End of the euro, Wednesday edition: MF Global and a referendum, oh my!

McClatchy is providing some good coverage of the European/EU/eurozone financial crisis. Kevin hall In Global financial turmoil follows call for Greek debt referendum 11/02/2011 gives some informed speculation on how events could unfold, though cautioning:

"How do you want me to make long-term predictions?" quipped Nicolas Veron, a senior economist at the European research center Bruegel, when asked what may unfold over the next 48 hours.

He quotes this view of what Greek PASOK Prime Miniter Georgios Papandreou may have in mind in calling the referendum:

"It's an attempt to force the main opposition party into sharing responsibility for the agreement," said Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington, and a Danish national. "Everybody knows that a referendum is extremely risky. If it's a 'no,' the reality would be that the (bailout) program would end because Europeans would cut them off."

And Hall reports:

The legal mechanism for the exit of Greece from the EU is murky. No member ever has left the EU. Greece's departure would raise investor fears of who's next.

If the Greek government collapses or a new one takes over and refuses to honor the debt agreement, the EU would cut off all bailout funding to Greece, Kirkegaard said. The European Central Bank would stop taking Greek financial assets as collateral and Greece would become a financial-pariah nation, untouchable for lenders everywhere.

That in turn would push what's been a protracted downturn in Greece into a possible depression. EU leaders would spend their energy trying to keep Greece's problems from spreading and bringing down other economies. Banks would have to set aside even more money as protective buffers and a credit freeze probably would spread across Europe, as it did during the U.S. financial crisis in 2008.

The European Central Bank, Kirkegaard said, probably would emulate the U.S. Federal Reserve and aggressively purchase bonds from member nations at rates more favorable than market participants would demand. Rating agencies such as Moody's Investors Service and Standard & Poor's could downgrade the credit ratings of Italy, Spain and France, raising borrowing costs for them all and making it hard for these nations to pull out of a downward economic spiral.

Although, if a Greek pullout from the eurozone could prompt the ECB to become a buyer of last resort for eurozone countries' bonds, wouldn't it make much more sense for the ECB to do that now, before a Greek pullout sets off an unwholesome chain of events?

Greece faces a tough choice, obviously. But going the route Argentina went, defaulting on excessive debt and saving their economy and democracy from the madness of externally imposed, self-destructive austerity policies, certainly looks to be by far the more promising choice.

Sven Böll describes the incredible violation of Greece's democracy and national independence that the European austerity regime represents in a column praising the idea of a Greek referendum, Volksabstimmung über Euro: Bravo, Herr Papandreou! Spiegel Online 01.11.2011:

Sie hatten schon länger keine echte Gelegenheit mehr dazu. Seit anderthalb Jahren steht das einst stolze Land unter fremder Verwaltung, es ist de facto kein souveräner Staat mehr. Wichtigste Aufgabe der Regierung ist es, die Sparprogramme und Strukturreformen durchs Parlament zu bringen und umzusetzen. Diktiert werden sie von der stets strengen Troika aus EU-Kommission, Europäischer Zentralbank (EZB) und Internationalem Währungsfonds (IWF). Sonst gibt es kein neues Geld, und das Land wäre von jetzt auf gleich bankrott.

Nicht mehr Herr über seine Finanzen zu sein, um Geld betteln und dafür fast alles tun zu müssen, das ist für mittellose Staaten genauso würdelos wie für arme Menschen. Es kränkt die Seele, macht wütend und lässt einen verzweifeln. Wenn man weiß, dass die eigene Lage auch noch weitgehend selbstverschuldet ist, macht es das nicht besser, sondern nur noch schlimmer.

[They [the Greek people] haven't had a real opportunity to do that for a long time. Since a year and a half ago, it has no longer been a sovereign state. The most important job of the government is [now] to get a savings program and structural reforms through Parliament and implement them. That duty is dictated by the ever-severe Troika made up of the European Council, the European Central Bank (ECB) and the International Monetary Fund (IMF). Otherwise there will be no new money [for Greece], and the country would be bankrupt starting at that very moment.

To be no longer master of its finances, to beg for money and to have to do practically everything for it, that is just as degrading for a state without resources as it is for poor individuals. It sickens the soul, makes one furious and drives one to despair. And it doesn't make it better if one knows that his own situation is also to a large extent his own fault; rather it makes it much worse.]

President Obama will be focusing on the European debt crisis at the G-20 summit in France on Thursday and Friday. He will not exactly be carrying the banner for Occupy Wall Street. Lesley Clark reports for McClatchy,
G-20 leaders arrive in Cannes aiming to quell global economic turmoil 11/02/2011:

The summit’s host, French President Sarkozy has expressed support for the financial transaction tax [also known as a Tobin tax], as has Rowan Williams, the Archbishop of Canterbury, who in a column in Wednesday's Financial Times called on the UK government to embrace such a tax. The White House response to such a proposal has been muted.

Under Secretary of Treasury for International Affairs Lael Brainard told reporters at the White House Monday that the administration was "very much in sync with Europe on their goal of ensuring both that large financial institutions bear their fair share of the burden, but also that they're discouraged from taking the kind of risky behavior that led to the crisis."

But she said the White House has proposed a "financial crisis responsibility fee" that would be paid by the largest financial institutions, not retail investors.

A Tobin tax would be one helpful measure in discouraging some kinds of speculation and would also reduce some of the pressure for corporations to jazz up every quarter's earnings. But the Obama Administration obviously isn't enthusiastic about it. And that's only one piece of a what realistic financial regulation would be.

This is a report from the 11/01/2011 PBS Newshour on the collapse of MF Global, its relation to European sovereign debt and how 2008-style financial meltdowns are still not only possible but, in the case of MF Global, are still happening. MF Global's Risky Bets on Europe Backfire and Raise Big Questions:



Jared Bernstein explains in Two Lessons from MF Global On the Economy 11/02/2011, MF Global's high-leverage bet on eurozone bonds was based on the assumption that the European leadership would stabilize the situation:

... there’s interesting moral hazard in the MF case. The firm, and its benighted chief, former Gov Corzine, appears to have been betting on a bailout. And it probably wasn’t a crazy bet, except for the timing, which was what sunk the firm. (I know it’s 20-20 hindsight, but betting on the alacrity of the European’s timing in their debt crisis is really a very risky bet.)

The firm surmised that the banks exposed to troubled sovereign debt would get bailed out, and thus leveraged up to buy a lot of that debt at a steep discount. Had the bailout come sooner, MF and their investors would have made a lot of money—at the expense of European taxpayers. A classic case of socializing losses and privatizing gains.

Tags: eu, euro, european union, world economic crisis