Remember the European debt crisis? When everyone was horrified at Greek debt and then started to eye Spain, Ireland, Italy and Portugal with suspicion as well? All the pundits muttered darkly about which banks were most disastrously ‘exposed’ to Greek or Spanish debt.
Charts were made, names named, figures compiled and arrows drawn. It was a crisis on the brink of happening. So close were we all to the edge, that once again, as with the earlier US leg of the crisis, there was no time to ask how or why the banks had got to this insane position. Only that here we were in it and we had better act fast to get out. Only another master class in decisive action could avert disaster and save the banks and us – again.
And so the EU said it would stump up 750 billion Euros of taxpayers money to back stop everybody and everything. While the ECB said it would accept any Euro denominated bond as collateral from anyone, no matter how worthless it was on the open market. Everyone’s bad debts and stupid bond purchases were bought by the tax payers again. And magically it was all over.
Except it isn’t.
Yesterday the rate demanded by bond buyers, to purchase Greek 10 year bonds stood at 11.24%. That is 9% more than the cost of equivalent German debt! It is also nearly half again as much as Greece had to pay to sell the same debt back in June when the rate buyers demanded was 7.8%.
And Greece is not alone. The premiums that buyers charge to buy Spanish and Irish debt over what they charge Germany for its debt are higher now that they were before the EU announced its €750 Billion rescue fund. To give you the raw figures the spread (the extra those countries have to pay over and above what Germany pays) for Spanish debt is 1.73%, for Irish debt it is 3.31% and for Portugal it is 3.31%.
These figures say rather clearly that tensions and disparity between European nations are growing. It says those who were in trouble were not rescued. They are starting back down the same road they were on before. Only now, saddled with more debts, greater social injustice and lower chances of any meaningful growth, than before. Quite a different message from the stock markets which have been on a tear over the last week or so. And it is worth noting that prominent among those whose stock has been doing well on the stock market rally have been the banks.
So we have a situation where Bank shares are doing well at the same time as those whose bad debt they were and still are ‘exposed to’ are doing badly. Being exposed to dodgy sovereign debt was, only a short time ago, a crisis for the banks. Today the same exposure seems to mean nothing. How to put these things together?
The easy thing to say about the rising costs of selling some European nation’s debt, is that ‘the bond market’ still fears sovereign defaults. Hence the rate they demand for those countries is higher. Fair enough. That explains the rising rate at least. But actually, only as far as it goes.
The easy conclusion gives the impression of cautious debt buyers having to be bribed into reluctantly exposing themselves to risk by desperate nations. Almost as if it were a public service. And this it turns out is not quite the truth.
The truth is that the Bond market is about making a profit every bit as much as the stock market is, and it is every bit as uncaring about how it makes that profit.
Figures released yesterday by the BIS (Bank for International Settlements) makes this clear and start to answer our question.
They revealed that in the first quarter of this year, as the European debt crisis was rising into public consciousness, the European banks at the centre of it, were busy buying more debt from the very countries whose debts were making the headlines. Europeans banks, the ones who began to lobby hard to be protected and bailed out, were increased their holdings of the very Greek, Irish, Portuguese and Spanish debt that was imperiling them. In that quarter alone the European banks bought about another 109 billion euros of ‘exposure’ to risky countries bringing their total holdings of those nation’s debt to about 1.7 trillion euros.
The European banks increased their exposure to those four countries plus Italy, to about 54% of their total euro debt holdings. They did this even as the crisis was underway, and don’t forget the bankers were not taken by surprise by the extent of Euro debt. Ireland was already a well know case and those same banks had been deeply involved for years in helping the same debtor nations ‘massage’ their debt figures through the now infamous currency swaps. So they knew the reality and extent of the debts.
Yet the banks chose to buy more high risk dodgy European debt until 50% of their total European debt holdings were from the least stable nations! UK, US and Japanese banks kept their exposure down at about 27% of their holdings.
WHY did the European banks hold so much?
