It’s not about Greece any more – it’s Italy’s backdoor bailout
At this very moment I am travelling at high speed through one of the cradles of the European Union. The coal fields of France, as well as Germany were the origins of the European political project, and the Eurostar to Brussels passes straight through them.
Back in 1952 the six-nation European Steel and Coal Community (France, Germany, Benelux, AND Italy) was founded in the words of the French foreign minister to make war unthinkable and “materially impossible”.
As I travel I hear that the planned meeting of European finance ministers planned for tomorrow has been postponed “to later in the week or early next week” so that they can “sign off the details”. There are even suggestions of another EU leaders summit this weekend. Incredible.
For now, no finance ministers means no numbers. No numbers means no deal worthy of the word. And no deal means no hope of killing off this crisis.
The broad contours of the deal are well known:
1) Bubble wrap the eurozone banks in €100bn more capital.
2) Get the banks to agree a write off of between 40 and 60 per cent of debts (vs 20 per cent already agreed)
3) Equip the Eurozone bailout facility with €1 trillion or two of firepower to deal with possible spill over for Spain and especially Italy.
If it was just point 1 and 2 there would be no problem. The EU leaders could probably hold their summit via Twitter, subject to the fast one the Germans have pulled on the French banks (French banks kept on to their Greek debt out of solidarity whereas some German financial institutions quietly offloaded it in the past year). They will also try hard to make it “voluntary” and avoid a credit event which will fire off the payment of credit default swaps. The banks’ negotiator the IIF warned of “severe contagion” last night.
The problem is that the Greek bond haircut (PSI, private sector involvement in the jargon) sets a precedent that only a hopeful holder of Portuguese, Irish, Spanish and particularly Italian debt can ignore. If you don’t believe me then I hear of a meeting between Ireland’s troika inspectors and bond traders where the first question was: “If Greece can do this why not Ireland?”.
That’s why the EFSF needs to be bazooka-issued, or supersized. (Remember I visited the EFSF offices in Luxembourg: it employs 15 people, but could command a euro firepower ten times that of the European Union). Now France wants this to happen by pretending that the EFSF is a bank and so can then draw on the limitless funds of the European Central Bank.
The Germans see this as the ultimate debasement of the euro, and the final lap of a journey taking the single currency from something close to the deutsche mark, to something closer to the lira. Instead Germany proposes an insurance company style leverage of the EFSF. That idea is handily being pushed by one of the German financial companies that managed, quietly, to dump its Greek debt.
Follow Faisal Islam on Twitter: @faisalislam
In any event, what is now clear is that Germany sees the EFSF as a bailout of Italy. Some weeks ago one trader said that the Italian reform that the Euro authorities were really looking for, was the exit, stage left of Signor Berlusconi.
And this is where it gets very interesting. For the past few months Italian government debt has been given a backdoor bailout from the European Central Bank in Frankfurt. It is a form of quantitative easing, the purchase of government debt with central bank created money. That was only agreed after a stern letter from the ECB President Trichet, outlining specific budget measures that Italy needed to take.
The EFSF, in essence, should take on this baton from the ECB. Indeed the German parliament appears to be insisting on this in draft legislation. But in return Italy is required to make cast iron guarantees for economic reform to boost its growth. Indeed Signor Berlusconi needs to write a letter to Brussels outlining his “concrete steps”. It is yet to arrive.
So there we have it. Meetings continue tonight. I’m far from convinced. And all the while you can see the rising cost of borrowing not for government bonds, but for the bonds of the EFSF. Yes the creditworthiness of the actual bailout rescue facility is now under question.
Hat-tip to Scotty Barber of Reuters, whose article provided some of the inspiration for this blog.