Friday, June 24, 2011

Pointless Europe, redux operating on emotional rather than economic principles....

Pointless Europe, redux operating on emotional rather than economic principles....
By Chan Akya

Barely three years ago on the back of the Russian invasion of Georgia and the feckless response this elicited from the European Union, I wrote an article entitled
Utterly pointless Europe, (Asia Times Online, August 16, 2008) that discussed the lack of strategic space for the EU to maneuver through, and ended the article by suggesting that Europeans could avoid strategic extinction by simply falling under the Russian yoke and allowing the Kremlin to do their thinking and decision-making for them.

It appears three years on that my views were rather generous compared with the more mundane reality that has since unfolded. The economic views that led me to write articles from "
Euro-trash" (Asia Times Online, March 11, 2008) to Strauss-Kahn, the IMF and Europe's decline" (Asia Times Online, May 17, 2011) have only solidified the view of a continent that is operating on emotional rather than economic principles to the point of becoming entirely dysfunctional.

If I had even a fraction of the artistic talents of Salvador Dali, there would be a painting of European institutions dripping like his timepieces (as in the aptly titled Persistence of Memory, 1931 image below),

set on canvas with the background of a cemetery rather than distant cliffs. The idea of the Acropolis, the Eiffel Tower, the Sistine Chapel, Big Ben all dripping into incoherence may appear something out of a sick (or surrealistic) mind but it is actually the abject reality of Europe today.

The allusion of surreal images isn't simply a result of my travel-induced tedium but something more mundane namely a defense mechanism that helps one navigate through the media prose that describes the events across Europe.

Take one example - the German government in the beginning of June is said to have asked one of the world's largest banks for its opinion on what the markets expected. Sure enough, the bank in question produced a "research" report that trotted out the official party line, ie that markets fully expected Greece to be bailed out. In other words, there should be no default because that would scare the markets.

Against that alleged view of the markets we have an abject reality of the cost of insurance on Greek sovereign debt (through credit default swaps - or CDS) essentially exploding as in the picture below from the Bloomberg service. Now, which market would be said to be "expecting" a bailout when its participants all seem to be nervous enough to be buying protection at whatever cost they could find it at?

Is it possible that the bank in question was referring not to the volatile CDS market but to the apparently better-behaved sovereign debt market (ie actual bonds rather than derivative contracts that could be traded separately)? In which case, why don't we look at the behavior of the much heralded "bailout" bond for Greece that was issued in January 2011 - shown in the graph below:

Surely you're joking Dr Feynman? Here is a bond that on opening day plummeted to two-thirds of its value and since then has only traded down to a now-derisory price of 50%, implying that over a five-year period investors would be expected to lose half their original principal.

Now, though, hang on a minute - if the bond did so badly, who exactly bought at par (ie 100% of face value) on the issuance date? Step forward the European Central Bank, that repository of good fiscal sense and amazing fixed income portfolio skills (see
Bank folks can't count, Asia Times Online, June 14, 2011).

We do know now that Germany capitulated entirely to the French proposals for a bailout after insisting a long time in favor of either verifiable austerity or an outright default due in part to the "market research" done by the major bank. Yet the basic facts above would have been obvious even to an obvious simpleton (which most German politicians are not in my opinion) through a simple Google search.

More mysteriously, why did the erroneous views of a bank help to cloud the straightforward Teutonic logic that Germans are stereotyped with (quite fairly in my opinion - and I mean that as a positive comment) - this is a mystery until one realizes that the project wasn't about bailing out Greece but rather about bailing out banks.

Look at bank exposures (excluding the ECB, which as I mentioned in the aforementioned article, is already bankrupt) and one notices that rather than German banks, it is the French banks that have massive exposures. One particular French bank has 30 billion euros (US$42.7 billion) in exposure to Greece all by itself.

No wonder there was no appetite on the part of the French to take any risks on the bailout; somehow co-opting Germany with the notion that German banks had a lot of exposure to French banks therefore would be sucked into any spiral that loomed after Greece defaulted.

The rum thing though is that enough people know this already - so even if Greece was bailed out this time, the circle would merely widen to capture Portugal and others until the EU did blink. An inevitable construct (or should I say destruct), only one that keeps getting bigger with every iteration.

Away from Greece, the bailout and banking matters, things don't look so nice for Europe on the geostrategic front either. There is the basic issue of Libya where the North Atlantic Treaty Organization (NATO) action has now cost over US$1 billion, with nothing but a bunch of dead Libyan civilians to show for it. Once the Americans walked out of the Libyan situation and left matters to their European allies, mission creep and lack of coordination appear to have set in (almost in equal measures). There are now NATO ground forces, albeit only attacking from the air.

The proverbial story of the man running from the bear makes its appearance here - "I don't have to be faster than the bear, just faster than you." A 100 days after airstrikes were launched on their country, Muammar Gaddafi and his forces have to only decide to lie low while NATO's member countries quietly blow through their budgets - which given their parlous financial state means that other dictators ranging from Syria's Bashar al-Assad to Zimbabwe's Robert Mugabe can rest assured that Europe cannot widen its engagement. Cue more deaths and repression as dictators revel at the weakness in the core of Europe.

It is into this muddled old continent that China's Prime Minister Wen Jiabao steps this week. Much is promised - market sources widely (and perhaps wildly) report that Wen will announce further bond purchases by China targeting the weakest European sovereigns; express confidence in the actions against Libya and ... in effect make the point that the EU would do well to become an instrument of Chinese foreign policy.

Does anyone think there would be many European protests if Chinese artists were repressed? Even as the artist Ai Weiwei was released on bail, civil rights lawyer Xu Zhiyong was imprisoned on Thursday. In the past, the release of Ai Weiwei would have been one of those subtle Chinese gestures aimed at a smooth trip for their leaders in barbarian lands; the dual measures show increased confidence in doing just about anything before and during an important leader's trip across Europe.

The not-so-subtle message: the leader is more important than the destination.

I don't need to detail the other aspects of Europe's decline - be it the scandals around political leaders across the region, rampaging unions on strikes everywhere from London to Athens, and the general specter of rot and decay that permeates every aspect of European life. The transition from major economy to derelict tourist destination will soon be complete.

Greece Eu's lehman moment...?

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