This morning’s key headlines from GenerationalDynamics.com.
- Iraq’s crisis worsens, as al-Maliki turns into Javert
- Massive European bailout operation appears to be failing
- Defense Sec’y Panetta threatens Iran over nuclear weapons
- Egypt’s Salafi Nour party affirms support for Israel treaty
Iraq’s crisis worsens, as al-Maliki turns into Javert
In Victor Hugo’s great novel Les Misérables, which describes the failed uprising of students that occurred in Paris in 1832 during France’s generational awakening era, the character Javert puts “the law” above all else. “You will starve again, unless you learn the meaning of the law,” he says to Jean Valjean. Iraq is now in a generational awakening era, and the Shia Muslim Prime Minister Nouri al-Maliki appears to be turning into Javert. In doing so, he’s precipitating a major governmental crisis. He talks about “the importance of acting in a manner consistent with the rule of law and Iraq’s constitution.” Thus, he’s demanding that the Sunni vice president Tareq al-Hashemi be arrested and turned over for trial. Upon the objection of the Sunni Iraqiya bloc in the Parliament and its threats to quit the governing coalition, he repeatedly emphasized his own powers under the Iraqi constitution, and he spoke at length about the options available to him if they did. The net effect of these options would be to shut the Sunni minority out of the unity government and move toward a government run by the Shia majority. In the novel, Javert’s obsessive devotion to “the law” forces him to commit suicide, when he can’t deal with the contradiction of owing his life to someone whom he considers to be a criminal — Jean Valjean. Let’s hope that Iraq isn’t committing suicide. McClatchy
Massive European bailout operation appears to be failing
An enormous drama played out in Europe on Wednesday, leaving officials in a state of shock.
For months, pundits have been demanding that the European Central Bank (ECB) purchase toxic bonds from Greece and Spain and Italy in order to bring down yields (interest rates), which are now unsustainably high. The ECB has been steadfastly refusing to do so, because that would violate EU treaties and regulations. The Germans are opposed because they see ECB bond purchases as a free ticket for Greece, Italy and Spain to return to completely profligate spending.
So the ECB did something different on Wednesday — a “Long Term Refinancing Operation” or LTRO. The ECB offered unlimited amounts of euros in 3-year loans to banks at 1% interest. The analysts had expected the banks to borrow only €250 billion or so.
So the first shock was that 523 banks applied to borrow €489 billion, almost twice as much as the analysts had expected. This announcement was initially met with glee by investors, who assumed it meant that there would be a lot of money floating around, and it would pour into the stock market as usual, and stocks went up.
The ECB’s intention with the LTRO program was to make lots of money available to banks so that they would use that money to buy up toxic bonds from Italy and Spain, and so that they would lend that money to businesses, in order to promote growth. Thus, the LTRO is supposed to be a form of quantitative easing.
However, that’s not what happened. The second shock was that the banks used 61% of the 3-year €489 billion loans to pay off previous 7-day, 3-month and 1-year loans from the ECB. Thus, the net borrowing was much smaller, about €190 billion.
Furthermore, eurozone banks will have to come up with €750 billion in 2012 to pay off other debts. So it’s clear that the banks are going to hoard this LTRO money to pay off their own debts, rather than lending money to businesses or buying other people’s toxic bonds.
One UBS analyst said, “We still believe it is difficult to reconcile a government desire for banks to continue buying debt with the need for banks to reduce risk exposure associated with government debt.” In other words, if you want banks to survive, you’d better not expect them to take on more toxic debt.
So this LTRO apparently will help banks get past the year-end obligations and some of next year’s debt payments, but will do absolutely nothing for employment or productivity or economic growth in Europe. It’s just more money that will sit in the banks’ mattresses, doing nothing, not contributing to the economy and not contributing to inflation.
Here’s an additional angle to the above.
It seems that European banks HAVE been buying some toxic Spanish and Italian bonds in the last few weeks, pushing yields (interest rates) down a little.
But once a bank has those toxic bonds in its portfolio, it’s allowed to use them as collateral to borrow money from the ECB. That’s apparently what’s been happening.
So one possible unintended outcome of the LTRO is that it may actually REDUCE bank purchases of toxic bonds, since banks don’t need to purchase them any more to get ECB cash. Bloomberg
Defense Sec’y Panetta threatens Iran over nuclear weapons
In an interview on Wednesday, U.S. Secretary of Defense Leon Panetta said that Iran would be crossing a firm “red line” if they developed a nuclear weapon. When asked how he would react to a military strike on Iran by Israel, he said,
“Well, we share the same common concern. The United States does not want Iran to develop a nuclear weapon. That’s a red line for us and that’s a red line, obviously, for the Israelis. If we have to do it we will deal with it.
If they proceed and we get intelligence that they are proceeding with developing a nuclear weapon then we will take whatever steps necessary to stop it.”
He added that “no options are off the table,” including military steps, and that a nuclear weapon in Iran is “unacceptable.” CBS News
Egypt’s Salafi Nour party affirms support for Israel treaty
The spokesman of Egypt’s ultraconservative Salafi Nour Party said in a Wednesday interview that the party is committed to agreements signed by previous Egyptian governments, including the 1979 peace treaty with Israel. The interview countered Israeli fears that Islamist parties would seek to cut ties with Israel. “We are not opposed to the agreement, and we are saying that Egypt is committed to the agreements that previous Egyptian government have signed,” said the spokesman. He added that he supports changes to the agreement, but “the place for that is the negotiation table.” Long-time readers who recall my discussions of the Muslim Brotherhood earlier this year will not be surprised by this development (see “Violence between protester factions kills three in Egypt” from February). Abrogating the treaty would be almost a declaration of war with Israel, and the Egyptian people have no taste for such a war. The youthful protests are angry at the ruling army council, not at Israel. AP