This crisis is likely to culminate with capital controls re-imposed in Ireland, following a Europe-wide run on the banks. This bank run will be an accelerated and panicked version of what is already happening right now. Money is likely to leave all the major banks of the eurozone with the exception of German banks.
This is because savers fear the breakup of the euro will leave them with “cheapened” savings in their own countries. Obviously, the corollary of this should be a wall of money flooding into Germany because — whatever happens — the currency that Germany will eventually trade in will rise against all others.
And so we are likely to see a massive credit crunch all over Europe because without funding, lending will dry up.
As lending dries up, growth will plummet and the already fragile bond markets of the non-German members of the eurozone will close down. This means that the enormous redemptions which are necessary next year to roll over the huge national debts of Italy and Spain, together with France will not be financed. These countries will have to renegotiate their debts.
Yesterday, for example, Italy raised money but paid more for three-year money than for 10-year money. The three-year yield was 7.89pc while the 10-year yield was 7.56pc . This is abnormal because you should always pay more for money that you borrow over the longer term, not least because — based on the bird in the hand notion — the risk to the lender rises as the amount of time the lender has to wait to get his money back is extended. But in Italy, the risks are now accumulating in the near term as money leaves the country and the expected crisis comes closer.
The rest of Europe is now imploring the ECB to act and save the day. Who else will buy these bonds if the ECB does not? But it is quite likely that the European Central Bank will sit on its hands, hiding behind its limited mandate, which prevents it from financing governments. Maybe the reason the ECB is not acting is that it has misdiagnosed what is going on.
I speak now as a former central bank economist when I talk about the type of thinking that has taken over in the heads of ECB economists. In the 1990s, there was an obsession with government spending inside the heads of economists at the various European central banks.
This line of thinking saw “evil” governments everywhere and if the central banks financed these free-spending governments, it would lead to fiscal incontinence everywhere.
Possibly as a result of this thinking, the German faction in the ECB believes two evidently false propositions and because it has not diagnosed the problem correctly, it lurches to the wrong conclusion.
The first misdiagnosis is that the eurozone crisis is the result of too much government spending. This is patently not true. Ireland and Spain entered the crisis with budget surpluses and Italy has been running a primary surplus for years. Only Greece fits neatly into the “too much government spending” model. We all know that the main problem is excessive lending by private banks to the private sector.
The second canard held dear by the ECB economists is that austerity leads to growth. This idea is so silly that it is amazing time is still devoted to it. But here goes. Some economists believe that if a government cuts spending, the average citizen will conclude that his taxes in the future will be lower, which makes him feel richer today. As a consequence of this extraordinary insight, he will bring forward spending that he was going to make in two years’ time to today.
Can you think of anything more ludicrous?
This thinking leads to what I would call “policy vindictiveness”. The ECB sees the crisis now as an opportunity to teach governments a lesson and to drive home the point that the ECB has been right all along. Therefore, we get an element of vindictiveness in its overall approach.
But it fails to realise that it is maturity and wisdom and not small mindedness that is called for now. The ECB’s job is not to use the crisis to prove a point but to stop a dire situation becoming worse. However, while rhetoric is cheap, wisdom is — unfortunately — in short supply.
As a result, the central bank does nothing as the commercial banks experience a run on deposits. Bank runs happen quickly; that is why they are called bank runs, rather than bank ambles.
Here in Ireland, as savers’ money floods out of the country, the State will be faced with a choice. Does it allow this to happen or does it impose currency and capital controls to “lock in” money? We will not be the only country faced with this choice — all peripheral eurozone countries will be faced with the same dilemma as the citizens move to protect their savings.
Remember the citizens will be the last to “doubt” the banks. Shareholders have already sold, so too have bondholders, the final sources of bank funds are small deposits and, as always, they are the last to move. The big deposits moved a long time ago as evidenced by Siemens moving €6bn out of Soc Gen a few weeks back. This is a recurring pattern in financial history — the little guy always pays.
After the imposition of capital controls, the existence of the eurozone will come into question because it is hard to sustain the idea of a monetary union with capital controls. At this point, its strikes me that the most likely next move will be that the core countries, including France, will execute the plan they have been hatching for some time now, which is to move forward with a two-speed euro.
In fact, a move to a two-speed euro can only happen if capital controls are imposed. As these events tend to happen quickly, many citizens will not realise what is happening until it is over and done with.
The whole debate in Ireland about the next phase of the euro is reminiscent of the boom years where those of us who called the boom correctly as nothing more than a “vacuous confidence trick” and a “scam” were labelled unpatriotic, while those who ripped off the people with greed backed up by “quack economics” peddled by fully paid-for “quack economists” were treated as national heroes.
