The leaders of Europe appear to be ready to announce a increase of the European stability and rescue fund in the coming hours or days. While not surprising, it is mildly amusing to watch this unfold in real time as politics and state sovereignty issues rise up.
Here are some quotes from the ECB press conference today.
Let’s start with the European Central Bank President Jean-Claude Trichet talking about his own rescue fund. He sounds like a military general who has been given a jeep, when he asked for a tank.
EURO ZONE STABILITY FUND
“Let me only say that I said publicly on behalf of the Governing Council that we were shipping to the executive branches collectively the message that we thought that this stabilization fund should be improved quantitatively and qualitatively. But I am only repeating what I already said.”
“As regards the auctions … let me only say that we are observing very closely what happens. We consider that what is decisive is the credibility of the executive branch’s policies in all domains, fiscal and policies and structural reforms and macro policies in general.”
ECB BOND BUYING
“On our SMP programme, let me only say that it is an ongoing programme and I have no other comments like that.”
ASKED IF ECB IS BECOMING A BAD BANK
“The insolvency of the ECB question is an absurd question from our standpoint.”
“In view of the ongoing vulnerability to adverse market reactions, countries need to do their utmost to meet their deficit targets and put government debt and GDP ratios firmly on a downward trajectory.
“In this regard, the Governing Council takes note of the recently announced measures in some euro area countries to reduce their very large fiscal imbalances. Where necessary, additional corrective measures, preferably on the expenditure side, need to be swiftly defined and implemented.”
You know things are not going well, when a rescue fund that was never supposed to be needed, is already in need of an increase in capital before it has issued its first bonds. The fund has not actually rescued anyone yet, and it is already in need of its own rescue.
The market is getting harder and harder to find real capital anymore. Case in point, Japan with a 200% debt to GDP ratio, which is the highest in the developed world, is going to print up even more debt to fund the purchase of up to 20% of the stabilization bonds issued by the European rescue fund. So to be clear, we will have new debt issued to purchase the newly created quasi AAA debt, to fund the newly issuing of non AAA Sovereign debt.
The system has reached the stage that a bankrupt sovereign state is issuing debt to buy bonds in a vehicle that is tasked with buying debt from a bankrupt Sovereign state that is no longer able to go to market. Folks this is reaching the level of a Monty Python skit.
This brings up a serious question not seen answered in the public yet.Who is ultimately responsible for the bonds that the rescue fund is going to be selling as AAA investments? Whose AAA balance sheet is guarantying these bonds that will be sold to investors like Japan?
We appear to have the Belgium finance minister commenting on the change in the structure of the mechanism to bail out Europe, while we have the Spanish Finance Minister holding a press conference that resembled a briefing by the old Iraqi Information Minister in the spring of 2003.
“If you are talking about financial assistance, for sure, not. But of course any of the countries of the euro area, we need all the others because we have to improve our economic governance so we have to work together. But if you are talking about a bailout, definitely not,” Salgado told CNBC.
This reminds me a lot of the last days of Bear Stearn’s, when Alan Schwartz was on CNBC talking about how strong the balance sheet was in 2008. The difference is that today it is the Finance Ministers for EU nations who are talking about the strength of their nations banks or balance sheets.
The takeaway I get from reading the following quote is the ECB and the individual sovereign central banks do not communicate at the same level as would be expected in the US. The following comment brings up an interesting topic. If Spain or Ireland or Greece have no clue what the ECB is doing at any given time, how do they expect to show a united front?
“As you know we normally do not know because the European Central Bank, they say how many bonds they are going to help but not the countries of origin but we think we are capable to do by our own means,” she said.
If I was with the ECB, the first thing I would do is to send liaisons to each central bank I am working with, and provide everyone with the daily agreed upon talking points. The absolutely last thing I would want is a bunch of Finance Ministers holding individual press conferences with tidbits about a lack of strategy or planning or communications with the nations I am supposed to be helping out.
Today we have had the Belgium Finance Minister discuss the expected increase in the bailout funds. We have had the Spanish Finance Minister discuss hypothetical funding sources besides the one she has access to. There does not appear to be a professional approach to this rescue. It is less than confidence building to watch these leaders step in front of a camera and make comments like they have today.
The communications of a nation to be bailed out and the rescue team need to be on the same page. There needs to be a sense that the adults are at work, fixing the problems. Instead you only have to look at the way this has been presented, to start wondering if there is a reason some of these people want the system to crash? The very actions they are taking, are undermining their own ability to deliver a rescue any one would believe in.