Germany Trying To Sabotage Greek Bailout

I noted last week that "the IMF regards the EFSF as a busted flush, and has no intention of throwing any more money into the doomed project".

Unsurprisingly, the G20 have now stated categorically in their end of summit communique that no money will be forthcoming until the Eurozone puts more of its own money in, and that it is "essential" that the Eurozone boosts its own firewall first.

Meanwhile, as if deliberately trying to further humiliate and antagonise the Greeks, the German Finance Ministry has announced that more than 160 German tax collectors have volunteered for possible assignments in Greece.

Anyone would think that the Germans were deliberately trying to sabotage the bailout, and force the Greeks to walk away from it!

Given that German Finance Minister Wolfgang Schaeuble doesn't believe that the bailout will succeed, it is in Germany's interests that time and money are not wasted on it.

 

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G20 Failure

The G20 in Cannes looks like ending up as an enormously expensive failure.

It is now highly unlikely that world leaders will announce a figure for the increase in IMF funding, as the Americans are keen to "keep up the pressure" on eurozone to sort themselves out.

The Greek referendum has been cancelled, and it looks likely that the Greek government will fall.

Italy is now under close supervision, as its bond rates rise.

The Chinese will not put a Yuan into the over hyped and poorly structured fantasy known as the EFSF.

All in all this G20 meeting has shown how lacking in real leadership the world really is, just at a time when it needs it most.

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Six Days To Save The World

Reuters reports that finance ministers and central bankers of the Group of 20 major economies said they expected an October 23 European Union summit to "decisively address the current challenges through a comprehensive plan".

The French Finance Minister, Francois Baroin, said that Berlin and Paris were well on the way to agreeing a plan to reduce Greece's debt, stop contagion and protect Europe's banks.

I will believe that when I see it.

As I have noted many times before on this site, there is no plan!

Am I being too cynical?

No, I am not.

Angela Merkel has made it clear that “dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled."

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EU Digs Itself Deeper

I wrote yesterday that markets have a "herd mentality" that reacts to situations with a mixture of fear and greed (depending on the nature of those situations).

Whilst this observation may be "obvious" to many people, it seems that those who claim to lead the EU have not yet understood it.

European finance ministers are now engaged in a massive damage limitation exercise following recent pronouncements from the German Chancellor, Angela Merkel, who sought to to make bondholders contribute to future bailouts. Unsurprisingly the markets have been "royally spooked" by this, and bond yields have been forced up.

Does this matter?

Very much so if you are a heavily indebted nation (such as Ireland), as yields increase so does the the cost of servicing the debt.

Sadly EU minister have only realised, post the EU summit, exactly what damage their agreement on bailouts has done to market confidence. One is tempted to ask why certain people hold the positions that they do, given that it is clear that they do not understand how markets work?

That is a question that needs to be answered at some point.

However, in the meantime, EU ministers have been furiously backpedaling. They have issued a statement from the tense and divided G20 in South Korea saying that the crisis resolution mechanism that they are discussing, that may force bondholders to share the cost of a bailout, won't apply to outstanding debt.

All very well, except for two problems:

1 This clearly shows that the EU is making up economic policy and plans "on the hoof"

2 The application of this "shared responsibility" to future debt will simply increase future yields (as the markets will need to price in the extra risk)

Like it or not, the EU have managed to undermine a future source of revenue and seriously destabilise and unnerve the bond markets. The result being that countries such as Ireland have been pushed closer to the edge of financial meltdown, as the costs of servicing their debt has risen.

It is hardly surprising that the Irish Prime Minister, Brian Cowen, views Merkel's comments as being less than "helpful"!

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Outlook - Stormy G20 Predicted

The atmosphere at the forthcoming G20 summit in Seoul later this week is likely to be somewhat heated, following on from pre summit soundbites issued by the Chinese and then Barack Obama over the recent move by the US Federal reserve to print $600BN (Quantitative Easing 2).

China, and some other countries, are not happy that this tactic pushes the Dollar lower, thus making their exports to the US more expensive and the lessening the value of their Dollar based investments.

Barack Obama responded, during a press conference in India, by saying that QE2 would bring about higher US growth rates which would be "good for the world as a whole". The US is also of the view that the Chinese Yuan is undervalued, and are pressing the Chinese to let it float higher.

The G20 will see an intensification of this "spat", as various countries begin to draw battle lines over possible future "currency wars".

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G20 Flexibility

The low key G20 meeting in Canada produced a communique that took negotiators 45 hours to draft.

The final communique endorsed a flexible timeline for each country to build up higher levels of banking capital and liquidity.

The result may well be favourable to some countries. However, as the banks are now global players they will simply use this flexibility in their own interests and simply pick and choose their best options and best countries in which to operate from.

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HSBC Moves CEO

HSBC is relocating Michael Geoghegan, its chief executive, from London to Hong Kong as from February next year.

HSBC state that there are no plans to move the company's domicile from the UK.

However, as the G20 ponder what they intend to do to punish bankers for their hand in the economic mess and as the UK 50% tax rate kicks in, doubtless the fact that Hong Kong has a 16% tax rate may well have a bearing on future plans for the location of HSBC.