Again the temptation here with the euro will be to shoot the messenger. But that would be wrong.
Europe is headed towards a major policy shift, the most likely outcome is some type of two-speed euro but before that happens, the people will panic. And all the while the ECB, which could do something, does nothing because it wants to prove a point.
I have had my savings in euros for a longtime. Im a back to education student so I dont have much. and few grand. will I be aloud travel with these euros to exchange them into deuchemark, when the euro goes. what is the best way to protect the value of my savings.
Muddle Through The European Union will probably stick to a policy of seeking temporary solutions to its debt crisis in the coming weeks rather than move toward a fiscal union or breakup of the euro. If a company is generally performing well but bits aren’t, that’s a management issue. “That gives you a picture of 17 people sitting in a room pointing fingers at each other and not 17 people sitting in a room and creating solutions. So the crisis of the euro zone is very much one of management, of policy making, rather than the one of fundamental economic… Read more »
There will be no PIIGS euro what have we in common with Portugal, Italy, Greece or Spain ….nothing , it will be the punt for us . And it is too moch government spending thats causing the problem ….and the only answer is AUSTERITY. Many people accross Europe have had living standards reduced since the crsis began so why should governments continue to spend as before . Currently we are subsidising the public service while they enjoy a good standard of living the rest of us endure unemployment , emigration etc. David is a populist only peddling misinformation, he has… Read more »
Came across this, has to say, helps when I read stuff like this (always drink sensible especially after Budget-Austerity announcements). Maybe we can all meet for a Christmas drink in Doheny and Nesbitts and toast the madness! Keep the spirits up one and all, life always goes on! “Family owned since 1877, McWilliam’s is Australia’s most award-winning winery. The McWilliam’s family has premium vineyard holdings throughout the most prestigious wine growing regions in South Eastern Australia.” http://www.mcwilliamswine.com/ Interesting to see in the documentary about the PDs that their former headquarters is up for sale, barely a trace left of them… Read more »
whats the best strategy if you have some savings? Pay off mortgage debt, Leave as is or open a foreign bank account in another country and currency?
David, I don’t know if you read these comments but various respondents have pointed out that the euro project is now just a Goldman Sachs plot device designed to wrest power away from the voters and into the hands of the ‘bankers’. I find your lack of any reference to the real players involved in these event a little surprising. You say we will get a 2 speed euro, so be it, but how does this suit or well heeled amigos? Is it what they want or what?
@doc, Well if it is a tracker I think cancelling your direct debit might be a wise move, I mean, what the hell will happen if there is no euribor to link with? Are we on trackers fu€ked? I think the banks will welcome the PUNT back so they can finish off the economy with the crucifiction of the tracker crowd. I personally am going ot drink brandy throughout Christmas and do a Scarlet O’hara on the whole f’kn thing. “after all tomorrow is another day”
David I have been saying this all along; small savers will get screwed, however you are only stating it now after your constant weekly euro bashing articles the past few years. You were one of the 1st to encourage us to leave the Euro with all our problems solved, the “magic bullet” exodus; devalue to punts, exports cheaper, imports dearer we run a surplus, default on debts and trade our way out of difficulty. Never stating from the BEGINNING that this would ruin savers and those with no or minimal mortgage (the silent majority) only benefiting the entrepreneurs! (crooked builders,… Read more »
Right about some very large companies appearing to be becoming banks. Truth is they have had bank arms for quite a while and horrible but true, this may be the only division making a profit – from the bubble. The horrible fact is that some of these firms are physically in real trouble after peeling away this mirage. At the end GM’s GMAC was the only piece with a virtual profit. This might explain huge restructuring going on, bracing for the blow-out. Banking is so intertwined with what should be industry, the effects will tear the physical economy apart, a… Read more »
David,
While I’m under no illusions you are a saint or oracle – nor did you ever claim to be – I am very grateful to you. You have some bravery, some honesty and I think you do want the best for us ‘regulars’.
Sincere Thanks.
The best time to do this would be the Christmas holidays – close down borders, apply capital controls, as openly discussed in Die Welt a couple of months ago in the context of issuing a new DM. They estimated cost and the time needed to do it, only a few days- they have the Euro rollout experience!
A nice Christmas present.. Only problem will the financial system make it to Christmas? The schemers underestimated the tsunami effect, and planned in calm undulating waters.
