Soros On Europe: Iceberg Dead Ahead
Submitted by Tyler Durden on 04/14/2012 15:04 -0400
George Soros has been a busy man the last few days. Appearing at the INET Conferencea number of times and penning detailed articles for the FT (and here at Project Syndicate) describing the terrible situation in which Europe finds itself - and furthermore offering a potential solution. Critically, he opines, the European crisis is complex since it is a vicious circle of competing crises: sovereign debt, balance of payments, banking, competitiveness, and structurally defective non-optimal currency union. The fact is 'we are very far from equilibrium...of the Maastricht criteria' with his very clear insight that the massive gap, or cognitive dissonance, between the 'official authorities' hope and the outside world who see how abnormal the situation is, is troublesome at best. Analogizing the periphery countries as third-world countries that are heavily indebted in a foreign currency (that they cannot print), his initial conclusion ends with the blunt statement that "the euro has really broken down" and the ensuing discussion of just what this means from both an economic and socially devastating perspective: the destruction of the common market and the European Union and how this will end in acrimonious recriminations with worse conflicts between European states than before.
However, he offers some hope and a potential solution to the fact that these nations have implicitly handed their 'seignorage rights' to the ECB, in the potential for a balance between fiscal austerity and deflation (or at minimum new rules that would remove to a greater extent the vicious circle of the fiscal compact as deflationary debt trap). The punchline being the creation of an SPV that 'owns the ECB's seignorage rights - estimated to be worth $2-3 trillion' that could explicitly be used to acquire bonds without violating the Lisbon Treaty. The sad truth of this admittedly smart financial engineering (pretend austerity and optically no money printing when exactly that is occurring) is that the Bundesbank will never agree to it (as implicitly it ends up at the foot of the German taxpayer to a greater or lesser extent) even though, as he concludes, the future of the Euro is a political one and thus "beyond the Bundesbank's competence to decide." Just as we noted back in December and reiterated here as likely given TARGET-2 imbalances (also confirmed by Deutsche Bank), Soros points out that the Bundesbank has "started taking measures to limit the losses that it would sustain in case of abreakup." and this creates a self-fulfilling prophecy that markets are reflecting.
A must-watch harsh reality check on Europe and a man trying to find answers when the authorities remain blind to the endgame...
Jaime Garcia-Lehaz, a deputy minister in Luis de Guindos's economy ministry, said on Friday: "They [the ECB] should step up the purchase of bonds" after the cost of insuring Spain's bonds against default surged to record levels.
Mr Garcia-Legaz added: "If you're demanding ultra-restrictive fiscal policies from Spain and Italy then it makes sense to have monetary policy with stronger bond purchases."
His comments came as ECB officials divided over the best course of action to quell the Spanish economic crisis after new data revealed Spanish bank borrowing from the European Central Bank doubled in March.
While executive board member Benoit Coeure signalled the bank may start buying Spanish bonds, his Dutch colleague Klaas Knot said yesterday that the ECB is "very far" from reactivating a policy that failed to stop a sell-off in Spanish bonds in November.
The clear need for emergency funding triggered renewed turmoil in the financial markets on Friday.