Euro downgrades and looting


By David Malone

I reported recently that I thought the EU was repositioning for the next big event.

Here’s a small time line of scattered events.

Over the last few months, it turns out, European Central Bank (ECB) bail outs and loans just have not been enough for either Greece or Ireland.  Not surprising in the case of Ireland where every time anyone moves, they trip over another can of undeclared bad debts.

But not to worry, Ireland and Greece have been printing up new debts for their people to pay off, in the form of inky stinky Euro bonds, at a frightening pace.  70 billion so far and likely to rise to 100 billion.  This means that though the ECB disdains actual printing, or so they say, it has been forced to do so because the Irish and Greek central banks are doing a bang-up job of conjuring Euro debt out of thin air.

Then a few days ago we had the news of the Danes test driving the new rules for allowing senior bond holders to ‘share’ in the losses of a bank default.

Moody’s, the ratings agency, promptly said said it would look again at all European bank ratings precisely because it was reviewing their stability in light of the greater willingness of European nations to ‘share’ some of the losses with bond holders.

Wednesday night European bank’s emergency overnight borrowing from the ECB suddenly shot up, from an average of 1 billion that had held since Christmas, to 15.5 billion euros.

Thursday, Reuters says Portugal is now going to have to accept its own IMF/EU bail out as early as April, because it does not believe its banks will survive if it does not.

Then later on Thursday, waiting until the closing bell on Wall Street today, Moody’s just released the headline that it was downgrading the subordinated debt of 23 German banks.  Remember, once the senior bonds holders are in line for losses then the subordinated debt holders are burned.

So what do we have?  Seems to me we have Greece and Ireland drowning and printing up debt in a last ditch attempt to make sure no one in the countries survives to tell the tale.  The Danes decided they were not going to suffer the same fate and had a word with their bond holders.  That frightened the hell out of the bond holders.  Moody’s realized its bank and debt ratings were based almost exclusively on the belief that no matter how insolvent a bank was, no bank would be allowed to fail and no bond holder would be expected to have his lunch interrupted.

When Moody’s realized this might not be true they announced the re-assessment.  Was this a worry to the banks?  Well suddenly someone, or several someones, felt the need to borrow 15 billion from the ECB rather than each other, at the expensive overnight rate.  We can assume some of the someones were Portuguese.  And some might even have been German.  The German banks likely to be among the 23 facing debt downgrades will be some of the Landesbanks and Commerzbank.

What will happen now? Well the IMF vulture is circling.  Last Friday the IMF, ECB and EU had a meeting with  Greece and said publicly that the Greek government should “recalibrate its assets“.  Which they explained meant Greece should now sell some of its assets to pay off its debts.  In other words sell things that belong to the Greek people to pay off the debts of Greek bankers in order to save French and German banks.

Ireland already had this same advice, so did Hungary and in the UK the Tory boys were all set to sell off every woodland they could get their hands on.  A pattern here?

The European Banks are not healed. The governments who have been bankrupting their people to save their banker friends are running in to trouble.  Too much debt and still the banks are not solvent.  The decision to ‘share’ the losses with some bond holders is now rippling out.  We will see downgrades in France and elsewhere in the next week.

One thing that would help the banks is if their friends in government could  get all sorts of assets in to their hands for fire sale prices.  Such assets would bolster the banks in ways far more immediate than  making a few good loans.  Banking takes time to make a return.  Looting is wonderfully quick.

We are heading for another event.  Ireland, Greece and Portugal are on point.  The pressure on the ‘core’ nation banks will grow.  That will put pressure on the politicians to speed up the looting and or bring forward another cash injection.


David Malone is the author of the book Debt Generation. You can read and listen to excerpts from his book here: