While awaiting Mr Draghi’s 6th September statement, a reminder: “It is the German banks, stupid!”

In April 2011 I wrote a piece, entitled “It is the German banks stupid” in which I claimed that the primary reason why Europe was allowing a preventable debt crisis to engulf the Periphery had to do with the sorry state of the German banks and with the determination of the German government to do nothing that exposes their precarious condition. I called it the Great Banking Conundrum: how to deal with the Periphery’s public debts without revealing the depth of the black holes in Germany’s (and, less so, France’s) private sector banks. In that piece I opined that the powers that be in Frankfurt and Berlin were busy worrying about Germany’s banks:

“Only they do so in secret, behind closed doors, struggling to find a solution to the Great Banking Conundrum behind the European people’s backs and away from the spotlight of publicity. Their deliberations are now in a new phase, taking their cue from the Greek debt crisis. Lest I be misunderstood, the Greek crisis, however monstrous by Greek standards, is in itself no more than an annoyance for Europe’s surplus countries. A gross sum of €200 to €300 billion could be restructured quite easily or at least dealt with somehow. Its significance lies in the opportunity it offers Germany for revisiting the European banking disaster in its entirety. The Greek debt restructure, with its repercussions on Europe’s banks, is a useful case study; a dress rehearsal; an excuse to begin the process of taking the broader Great Banking Conundrum more seriously.”

Since then much water has flowed under the bridge. The Greek debt was restructured almost a year later (soon to be restructured once more) and, more importantly, banking losses have been transferred en masse to the Northern European taxpayer via: (a) gargantuan ‘bailout’ loan agreements with four Eurozone countries (Greece, Ireland, Portugal and, now, Cyprus plus the far more significant country, Spain) and (b) the ECB’s LTROs that have pumped 1 trillion worth of liquidity into largely insolvent Eurozone area banks.

Tragically, this large-scale transfer of ‘pain’ from the banks to the taxpayers, via the institutions of the Eurozone, has done absolutely nothing to stem the Crisis. Why would it? Without putting in place the missing institutional tools for reversing the domino effect, a mere transfer of pain from one insolvent entity to another offers no respite. So, we now find ourselves at a phase of advanced disintegration of the common currency area. Only the other day, the ECB unveiled the extent of the disintegration: small and medium sized firms in Spain pay interest rates that are, on average, 210 basis points greater than those paid by comparable German firms in order to borrow sums of up to one million euros.

Recalling that the idea of a single currency within a single market was to create circumstances for convergent prices of homogenous goods (and money ought to be the most homogeneous of all goods!), a spread of 210 basis points for companies with the same profitability outlook, in the same economic area, is bordering not just on the scandalous but, indeed, on the utterly unsustainable. As long as markets function properly, the ‘price of money’ (the rate of interest) ought to be equalised across different regions of the same currency area when the borrowers are similar in terms of creditworthiness, profitability, prospects etc. When an immense spread of 210 basis points is observed between comparable private sector agents, courtesy only of their geographical location, we know that our currency union has ceased to function.

There is nothing controversial in these views. Our politicians know that this is, indeed, our situation and have, in the June EU summit, said so, in effect, by agreeing to implement a banking union as a means of reversing the disintegration process. A few weeks later, Mr Draghi also confessed to having no doubt about our predicament, stating categorically that the ECB will act decisively, announcing a major… announcement on 6th September. What should we expect? How far off will Mr Draghi’s announcement fall from what he wants to announce?

There is little doubt that Mr Draghi wants the ECB to play a telling role in overseeing the banking union (by supervising banks throughout the Eurozone and also by acquiring the powers to wind them down if they are judged to be insolvent). We know this because he has said so and has, also, expressed a clear ambition to intervene in the bond markets too, especially these of Italy and Spain, so as to put a lid on the huge spreads that prevent the ECB from increasing the money supply to (or reducing interest rates in) the Periphery. But will he be allowed to do these two things? Or will he be stymied by German opposition?

The 6th of September is nigh. So, we shall see. Nevertheless, we already have signs that Mr Draghi will, indeed, be stymied. On 30th August, 2012, the German finance minister took the rare step of writing an article in the Financial Times entitled “How to protect EU taxpayers against bank failures”. A quick reading may mislead the reader into the conclusion that Mr Schauble is all in favour of centralising bank supervision under the auspices of Mr Draghi’s ECB. Alas, the opposite is the case. Read more carefully, his article is a manifesto for stopping the ECB from playing a decisive role in bank supervision and liquidation. “[W]e cannot expect a European watchdog to supervise directly all of the region’s lenders – 6,000 in the eurozone alone – effectively”, wrote the German finance minister. This is code for: National supervision of banks remains as is. The ECB will look over the national supervisor’s shoulders, without any effective powers to fire directors, impose capital injections or, indeed, wind banks down if it thinks it is necessary to do so. Put differently, when Mr Schauble suggests that the ECB “should focus its direct oversight on those banks that can pose a systemic risk at a European level”, he seems to be saying that Deutsche Bank must be supervised by the ECB but the landesbanks, Bankia, Dexia and all the other smaller banks whose fortunes are intertwined with large banks like Deutsche Bank (including their own, often murky, subsidiaries) must be kept off the ECB’s watch.[i] This is equivalent to suggesting that the ECB becomes a bank supervisor only in name. In short, the German finance minister took to the pages of the Financial Times to preempt Mr Draghi with the following concealed statement: “The ECB will be given a ceremonial role as banking supervisor, possibly with a remit to supervise Spanish, Italian and Greek banks but, when it comes to Germany’s banks, it will be told in no uncertain terms to “keep off”. Germany’s banks are not to be subjected to non-German, genuine, oversight. Period.”