There were capital controls in the 1970s in Britain. And it was ridiculous. There might even have been an agenda to prevent British residents holidaying on the Med, and choosing old Blighty instead. I have resolved a way around this – though, I will not mention it until after the Budget, in case the option is levied. Though, if this becomes a big trend I can see Noonan bringing in a levy on money invested there also. Why don’t they levy the Bank Bondholders ? The secon factor that makes matters different this time is online organization of protests, and… Read more »
These kinds of comments should come as no surprise I suppose. A few outraged johnny come latelys to the discussion and no doubt a sock puppet or two. Most of what you have to say has been well discussed here in the last three years, and its all entirely academic at this point. As soon as the savings of Germans and the pensions of the French became linked to the price of a field in Mullingar purchased by some Irish yahoo looking to make a buck, there has only been one question to answer: who was going to get screwed… Read more »
{ The ECB sees the crisis now as an opportunity to teach governments a lesson and to drive home the point that the ECB has been right all along. Therefore, we get an element of vindictiveness in its overall approach. } The ECB is moralizing. And to be honest this is hypocrisy and bull. The ECB, and that clown Trichet, created the problem in the first place by not monitoring the capital flows into private sector banks in Spain, and Ireland, during a time period when they set their interest rates too low. The ECB are in no position to… Read more »
Excellent comment on the two wrong ideas snaking through the heads of the EuroZone’s leaders and their shrill attitude of vindictiveness. They have chosen to be scolding school marms rather than problem solvers. If they had diagnosed the problem correctly they would have focused in on what to do about the banks, not what to do about governments. Just imagine if the EU let their banks go bankrupt, nationalized them, gave up on collecting some of the debts owed to the banks (normal write-offs to clean up a balance sheet), fired the top executives, guaranteed the savings of depositors, wiped… Read more »
subscribe (against my better judgement!).
Put your money entirely outside the EuroZone, primarily into dollars (US and Canadian) and gold. China and the US will act together to make sure that their currencies are not too severely injured by the Euro’s collapse. But you cannot trust the Chinese.
Olli Oracle
“The economic and monetary union will either have to be completed through much deeper integration or we will have to accept a gradual disintegration of over half a century of European integration,” Economic and Monetary Affairs Commissioner Olli Rehn told the European Parliament.
Blimey, you are not mincing your words in this article David.
David, I nearly choked on my dinner when you absolved Bertie Ahern of any culpability in the Irish crisis, telling us government spending was not a problem. What? The twin towers of excessive bank lending, piggybacking runaway government spending shafted us. How can you dismiss the latter at the stroke of a pen? It beggars belief. Telling us that the Government was running a surplus pre-crisis is the lamest excuse I’ve ever heard ; da Bert would be proud of that one. You know very well that such spending was a false, unsustainable and temporary byproduct of the credit boom.… Read more »
Hi all, especially Georg, Dorothy, Malcolm or anybody with more financial wit than me. What exactly does a two speed euro mean? What will a German euro be able to buy and what will an Irish euro be able to buy? Will they look the same? If I travel with it hove will it affect my spending abroad? I live in the world of small savers and small spenders.
Explanations in plain Englis please.
Anyone know what the collective noun for economists is?
Might be ‘tribe’ or the somewhat obscure ‘clashing’..?
One of my economics lecturers says that one should cross out every second sentence when preparing an economic report.
‘It’ll give it a vibrancy’ she says.
