When my devotions could not pierce thy silent ears, then was my heart broken, as was my verse. My breast was full of fears and disorder. My bent thoughts, like a brittle bow, did fly asunder: Each took his way; some would to pleasures go, some to the wars and thunder Of alarms. From ‘Denial’ by George Herbert
As David Coleman would’ve said, “Thursday is the Big One”. At that eurozone FinMin’s summit, push meets shove in the face of a Germany desperate not to get exposed, an ECB desperate to inflate away debt, a Brussels desperate to make taxpayers the final debt guarantor, and a US down-and-dirty desperate not to let contagion hit its shores.
The striking thing about all these aims – apart from the obvious conflict of interests – is that they are all ultimately unachievable. But from Day One, the EU’s approach to life has been to make a molehill out of a mountain.
Germany is about to get very exposed to a Spain becoming increasingly truculent and rapidly insolvent. (You read it here first). Indeed, Merkel’s rationale for bending a little on the ESM booster is that she is worried about Iberia in general: but being a scientist, one assumes her maths are good enough to know that she’d be peeing at a Tsunami by setting 700 billion euros aside to bail out Spain.
This leads us to the ECB where, whatever his public pronouncements might be, Mario the Bondholder Impaler has an excellent head for figures, and knows that only currency-printing on a massive scale will bail Spain out. It would also rapidly cheapen eurozone goods, and help in the process of stimulation desired by the man in the Italian mess, Mario Monti. Very quickly, however, it would mean exploding raw material costs – and simply deepen the slump. And of course, with every time that Signor Draghi’s finger hovers over the printing button, the Bundesbank, Berlin (and most of Bankfurt these days with the exception of Josef Ackermann) get an attack of the vapours.
Over in Brussels, the Mad Folks like Regler and Rehn have privately sussed that there is little appetite for ESM risk in the markets, and thus stealth taxes of one form or another are the only way. The fact that these taxes would be required to help countries who couldn’t pay the taxes because they need help wouldn’t occur to Klaus and Olli, because both men lost their enfeebled grip on financial reality a long time ago. Nor would they worry too much about the obviously depressive effect of those taxes on demand throughout the EU as a whole. Nor, ultimately, that most Europeans would rather hang these two useless incompetents upside down within easy reach of a pride of lions than pay any more to preserve The Great Dream.
Finally, we look west towards a Washington where euro-pooping is now widespread, indeed almost the anxiety of choice in the Obama White House. For some reason, the markets over there have reacted not to Ben Bernanke’s heavy hints of headwinds to come, but instead to his vague yes/no/reservations mini-hint about further QE. I say “for some reason” but I really mean one reason: here comes one last chance to pump up those share prices and fatten up those cash cows before we all accelerate away towards the hills yelling “F**k the women and children, run for yer friggin’ life”.
But the cool black Dude himself remains paranoid about debt contagion ruining his undeserved chance of a Second Term, and in this matter he is being regularly (and rightly) wound up by his main Fed advisor, Club Treasurer Tim Geithner. Both men wanted Greece amputated, and both men would still like to find a way of doing that. But realism is interposing its rude assertions into their thinking processes. The decision was taken by State and the Fed to ‘bet the farm’ on Germany early last year, and as both France and Sarkozy began to unravel, this looked increasingly like a safe bet.
Now they think Merkel may well be just another dumb eurocrat who misunderstands the markets and does too little too late. The media-leak intelligence at the minute is very much that what Germany will do is agree to the most minimal option available for Firewall construction. The Obama Administration knows that won’t be enough, and its big hitters will become yet more pissed off. So too will Mario Draghi (who does understand markets) and Mario Monti (who knows that his much-hyped Italy will be a basket case alone requiring far more than 700 billion euros). So too will the Bundesbank and Frankfurt Germans, who will see German catastrophe just around the corner from this increased placing of the Hun neck on the block.
So everybody will leave the session pissed off, but the main players will come out to the press corps afterwards and change strategic tack 100%: this time, they will make a mould-breaking mountain out of a their miserably insufficient molehill.
That’s the thing with the molehill/mountain model: you can reverse it depending on the circumstances. It works for annual quoted company results one way, and bank liabilities in the other. It works in politics and banking pretty much all the time. But in terms of real economics and real insolvency, it doesn’t work at all. The markets will be completely unconvinced, and within 48 hours at the most, bond yields will be rising again in Spain.
And that’s it really. “Nothing to see here, move along please. Er…excuse me sir, would you mind kicking that can a little further down the road?”