The Spanish bailout of 100 billion euros is no surprise. In fact, the Spanish government made a lot of preliminary moves to make sure it wasn’t a surprise. The Spanish had already tried a government bailout and imposed their own austerity package which is detested in Spain, but it wasn’t enough to keep the Spanish banks functional. They then confirmed that they would be asking for a bailout by denying they needed one.
Just seven months after winning a landslide victory, Prime Minister Mariano Rajoy was forced to abandon his bid to recapitalize Spanish banks without recourse to external help as a deepening recession forced lenders to recognize spiraling losses. Today’s move means Spain has a firewall in case the Greek election on June 17 unleashes a fresh round of market turmoil.
You’ll note the use of the expression “…forced lenders to recognize spiralling losses”. Lenders have been in denial for a long time about Europe’s limping economies. The bailout is now also being used as a defensive move against any further fallout from the Greek fiasco.
To give some idea of the depth of this issue:
Part of the Greek package was that lenders would have to accept 50% losses on their loans. That was one of the reasons it took so long to come up with a package. It’s also a good yardstick for measuring the over-lending and over-borrowing practices of the past. Greece was in a position of borrowing far more than its small economy could actually repay. Falling revenue meant that the Greek government was digging in to its reserves, and that future income for the government would be far lower than credible to maintain payments. Apply the same numbers to the much bigger Euro economies, and you can see that lenders really are at serious risk of major losses. That includes a lot of banks around the world.
This Bloomberg quote more or less describes the German overview of Europe:
“The Spanish problem was entirely avoidable,” said Thomas Mayer, an economic adviser to Deutsche Bank AG in Frankfurt. “When Bankia got into trouble and they had to inject another 19 billion, the market thought, well, they don’t know what they are doing.”
The question whether the Europeans really are aware of the nature of the unholy mess their borrowing has created for them still hasn’t been answered. If the Germans seem unduly severe in their general distaste for the situation, it’s because they simply don’t believe that the Europeans know how to manage the issues. They see the numbers, not the rhetoric.
They also see Europe’s very undisciplined economies as a risk to themselves in their not-much-wanted role of banker to Europe. They distrust the competence of the other nations and don’t believe in their ability to manage their own affairs. They above all don’t want to be forever paying for the mistakes of the other nations.
The German sense of humor, explained
Germany recently came up with a proposal to finally fix the Euro mess which is pure black humor. The Germans proposed a centralized revenue management system, run by themselves. Since people usually don’t get German humor and keep saying the Germans don’t have a sense of humor, I’ll explain this joke:
1. They made the proposal knowing full well that the French would oppose it on principle, not wanting the Germans to have that sort of power. The new French president is also committed to anti-austerity measures.
2. The other European nations would resent giving up their revenue sovereignty, particularly to Germany, and despite the fact that their own management got them in to these messes.
3. The German revenue system is one of the most effective in the world. Germans work shorter hours and make more money than most people on Earth. So knowing the Europeans would object to the idea of centralized revenue on the German model, they would also be rejecting the likely effects on standards of living of a German-type revenue system.
(a) If Europe accepts the centralized management idea, Germany gets what it wants and can control the series of train wrecks it’s being asked to fund. That would save the Germans a lot of money, both now and in the future.
(b) If Europe rejects the idea, Germany can say, “We told you what we want and what needs to be done about this situation to manage the issues and prevent more problems. If you’re not prepared to accept it, why should we pay for bailouts?
Europe could go to the IMF, but the IMF is short of money as a result of other collapsed economies and one of the major supports and possible sources of future funding for the IMF is, you guessed it, Germany. The same situation applies to the World Bank.
The Germans don’t actually want to put their own resources into managing other people’s blunders. Still less do they want to be seen as a cash cow for Europe as a whole. They also don’t particularly like the idea that they’re seen as the default banker for Europe’s worst debts.
Spain has basically proved the Germans right. Europe in its present condition as a collection of ad hoc borrowers is a lousy risk option by any standards. With proper management, borrowing could be very constructive, but until that sort of management is in place, the risks remain, and those risks are going to be unacceptable to lenders.
France and the UK are also on the spot. They may dislike the German idea, but they’re also well aware that they could be asked to carry the can for the other EU nations, and neither of them can afford to do it. France is pushing for more positive measures and growth options to create revenue and boost financial dynamics, but they’ll need German support to fund these measures. The UK is wincing under its own austerity measures and needs trade. It particularly needs the European finance sector to revive for its own big financial sector to make money.
The Germans do have a lot to gain out of acceptance of their idea. Shoring up the messy debt situation will improve Europe as a whole, and will therefore benefit German trade. Getting rid of the fantastically chaotic national debt issues will make Europe a better place to do business for German industry and services.
It’s the way the Germans have expressed their solution which is hilarious-
“All you have to do is to do the exact opposite of what you want to do. Let us run this mess and manage the revenue for you. We’ll sort it out, and we’ll also prove that we know how to manage your finances better than you do, which is what we’ve been saying all along.”
The further joke is that centralised revenue and debt management very probably would work and work well. The Germans would dismantle the debts systematically and within law, sell some of them, and defuse the regular Improvised External Debt explosions which are crippling the EU economies. The other Europeans are well aware of that, but don’t like the idea of the Germans, of all people, doing it.
When anyone tells you Germans don’t have a sense of humor, don’t believe them. They can prove they do.