Similarly with the bond purchases that Mr Draghi knows are crucial to return to the ECB some control over interest rates in the Periphery. The German government have been keen to see to it that Mr Draghi does what it takes to buy the Eurozone another year or so (just like he did at the end of last year with the LTRO) but not to fix the system once and for all. Such a permanent fix would create an impetus for a true banking union, of the sort that Frankfurt-based private banks want to keep at bay.

So, when you hear Mr Draghi declare that the ECB will (a) have a limited role in supervising banks and (b) purchase only short term Italian and Spanish bonds, targeting a lowering of the spreads for debt with maturity less than 1 or 2 years), feel no surprise. His brief is dictated to him and reflects a singular objective: to remain on the right side of Germany’s bankers.

Conclusion

The common currency area is broken. In fact, it is no longer a common currency area but, rather, an area in which the same currency is used. To begin fixing this broken system, without adopting radical measures like those we suggest in the Modest Proposal, the ECB must become the equivalent of the FDIC and the Fed, plus it must work towards turning the EFSF-ESM into Europe’s TARP. At the same time, it must unleash an asymmetrical quantitative easing (QE) program that targets the Periphery, thus restoring the circuits of a proper monetary union.

Unfortunately, the ECB will not be allowed to do any of this, I very much fear. Unless I am very badly mistaken, Mr Draghi’s announcement on 6th September  will show that the ECB’s banking supervision role, crucial as it may be, will be undermined by a Germany determined to keep afloat the cosy and unwholesome relationship between Germany’s private banks and German politicians. As for the QE part, the ECB will only be allowed to embark upon such a purchases program in a limited manner; one that buys Europe a little more time during which to continue to stagnate.


[i] In a more recent article, again in the Financial Times, Wolfgang Munchau, comments that Mr Schauble is treating the banking union as if it were a means of enhancing competition in the banking sector (thus focusing only on the large banks) – when, the issue at hand, is to supervise their speculative strategies and the extent to which they are hiding deeply entrenched insolvency. 

78 thoughts on “While awaiting Mr Draghi’s 6th September statement, a reminder: “It is the German banks, stupid!”

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  8. Schäuble is the corrupt remainder of the completely corrupt Kohl government, so why does anybody wonder about what he says?

    • Thomas – About German corruption, check out this video from a German economist and what he thinks the problem is with the Euro. http://www.youtube.com/watch?v=mn0hsY7R0ck&feature=plcp – He seems to think Germans want people to be free from oppressive government and be free to trade with each other and other countries. He also says that France has the exact opposite idea and that the Euro was their idea not Germany’s. Interesting stuff, at least I thought so…

  9. “Waves – Sorry, you need to explain it to me, how is Germany making money of the situation?”

    Srsly now , yet you try argue with economic terms without knowing how germany makes money of Greeks and the whole Eurozone coup,e years now.

    by creating chaos in the south , they secured 0 or negative interest rates while “lending” to the south within 300-700%+ due to the interest rate differential.

    Your making 68bn off Greeks as of now while having give less than half.

    This is pure speculation , on top of that the hypocrisy is through the roof ,

    firtly calling Grreks lazy when theyr second going to be first terms of hourking hours.

    you have the gym of productivity which is just another scam to justify your average of 6 hours of working , since you got rich by not paying war repayments and tealing off souths money through banace of payments and other bs.

    Furthemore you demand buy the south or should i correctly say rip off the south of his resources and everything else.

    all of that through siemens corruption , through black payments to the corrupt politicians south has.

    I could just be blunt and say leaving germany alive after ww2 was a huge mistake.

    Third times the charm maybe ;p

    • St3roids – If you believe Greek government debt has a 20%+ yield for no reason that I would recommend you try to borrow money from a German bank at 3% and invest in Greek government debt. If the German bank thinks this is a bad idea then I would ask them why. Maybe they could explain it better than me.

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  14. A company which is located in a country which might default does also have a higher default risk if the success of that company depends on local demand, hence a higher interest rate for private companies is the most normal thing in the world. Why should I lend my money to a company which is more likely to fail if I get the same interest rate if I lend my money to a company which is less likely to fail, Mr. Varoufakis? Why should anyone do that?

    The ECB controlling all banks in the Eurozone, even the smallest? How should that be possible in practical terms? Do you prefer effective control of banks or not, Mr. Varoufakis? Are you aware of the morale hazard risk if the ECB acts as a Central Bank and as a control authority at the same time? And why are you complaining about the concept of subsidiarity if national governments take responsibility of their banks if they fail to control them properly? It seems to me that those who are in favour of integrating even the smallest banks are simply trying to socialize bad bank debts as fast as possible at the expense of the European tax payer. Have you ever tried to contract an insurance when the damage has already been caused, Mr. Varoufakis?

    Banks all over the world are interconnected, not only within the Euro Zone. Does that mean that there should be a “world banking authority” , including each single and even the smallest banks in the world?

    • I would like to address, if I may, your first paragraph. What about companies that direct the majority of their products or services some 80% of that in many cases to the global market and the EU? Should in these cases be a significant difference in credit interest rates (more like actual access to credit lines in many cases..) or not? Doesn’t this difference in interest rates grant an unfair advantage between companies that compete in the same unified single currency market? Is it not a given that companies that benefit from this strategic advantage will do the sensible thing and try to grab as much market share possible effectively driving out the competition?

