The overarching theme of my comments is that the overarching theme of this piece is skewed toward this kind of ‘mea culpa’ vibe. What I mean is, this ‘Gee, we sure thought Europe was headed for the rubbish heap, but right at the last second the ECB sequestered the whole financial crisis for the next year. Whodathunkit?’ theme that pops up throughout.
My analysis -- and almost every Stratfor employee I can think of who has been following this including G has at various points agreed with this – has been that the EU institutions, the bureaucracy, the elite, are going to throw everything and the kitchen sink at this. When it comes down to the short hairs as G likes to say, these guys are going to blast credit into the system and put off the collapse.
Now they have. Or implied that they will if need be. Color me shocked. But this is not a binary event. What I mean is, there are not two states of the crisis called “pre-money-printing” and “post-money-printing.” It’s a continuum. So the crisis continues to unfold. The negotiation continues.
This is mostly a good tactical update but the binary analysis of “they were mega fucked, but now they’re totally safe for a year” is flawed. Coupled with an implied mea culpa that I’m pretty sure we never stated publicly, this is a problem.
See my specific comments below for context.
The European crisis -- now entering its third year [well into its 3rd year – Hypo bankruptcy was around or before Lehman if I recall] -- has reached a critical point. Recent decisions by the European Central Bank are granting the Germans the time they need to attempt the rewiring of Europe to their preferences.
The core of Europe’s ongoing crisis is that the Continent’s wealth is in the region’s north while the region’s periphery cannot grow without outside credit. That credit was made available when the eurozone’s creation put all of the eurozone’s states into the same capital pool. Many states -- most notably Greece, Italy, Spain, Portugal and Ireland -- were able to access credit in unprecedented volumes. The result were unprecedented debt loads that are no longer sustainable. Barring extensive, and ongoing, outside financial support all of these states and much of the European banking system will go bankrupt.
The question for the past two years has been where will that outside support come from? Or will it even be coming at all? The Northern Europeans have sought to limit their exposure to the financial troubles of the periphery, only -- grudgingly -- granting assistance when the debt loads threatened the disintegration of the eurozone itself. Such irregular dollops of aid were sufficient to manage the financial problems of the small states of Greece, Portugal and Ireland -- whose combined bailouts ‘only’ totaled about 430 billion euro. But as the crisis evolved and spread Italy is the next state likely in need of aid and a bailout of Italy would cost -- conservatively -- 800 billion. And that before the weakness of Italy’s multi-trillion euro banking sector was taken into account[what beyond sovereign debt holdings implies weakness in Italy’s banking sector? I thought it was one of the more sound systems].
Barring large-scale support, Italy -- with its 2 trillion in national debt -- was sliding very quickly towards default. Already investors were demanding some 7 percent on its ten yeargovernment debt -- roughly twice what Italy had been paying for the bulk of the euro era. Such high and rising borrowing costs for a country with a debt load of 120 percent of GDP largely made a default inevitable[I don’t have the numbers in front of me, but you are leaving out one thing which is growth. Italy had a high yield debt market and 100%+ debt/gdp for many years, but it was also growing at a fair clip. Now at 120% and no growth prospects, the ability to service higher yield debt is basically gone]. Such default was highly likely to occur early in 2012. In February alone Italy must refinance over 60 billion euro, with another roughly 40 billion euro coming due in both March and April.
GRAPH: Italian debt maturing by month (in billion)
Faced with such massive needs, particularly in the short term, the end of the euro era seemed nigh. European states were unwilling to increase their commitments[incapable of providing adequate commitments], extra-European states were uninterested in paying into funds without more European commitments, and the IMF lacked the resources (by half) to bailout Italy. The only institution that even theoretically could help was the ECB, which as the manager of the eurozone money supply could potentially purchase sufficient volumes of Italian government debt to stabilize the system. But as ECB governor Mario Draghi stated explicitly on Dec. 8 the ECB could not help: “We have a treaty and Article 123 prohibits financing of governments.”The refusal of the ECB and European governments to come to the rescue of peripheral states in general and Italy in specific formed the core of Stratfor’s forecast that the eurozone was running out of time, pushing us to begin forecasting what the world without the euro would look like. [I believe the Q4 forecast said Europe would survive another quarter, but it was now in the process of disintegrating. The process of disintegrating is based on a long standing multi-decade forecast. Where did we say the ECB and EU would refuse to rescue the system? As far as I know this was all based on our standing forecast of EU disintegration and not any of the proximate actions along the way.]
One day later Draghi changed the game. [see again here you’re painting it as if individual events are altering the entire course of the forecast. Draghi bought some time. There has been and will continue to be back and forth on this issue. There can be no doubt the EU ‘elite’ are going to try to save the system. I don’t think we ever forecasted that they wouldn’t try to save it, at least I really hope we didn’t. ] The ECB announced on Dec. 9 that it was prepared to purchase up to 20 billion a week of stressed eurozone government debt. That amounts to potentially one trillion euro over the course of a calendar year. Not only is that more than enough to buy up every euro of Italian debt, it is potentially enough to purchase roughly 80 percent of all eurozone debt that comes due in 2012. Even adding in planned new debt issuances ‘only’ raises the total volume of all sovereign eurozone debt to 1.5 trillion -- the ECB could potentially buy up 2/3 of all that is available all by itself.
