Today the acolytes of European banks declared victory over the the “debt crisis” and announced to have saved Greece, Italy, the World.
Before I get into details of their “fantastic rescue plan” let’s establish some facts:
The Greek public currently has about 150 billion Euro in Greek bank accounts, down from 237bn at the beginning of the year, and 600 billion Euro in European banks, mainly in Germany. These 600 billion do not include money in accounts in US, Brazil and other countries.
Greek sovereign debt which is supposed to be the cause of the “European debt crisis” stands at 109bn Euro but could well be 200 or 250bn. Whatever it is it could be completely eliminated by the Greeks themselves. A certain percentage of their 750bn in cash turned into compulsory government bond purchases would eradicate all debt and make Greece the first country in history to have repaid its debt.
Germany does this for decades already by adding a 5% “solidary surcharge” to income tax for financing reunification costs, and Italy once forced a levy of a few percents on all bank accounts in Italy.
The “European debt crisis” is a smoke screen and I have elaborated on some of the reasons for this in Part 1 to 4 already. Let’s now take a look at the historic origins of sovereign debt.
Venue: Palaccio Veccio the city state of Florence in Italy in the mid-14th century.
The city government had the bright idea to fund the next military campaign by using the citizens’ money. In those days victory depended on the amount of capital available and the spoils gained would outweigh the costs, so these war-bonds could be repaid with interest.
Thanks to the banks these war-bonds could be traded and capital raised from beyond the city walls of Florence. Investors wanted a continued return, so maturity could be extended beyond the duration of military campaigns and interest paid only, there was no need to ever repay them, you simply replaced them with new bonds.
The cities of Venice, Pisa, Siena followed suit and the system of government debt securities was established. The Medici, Peruzzi and Acciaiuoli families were the first traders in this unlimited money market. They quickly became the richest families in Italy.
The world’s oldest financial institution still active today is the Banca Monte dei Paschi di Siena, founded in 1472. They still hold debts from this period.
The debts accrued by Florence today amount to 518 million Euros. As the mayor of Florence says “our fathers walked into the restaurant, and we inherited the bill”. Some 50m of this debt are “off-balance-entities” (see Part 4) dumped by the banks Merill Lynch, UBS and Dexia in a criminal manor, alledgedly, onto Florence.The mayor is suing these three banks and is confident of winning the case which will be a first in the history of banking.
Modern Italy has debt of 1.9 trillion Euro equating to 120% of GDP. It also equates roughly to the amount of unpaid taxes. Italy does not enforce these taxes as a matter of principle.
Why? Because the money goes straight back into the economy without the government wasting a share of it. People build houses and the average family owns one, two, three or more houses. The total amounting to 4.832 billion Euro (4.832tn) of which only 7% is mortgaged, so the people own 4.500 billion worth and the banks 320 billion worth only.
This makes Italians the richest people in the world, the influence on the property market of banks is minimal. Banks can neither cause a boom nor a bust situation.
So banks have an interest in having Italy downgraded causing a higher yield on bonds.
Since the downgrade Italy needs to pay 5.75% interest compared to Germany’s 2.15%.
Without interest payment the Italian budget would be balanced.
Debt does not equal debt. Debt caused by building bombs that get dropped somewhere have a different affect on the econony, it enriches the bomb builders and droppers only.
Benefits of Italian debt (unpaid taxes) filter through to the entire population. Before Italy joined the Euro debt was reduced through devaluation of the Italian Lira. Now that Italy no longer has this mechanism debt quite simply accrues and gets served through interest payment. Due to the high volume of privately owned debt free property Italy could afford much more debt.
In contrast countries like US and UK have mortgages so high that the term “negative equity” had to be invented. People do not own property but mortgages and the banks own the lot. A property costing $100k will earn the banks $150k in interest. An Italian spending the same amount will call three properties his own and the banks draw a blank, that’s the difference.
Now let’s take a look at how Greece, Italy and the world economy were rescued today:
The governments of Europe no longer have to bail out Greece, instead the banks took a haircut of 50% equating to about 100 billion Euro. This reduces the Greek debt from 200bn to 100bn, then Greece gets new credit of 100bn that they can draw up to 2014.
The logic behind this: Greece cannot serve its “old 200bn” and won’t be able to serve its “new 200bn”, hence victory over the debt crisis was declared. As a consequence the world stock markets reacted euphorically and added about $7000bn (7tn) to share values (could be a bit more as I counted the major markets only and Asia still has to react).
Banks take a loss of 100 billion. Then they have to raise these from the puplic in order to recapitalize, so you the tax payer pays this bill. The European rescue fund, EFSF, contributes 30bn of which Greece has to provide 15bn.
The bank’s recapitalisation was disguised as increase of capital from 4% to 9% to cover their “off-balance-entities”. This estimates their “off-balance-entities” at roughly one trillion which would amount to 2% of the world’s 50 trillion government bonds only.
The banks totals by country:
Greece 30bn, Spain 26,6bn, Italy 14,77bn, France 8,84bn, Germany 5,18bn and a few minor countries.
Should these banks not be able to raise that amount by June 2012, then their governments will intoduce the missing capital. In that case you, the tax payer, pay again.
Italy announced that it plans to reduce its debt mountain from 120% of GDP to 113% in the near or distant future.
Bank shares made record gains, J P Morgan added 8,3 percent and Citigroup 9,7 percent.
Trading volume reached a record 11,95bn (average 8.47bn).
The logic behind that: this must be all good news and greed still works. The sheep are back and the shepherds know how to guide them.
Let me close with another moment in history. In 1781 France made its budget public. They had revenue of 503 million Livres and 610 million Livres expenditure of which about half accounted for interest and debt repayment, 19% for administration and 6% for the royal court.
The bankers (all nobility at the time) concluded guillotines will become the market of the future. Their instincts were spot on. You can always trust a banker to finance his own execution as long as it is profitable.