Eurozone market wobbles, bank and sovereign jitters – as Diane Keaton sang in Annie Hall, “Seems like old times.” Or at least, seems like 2012. Yesterday a “mild” global sell-off was triggered by fears that financial troubles at Portugal’s Banco Espírito Santo “could spark another sustained bout of eurozone debt angst,” according to the Financial Times.
The concerns subsided today, but as economist Raoul Ruparel asks in his Forbes blog was it “a one off or the start of something bigger?”
Whichever it was, the rumours that started the sell-off – that Banco Espirito Sancto, Portugal’s largest bank, could fail – reminded investors that if the bank were in trouble, it would have to turn to the sovereign, that is the Portuguese state, for help. And the Portuguese state, which has only just left an EU-imposed bail-out, is in no shape to help.
This was a sharp reminder that all the posturing and programmes and “austerity” of the eurozone since the banking crisis started in 2008 still have not healed the banks or broken the deadly link between bank debt and the sovereign.
Markets had convinced themselves that Mario Draghi, head of the European Central Bank (ECB), had ended that danger with his undertaking in July 2012 – as the cost of financing debt was spiralling up beyond the capacity of the eurozone peripheral states — to do “within our mandate…whatever it takes to preserve the euro.”
Now financial analysts are pointing out to the market that Draghi’s undertaking – his commitment to buy unlimited peripheral debt if called upon – is bluff.
In a note published today, analysts at London’s Fathom Consulting say that if Draghi’s plan “were fully credible and permanent then it could be a long-term solution – the ECB would buy unlimited amounts of Periphery debt and any losses would be made good by (essentially) Core sovereigns – in other words, a fiscal transfer.”
Fathom Consulting mentions no names, but that would be a permanent transfer of funds from Germany and other rich northern eurozone countries to the weak periphery of Greece, Italy, Spain, Portugal and maybe still Ireland.
However, in Germany the Bundestag says that is never going to happen, not unless Berlin can take permanent control of the fiscal and monetary policy of the peripheral state, something which the people of the peripheral states would not tolerate.
To go back to the Fathom analysis, that means Draghi’s plan “it is neither fully credible nor permanent.”
“It has bought time, but may now be the starkest example of what the BIS [Bank for International Settlements, the bank for central banks] recently highlighted – ‘a build-up of financial imbalances [that] are in danger of making the global economy permanently unstable.'”
What if a bank, a Portuguese bank or any other eurozone bank, were to fail and call on the ECB to do “whatever it takes?”
According to Fathom’s analysis, “Outstanding peripheral sovereign debt is currently worth around €3.8tn [£3tn]: if the ECB were forced to buy 20 per cent of that and suffered losses of 20 per cent when some sovereigns actually defaulted, then the total hit would amount to €150bn [£119bn].”
“This would effectively wipe out not only the ECB’s own meagre capital of €5bn [£3.9bn] but also the Eurosystem’s €75bn [£59.7bn] of capital and reserves.”
The ECB itself would have to be bailed out. Fathom doesn’t say it, but the only way the ECB could be bailed out is by total surrender of the eurozone to German control.
Then indeed it would seem like old times.