CHART: Eurozone government debt maturing by month in billion euro (ECB purchases could theoretically reach 80 billion per month)
Barring severe miscalculations on the part of ECB officials managing the purchases or national governments issuing the bonds on the issue of timing, an Italian default -- or Spanish or French or any other sovereign eurozone default -- is impossible for 2012.[I think the implicit threat is still that Germany can leave. The calculation I would make, and I think everybody is making, is that they’re full of shit and will bail. Or let the ECB bail and stay in the bloc.]
Backstopping the eurozone system even further, that same day the ECB also announced it was granting all eurozone banks access unlimited, low-interest liquidity loans with up to a three-year maturity. The liquidity program should prevent any eurozone bank from defaulting on its debts, as well as granting them sufficient credit access that all may continue to participate in the sovereign debt markets should they so choose.
Taken together, the ECB actions have flipped a eurozone dissolution in 2012 from a near-certainty to a near-impossibility[if you thought they were going to let the euro fail then that was one thing, but I don’t think we forecasted they would let it fail, and we should not admit to what I consider to be a misconception of the crisis as a Stratfor mistake. #1 we didn’t say this publicly and #2 most of us never shared this analysis of the situation with you. If we published this we would essentially be saddling everybody with what I consider to be a mistaken perception of the crisis that nobody else held.]. Issues that have been critical in recent months -- the poor (and weakening state of the European banks), high and rising Italian borrowing costs, the possibility that eurozone states will have their credit ratings slashed, the ability of the eurozone bailout fund to raise large volumes of cash, the utter disinterest of the Chinese and Arab oil states in assisting Europe -- suddenly became irrelevant.
With the financial crisis sequestered for now[way too strongly worded. Nothing is sequestered. The ECB just brandished a monetary weapon. Decisions can be altered, new issues can pop up. This is still very much in flux. The ecb just took the whole situation down one octave. All the underlying dynamics are still going to play out.], Europe returns to the political field. Germany is attempting to force all eurozone states to abide by German-dictated financial restrictions which would allow Berlin -- either directly [whoa – not directly] or via the Brussels bureaucracy -- to directly intervene in their budgetary process. The dominant issue in 2012 will be the negotiation and ratification of a treaty encapsulating German ambitions. Many states will attempt to resist this German effort, but inertia is working with the Germans.
In 2011 Germany was able to force personnel changes on the governments that were most resistant to the German effort: Greece and Italy. Both now sport ‘national unity’ governments led by prime ministers who served extensively in European structures. Both are working to implement German reforms and austerity measures. Also in 2011 a German-led coalition managed to force the fractious Belgian system to craft a government nearly two years after elections failed to generate one on their own. The new Belgian government’s first task was similarly to implement German-dictated reforms. Best of all from the German point of view, all of these new governments were installed using the existing parliamentary makeups. In none of the three states did the government’s fall require new elections that might subject unpopular austerity programs to popular vote. Perhaps it wasn’t very democratic, but keeping the issue away from what could become a referendum on Germany’s role in Europe served the German agenda admirably.
The Germans will seek to repeat this process in 2012 in other states that will resist the German-led effort. The two states most likely to attract German attention are Ireland and Finland. Ireland’s constitution stipulates that any EU treaties must be ratified not only by the parliament, but also by a popular referendum. Twice in recent years the Irish population has rejected such treaties. Luckily for the Germans, Ireland is already laboring under the stipulations of an EU bailout program, greatly increasing German leverage against the Irish. Finland also has legal restrictions as to what sort of powers can be devolved to the EU. A 2/3 majority is required in the Finnish parliament -- as opposed to a simple majority in most EU states -- to approve some of the treaty changes that the Germans are seeking. That’s a high bar in normal circumstances; doubly so considering the somewhat euroskeptic views of the current parliament.
Other states may also prove problematic. Slovakia has been the European state least willing to either participate in bailouts or cede additional sovereignty to Brussels. The Netherlands is solidly pro-European, but because they see a united Europe as the best way to hedge against German power; the Dutch have no desire to see Berlin dominate Europe. Spain faces the most egregious budget deficit of the states not currently under bailout and will have to make the deepest changes to meet German demands. All will likely find themselves in the German crosshairs in the coming year.
None of these states will be pushovers, but the Germans will be aided by a quirk of European scheduling. With the exception of France and Slovenia, no eurozone state faces scheduled national elections in 2012. This grants German the possibility of reworking difficult governments without having to subject them immediately to popular votes which might reject Germany’s path. The opportunity looms large that the Germans can replicate their Greek, Italian and Belgian successes in Finland, Ireland, Slovakia, the Netherlands and Spain.