Bankiarupt

The Financial Times reports the latest financial trick to emerge from the euro crisis. The Spanish government, which cannot sell its bonds at less than disastrous yields, has decided to bail out one of its major banks, Bankia, by directly giving it Spanish government debt securities that it would then exchange with the European Central Bank (ECB) for much-needed euro cash. This will help the Spanish state find the funds – reported as €19bn – to manage the overall bank bail out. Apparently, Cyprus will follow suit.

My view has been that the euro project is such a longstanding and important construct for the major European powers – Germany and France – that they will move heaven and earth to defend it. Earlier plans attempted to create a firewall around Greece, though still to keep it within the euro system. I admit to some reconsideration now.

It is not simply the possible rejection of austerity measures in Greece that creates for Germany and other creditor countries the prospect of unending, unproductive subsidies that they are likely to reject. The scale of the problems in Spain, and other countries too, means that the numbers have simply become too large. When it comes to hundreds of billions of euros, then Germany and other creditor countries in Europe will begin to ask questions: can this money be better spent than on bailing out recalcitrant bankrupts? Especially when their actions, as with Spain’s latest move, only add to the burgeoning liabilities of the ECB. Spain is essentially saying that ‘We cannot pay for the bail out, so we are passing the ball to Europe’ – ie the creditor countries who will back up the ECB.

This is such a big crisis that the resolution is not something to be sorted out over a policy weekend, as many previous weekends have shown. It is also more than facile to expect anything progressive from Hollande, who will simply act to protect France’s interests in the troubles ahead – essentially by making Germany pay more, if possible. A long, hot summer is ahead in Europe.

Tony Norfield, 27 May 2012

Tea Party Antecedents

The US ‘Tea Party’ takes its name from the famous ‘Boston Tea Party’ of 1773, when hundreds of crates of Indian tea on British ships were dumped into Boston harbour by American colonial rebels. However, a common misunderstanding is that this event was a protest about high taxes. It was not. The reason for the anger was that the British had actually cut the tax on imported tea. This meant that American smugglers and merchants dealing in tea supplied by Dutch ships were going to be put out of business because their product would soon be selling at a higher price than the new imports of Indian tea!

It is true that the American settlers were also indignant about rules being changed without consulting them – ‘no taxation without representation’ - and about to whom the British would give legal rights for importing tea. Yet the relevant point is that the claimed forebears of today’s ‘Tea Party’ in the US Congress were smugglers and dealers threatened by changes in the global economy. It is this that makes the name more apt than its members will realise.

Back in the late 18^th century, history was on their side. Today’s tide of reaction will find success much more elusive as the US struggles over its own bankruptcy.[1]

Tony Norfield, 1 August 2011

---

[1] See ‘The Real US Debt Crisis’, 26 July 2011 on this blog for details. The article ‘Anti-Bank Populism’, 5 July 2011, also explains how the build up of debt was due to the crisis of low profitability.