Now that the ratings agencies have come around to notice that eurozone nations’ debt isn’t worth the paper on which it’s printed, the Brusselian Empire has responded by . . . threatening the agencies (Telegraph‘ UK):
The EU authorities are attempting to muzzle free opinion, first by threatening Fitch, Moody’s, and S&P with vague retribution, and then by drafting restrictive laws to prevent them from publishing unwelcome messages.
It is financial repression, pure and simple. The same will be done to the press in due course. Then to you, dear reader.
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But let us be clear. The EU itself brought this about by declaring war on the very investors needed to finance the vast borrowing needs of the European project. By baying for the blood of bankers and “speculators” (ie pension funds and the like who bought Greek, Portuguese, and Irish debt in good faith), Chancellor Merkel has set off capital flight and raised the spectre of defaults. Her specific demands for “burden-sharing” by Greece’s private creditors (and therefore Portugal and Ireland next) have changed the landscape. The agencies have no choice at this stage. Their job is signal default risk.
The ECB has warned tirelessly that attempts to punish investors in this fashion would back-fire horribly, set off a fresh contagion, and potentially spiral out of control. This is where we are today as Club Med bond yields go haywire again. Governments need to love and caress bond-holders, not spit at them.
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What should have been done is obvious. The EU’s bail-out fund should have been given powers mop up the bonds of countries in distress on the open market at a hefty discount (as the ECB suggested). Investors would have suffered condign losses, and the EU could have given Greece debt relief by retiring bonds with no net loss to European taxpayers.
This elegant solution was blocked by Germany because it was seen as a slippery slope towards a Transfer Union, and might have violated the Grundgesetz. (In a sense the Germans are right, but you shouldn’t join a currency union in the first place if don’t realize that it implies fiscal union.)
As good as this piece is, the author (Ambrose Evans-Pritchard) makes one critical mistake: the idea that the European Central Bankcan simply retire sovereign debt is more dangerous than “elegant”. It would be a de facto default, with all the banks if Europe forced to pay for it.
In reality, the ECB only has one choice: devalue the euro for the sake of the south. Default can’t be localized, as it would lead to several French banks screaming for a taxpayer bailout. Since it’s France, they’ll get it, meaning the only difference between Paris and Athens is about 12-24 months. This is the nature of multinational currencies: in the end, they’re only as strong as their weakest member nation.
The eurozone will learn that the hard way. In the meantime, they will make things worse by going after the ratings agencies. The market does not take kindly to governments restricting information in order to hide bad news (it slowed down foreign investment in China dramatically). Expect investors to steer clear of Europe in favor of North America – especially if a debt-ceiling-spending-cut deal is reached.
Bismark’s wisdom still reigns.
Cross-posted to Bearing Drift