisco Chronicle:

Investors are losing money on bonds sold by Europe's bailout fund as optimism ebbs about policy makers' ability to contain the economic crisis.

The 440 billion-euro ($588 billion) European Financial Stability Facility has sold 13 billion euros of bonds and all are under performing relative to alternative investments such as debt of Germany and France.

Anyone who sold 1 million euros of German five-year bonds to buy the EFSF 2.75 percent, 5 billion- euro bond issue repayable in July 2016, lost 50,000 euros, data compiled by Bloomberg show. Switching into the EFSF bonds due in December 2016 would have cost a buyer more than 34,000 euros.

"That's telling you that global investors are losing confidence in the whole EFSF apparatus," said Michael Riddell, a London-based fund manager at M&G Investments, which oversees about $323 billion of assets...

Well worth a read.

"A burning building... with an exit"

Denis Cooper emailed me his letter to The Telegraph with permission to reproduce. To cut a long story, the EFSF has no legal base in the EU treaties anyway, and its proposed permanent successor the ESM cannot be set up until the EU Treaty is amended (which requires UK consent).

Our MPs could stop the ESM coming into force by blocking the forthcoming Bill to approve the amendment (as proposed by Decision 2011/199/EU). With that EU treaty change killed off, it couldn't be used for any other purposes, including agreeing to a Tobin tax in the eurozone (or imposing it on UK banks, for that matter).

Here's his letter in full:

Sir

If European Commission president Jose Manuel Barroso wished to introduce a financial transactions tax just in the eurozone (editorial, today), then he could probably do that without needing any further EU treaty change beyond that already [provisionally] agreed [but not yet ratified] on March 25th.

Such a tax could easily be represented as one component of a "stability mechanism" to "safeguard the stability of the euro area", and would therefore fall within the scope of the new paragraph which would be inserted into the EU treaties through European Council Decision 2011/199/EU "amending Article 136 of the Treaty on the Functioning of the European Union with regard to a stability mechanism for Member States whose currency is the euro".

Therefore under that EU treaty amendment the eurozone governments could agree among themselves to impose the tax just within the eurozone, and as the UK would not be a party to that intra-eurozone treaty or agreement it would have no say over its contents and would have no veto to exercise.

I wonder whether the government will now reconsider the wisdom of so readily assenting to European Council Decision 2011/199/EU back in March, and decide that it will not proceed with the Act of Parliament which is necessary before it can be finally ratified by the UK.

Yours etc

NB. European Council Decision 2011/199/EU is here. It would insert this paragraph into the EU treaties: "The Member States whose currency is the euro may establish a stability mechanism [the ESM] to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality." which could easily be interpreted as giving the eurozone state governments the right to agree to a financial transactions tax just within the eurozone.

The European Stability Mechanism

Denis Cooper has summarised something rather complicated. It's still rather long but worth a read, the sting is in the tail:

On March 25th EU leaders agreed on a radical amendment to the EU treaties through European Council Decision 2011/199/EU. Over the past five months the UK media have hardly even mentioned that this treaty change has already been agreed, let alone discussed its potential implications. The nature of the amendment is that of a licence which the 27 EU member states as a whole would grant to a class of EU member states, the (now) 17 EU member states in the eurozone.

The fact that it is considered necessary to change the EU treaties so that henceforth the "The Member States whose currency is the euro may establish a stability mechanism ..." confirms that the stability mechanism they have already established, the European Financial Stability Facility or EFSF lacks any legal base in the present EU treaties.

And bearing in mind that Christine Lagarde, then French Finance Minister and now head of the IMF, described the actions of EU political leaders on May 9th 2010 as "major transgressions" of the present EU treaties, which are "very straightforward - no bailing out", clearly a treaty change to legitimise similar actions in the future must be seen as a major treaty change which should be the subject of significant public debate across the EU, including in the UK. The eurozone states are already proceeding to make use of their new licence, even before it has come into force, through a Treaty establishing the European Stability Mechanism which they signed on July 11th.

While few people in the UK have noticed this development it has attracted the critical attention of the economist and commentator Dr Oliver Marc Hartwich, a German and a former Londoner now resident in Australia. In a Business Spectator article entitled A poisoned chalice of EU power he writes scathingly:

“The ongoing assault on the basic rules of liberal democracy has been the defining feature of the euro crisis. The treaty to establish the new European Stability Mechanism is the best example of this fundamentally undemocratic approach … it may be European but legally it stands outside the EU. This means that the EU can formally keep its commitment to the Lisbon Treaty’s ‘no bail-out clause’ though the ESM will provide just that …

"If the ESM has thus turned parliaments into mere cash machines, will it at least be transparent and accountable? Provisions about legal privileges granted to the ESM suggest otherwise … European governments do not have the slightest interest in a thorough debate about the introduction of the ESM. They cannot risk the public understanding what this ESM treaty really is: an enabling act that undermines budget rights of parliaments; a coup d’état of the continent’s political leadership against their peoples; and the most costly piece of legislation ever put before European lawmakers. It would be crazy to explain to ordinary Europeans what their political leaders have conspired to introduce. And so they don’t."

From a British point of view, it is crucial to understand that because intra-eurozone treaties such as this would be allowed by the EU treaties as amended by Decision 2011/199/EU, but would legally stand outside the EU, it should not be assumed that integrationist measures such as "eurobonds" or a "fiscal union" or a "transfer union" would require any further changes to the EU treaties, provided that such measures were confined to the eurozone and ostensibly at least would not apply to the rest of the EU.

Therefore if anybody is fondly hoping that the need for further EU treaty changes would give the UK government a splendid opportunity to extract concessions and repatriate powers in exchange for its agreement, they would be sorely disappointed. Just as the UK is not a party to this first intra-eurozone treaty so it would not be a party to subsequent intra-eurozone treaties – unless and until the UK joined the euro - and therefore the UK government would have no veto to exercise over changes to those intra-eurozone treaties, and so no leverage for extracting concessions from the EU, even if it was disposed to do so.

All this depends on the eurozone states being granted their licence by the final ratification of the EU treaty amendment embodied in European Council Decision 2011/199/EU, and in the case of the UK that will require parliamentary approval through an Act. Is it too much to ask that our MPs will stop and think hard about the long term implications of giving their approval of that Decision, rather than just nodding it through?