If David is correct in his assertion that the House of Cards is about to crumble then how can another journalist in the same newspaper (Irish Independent) make a statement like this: “Benedict Brogan: Global move by top central banks a defining moment that will save Europe” People need to start telling the truth. If David is right (and I have no reason to think he’s not given past experience) then clearly this other geezer needs to be sectioned under the Mental Health Act immediately. How can a society function when we cannot believe 90% of what the government and… Read more »
If anyone has ever been lucky enough to possess a €500,€200 or €100 note have you ever tried to change one.I always wondered why such large notes were ever printed as nobody ever seemed willing to change one for you.Can anybody tell me why these large denomination notes were ever printed in the first place.Was this some sort of forward thinking on behalf of the ECB or am I being too generous in my thought patterns. Slightly off topic, can anyone see the irony in the Treasury Holdings portfolio, under the control of NAMA, the very body whose HQ is… Read more »
David is correct, the timing may be off somewhat… Media are allowed free-rein. Better to quote that ridiculous headline back to the journalist a few weeks later. With murderous cost cutting in health there are no beds for the journalists. To get a paragraph in a mass tabloid, costs thousands. Who has the money I wonder. As Lincoln said, you can fool all of the people some of the time, some of the people all the time, but not all the people all the time. Nonetheless the financial elite is bankrupting itself to disprove Lincoln. Unless 24x7x365 media is pumped… Read more »
Germany 11/2011 6.7 million on Hartz IV 3.3 million on slave minimum wages with no social protection 7.2 million on 400 Euros Jobs 1.0 million pensioners on Hartz IV pension Cost for Health is exploding, system at large in a state of slow collapse. Debt to GDP >80% 2011 trade surplus is the highest since October 2008! Anything wrong with this picture? People are being forced to eat a shit sandwich of austerity and propaganda lies. More and more people are falling through the net, silently. Poverty increases on all fronts, and the rich are getting richer, much richer! At… Read more »
David, Ireland might have entered this crisis with “a surplus” as you’ve put it in this article. But in all seriousness, was it really a surplus in the normally understood meaning of the term, when the revenue behind the “surplus” was based on a giant government led ponzi scheme that you yourself correctly identified and were ridiculed for exposing?!? Ireland entered this crisis with all the credibility that you would normally attach to a chronic heroin addict, who was after downing 2 litres of vodka from his local Molloys liqueur store. I agree with the thrust of the article, obviously… Read more »
And for the avoidance of doubt, I’m withdrawing my 5k on deposit from AIB in the morning and securing it in a private safe, I’ll be fucked if I’m getting caught up in this shit with capital controls and the rest of it.
@rincewind, it’s well known in accountancy circles that AIB hasn’t a cent to lend to any small business customers, they are blagging the whole thing, fobbing companies off and spoofing their small business customers, in an attempt to see out the next 3 months in the hope for an “improvement in market conditions”.
People need to snap out of it and get real, if you have any deposits in AIB or other basketcase banks, get them out and protect the little that you have. For fucks sake folks, the clue is in the article title.
David,
I have savings and moved them into a sterling holding account with Investec. Is my money safe? Is what I’ve done called moving my money OUT of the country? If it isn’t how do I do it?
Citizens of Prisons Some people like to set the alarm in the morning to an earlier time to the time they like to get up.Sometimes its because to remind themselves that they are still alive from the night before .Sometimes to give them time to think.And sometimes both.Either way it gives them the opportunity to do better in their lives. Our Prime Minister denies us our rights as Irish citizens to be informed in good time and to suffer the intransigence of misinformation in our lives when he is already priviledged with information that matters to all of us. His… Read more »
Nonsense, David. WE live in a much more technologically and politically advanced economic environment than the ones you are basing your conjectures on. All banks accounts in the EU and indeed in the rest of the ‘first’ world include details of citizenship and domiciliation. Of course conversions would have to occur on this basis. Aside from anything else, it would be an unacceptable eventuality to allow a sizable proportion of citizens to remove their money from their home country and thus increase their spending power in their home country by significant multiples on a forced conversion. Such a scenario would… Read more »
Morning, Thanks for all the comments – the good and the bad. It seems to me that this is what markets are all about, there are sellers and buyers. There are those you believe one thing and those who believe another. Thats the way the world works. So thanks again. Just to clarify on government spending, I believe that countries, like individuals should live within their means, but they should do this over the business cycle. As a result of this logic, I was the most vociferous critic of the credit boom because it was amplfying an already growing economy,… Read more »
By now the Irish media will be talking about the recent concerted action by the ECB and the central banks of the nations with large economies. This consortium action caused the major stock markets to rally. Some thoughts on this action. Here’s what informed media in the USA think this concerted action by the major central banks means: 1. A European bank was about to go under and this coordinated gave it access to capital to get through this and any new crisis. 2. This action gave the ECB greater access to capital to provide credit when needed to the… Read more »
