Berlin wants to break South’s politico-economic standing

José Manuel Barroso, President of the EC, and the College of the EC went to Moscow to participate in an Executive to Executive (E2E) meeting with Dmitry Medvedev, Russian Prime Minister, and several Members of the Russian Government. Three agreements were signed on this occasion. (EC Audiovisual Services).

Amidst the Cyprus banking crisis there was no room in the first page of mainstream media, to analyse and comment on the decision of the Spanish government to impose a haircut (tax), albeit small, on the country’s bank deposits to the tune of €3 to every thousand. In the face of it, the Madrid exchequer is looking to collect €2 billion to compensate some three hundred thousand small Spanish investors. Those people were robbed by their own banks, being guided to invest their life savings in worthless toxic assets, like preferred stock.

This problem is not at all new and at times becomes a prime issue by the country’s media. Why now the Spanish government suddenly decided to ‘tax’ people’s deposits? This is a direct parallel with what is happening in Cyprus. It’s a clear  premonition that any future problems in the country’s banking system will not be confronted by using taxpayers’ money in a bailout operation, but instead it will be restructured in a bail-in procedure, using people’s life savings in bank accounts.

Or what if the central EU countries want also to underline the distinction between the insecure South Europe banks in Italy, Spain, Greece and of course Cyprus, in comparison to their own ‘solid’ banking systems, in which Deutsche Bank is a pivotal name? Today Cypriot, tomorrow Greek and the day after tomorrow Germany will force more banks to close down in the South.

Schauble knows better

Wolfgang Schauble, the German Federal Minister for Finance says it openly. He insists that Cyprus has the wrong structure. Greece is already under restructuring and in a few months probably Italy and Spain will find out that they also have not the ‘right’ economic structure. Only Schauble knows which country has the ‘right’ structure!

From the very first moment when it was announced that Cypriot deposit account holders will be held responsible and will be called to cover a large part of the cost of the restructuring of Cypriot banks, the Sting diagnosed an experiment with reference to the entire South Eurozone financial system. On 19 March George Paper wrote: “Was it probably an experiment to test the reactions of some hundred thousand Europeans in a case like that? It must be noted that it is not clear if Cyprus is a ‘systemic’ Eurozone member, being in the east-most corner of the Mediterranean. So it can be a perfect case for some sick minds in Berlin, Brussels and why not in Washington and elsewhere to test how the European will react, if they are asked to pay with their own deposits the salvation of ‘systemic’ banks when they go…bust”.

Bankers do it again

Given that the entire western financial system is again accumulating toxic assets and risky bets, the next crisis is not very far away. Even the German peripheral Landesbanks, like BayernLB και NordLB, are in a precarious situation depending largely on state aid. Probably Eurozone’s banking problem may be more serious, than in the case of the US at the time when Lehman Brothers went bust in 2008.

In view of that, the resources being stored in the European Financial Stability Facility and its heir the European Stability Mechanism (EFSF/ESM) estimate at €700 billion are by far inadequate, to support the banking system of the entire Eurozone in case of a major crisis. At the same time all the South European Eurozone governments are so deep in debts that any possibility of those taxpayers paying for the bailout of banks, is out of question.

As a result the next available pool of money to be tapped, in case the Spanish or the Italian financial system need, support it’s the bank deposits in those countries. Cyprus is presently the first guinea pig and Spain prepares for the same arrangement in a much smaller scale. It is very handy and easy for the banks just to give a deep haircut to their customers’ deposit accounts and in exchange give them some worthless paper, like preferred stock or any other financial product.

Credible North, worthless South

All along those procedures the central Eurozone countries and mainly the ones with real financial reserves like Germany, Holland and Finland will try to capitalise on the South’s woes. This was quite evident last summer, when at the time when Italy and Spain were borrowing in the region of unsustainable interest rates (6% to 7%), Germany issued its own sovereign bonds succeeding to place them with negative yields. Terrified or guided money managers appeared not to mind about returns, looking just for a safe haven in Berlin’s debt issues.

Of course all that could have been avoided if the European Central Bank had acted like its American counterpart, the Fed. To be reminded that in order to effectively counter the American credit crunch triggered by the bankruptcy of Lehman Brother, the US government issued bonds in the region of trillions of dollars, which were bought at face values by the Fed. With this abundant liquidity the Washington government recapitalised the major American banks and later in the good times (2012) even made some profits, by selling the stocks it acquired during the crisis (2008-2009).

In the case of ECB this doesn’t seem to be an option. Let’s see why. The programme of Outright Monetary Transactions (OMT), announced on 6 September 2012 is supposed to use unlimited resources to buy government bonds in Eurozone countries under distress. The idea was to help Italy and Spain borrow at lower interest rates. Its success was enormous, because it managed to reduce the borrowing cost of those two countries and restored confidence to the Eurozone financial sector. All that without the ECB having spent not even one euro to buy bonds. However what if there was a need to spend some billions of euros?

The OMT mean nothing anymore

The ECB however made this kind of help to governments in distress conditional on their acceptance to sign with the troika of EU-ECB-IMF a memorandum of understanding, imposing the application of a draconian austerity programme. The relevant ECB decision is quoted here: “A necessary condition for Outright Monetary Transactions is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme…The involvement of the IMF shall also be sought for the design of the country-specific conditionality and the monitoring of such a programme”.

Large countries though, like Italy and Spain, wouldn’t or couldn’t accept politically such a conditionality, in exchange for ECB’s help under this OMT. As this becomes bit by bit clear, the OMT is rendered rather worthless. This is pretty obvious in the case of Rome. After the last election in this country, whatever government is formed will be not only unwilling but also politically unable to sign a programme, similar to the one of Greece. In view of that, it seems that the troika of EU-ECB-IMF are promoting now the idea of bail-in, in case Italy or Spain faces a financial crisis.

In short, Germany not only blocked the ECB from functioning as a real central banks, but now with the new ‘solution’ of haircuts on bank deposits tries to condemn the South of Eurozone to a second class financial space. Berlin probably believes that in this way it will turn the entire region to an obedient customer.

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