"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Monday, September 20, 2010

PIMCO's El Erian does not believe EU bailout of periphery is a success, and what Michael Hudson has been saying all along.

Good article from MoneyMarketing.co.uk (emphasis mine):
In a post for the Financial Times, Pimco chief executive Mohamed El-Erian warned that the European Central Bank/International Monetary Fund aid handed to Greece, Portugal, Spain and Ireland have not aided their economies, rather just aided those looking to take their money out of them.
He says: “The public sector bailout is not working. Rather than provide assurances of better times ahead and, thus, encourage new investments, ECB/EU/IMF support funding is being used by existing investors to exit their exposures to the most vulnerable peripheral European countries.”
That's an interesting point El Erian makes.  I would add: isn't that what the bailouts were designed to accomplish first?  I am in agreement with many of Michael Hudson's points in the "The People v. the Bankers." It's a common story that one can also see ocurring in the US.  The elites are protected first and foremost, and the losses are socialized.  That's not to say that Greece was not run poorly, or that there wasn't corruption that needed to be addressed.  As Michael Hudson states in "The People v. the Bankers:"

Let’s call the “Greek bailout” what it is: a TARP for German and other European bankers and global currency speculators. The money is being provided by other governments (mainly the German Treasury, cutting back its domestic spending) into a kind of escrow account for the Greek government to pay foreign bondholders who bought up these securities at plunging prices over the past few weeks. They will make a killing, as will buyers of hundreds of billions of dollars of credit-default swaps on the Greek government bonds, speculators in euro-swaps and other casino-capitalist gamblers. (Parties on the losing side of these swaps now will need to be bailed out as well, and so on ad infinitum.)
This windfall is to be paid by taxpayers – ultimately those of Greece (in effect labor, because the wealthy have been untaxed) – to reimburse Euro-governments, the IMF and even the U.S. Treasury for its commitment to predatory finance. The payment to bondholders is to be used as an excuse to slash Greek public services, pensions and other government spending. It will be a model for other countries to impose similar economic austerity as governments run up budget deficits in the face of falling tax collections from the financial sector being enriched by the translation of junk economics into international policy. So the bankers for their part will have little trouble meeting their bonus forecasts this year. And by the time the whole system collapses, they will have spent the money on hard assets of their own

Bank lobbyists know that the financial game is over. They are playing for the short run. The financial sector’s aim is to take as much bailout money as it can and run, with large enough annual bonuses to lord it over the rest of society after the Clean Slate finally arrives. Less public spending on social programs will leave more bailout money to pay the banks for their exponentially rising bad debts that cannot possibly be paid in the end. It is inevitable that loans and bonds will default in the usual convulsion of bankruptcy.
Back to the article on Pimco's El Erian.  As I mentioned in prior posts on debt deflation and economic contraction:
El-Erian says the market risk for the sovereign debt of the so-called PIGS is still “at or near danger levels” and something must be done soon to avoid sovereign defaults.
He says: “This situation cannot be sustained forever. It undermines any chance that the most vulnerable countries have of limiting the collapse in their GDP and maintaining social cohesion; it contaminates the balance sheet of the ECB; it exposes the revolving nature of IMF resources to considerable risk; and it raises the risk of renewed contagion.
“If [policymakers] continue to stumble and hesitate, what has been simmering may well come to a full boil in the next few months.”
Source HERE.

From my current experience living in Greece, I am witnessing what I believe to be a debt deflation economic contraction.  The government is cutting spending, collecting more in taxes, people are consuming much less, and private lending is decreasing.  I think the situation will become more obvious as the tourist season finally ends and the winter is in full swing.  Crime too, is on the rise.  Businesspeople I know are extremely negative and many are just happy to hold onto their businesses.

Obviously much of the wealth in Greece these past 10 years was illusory.  It was a debt driven economic expansion that also relied on EU funds that unfortunately were mismanaged.   Ireland too, is getting a lot of press lately about doubts it will not need IMF support.  We'll see.

The Euro crisis is far from over.  By the time all is said and done, it will be an historic political, social, and economic test of cohesion.

No comments: