Europe’s unholy alliance

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Alexis Tsipras, Angela Merkel, Athens, austerity, bailout, Bank of England, banks, bonds, Britain, Bunds, creditors, crisis, Cyprus, debt, debt crisis, ECB, economy, EFSF, election, EU, EUR, euro, euro zone, Europe, eurozone, GBP, greece, housing, maastricht, NKK, Norway

A deal struck between debt-ridden Greece and its international creditors could safely be called an “unholy alliance”. Cobbled together under pressure and doomed to failure.

Europe has been host to many over the centuries. In 1855, the term Unholy Alliance was coined for Western European alliances with the Ottoman Empire against the interests of the orthodox Catholics of Russia, Greece, and most of the Balkans.

Before World War II, the term was used for the Molotov-Ribbentrop Pact between Nazi Germany and the Soviet Union which partitioned Poland in 1939.

Perhaps not militarily, but economically surely, the deal struck for Athens has caused humiliation to Greece. Even the Greek premier Alexis Tsipras, who appears to judge a snap election this year may help him – or perhaps ensure he doesn’t actually need to implement the pledges he made to Europe and the International Monetary Fund – recalls the brokered deal was made with “a knife to my throat”.

With that kind of language, and deep resentment between Germany’s Angela Merkel and Tsipras, is this the way Europe should be governed? Is this a credible way to win influence and win a debate? Is this really going to help Greece and Europe in the long-run or upset everyone now and later?

Europe is supposed to be a force for good. Many of us who believed in the European goal did so because we felt it would help unite and end hostilities. Although violence has been contained to the streets of Athens, there is no doubt that we have witnessed a war.

So the European Union does feel rather hollow. It is not just about whether we can trust the Greeks this time to deliver, to reform, to pay back their debts. But whether Europe can still work together.

Since the eurozone debt crisis began in 2009, some rather unsettling things have happened, which point to the Greece showdown being the beginning of the end for this European experiment.

Like Germany’s response to depositor protection in Ireland in 2010 when the crisis built up steam, to arguing over a bank levy which penalises a non-eurozone member, the City of London, to enforcing Greek compliance, there has been nothing but delays, prevarications, failed summits, and rule fudges.

When the euro was being talked about in the late 1990s I was working at Dow Jones Newswires. I was asked to write about how European fund managers were gearing up for the single common European currency which would kick off in January 1999, with Greece delayed to join until January 2001.

European fund managers were on balance keen on the currency. To them it meant doing away with 20-odd currencies and just having one to deal with. No more transactional costs or forex risks. It also meant that fund managers were beginning to think of Europe as one portfolio. Gone were the country-specific funds and in came the regional. Easier to manage with all of the then eleven eurozone member states plus Greece soon after. Well, if only all the countries had complied.

We now know that a hollow promise was sold and the Maastricht Treaty of 1992 had failed to draft law around “what if” happens scenarios. It was all about the positives and never about the negatives.

No one much cared to ask what would happen if any member state was not delivering. No one built in contingency plans, so that when the crisis started a decade later, the EU top decision-makers were bereft of making decisions and debated and procrastinated. They applied pointless compliance rules to a situation which had shifted and had no buffers in place to take the blow safely and without mess.

Now investors are starting to feel like they have been undermined by politicians. Having bought into a political pact, they now realise this may have been a mistake. Central banks are much the same.

The euro remains a major currency today, but seems to be in decline. Major central bank reserves of euros have fallen by a third since 2009 to around 20% from around 30%. That is not a vote of confidence in the currency or the policy.

Meanwhile, with the procrastination that has followed since 2009, not only have the cash sizes of bailout of places like Greece become ever more expensive, but the over-arching policy of quantitative easing by the European Central Bank has begun having peculiar consequences both inside and outside the eurozone.

The QE programme risks fuelling house price bubbles as investors seeking higher returns pour cash into real estate. Germany, Norway and the UK with ultra-low interest rates and bond yields are sending investors into real estate, according to a Moody’s Analytics report. Since 2010, average house prices in Norway have risen more than 30 per cent, in Germany by nearly 25 per cent and in the UK by nearly 15 per cent, the research found. Both sterling and the Norwegian crown are seen as safe haven currencies too.

So not only has the eurozone mismanaged itself. It has caused problems for others too.

