World View: Merkel Breaks Promise; Agrees to Eurozone Debt Sharing

World View: Merkel Breaks Promise; Agrees to Eurozone Debt Sharing

This morning’s key headlines from

  • Germany and Angela Merkel cave in to Italy and Spain
  • Germany’s Parliament approves the growth/fiscal pact
  • China blocks Bloomberg web site over story on Xi Jinping’s vast wealth
  • Top London banker Geraint Anderson describes deterioration in ethics and morals

Germany and Angela Merkel cave in to Italy and Spain

Just a few days ago, German Chancellor Angela Merkel said that there would be no “euro bonds” and no full debt sharing with other European countries “as long as I live.”However, Italian Prime Minister Mario Monti and Spanish Prime Minister and government President Mariano Rajoy threatened to create a crisis that would keep the meeting going all weekend.

As a result, Angela Merkel appears to have done a full 180 degree turn. The wondrous new “growth pact” or “fiscal pact” adopted on Friday at a meeting of eurozone leaders appears to do exactly what she just said she wouldn’t do. As far as I can figure it out, here are the terms of the new agreement:

  • Bailout money will be provided from the European Stability Mechanism (ESM), a bailout fund with much of the money coming from Germany.
  • In previous bailouts, the money was loaned to the country, along with demands for austerity measures, such as raising the retirement age, privatizing public sector businesses, or cutting the number of public sector workers.
  • The big change in the new agreement is that ESM will lend the bailout money to the countries’ banks, rather than to the countries. That way there are no nettlesome austerity requirements, and no increase in the countries’ debts.
  • The banks can then use the money to buy the country’s bonds, thus pushing down bond yields (interest rates). Spain’s 10-year bond yields have recently been above 7%, and Italy’s above 6%, rates that are considered unsustainable.
  • With interest rates lower, the countries will be able to borrow more money by selling more bonds.
  • Thus, Germany will be indirectly purchasing other countries’ bonds, which Merkel had said would not happen in her lifetime.

This is being called a “growth pact,” but it will not create one iota of growth. It will simply permit profligate behavior to continue.

Friday’s euphoric market reaction is based on the fact that all this new liquidity will enter the marketplace, and, as usual, it will enter the American stock and bond market, pushing stock prices up and bond yields down.

The can has been kicked down the road for a few extra weeks, making the problem worse than ever. Spiegel and UPI

Germany’s Parliament approves the growth/fiscal pact

Germany’s Parliament quickly approved the growth/fiscal pact late Friday, by an overwhelming 2/3 vote in both the lower and upper houses (Bundestag and Bundesrat). However, many details of the pact still have to be worked out and negotiated, and those negotiations are expected to be complex and lengthy. We saw this happen last year — a major bailout of Greece was announced with great fanfare, but the actual details of the agreement weren’t worked out for months. Bloomberg and Spiegel

China blocks Bloomberg web site over story on Xi Jinping’s vast wealth

China has blocked the Bloomberg/Businessweek web site because of a lengthy article detailing the vast wealth of Xi Jinping, who is in line to become the next president of China. The article details family assets worth hundreds of millions of dollars. Chinese officials are sensitive to such revelations, because China has tens of thousands of “mass incidents” or riots each year, usually triggered resentment over Chinese Communist Party (CCP) members using their political power to accumulate wealth. The article points out that Xi’s vast wealth contradicts his own statements about not being interested in money. Bloomberg and International Business Times

Top London banker Geraint Anderson describes deterioration in ethics and morals

When the British refer to the “The City,” they’re talking about London. Geraint Anderson was a top investment banker from 1996 to 2008, when he left and wrote a book called “CityBoy.” On Friday morning on BBC, he described how things changed during the 12 years he was a banker:

“The City is full of greedy, clever, ruthless people who go into that job for that reason, which is to make a fast buck. And when a system is open to abuse, those traits allow those individuals to abuse it for their own ends, and in my 12 year career, I genuinely saw a real deterioration in ethics and morals in the City. I started getting asked quite openly and blatantly for inside information, for example. The fact of the matter is that these sort of events occurred all the time in the City, be it pump and dump, whereby you actually spread rumors that a company’s about to be taken over and buy the shares, or bear raids, where you spread rumors that the company’s about to go bankrupt, and sell short the shares. These are the things that people.”

Anderson is describing the generational change that I’ve been writing about for years, about the “deterioration in ethics and morals” that accompanied the rise of Gen-Xers to middle management positions, resulting in the financial crisis.

However, he makes another point that I haven’t emphasized often enough — namely that banking became a place that attracted “greedy, clever, ruthless” people. There probably are no more crooks in Generation-X than there are in other generations. But what does characterize Generation-X, and makes it different from Boomers and other generations, is that Gen-Xers refuse to condemn or investigate unethical or illegal behavior in almost everyone, making it possible for banking and politics to become the two homes of crooks who are looking for a place to defraud and extort people without fear of blame or prosecution.

The people of Europe these days are extremely anxious and scared, because they can sense that the financial system is collapsing and that all the politicians are lying. The Barclays Bank revelations of massive fraud by arrogant banksters has confirmed their worst fears, that there’s nobody left to be trusted. This is all part of the generational change in attitudes that are taking place, and making any “growth pact” worthless. Increasingly, people today don’t trust anyone, and so banks are not willing to lend, businesses are not willing to hire, and ordinary people are not willing to go further into debt. That’s the generational change in attitudes and behaviors that’s triggering the deflationary spiral and the worsening financial crisis. And to repeat what I’ve said many, many times: There is NO SOLUTION to this crisis. It can be postponed, which will only make it worse, but the worst cannot be prevented.