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LEAKED: Mario Draghi And His Triumvirate Shut Up German Finance Minister To Keep Cyprus From Blowing Up The Eurozone
Wolf Richter www.testosteronepit.com www.amazon.com/author/wolfrichter
The state-sponsored chorus about the end of the debt crisis in the Eurozone has been deafening. It even has feel-good metrics: the Euro Breakup Index for January fell to 17.2%—the percentage of investors who thought that at least one country would leave the Eurozone within twelve months. In July, it stood at 73%. For Cyprus, the fifth Eurozone country to ask for a bailout, the index fell to 7.5%. “A euro breakup is almost no issue anymore among investors,” the statement said.
Just then, in a fight over whether or not to bail out Cyprus, top Eurocrats exposed what a taxpayer-funded con game they thought these bailouts really were—and how fragile the Eurozone was.
A debate has been raging in Germany about Cyprus. Not that the German parliament, which has a say in this, wouldn’t rubberstamp an eventual bailout, as it rubberstamped others before, but right now they’re not in the mood. Cyprus is too much of a mess. Bailing out uninsured depositors of Cypriot banks would set a costly precedent for other countries. And bailing out Russian “black money,” which makes up a large portion of the deposits, would be, well, distasteful in Germany, a few months before the federal elections.
For the tiny country whose economy is barely a rounding error in the Eurozone, it would be an enormous bailout. At €17.5 billion, it would amount to about 100% of GDP: €10 billion for the banks, €6 billion for holders of existing debt, and €1.5 billion to cover budget deficits through 2016. The new debt, a €2.5 billion loan that Russia extended in 2011, and other debt would amount to 150% of GDP, according to Moody’s. Unsustainable. So haircuts would be necessary. But whose hair would be cut?
As always, there is never an alternative to a bailout. “It’s essential that everybody realizes that a disorderly default of Cyprus could lead to an exit of Cyprus from the Eurozone,” said Olli Rehn, European Commissioner for Economic and Monetary Affairs. “It would be extremely stupid to take any risk of that nature.”
A risk German Finance Minister Wolfgang Schäuble would be willing to take. He’d been saying publicly that it wasn’t certain yet that a default would put the Eurozone at risk—”one of the requirements that any bailout money can flow at all,” he said. Cyprus simply wasn’t “systemically important.” In fact, there were alternatives.
Heretic words. He needed to be shut up, apparently. And that happened at the meeting of Eurozone finance ministers a week ago, details of which sources just leaked to the Spiegel.
The meeting was marked by the transfer of the Eurogroup presidency from Jean-Claude Juncker to the new guy, Dutch Finance Minister Jeroen Dijsselbloem. Cyprus was also on the agenda, but not much was accomplished, other than an agreement to delay the bailout decision until after the Cypriot general elections in February. The government has resisted certain bailout conditions, such as the privatization of state-owned enterprises and the elimination of cost-of-living adjustments for salaries. Now, everyone wanted to deal with the new government.
But what didn’t make it into the press release was that ECB President Mario Draghi, bailout-fund tsar Klaus Regling, and Olli Rehn, all three unelected officials, had formed a triumvirate to gang up on Schäuble.
That Cyprus wasn’t “systemically important” was something he kept hearing everywhere from lawyers, Draghi told Schäuble at the meeting. But it wasn’t a question that can be answered by lawyers, he said. It was a topic for economists.
A resounding put-down: Schäuble, a lawyer by training—not an economist—wasn’t competent to speak on the issue and should therefore shut up!
The two largest Cypriot banks had an extensive network of branches in Greece, the triumvirate argued. If deposits at these branches weren’t considered safe, Greek depositors would be plunged again into uncertainty, which could then infect Greek banks and cause a serious relapse in Greece.
If Cyprus went bust, they contended, it would annihilate the flow of positive news that has been responsible recently for calming down the Eurozone.
For weeks, all signs have pointed towards an improvement, they argued. Risk premiums for Spanish and Italian government debt have dropped significantly, and balances between central banks, which had risen to dangerous levels, have been edging down. If the money spigot were turned off, this recovery could reverse, they argued. Contagion would spread and could jeopardize Ireland’s and Portugal’s return to the financial markets.
Further, Cyprus was carrying its portion of the bailout funds and therefore had a right to its own bailout—a legal argument even a mere lawyer should be able to grasp.
And so, letting tiny Cyprus default could tear up the rest of the Eurozone, they argued—saying essentially that bailouts were a delicate con game, and that Schäuble, by digging in his heels, was blowing it up.
It made for another bitter Eurozone irony: the democratically elected finance minister of a country whose taxpayers have to pay more than any other for the bailouts got shut down by unelected Eurocrats who, in a continued power grab, postulated that Cypriot banks, their bondholders, their depositors, even their uninsured depositors, even Russian “black money” depositors had a “right” to the German money (and anyone else’s). And if Schäuble refused, it would blow up the entire Eurozone. Schäuble’s response hasn’t bubbled to the surface yet. And bailout queen Chancellor Merkel, who is trying to avoid tumult ahead of her elections, has a new headache. Read... Russian “Black Money” Threatens To Boot Cyprus Out Of The Eurozone.
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I did, and thanks for throwing it out there. Be careful. I have to stay far away from getting specific on here. you should too. Being in the biz you never know who is watching.