    • Tasos – If I can chime in. Should, would, could. What difference does it make? The fact is investors want a higher rate of interest from some people/businesses/countries than others. If that is what they want then that is was they are entitled to, we are told we live in a free world are we not?

      People can choose for themselves the return they expect from a given investment. Are you saying people should not be free to put their money where they want? Or are you saying you are happy to take on the risk of investors who want to put money into Greece (ie if things go south for them you pay)?

      There are 2 choices, one you let people do what they want for the return they want
      or
      you as a taxpayer start backstopping the gambles of reckless investors through your tax money.

      I have no idea why you would want to go with option 2 but if you do, do you give me the right to opt out if I do not agree?

    • @Richard
      The point is that a single currency economic space cannot work with such extreme differences of money access for private businesses that operate and many times compete in the same markets. In the end this would result in a winner take all situation that would be intolerable for the losers. If this situation is allowed to go on, then there really is no point in having a single currency, at least in the mind of the losers of this game. I will give an example: Imagine two companies that compete in the EZ as well as their own domestic markets and they control the exact same market share in each. Assuming all other factors being equal the 210 basis point interest rate difference between them mentioned in the post will undoubtedly give an advantage to the firm that has it. This firm will of course use this advantage to its benefit maybe using extra liquidity to bargain for better prices with its suppliers, be in a better position to rollover its debt, invest in R&D, you name it. The point is you have better money access, you have better options you have a head start in the competition for the market. Remember that we are talking about comparable companies so this advantage could go a long way towards deciding each company’s survival and success.

      Now I will try to demonstrate the failure of a probable popular counterargument: The people from the countries that benefit from low interest rates say: Ok, that may be the case, we can’t do anything about that (do not want to, we are not stupid..let’s just say we can’t meddle with the free market and be done with it) so to even things out here is what you are going to do: Lower your wage costs so you will have an advantage in this area and things are going to even out. This sounds logical but unfortunately it has some undesirable side effects. When this happens people have fewer money to spend, the economy goes into a recession, maybe the company has to face tax hikes because the government is losing money because of the cut wages, domestic economic outlook worsens and guess what happens: Two things: The company that suffers from this 210 basis point deficit loses profits from its shrinking domestic market and due to the worsening domestic economic environment it now borrows money for even higher interest rates so its international chances aren’t looking so good either! So at best we are back to square one, at worst the company finds itself in an even worst position than before.

    • Tasos – You make excellent points, lets assume I agree with you. Lets move it on and imagine that Greece goes back to the Drachma and Germany continues with the Euro.

      How exactly does that help Greece?

      Looking at deposit interest rates before the Euro
      http://www.tradingeconomics.com/germany/deposit-interest-rate-percent-wb-data.html
      http://www.tradingeconomics.com/greece/deposit-interest-rate-percent-wb-data.html

      1985 Greece = 15%, Germany 4.5%
      1990 Greece = 17%, Germany 7%
      1995 Greece = 13%, Germany 4%

      What is the difference? Greece has always paid more for money than Germany, it has nothing to do with the Euro. It has everything to do with how the economy in each country is run.

      In short a spread is normal, it existed before the Euro it exists now hence the Euro cannot be the cause of the spread.

      The health of the economy dictates interest rates, not the other way around. If you blame the Euro for the problems in Greece you are saying low interest rates dictate the health of the economy which is not correct. I mean how can they? Low interest rates do not reduce taxes, low interest rates do not reduce regulations.

      Low interest rates make it easier to start business for sure but why are the rates low to begin with? Because the economy is an environment where all business stand a better chance of success, ie investors stand a better chance of getting their money back plus interest. Interest rates are lower because there is a proven record of people making money lending to businesses. If businesses start to fail interest rates will go up, if businesses succeed interest rates will reduce.

      In other words the success comes first and then the lower interest rate.

      Assume everything is okay and then the government increases income tax by 15%. Businesses are going to start to fail and interest rates are going to increase.

      No one is going to lend at the same terms the day before the change compared to the day after, at the very least they are going to want more interest rates until the effect of the change is known.

      I think I am labouring the point but it is an important one to make.

      A healthy economy dictates the interest rate, a low interest rate does not make an economy healthier. Interest rates are low because the economy is healthy.

      If you try to lower interest rates in an unhealthy economy there is only one outcome, inflation. You are pumping money into a system that wastes the cash to pay for compliance and taxes. Not to mention the fact that low interest rates reduce savings further increasing the pressure for higher interest rates because the banks have less cash to lend.

      Sure central banks are trying to make economies better through lower interest rates but I hope the examples I am giving here show this is impossible, at least in the long term 5 years plus.

      Going back to your point about same businesses competing but with different borrowing costs. Again, why are businesses in Greece having to pay higher rates of interest than businesses in Germany? Because a business in Greece, going on past history, the last 3 years for example, has a higher chance of failing than one in Germany. Why? Personal tax burden relative to income, more regulations, less freedom from government paperwork, higher corporation tax, expensive to export etc etc.

      Lets assume the tax burden is the same in Germany and Greece. Honestly, do you think the German company has better prospects than the Greek company and if so why? I would say even if the borrowing rates were the same Germany has the advantage and the only reason is that the Greek government and Greek unions are more involved in the economy than those in Germany.