Cyprus needs to crush a few banks not grapes

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Athens, austerity, bailout, bonds, Bunds, Cyprus, debt crisis, default, downgrade, ECB, EFSF, ESM, EU, euro, Europe, European Union, eurozone, German Federal Elections, Germany, greece, IMF, International Monetary Fund, investors, Ireland, Merkel, recession, restructuring

The events in Cyprus could be smelling like Orange blossom again if a deal to agree a bail-in of savers succeeds in a few hours’ time. But there is a greater chance that an escaped elephant from a Berlin zoo would negotiate a crate of grapes without crushing any of them.

If Cyprus walks up the altar of reform and agrees to tax its savers it will not only be setting a precedent for other eurozone nations perilously in need to boost their finances. It will also be pandering to the enormous pressure that the European Central Bank has put the tiny island under – misguidedly at that.

Tonight Cyprus politicians approved three key bills. But don’t get too euphoric: they are pathway bills to pave the way for securing a broader bailout. A lot of drama surrounds the bullying tactics of the ECB at a time when we learn that actually Cyprus is not at risk of bankruptcy until June – three months away.

Cyprus produces a miniscule EUR20bn contribution to the eurozone economy’s EUR9.4tn GDP and unlike in Greece, the ECB and European national banks actually have just a EUR27bn exposure to the island.

And unlike Greece, Cyprus hardly has any senior bondholders. It may regret that it doesn’t, because now the only haircuts that can be relied on are from savers.

But the point of all this is that the ECB – driven by pressure from an unrelenting Germany which wants to wave the stick ahead of September’s Federal Elections – has made a monumental miscalculation by insisting that Cyprus will lose its liquidity lines as soon as Monday if neither Nicosia’s Parliament passes through a savers tax by then or the other troika members EU and IMF fail to agree a new rescue plan for the debt-stricken island.

Different numbers have been bandied around this week about just how much debt the Cypriot banks are holding. But the New York Times today reported that it is running at EUR30bn – which is more than the entire value of the economy.

Yet the government and savers are not running a deficit. It is the banks who are.

Russia turned away a Cypriot delegation this week who asked for a measly EUR10bn loan to cover their problems. Put into perspective the amount Cyprus actually needs is equivalent to one German Bund and one Bobl or Schatz auction!. Given that Russians are a large part of the savers in Nicosia one can only speculate what it is Moscow knows about Nicosia that made them refuse.

But there is a way to avoid setting a precedent raiding savers or taking Russian cash. It is one that, before the crisis mushroomed might have even worked for Greece. But it is one that would surely work more effectively in Cyprus given the limited eurozone banking exposure to the island.

Do an Iceland. Quite literally, Cyprus ought to quit the eurozone and possibly even the European Union, by way of a temporary suspension of membership.

It has been said that Cyprus would suffer because of its debt pile. But that is a fallacy.

The purpose of exiting the eurozone would be to put Cyprus’s house back in order without pressure from outside. Rather, Cyprus should consider releasing itself from the ECB’s straightjacket and simply melt down the local banks.

Iceland did it rather than accept Russian money. And Iceland didn’t even have the benefit of a European Union membership to expect international assistance. Yet the banks were punished for their misdemeanours and now are back, leaner, fitter, and the Icelandic economy is growing again.

If it worked for Iceland, why not Cyprus?

Membership of the eurozone was based upon hitting certain fiscal criteria. So why is it not the case that when those criteria are breached, the nation gets a temporary suspension? As soon as the nation qualifies, it comes back into the fold – if it still wants to.

The brutal reality….from the fumbling way the banking crisis was dealt with by European leaders in 2008 through to the setting up of a half-baked European Financial Stability Facility through to handling Cyprus…is that the European Union model was built on ideals and fantasy.

It was all about ever-closer integration and solidarity. A bit like Soviet communism if you think about it. But just like the propaganda of the East, so too the EU is built on fiction, double standards and convenient oversights of “what if something goes wrong?”

That is the question. The EU has never really thought about what happens if an external crisis like the US-initiated Credit Crunch come over to Europe.

Even if Cyprus is saved today it will be an empty victory. The real problem will continue to depress the eurozone and line us up for another flashpoint in the crisis. Well, can’t complain: at least it gives journalists and market analysts something to write about for a decade.