True that, good point fonz and i appreciate the caution- we are anonymous here after all but theres no need to take risks of that sort. Keep an eye on those calls though, there really are a few pockets of low hanging fruit, even in this market. All the best for now
I think most of us are on the same page, but being a blind optimist is simply dangerous as that which cannot be sustained, won't be. All one can do is take risks acceptable for their situation and hedge accordingly. This aspect of life will never change, but to suggest that the boomers should "die off" so things are better for you is definitely revealing about you as a person. especially considering that some of those boomers might have developed the technology the you enjoy today.
Same to you man. Welcome aboard.
ah, someone that remembers. well, that was an averted hyperinflationary "bout", and you probably remember the medicine that cured it
it was shock therapy. do you expect something similar, to make it "end okay"?
I remember it perfectly.
The pain as my mortgage interst went fron 5 to 16.5% in twelve months,as my
house lost 25% of its value.
All because Nixon closed the gold window,and the Arabs decided they wanted a lot more
funny money for their oil.Look how long it took for that inflation to arrive.
Does anyone doubt that the Arabs would prefer payment in a gold backed currency rather
than the dollar ?
If you do,I've a very nice Tower in Paris for sale.
indeed. yes, now let's see, how did we get out of that stagflationary period? Ah yes, we raised rates. Go ahead Bernanke, raise rates again motherfucker, I dare you.
He is "twisting" his short term obligations into long term ones. I could see the fed raising rates after they get locked in at low rates on long terms.
Everything is nice and calm now. European bonds are doing great and the crisis is over.
Just look at all that money being poured back into Europe, especially at the periphery.
Ah. I feel better already.
:/
Things are setting up for a major downturn in the marks real soon, just you wait.
Yes; yes; Orly you got the sarcasm right; but do you have the trade right? Short the EUR/USD right now; it's going to revert to the mean; with overshoot to the downside first, of course. This currency rally represents the mass mind; go against it.
Orly have you given up yet thinking you can game the system? You felt a month or so ago that the Euro was going to tank, the S&P was heading to 900 and gold would be in the 1500's (It still might be) at the end of January.
I am not saying this as an attack. I actually completely agreed with your rationale and conclusions. But this market has continually taken every aspect of it, currencies, equities, commodities....out to the woodhed. It does not matter how much technical or fundamental analysis you put into it.
Well, I think it would help to discern the difference between a market call and a discussion of possibilities.
As above, the EURJPY should retrace to between 117 and 113 before turning higher.
Now, talking to Chump666 or Yen Cross about certain possibilities, such as how the Euro or Aussie may move and what the implications would be for oil or the SPX and what levels to look for as they correspond...
Anyway. There is a difference. But maybe you're right; I should just be quiet now and read to myself.
:/
P.S. It was you I was speaking with about the SPX and the Fibonacci levels, after you specifically asked me what they were. And now, you're bashing me about that?
Okay, man.
"I am not saying this as an attack. I actually completely agreed with your rationale and conclusions."
I tried to go out of my way to make it clear I was not bashing you. I figured you could handle it. And yes, I specifically did ask you certain questions.
But my ultimate point which I knew would just end up rubbing you the wrong way is this.... You, Yen, Chump and some others seem to put more time, energy and thought into this than anyone else on here. In the past you would have been rightfully rewarded for it. Maybe you still are and I am just nitpicking a small point in time to to illustrate. But it seems like this whole sham of a market is laying waste to people who go the extra mile. I think it sucks, and I wonder if you have already arrived at that conclusion too, or if you never will.
You can choose to think I laid a personal attack on you or you can see my point for what it is. Which was not that at all. Whatever works for you.
No, it's not that. I don't mind, as I can take it okay.
It's just today that everybody on the InterWebs is taking a pot-shot at anyone with an idea. Everybody's like, "How would you know? Nobody knows!"
Yeah, I know nobody knows but I can only lay out my best ideas, technically speaking, as I am not privy to insider information or have forward-looking algos that can tell me about European bond spreads and the like.
I suppose what bothers me is I see all these other curious people ready to throw in the towel, take their ball and go home. I wish I could have everyone understand that this is the single-most difficult time in human history to be trading or investing in anything.
Everything is in flux day-to-day and what used to take months or years to come to fruition now happens in the flash of an eye. It is the whys and the where-tos that I am interested in because the market is not always going to be like this. These days are the best educational expderience you'll ever get in the markets and a good tool like ZeroHedge is there to help us shape our ideas and discuss the events that actually move markets. That way, when everyting is as calm as an Ohio lake, we'll be so been-there-done-that, we could trade in our sleep.
And, yes, it is frustrating to have brought up that what I thought was going to happen didn't happen (even if I didn't really say that...). At least I listed my reasons in clear language (not like some others, I might add...) and can put those thoughts out there without fear. Not because I am always right or don't care what you think but because I had that idea and reasons to go with it. I am more than happy to have a discussion where I am corrected.
I think that's what we're here for.
:D
My answer went above. I must have not hit reply. My bad. All the best to you.
Will you two get a room for fuck sake.
Orly, fonzannoon,
Some great points made in both your sets of comments.
DavidC
Honey, the hurricane is getting close...let's pull down the shades and pop in a dvd...