      Bad government causes the spread. The spread does not make a government bad. Bad management comes first, then the interest rate. Interest rate is a reflection of management. You do not make good managers by artificially reducing the interest rate.

      I think I agree with what you say but you are blaming the Euro, I am saying it is impossible for the cause to be the Euro, the problem is bad government.

    • @Richard
      I can of course agree that a good and fiscally responsible government is basic for economic growth and that will reflect in reasonable interest rates for that government and for the private sector of the country. No one is saying the opposite in any country of the world. I think though you are comparing apples and oranges when you compare interest rates before and after the euro. For starters a lot of companies in many countries benefited from devalued currencies, inflation was also a factor. Local markets where less open or more protected against foreign competition, it was a completely different situation

      The problem is this current situation where the banking sector is critically wounded in most of the euroznoe and cannot function properly. I cannot remember a situation where so many banks were basically insolvent. This is a fact that cannot change even if you have the most fiscally responsible government in the world. It is a unique situation in Europe because the banks cannot be recapitalized domestically due to the single currency. So we have in fact a fragmented economic space in terms of interest rates but a single currency that prohibits any reasonable action towards the resolution of the crisis and acts as a catalyst for further disintegration

    • Tasos – “For starters a lot of companies in many countries benefited from devalued currencies, inflation was also a factor. ” – I would say only government benefited from devaluation. Savers, pensioners, wages all lost out because they never keep pace with the inflation.

      “Local markets where less open or more protected against foreign competition, it was a completely different situation ” – There has been no border “protection” between Germany and Greece for at least 20years, long before the Euro was introduced.

      “The problem is this current situation where the banking sector is critically wounded in most of the euroznoe and cannot function properly. I cannot remember a situation where so many banks were basically insolvent. ” – This should tell you there is something fundamentally wrong with the way the baking industry is organised. What other industry have you seen where ALL the major players have run into the SAME problems, at the SAME time for the SAME reasons? If we were talking about the car industry, tobacco or computing etc politicians would be branding the industry a cartel and rightly so. The answer is not to refloat a broken/collusive system.

      “It is a unique situation in Europe because the banks cannot be recapitalized domestically due to the single currency.” – This gets back to a fundamental fact. Money (in a fiat system) is basically worthless. It is only a reflection of the value of other things such as labour and property. I put it to you that property is still valued and that the productivity of labour in the EU did not suddenly go off a cliff in 2008. Any answer needs to work from this reality.

      “So we have in fact a fragmented economic space in terms of interest rates but a single currency that prohibits any reasonable action towards the resolution of the crisis and acts as a catalyst for further disintegration” – Going back to my previous point. Property is finite, so is labour (excluding technological advancements). Therefore increasing the amount of money in relation to property and labour does not help, it just creates more Euros per unit of labour, in other words it makes things more expensive, ie inflation. This cannot be the answer. Loans in a market system are only made when the end result creates value, whether it is a better product for the money, same product less cost etc etc. That is the only way to make progress as a planet. To repeat, simply allocating more Euros per unit of labour or per property changes nothing except the price. It does not improve quality of life.

    • @Richard:

      You have complete naive view on economics: the so called financial “markets” are no markets at all and should not be treated like markets but should be regulated. The interest rates they generate are not a measure of the health of an economy but completely irrational. So you cannot state that interest rates are dependent on the health of an economy, also because there is no sound measure at all about what is a sound economy.

      This is the reason, why we have the economic crsises we are now in: economics are completely unable to identify markets at all and therefore they are not able to understand what is happening in social fields they think are markets nor do they understand at all what money is and what relation humans have towards money and how they deal with money.

      The only thing they have is a faulty und scientific unsound model. And this is no wonder since this model is not testet against reality but reality is tested against the model and everything, that does not fit the model is ignored. This is the big contrast to any other sound science.

    • Thomas – I agree with you about economists. About interest rates, if you believe the markets are setting interest rates incorrectly then you are more than free to bet against them. Even with a small sum of money you can create enough leverage to make a killing. If you think interest rates are wrong, put your money where your mouth is. You could be a millionaire if you are right, if your wrong you will loose your shirt. This is the beauty of markets, geniuses like you who think the market is stupid can come in profit and good luck to you.

    • @Richard
      I see your point of view although I think you put too much emphasis on theory over reality. The reality is this catch 22 situation where entire economies are heading towards insolvency because of the state of the banking system and economies diverge due to the great interest rate differences. Banks need to be recapitalized all over Europe for its economy to be given a chance of a restart. I do not know how this is going to happen eventually (use of local currencies or euros) but trust me, it will happen. There is no alternative to that.

    • @ Tasos

      “Banks need to be recapitalized all over Europe for its economy to be given a chance of a restart”

      I disagree. Banks all over Europe should be deconstructed and closed, if they are not able to survive w/o taxpayer’s money. Just the deposits of mains treet people, real economy firms and public sector entitites are to be saved. The burden must be as much as possible on the shareholders and employees.

      This forced consolidation of the banking sector should have been started years ago.

  15. @Crossover This is allready approved, otherwise it would not be here….. Well, between all other comments he must feel stupid now. So, this is the best, to put it in the full light here.

    @Yannis Varoufakis: I admire your energy, not to get tired of all the reading and getting informed about so much what is in fact not Life at all, not Quality Time, but work, my God, what a job!

    I was wondering: how do you know what is going on behind the screens of the banks? Is this intuition or do you have secret sources? Or do you have master-brains to find out what is going on?