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Turner Gets Heavy

Lord Turner, chairman of the Financial Services Authority, last night at the Mansion House launched another attack on the banking industry.

Turner said that bankers faced a future stripped of profitable businesses:

"British citizens will be burdened for many years with either higher taxes or cuts in public services because of an economic crisis ... cooked up in trading rooms where many people earned annual bonuses equal to a lifetime's earnings of some of those suffering the consequences."

He added:

"Top management, in particular of banks involved both in complex trading and retail banking, needs ... to be willing to recognise that there are some profitable activities so unlikely to have a social benefit they should voluntarily walk away from them."

I would make a number of observations:

1 The higher taxes, needed to plug the fiscal black hole, are in part due to the fact that Brown failed to "put something away for a rainy day" during the "years of plenty". Instead he chose to "spend, spend, spend".

2 Where was the FSA during the period of "reckless" lending, when banks "cooked up" these failed schemes?

3 The financial catastrophe is in no small part down to the failure of regulation, emanating from the "bugger's muddle" of the tripartite regulatory system created by Brown.

4 Labour was happy to "schmooze" with the City during years of plenty, and had its fingers in the till earning billions in tax from the profits and pay of the banks/bankers.

5 The country did well out of the years of plenty, we are a far wealthier and more advanced nation than we were 30-40 years ago. This is a direct result of globalisation and freeing of currency flows. The current financial crisis has not set us back 30-40 years; ie we are still better off.

There will always be financial crises, each one different from the other. Turner and the G20 are unlikely to find a panacea that will prevent the next.

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The $1Trillion Boost

The G20 agreement to give the world economy a $1.1Trillion boost sent stock markets on an upward journey, as investors allowed themselves the luxury of hoping that the worst of the recession is over and that the ongoing financial meltdown has been staunched.

However, the bedrock of any sustained recovery will be "confidence", irrespective of the size of any cash injection if people do not believe that it will work then it won't work.

The key positive feature of this agreement is not just the size of the boost, but the fact that the leading economies have managed to co-ordinate their actions.

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Hissy Fit

President Sarkozy threw a hissy fit yesterday, and played to the domestic French audience, by threatening to walk out of the G20 summit if France's demands for tougher financial regulation and a global regulator are not met.

Sarkozy blames the "Anglo-Saxons" for the economic crisis.

Apportioning blame is all very well, but it is necessary to fix the problem first. As I noted before, if your neighbour sets fire to his house you do not sit on your hands and remonstrate with him, you help him put the fire out before it spreads to your house. Once the fire is out, you can then remonstrate with him.

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Dunfermline Building Society "Saved"

The Dunfermline Building Society has been broken up, with its non toxic elements going to the Nationwide Building Society; whilst the taxpayer has bought the toxic assets.

Under the deal the Nationwide absorbs the brand name, £2.3BN of retail deposits, 34 branches and £1.02BN of mortgages.

The taxpayer takes on poor quality buy-to-let loans.

FYI, the Dunfermline Building Society resides not a stone's throw from Gordon Brown's constituency. Fortunately for Brown, with only a few days to go before his much vaunted G20 summit, he will be saved the embarrassment of seeing his local building society going bust.

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To Play The King

Gordon Brown has effectively dismissed Mervyn King's warning that Britain may not be able to afford further fiscal stimulus measures.

Brown is warming up for next week's G 20 summit in London, and spoke to MEPs in Strasbourg yesterday; today he will attend a breakfast debate in New York hosted by The Wall Street Journal, deliver a speech at a New York university and meet with Ban Ki Moon, Secretary-General of the United Nations.

Brown continues to press for countries to use fiscal stimulus packages to refloat the economy.

Fiscal stimulation is all very well if it goes to the places and people that actually need it, and that there is the money there to stimulate the economy.

The trouble is that Britain entered this recession with precious little in the "store cupboard" as Brown has already spent it during the years of plenty.

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L&G Play Ostrich

Legal & General (L&G) have been acting like an ostrich recently, as they have put off telling investors in their structured products backed by Lehman Brothers that they may lose up to 20% of their investment.

L&G finally told 2,300 individuals the "good" news last week. This is of course a tad tardy, as Lehman Brothers went into liquidation three months ago. Indeed, the delay is even more surprising given that other structured products providers such as Meteor, NDFA and Arc warned investors within weeks of Lehmans' failure that their investments were at risk.

Why would L&G put off what was clearly inevitable?

Seemingly, according to some financial advisers, L&G wanted to avoid the negative publicity around Lehman Brothers.

I can't say that has worked, if that really was the reason, given that L&G now look rather foolish to say the least.

The two L&G plans affected are the Protected Capital and Growth Plan four and the Accelerated Growth and Investment Plan two. The plans were backed by Lehman Brothers, Barclays, Yorkshire Building Society, Citigroup Funding and Dresdner Bank.

Investors will now only be able to recover 80% of their capital in July 2011 if, when their plans mature, the FTSE 100 is below the level set when they were launched in July 2005.

I wonder if the FSA will look into this, given that financial markets are meant to be transparent?

Were I an investor in one of these products I most certainly raise this matter with the FSA.

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