25/01/2012 - 10:55

Crisis forces Europe to face the music

25/01/2012 - 10:55

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The eurozone’s financial mess will surely force leaders to acknowledge the errors of past practices.

The eurozone’s financial mess will surely force leaders to acknowledge the errors of past practices.

THE eurozone crisis continues to bite, with the Westpac-Melbourne Institute of Consumer Sentiment plunging 8.3 per cent in the past month.

While showing resilience in the face of the latest consumer confidence numbers, the Australian stock market has failed to respond to the two recent interest rate cuts. 
For the first time since January, the euro has slumped below $US1.30. 

Analysts at Australian banks have even been working on contingency plans to ensure funding lines stay open should the eurozone region break up.

Westpac CEO Gail Kelly has echoed the Reserve Bank of Australia’s warning that the European financial crisis is already pushing up bank funding costs.

Mrs Kelly said despite good growth in customer deposits since July, continued global uncertainty was producing a drag on revenue in Westpac’s markets and treasury unit.

“If economic conditions in Europe remain difficult or worsen, this will directly affect the price, and potentially the availability, of credit,” she said.

As the crisis continues grinding on with summit after summit, a key question remains unanswered.

How did this mess happen?

Simply put, no-one has been prepared to face up to telling the truth; that for decades the eurozone’s member countries have been racking up debt, never to be repaid

Also, until it could be hidden no longer, European socialists and their banker colleagues were bending their own rules to suit themselves.

While banks have much to answer for, they simply provided the investment conduit, enabling Mediterranean politicians to finance whatever they desired.

Last month, in his outgoing speech, retiring Reserve Bank deputy governor Ric Battellino said: “In aggregate, budgets in the countries that now form the euro area have been continuously in deficit for the past 40 years. 

“Clearly, there was no fiscal rule that aimed to balance the budget over the economic cycle, as there is in Australia.”

In other words, the European financial crisis is one of its own making.
Mr Battellino said Europe was heading for a: “Very significant weakening next year, squeezed by a vicious circle of government spending cuts, credit tightening and falling confidence.”

The crisis would cause most damage to Australia through its impact upon business and consumer confidence and the weakening of trade, Mr Battellino told a Sydney banking conference.

Despite minimal merchandise exports to Europe of only 4 per cent, he warned that Australian exports would be hit indirectly, via China, if Europe slowed markedly.
However the prospect of a falling Australian dollar would provide pain relief for some business sectors. 

Local depositors were reassured when Mr Battellino outlined the European exposure of local banks at only $87 billion, or less than 3 per cent of total assets.

Of this low level of loan exposure, 80 per cent was to Germany, the Netherlands and France. Despite this, Australian banks are heavily reliant on European markets for funding.

Mr Battellino said it was still possible that support from the IMF and European Central Bank could lead to a benign outcome in Europe.

However, he said it was impossible to rule out more severe scenarios, including countries exiting the euro, or inflation resulting from excess printing of money by the ECB, which would lead to more disruptive outcomes.

With the EU finally confronted with its financial profligacy, doubt remains about whether Europe’s real agenda is to address its problems, or rather impose a shady fiscal union that would ultimately engulf the UK. 

Within hours of UK Prime Minister David Cameron exercising Britain’s right to veto the new EU common treaty, French President Nicolas Sarkozy, and the European Commissioner for Economic and Monetary Affairs Olli Rehn, revealed their desperation by threatening the end of world, as we know it.

Yet despite a flood of pro-Euro media propaganda at home and abroad, Mr Cameron found himself in his strongest-ever electoral position, after standing up to the Europeans.

Australian Liberal pollster Mark Textor reported a 7 per cent swing to Britain’s Conservative Party.

The British PM justified his veto as follows:  “I went to Brussels with one objective, to protect Britain’s national interest. And that is what I did.”

The EU was pushing Mr Cameron to introduce a ‘Robin Hood-style’ Tobin financial transaction tax on British banks.

Understandably he opposed this new tax, without universal application. 

Mr Cameron has blown the whistle on European socialist governments that want Britain to solve their financial problems through a new common treaty, while the existing Maastricht Treaty continues being breached.

Twenty-five of 27 EU-member nations, including Germany, are currently in violation of Maastricht Treaty ‘hard caps’ on debt, deficits, or both, in a situation that’s evolved over years of non-compliance, without as much as one penalty being imposed.

The degree to which the deficit rules of the Maastricht Treaty are prepared to be bent have been reported through a huge deal that Greece arranged with US Investment Bank, Goldman Sachs.

Since 1999, the Maastricht Treaty’s rules threatened to slap hefty fines on euro members that exceeded their budget deficit limit of 3 per cent of gross domestic product with total government debt not to exceed 60 per cent.

The Greeks never stuck to the debt limits, and they only adhered to the 3 per cent deficit ceiling with the help of creative balance sheet accounting. 

On one occasion, huge military outlays were left out of calculations; on another billions in hospital debt were ‘overlooked’. 

After recalculating the figures, statisticians at Eurostat, a Directorate-General of the European Commission based in Luxemberg, consistently came up with the same results.

In fact, the annual Greek deficit had been far greater than the 3 per cent limit. And in 2009, it exploded to more than 12 per cent. 

Ten years ago, several investment banks offered complex financial products with which governments could push part of their liabilities into the future.

In February 2010, it was widely reported that Greece’s debt managers had agreed to a huge finance deal with Goldman Sachs in early 2002.

This deal involved so-called cross-currency swaps, whereby government debt issued in dollars and yen was swapped for euro debt for a certain period – to be exchanged at a later date back into the original currencies.

Currency swaps are long-maturity, over-the-counter derivatives.
In other words, they are bilateral contracts in which parties agree to exchange long-term streams of interest payments in different currencies.

Such transactions are a common ingredient of everyday government refinancing.

But in Greece’s case it was alleged that the US bankers devised a special kind of swap with fictional exchange rates.
Greece then received a far higher sum than the actual euro market value of 10 billion dollars or yen

In this way additional hush-hush credit of up to $1 billion became available.

It was reported that Goldman Sachs then on-sold the swaps to a Greek bank in 2005.

This credit, disguised as a swap, did not show up in Greece’s debt statistics.
Eurostat’s reporting rules do not comprehensively record transactions involving financial derivatives.
According to one German derivatives dealer, the Maastricht rules can be circumvented quite legally through swaps. 

In previous years, Italy used a similar ploy to mask its real debt level with help from another American bank. 

But this should come as no surprise when large investment banks make it their goal to hug governments close. 

While businesses are forced to contend with government that over-regulate and over-tax, this was no simple lobbying exercise.

Reports indicate that several major investment banks created such a deep exchange of people, ideas and money – including offers of lucrative job offers for retiring MPs – that it became impossible to tell the difference between the public interest and the interest of the investment banks.  

The culmination of this project witnessed banking technocrat prime ministers being appointed in both Greece and Italy.

In wrapping up his speech, what was deputy governor Battellino’s solution to the crisis?

Speaking in jest, he said Europeans should move to Australia.

Steve Blizard is an authorised representative of Roxburgh Securities.


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