    Incredible. But go on, you are one of the few professors with shining eyes and with something human. Somebody who is alive anyhow.

  16. Merkel in front of her CDU dream team today:

    “It doesn’t go without saying that peace should be taken for granted because we had this comodity for the past 67 years”.

  17. Dear Yanni, maybe there comes a point where one can say with a certain amount of certainty that a fix will not be implemented, however many problems the Modest proposal would solve. I would be interested to know under which circumstances you think Europe will be able to fix itself, give an example of a possible political scenario where your proposal has a chance!
    I for one believe your solutions are valid and would work but It is also arguable they don’t have a chance the way the system is. Maybe that’s what needs changing, the system as a whole.

  18. Intriguing…

    Schauble wants only 30-40 banks under the ECB supevision. 1-2 in every EZ country. Those will be the secured bank, that means that the other cannot survive and will be merged.
    Where does this lead?

    • Nice plan.

      While Germany is securing the dominance over Europe, they are getting rid of their dirt too.

    • Dear Waves
      Maybe, there are other reasons why Schaeuble may want 30-40 banks under ECB supervision than “Germany seeking dominance” and “Germany trying to dump its rubbish on others”?!
      It does not cease to astonish me how you (and many others) can only think of the most unfriendly motives behind anything German officials suggest.

      I have no clue if “30-40″ banks will really end up under ECB supervision. But maybe that would not be all bad? I guess that if each Eurozone country had its biggest 2-3 banks under ECB supervision, that clearly would mean that at least for those truly big banks, some other watchdog than the national authority would have a chance (and the obligation) to identify risks and do something about it. What is so extremely bad about that??
      How can this only be an evil German plan? I just don’t get it…

    • Dear Martin,

      Take Deutsche Bank. You cannot supervise it unless you also supervise the small outfits that it has spawned and into which i has hidden its worst assets. By demanding that only the parent is under ECB supervision, you are rendering the ECB toothless.

    • Dear Yanis
      I fully agree with you: If e.g. Deutsche Bank was under direct supervision of the ECB then the ECB should also be able (and obliged) to look into all subsidiaries of the Deutsche Bank, in order to prevent it from hiding bad assets there. I would have thought that a globallly operating bank such as Deutsche Bank would not only be under ECB watch with regards to its Germany-based operations but globally?!
      I am surprised to hear that may not be the case. That would truly be dumb. E.g. “Hypo Real Estate”, a failed German bank, was probably not doing too badly in Germany itself – but had massive problems with its Irish subsidiary where they held all their dodgy / worthless assets that brought the whole bank to its’ knees (and has cost Germany dozens of billions of EUR).

      Is it truly thinkable to implement an ECB supervision that would not stop anything like this from happening again in the future??

    • Martin,

      Germany has proved in this crisis that before and during the crisis it got the most out of other partners (politically and economically), through the common currency and at in the same time is suffocating the others altogether with blaming them for the situation.

      A common currency cannot work through suffocation.

      “We do not have the right to cause a humanitarian crisis in Greece” J.C.Juncker. Because that is the phase Greece is entering now.

      “Greece must stick to the agreement” Schauble at the same time…

      Germany is not showing leadership in the EZ. It is grabbing what it can…

    • Waves – You are correct Germany is benefiting massively from the Euro crisis, it is costing the German government billions of Euros, the reputation of Germany is being completely annihilated by mainstream media, economists, EU politicians & bankers saying it will be responsible for a humanitarian disaster, not to mention the massive drop off in its exports to Greece, Italy, Spain etc etc. You are right, Germany is a massive winner in the current situation and it is in their interests to drag it out as long as possible…..

    • Germany is making money out of this situation. It is also getting something more important, political power in the EZ.

      Exports are a problem for the moment but don’t worry, in a few months ,when the things troika demands from Greece now are imposed on your ass too, you will be able to sell cheap again.

      Germany is not thinking what should they do with the EZ. They are demolishing everything that is left. When nothing is left standing they will take over.

      Defending the German annihilated reputation may prove harder than working in Greece with the new troika regulations.

      You must consider getting busy with something else Richard.

    • Waves – Sorry, you need to explain it to me, how is Germany making money of the situation?

    • waves – you said Germany is making a profit, surely that is the goal of everyone ie to get a reward for your work/ using your property whether it be food, shelter, a tv, car, etc etc etc. Union or no union, you still need to eat.

    • @waves:

      “These are the right policies in a union?”

      Not sure what you expect, but this is a union, not a charity event. BTW, there are permanent demands Germany should show solidarity, with Greece, Italy, Spai, Portugal, Ireland, Cyprus. In the form of huge transfers of money. But solidarity is not a one way street. I’d like to learn what Germany will get, and when, for her transfering the fruits of her people’s work to foreign nations.

    • Yes everybody seeks profit, but in times of crisis and when the other are without the means that are needed to respond to the crisis, due to a crippled common currency that suits Gremany , that is called stealing from the others.

    • waves – “when the other are without the means that are needed to respond to the crisis” – Greece is more than capable of responding, as I have said may times before, Greece has the ability to be a powerhouse in Europe. The problem is the Greek government and the Greek trade unions are stopping it from happening because they know if they do the right thing they will lose a lot of their power. They would rather implode the economy and blame Germany than lose their power/control over the Greek economy.