IMF They opened the taps again, pushing liquidity into the markets. There are some rather informed rumors that in the Night of November 29th one of the big banks in Europe was about to go belly up, and a couple of coordinated emergency phone calls were setup. Well, perhaps we will never find that out to the full extend, but I would not be astonished if the story has grains of truth., a couple of shovels full of grains. The logical next step in this war is to increase the speed now and prepare for the major strike force to… Read more »
Euro or no euro I do not think the present government understands the dynamics of a recession. Firstly people in very vulnerable companies or in companies looking to take strategic cost cutting decisions lose their jobs. People in frontline sectors construction car sles etc lose their jobs. Their missed spending power and that of those who are afraid of losing their jobs impacts on small businesses. Small Business owners put all built up savings into the business in the hope the tide will turn. When savings are used they go to the Bank to borrow,(now not an option).They stop paying… Read more »
Ok, like alot of people I’m trying to find a quick, easy, safe way to protect my life savings from a possible euro break-up. My big idea is to simply walk into my bank and use my savings to buy a bank draft made payable to myself. The draft will specify that I am to be paid in Euro’s (not Punt Nua or whatever). I could hold it until the economic mess end-game is all over (admittedly earning no interest). If it turned out that Germany was only allowing residents to convert to New DM (or whatever) , I could… Read more »
It seems that we will have fiscal integration over the next couple of years which will entail controls on government spending, common bonds and a common treasury. There may be some more private write downs of bonds ala Greece. Scenario 1: More bank failures. There is a large sell off of the the Euro – answer – it almost crashed in 2001 and the other countries central banks intervened to buy it up to make sure it didn’t. That would happen again if it was going down too much too quick.There is a backstop there. Prob the max the Euro… Read more »
DMcW, Very good to go against the arrogant boom popular opinion. I fully sympathize. You have strength of character. I’ll bet some of the opposition came from very close not just press and public figures. You mention the idea of “amplifying” in numerous places. There is something in the financial system, not just Euro, that does this. It produces bubbles, housing, .com…, which have shorter and shorted lifetimes, but each time bigger. Bernanke is known as Bubbles Ben, and he just produced a 24 stock rally bubble. I’ll bet they were going to IPO Facebook then, and now hold off… Read more »
John Lowe moneydoctor on Joe Duffy a few mins ago telling everyone to leave their money in the banks and he’s not taking his out and more or less that people are panicking over nothing
Greetings to all from Italy, Much as I agree with David’s hypothetical analysis of what could happen to the “little guy”, I cannot really convince myself that the Euro will just disappear over night or rather there will be a break-up of the euro currency. Rather, as the attack is not on the currency (evidence the fx rate vs the dollar is stable) but rather against the government debt, it is logical that from the December 9th summit there will emerge two classes of euro-denominated government debt post December 9th. One will be free-standing such as the German government debt,… Read more »
I do not believe there is anywhere to run in a global financial crisis like this. Here is the thing: The mechanics of what we do to do work and provide goods and services is working well. What is broken is the system of payment for each unit of service/ good delivered. The paper we use for tender is now turning into ar$€paper. This is happening everywhere. So let the accumulators accumulate. 10 x zero = 100000000000000000 x zero. It does not matter. And if you think the the manufacturer nations have an advantage…think again, who is going to be… Read more »
David McWilliams called Gold “a useless metal” in a recent article.
“Can you think of anything more ludicrous?”
Well yes I can! It’s called Central Banking and creating money out of thin air and paying some rent seeking, globalist banker interest on it, who in turn goes off and pays some mercenaries to destabilise countries in the middle east in the hope of starting WW3
Money/Currency is the root of all evil, especially the paper and electronic varieties
Don’t expect something for nothing.
It’s about time irish people woke up to these facts
Warren Buffet dislikes Gold.
Buffett says “he’d rather bet on strong businesses instead of something “that doesn’t do anything.”
As far as he’s concerned, the only thing you can do with gold is admire and “fondle” it.
http://www.cnbc.com/id/42836715/Warren_Buffett_Isn_t_Joining_Gold_Rush_or_Betting_Against_U_S_Dollar
Would it not be wiser to invest in strong World beating companies that pay dividends similar to the kind that Buffet likes e.g. Intel, Pepsi, McDonalds, etc?
Request to the Moderator:
Dear Moderator
Would it possible please to have the post above at 8:05 from 30 November from @stiofanc02 addressed?
This is my own personal opinion and may not be shared by other posters on this blog. However, if the use of this type of language describing fellow posters is acceptable, then I feel that the site is greatly devalued.
I may be on my own here but I find it offensive.
Regards
Dorothy
Iceland President on Crisis: “We Allowed the Banks to Fail, and in the End, We Were Blessed with Our Own Currency.” The Icelandic people are getting through the crisis by not bailing out the banks, but putting them into bankruptcy – a report from Swedish public TV2 network news, on Nov. 28th, in a news installment including interviews with both the Iceland President Olafur Ragnar Grimsson, and an ordinary family, Eydis Hentze Petursdottir and Gudmundur Bjarni Sigurdsson. The father, Gudmundur, says in English: “What got me through the crisis was that, the country is still the same, but it is… Read more »
this probably sounds naive but what would the situation be if you were holding cash in German denomination only? would this be of use if the two tier euro went ahead?
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