Why was it the French banks had bought so much Greek debt? Why didn’t they buy German debt instead? Why had banks bought so much Irish or Spanish debt instead of British or French? In short, why were our banks were all holding so much debt issued by countries which the bankers themselves were quick to christen the ‘PIIGS‘ as soon as the crisis got going?
And the answer is profit. The banks chose, actively, knowingly to buy riskier debt for the simple and sole reason that it offered them much higher yeilds. The banks did not want too much safe but low interest Germany debt. They wanted lots of high interest Greek debt.
The fact is European banks actively created their own crisis, which has, at their insistance, become our crisis, by buying high risk, high return debt even as the danger signals started to flash red. They did so because at that time ALL European debt was accepted as collateral by the ECB on exactly the same terms. So why buy low yield German debt when you could buy high yield Greek or Spanish debt and still be able to off-load it at the ECB on identical terms?
When things started to look really dodgy, the banks just told everyone what danger they were in and what a catastrophe it would be for us, if they were to fail, and this made sure the ECB lowered its standards on which bonds it would accept as collateral. This was the critical part of the bail out. The ECB said it would accept any old rubbish. Which gave the European banks the green light to buy more high return, dodgy debt. Why shouldn’t they? They had an ECB guarantee that they could off-load the risk and walk away with the profit.
And that it where we still are today. This month the European nations have to sell twice as much debt as they had to sell last month. They will try to do this in the teeth of collapsing growth, growing public anger and a global slow down. The banks and other bond buyers will shake their heads in mock regret and insist on higher interest payments in return for ‘helping’.
The banks were not victims of bad soveriegn debts. They were willing partners, enablers and profteers of the situation. And they still are.
As long as the ECB gives them an out, they will continue to make the crisis bigger and bigger.
Of course you can argue that nations need to sell debt. And therefore the banks are helping. But their ‘help’ is holding us, the tax payers and citizens, to ransom. Their help gives them inordinate and undemocratic power over our sham of political process and over our lives and futures.
The banks have no real interest in solving this impasse. Why should they even want to? This is a new and more powerful arrangement for them. If this could become the new normal then the banks will have used debts as a means to effect a global transfer of not only wealth but more importantly, of power, from us to them.
Paul Krugman looks at this a different way.
Hello CMike,
My point about Ireland is that they have full-on austerioty but without any of the debt reduction it was supposed to dleiver. And this is why the markets have priced Irish debt as they have.
One THIRD of Irish debt is due to bailing our Anglo Irish Bank. WIth Anglo Irish bail out their debt is 18% without it would be 12%.
The Irish have been lied to. They are suffering austerity for nothing except bailing out a useless but politically connected bank. That is why Krugman's charts look the way they do. That plus the markets know fuill well what the banks won't say in public – that Ireland has a vast submerged iceberg of off-balance sheet debt hiding in SIV's
I have no problem with either stimulus or austerity as policies. Both can have their merits, both can achieve certain ends. My argument is that we have had neither.
In the countries which have incurred massive debts like the US and UK very little of that spending has stimulated anything at all. Because the vast bulk of the money was funelled straight into the banks where it has stayed to this day. Zero stimulus effect.
In countries which have embraced austerity like Ireland there has been zero debt reduction because faster than any money is saved by pillaging public spending, more debt is taken on bailing out banks like Anglo.
That is my argument.
What I have heard from BOTH sides of the almost entirely spurious austerity/stimulus debate is worthless self serving cant. Neither side is doing what it claims it is doing. Both sides are in fact saving their banks at the puiblic's expense, just disguising the fact in different failed ways.
Spain does have fewer and lesser debts than Ireland. It is also less in the spotlight of those seeking profit. Spain will get its turn. Ireland has bigger more pressing debts and is therefore a lot closer to the edge.
Where I agree with him is in questioning what good being compliant has done the Irish. They should riot and refuse. That would bring concessions from the EU and ECB.
The Obligee receives the Surety Bond and in most cases receives monetary compensation from the Surety Bond if the obligations are not met.