  19. EU’s capital accumulators have nicely and succesfully secured their deposits via the common currency. Public spending and people are now paying that cost, desperately needing oxygen in the shape of a new cheaper currency. This is not an administrative but rather a clearly political issue, that no central bank could resolve. The best wish for any central bank is for it to be a good tool, but in who’s hands?-that’s the question!

    • german banks borrow money from the ecb for 1% and give it to greece to finance her needs for 5%

    • Dear Peter
      Fantastic! German banks pay only 1% but lend to Greece for 5% – so 4% profit for the evil Germans!
      What you conveniently forget: it is not at all certain that the lending German bank sees it’s money back!
      Are you aware that banks had to write off 75% or so of what they had lent to Greece?

      Greece probably will need another “debt restructuring” – and you see the theoretical profit of 4% for German banks as excessive?
      That must be a joke!

  20. Dear Yanis

    Regarding “It’s the German Banks”: Germany is the biggest economy in the Eurozone and has run a current account surplus for a number of years. So it is no surprise that German banks are in trouble if foreign assets fail.
    However, I would like to point out that there are other countries, too, that are in a similar position (if you consider the size of their economy, they are even worse off). E.g. France. On page 26 of this (also otherwise very interesting document), you can see that German and French banks are very close in their exposure in absolute terms. Given the slightly smaller size of the French economy, the French exposure is HIGHER. There are certain countries where France is more exposed and others, where Germany is most exposed:

    http://www.sachverstaendigenrat-wirtschaft.de/fileadmin/dateiablage/download/publikationen/special_report_2012.pdf

    Regaring your general theory that the Eurozone is disintegrating and a 2.1% difference in interest rates was an indicator for that:
    There is no doubt that the Eurozone and the US are different simply because the US is a nation and the EU is not (at least not yet).

    You wrote regarding small to medium sized companies’ interest rates in Spain and Germany: “a spread of 210 basis points for companies with the same profitability outlook, in the same economic area, is bordering not just on the scandalous but, indeed, on the utterly unsustainable.”

    Countries’ credit ratings influence the level of interest rates also for companies in that country. To use a drastic example, a company in Zimbabwe would have to pay a higher interest rate for a loan than a comparable US company had to – even if the loan is denominated in US Dollars.

    The whole idea of the Eurozone was convergence – and at first, it appeared that it worked. But the crisis that started in 2007 and became very obvious in late 2008 highlighted that in fact, the standard of living converged, but not so much the underlying economic base in the different countries.

    Either, there are subsidies to permanently lift e.g. Greece and Spain on the level of living standard relative to e.g. Germany and the Netherlands that they had enjoyed in, say, 2006 / 2007. But these subsidies are not being handed out.

    Or the other scenario is that e.g. Greece and Spain are currently loosing that part of the living standard increase that they had gained during the real estate / public debt bubble 2002 – 2007 until the living standard is matched by the economic base of the country.

    This painful adjustment process is taking place right now and as it continues, there is a period of very low growth or outright depression in order to adjust to the new realities of the decrease of capital inflow into these countries.

    Therefore, it is probably rational that a Spanish company has to pay 2.1% more in terms of interest than its German counterpart – because it operates in a less favourable economic environment than its German counterpart.

    It has always been like that. In 2000-2007, that gap narrowed – but now the markets have realized their mistake. It was a market failure – not unlike the one that lead to “subprime mortgages” in the US being seen as very sound investmentes with the markets subsequently asking for interest rates close to that for US government bonds. We all know how that ended. E.g. Spain and Greece being able to take on debt for low interest rates was a similar market malfunction.

    Once the Eurozone economies truly converge again, the foundation of which is being laid right now with falling prices and increasing competitiveness in e.g. Spain and Greece, then the interest rate difference should go down again.

    • “Countries’ credit ratings influence the level of interest rates also for companies in that country.” They should not in a currency union. Period. The fact that you are mentioning Zimbabwe in this context proves my point.

    • @yanisv

      Seriously. Currency is just one of many parameters when creditworthiness is evaluated.

    • Hello Richard,
      i do believe we can become sustainable. But the problem for Gr is what is specifically our development model if there is one. Europeans observe some numbers which rank Greece exports in goods specifically to the worst level among members as % of GDP.
      Exports in goods are 20 b imports of goods 47 b
      We have technology, education and resources but we used them productively and effectively to create high added value, especially small and medium sized companies which will possibly restart economic growth by exporting more services and especially goods?
      It would be very interesting If we have had a research which will calculate the added value produced in each country of eu 17 their gross revenues and profit margins.
      Technology, education and resources exist in Greece and their quality is among the very good (resources are plentiful) but our ability to combine them under well defined plans is among the worst .

      (YanisV can’t do such a research!) lol

    • Hello MS – I know the UK and I know a bit about Greece and I can tell you the problems in Greece are obvious. The government makes people’s lives difficult. Hard to set up a business, horrendous social security costs, high corporation taxes are just some of the problems in Greece. I would say the Greek government should just copy the economic framework of the most successful states in the world. There are plenty of examples, Hong Kong, Singapore, UK, Germany, California and if you want, Bermuda, Cayman Islands, (dare I say Skopje?) etc etc. Nothing wrong with copying, its not rocket science what needs to happen, its been done before and is being done. The results speak for themselves. For example, there is no way people in Singapore should be better off than Greeks, even if you just look at location Greece destroys Singapore. I am not sure why politicians/unions in Greece are making it look so difficult. Actually, I think I know why, they have vested interests/ivory towers/fiefdoms galore, they know if they do the right thing they lose it all. It is the unions and the political class that are the source of the pain in Greece, nobody else. They have nothing to lose, their only saviour would be if they were subsidized by Germany forever, this is what they want, this is why they are making such a mess, they want to force Germany into money printing regardless of the cost to the Greek people. If they have to have Greeks starving to blame Germany then that is what they are prepared to do, like I said, they have nothing to lose, subsidies is their only way out.

    • @ Richard

      There is not an attempt to be subsidized by Germany forever (only 4-5 decates lol).
      Seriously, people try to change things, not as fast as other european want, but even creative distraction as a process- didn’t take time?
      Mind that recession over 7% of GDP is a problem and the repeating statements to leave euro do not bolster trust for creative investment initiatives, foreign and local.
      To copy an economic framework from successful states is something which many believe and its rational.

      However, California and Skopje are succesful states?

      PS: This is my last response to your writings. Excuse my impatience but I am getting the impression that you try to confuse me ( Lol )

    • MS – Why does everyone want to stop talking to me :-( Yeah with California I was talking about their software industry, you know, the conditions that exist in CA to make businesses like that thrive. I agree though California has major problems.

  21. Nobody prevents the southerm SMEs to apply for loans from northern banks, maybe they’ll get better conditions there? Just kidding.

    The question is, why the national banks in the south don’t offer comparable conditions to the SME there as the northern banks do. Do you have an answert? And pls. don’t mention ‘Germany’ in it, not even idirectly, because Germany has nothing to do with the credit conditions a, say, Italian bank imposes on an Italian SME.

    As for the ECB to not be able to efficiently oversee 6.000 banks: what exactly is wrong with this statement?

    Aside from that, pls. note that the reluctancy to hand over national powers to a transnational, undemocratic monster like the EU via undemocratic organs like the ECB is NOT a German speciality! The French refuse this much harder. So do other countries. And so far I’ve not seen any official statement from any country that they will happily cede portions of their sovereignty.

    Yanis, again you try to blame solely Germany, when in fact there are many to be blamed. Your bias affects your judgements, a lot.

  22. Yianis – You say “As long as markets function properly, the ‘price of money’ (the rate of interest) ought to be equalised across different regions of the same currency area when the borrowers are similar in terms of creditworthiness, profitability, prospects etc. When an immense spread of 210 basis points is observed between comparable private sector agents, courtesy only of their geographical location, we know that our currency union has ceased to function.”

    You say that the only difference is geographical location. This is completely wrong. Germany has a trade surplus, Italy, Greece, Spain do not. Immediately there is simply a massive difference between the countries which immediately justifies a difference in borrowing costs.

    Other differences come down to government surplus’s, deficits, primary or otherwise, government spending as a percentage of GDP, pension funding the list goes on and on and on.

    In fact, I think most people would agree it would be completely crazy for Greek and German governments to have the same cost of borrowing given the massive number of differences with regards to the structures of their economies and finances.

    With regards to the cost of private sector borrowing. Borrowers in Italy borrow from Italian banks, German borrowers borrow from German banks (in most cases). These same banks probably lend the governments money which immediately ties their fortunes to that of the government hence the difference in private borrowing costs.

    It is basic stuff I am stating here and having read your article I see no reason why you would think this means the “currency union has ceased to function” when all evidence shows everything is working as it always has done ie the investors deciding for themselves how risky certain debt is. Yet you are saying this is a failure. Who are we to judge how risky someone else believes something is? Surely people and investors should be free to believe Greece is more risky than Germany even if they were wrong, you must agree with freedom of choice?

    If you want to take things a step further my argument can be used for individuals who have different borrowing costs within the same country even thought the currency is the same. etc etc etc

    • Richard, with all due respect, you have a talent at missing the point – almost every time. You write: “You say that the only difference is geographical location. This is completely wrong. Germany has a trade surplus, Italy, Greece, Spain do not.” Germany’s surplus ought to be irrelevant to the interest rate that an SME must pay to borrow. Take for instance a firm in Ohio; which is a deficit state. And another firm in NYC or in Washington State (which are surplus states). If they two firms are financially ‘comparable’ (i.e. equally credit worthy, profitable, efficient etc.), they will get loans at approx. the same interest rates – no matter what the surplus/deficit of the state in which they are located might be. This is how a proper currency union works. Not so in the Eurozone. It is an open and shut case: the Eurozone is not a functioning common currency area as long as these spreads (for comparable private firms) persist. Is this so hard to understand?

    • Thanx Yanis for this perfectly good and equally perfectly simple example. This is exactly the reason why the eurozone is broken. Now, the problem is I think that this simple fact, namely that within a united common currency market the price of money towards private companies should depend solely on fundamentals is somehow completely lost especially in countries where they benefit from low interest rates! There is absolutely no point in being in a currency union if your companies are driven out of business by competitors in the single market that are making use of their cheap money access. Plain and simple.

    • “There is absolutely no point in being in a currency union if your companies are driven out of business by competitors in the single market that are making use of their cheap money access. Plain and simple.”

      This perfectly explains the worsening of the CA Balance after the adoption of the euro….still smart asses want to blame it on the lazy greeks…

    • Crossover – “There is absolutely no point in being in a currency union if your companies are driven out of business by competitors in the single market that are making use of their cheap money access. Plain and simple.” This perfectly explains the worsening of the CA Balance after the adoption of the euro” – Yeah your right, for example Greece simply cannot compete with Germany when it comes to attracting tourists to it’s islands…….

    • “the Eurozone is not a functioning common currency area”

      I agree completely.

      And it will never be one, can’t be.

      “as long as these spreads (for comparable private firms) persist”

      Such spreads exist everywhere, even in the US. The interest rates demanded are depending on a lot of elements, and the location of the firm is one of them. Even if they are equally credit worthy, profitable, efficient, there are still differences.

      So you can of course rightfully question the size of the spreads, but not their existence.

    • There is a distinction here. Italy, Spain have trade deficits but not to the extent of Greek deficits in producing goods especially. The extent of deficit differentiates country case by case.
      After years of reforms probably Italy and Spain or Ireland might regain parts of their competitiveness and be able to compete better as those countries have worldwide industries in services – goods and renowned brand names.
      The point -for some Europeans- is whether there are COUNTRIES /SPECIAL CASES which cannot adjust their performance to the obligations perceived from those Europeans as vital.
      So they want specifically and very detailed put some rules which solidly define a proper currency union –according them- and how it should work.
      The reforms, the competitive advantages, the ability of a society to create value, the quality in education the expenditures in R&D will define the kind of a currency union.
      However the political thesis of eu is under consideration if the solution is to expel countries which do not much the criteria altjought try a lot and have potentials. The real danger might have undefined loss in economic –geopolitical power of eu.
      Greece can also do it. We have made a lot.

      PS: Ohio is still 1 of the 10 largest exporting states even with deficit.

    • @Richard

      Greece became more expensive for tourists since the euro adoption.So i dont really understand your point.Tourism alone never saved anyone anyway…

    • Cross – The point I am making is that different countries specialize in different things due to geography, location, climate, resources. No one is expecting Greece to make cars like Germany, like wise nobody is expecting Germany to have a tourist industry like Greece. This is one example of many…

    • Sure.That still doesnt change the fact that Greece became more expensive.This not only affected the tourism industry but the 2ndary sector that existed at the time no matter how big or small it was.On the other hand,using the same currency with Germany (and in combination with Germany’s beggar thy neighbor policy), made German products cheaper.
      So the economy got screwed in 2 ways.Enterpises faced harsh competition not only when it came to exports but in the domestic market aswell.

    • Crossover, hold on, the borders were open long before the Euro came along. About prices increasing, yes, because there was more money in the economy and it was being wasted. Look at government spending for the source of the cash.

      About the prices of German products, on the one hand you say things got pricier but German products got cheaper? For what its worth, in my experience foreign goods in Greece were much cheaper before the Euro, German or otherwise. German exports to Greece went up because of the increased cash in circulation, not because things got cheaper.

    • @ yanis

      This from a speech given yesterday by German ECB executive board member and former State Secretary in Schaeuble’s Ministry of Finance, Joerg Asmussen:

      “Yesterday, the ECB has released data illustrating impressively that ECB interest rate decisions are now reflected asymmetrically at best in the real economy. On loans of up to 1Mio EUR for 1-5 years, small enterprises in Spain pay interest rates of 6,5 pc, the highest since 2008. In Italy, the rate is currently 6,24 pc, while the same loan can be had for 4 pc in Germany – despite identical central bank rates.”

      http://www.ecb.europa.eu/press/key/date/2012/html/sp120904.de.html

    • Im saying Greek products got pricier duh! Doesnt it go without saying?The drachma was much weaker than the euro….when was it cheaper for someone to come for tourism in Greece pre euro or post ?
      Hell no foreign goods were nowhere near cheaper.I couldnt buy a game boy back then….it costed like 60.000 gdr which is 176 euros….I dont even know where you heard that foreign goods were cheaper?!!?

    • Corssover – Im not sure what you are saying. I went on holiday to Greece pre Euro and I was snapping up CDs, trainers and Italian Designer clothes at nearly half the price they were in the UK. Fuel? Forget about it, that was also about a half/third of the price in the UK. Food, taxis, I felt guilty paying so little. How prices seem to someone on Greek wages pre and post Euro I cannot comment. From a Welsh perspective, prices in Greece seem to have almost doubled.

    • Yanis – You raise some interesting points. I checked municipal bond yield spreads for some states and they are pretty close, within 2% of each other.

      However if you look at local government yields, they vary massively inside states and state to state. For example
      http://www.rwbaird.com/bolimages/Media/PDF/Insights/Municipal-Bond-Market-Commentary.pdf
      http://money.usnews.com/funds/mutual-funds/municipal-bond

      Currency unions. Ecuador and the USA, Ecuador issues debt at around 8% despite using the same currency as the USA.

      Given the the Fed/ECB is setting the cost of money you would expect spreads to be close, so why the difference in Greece/Spain/Italy? Debt loads. European countries are for more in debt than the states of the USA http://www.usgovernmentspending.com/state_debt_rank

      The state budgets are also smaller as a percentage of GDP than Europe.

      Why are state borrowing costs so similar? States in America are run much better than in Europe because they have the dollar. They are more fiscally responsible because they cannot print their own currency and have not be able to for decades. They are used to this environment, countries in the Eurozone are not, hence the problems. Such a massive change (new currency) is bound to have teething problems and even defaults.

      I will concede that a central bank that is prepared to pump trillions into an economy is going to be able to keep borrowing costs down but I think the long term cost of this is going to be massive, it is simply making any correction much bigger. Commodities prices are indicating inflation much worse than the government/fed/ecb figures suggest.

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