The European Commission, a group self-tasked with herding cats, has proclaimed the end of “austerity” in the Eurozone for governments, granted citizens will surely continue to feel quite austere. But what does this mean for Europeans and their economy moving forward?
Before we dive into it, we would add that absolutely no austerity was obtained in any EZ national budget, except perhaps where it was forced by plummeting tax receipts as a result of all-out economic collapse (Greece). See: What Austerity Measures?
Here were the Commission’s proclamations on deficits:
- EU EXTENDS DEFICIT DEADLINE FOR POLAND TO 2014
- EU EXTENDS DEFICIT DEADLINE FOR SLOVENIA TO 2015
- EU EXTENDS DEFICIT DEADLINE FOR PORTUGAL TO 2015
- EU EXTENDS DEFICIT DEADLINE FOR NETHERLANDS TO 2014
- EU EXTENDS DEFICIT DEADLINE FOR SPAIN UNTIL 2016
- EU RECOMMENDS LIFTING DEFICIT REGIME FOR ROMANIA, LITHUANIA
- EU RECOMMENDS LIFTING EXCESSIVE-DEFICIT REGIME FOR ITALY
- EU SAYS 20 STATES CURRENTLY UNDER EXCESSIVE-DEFICIT PROCEDURES
The “deadlines” the EU speaks of is simply a sliding target for lowering its annual deficit so it totals “only” 3% of 60% of its respective economies (GDP).
We would add this target should be a 3% surplus; otherwise, we’re getting poorer.
This idea of collateral creation is grand, because the total amount of securitized subprime auto loans and overdue credit card bills to be pledged to the European Central Bank (ECB) is limited.
Hence, the drive to create new “assets,” by encouraging nations to issue even more debt, as the partially nationalized banks of Europe do the same—issue more debt.
As explained in France - License to Print, the M.O. is simple: banks issue debt (where the specific bank in question is either implicitly or explicitly backed by its sovereign government) and hand it to the ECB in exchange for euros.
Banks then turn around and buy sovereign debt of their countries with the euros, and pocket a spread.
But wait!! There is more!!
Now the banks take the sovereign debt just purchased with the freshly printed euros, and use it as collateral to obtain euros in the private credit creation process—dubbed shadow banking.
The sovereign bond in question is used as collateral for another fresh batch of euros (this time the euros were printed out of thin air by another financial institution seeking the collateral offered).
Of course the lender of euros now has secondary “ownership” of the collateral—the original sovereign bond—and so it too can pledge it onward as collateral, in exchange for euros.
This process can go on as long as the financial institutions in question please. The Bank of International Settlements (BIS) reminds “rehypothecation of client assets can also delay the recovery of assets or even impose losses on beneficial owners.” Yep, we saw that in 2008.
The BIS further states it is okay for banks to help out a nation-client, but not an internal trading desk (cough MF Global, JPM, et al). “Rehypothecation should be allowed only for the purpose of financing the long position of clients and not for financing the own-account activities of the intermediary.”
All of this discussion means Europe has reached the end of the line with good collateral and assets—too many Spanish housing securitizations, and not enough real loans to real businesses and homeowners with a valid economic purpose or hard asset collateral (the deed to your house, car title. etc.).
So when a piece is released into the wild, saying “according to a document obtained by Bloomberg News, the European Commission is weighing whether firms should have to obtain formal consent from their clients before being allowed to reuse assets to back other trades,” antennae should abruptly go up.
The bread and butter of private credit creation has been put on the front page by the European Commission, so what this means for Europeans is one big screaming match.
Few good assets remain, and with none being created in the traditional lending channel, and with even the repledging (rehypothecation) of assets under fire, there is simply nothing left for a Keynesian recovery.
For this reason recovery will not come for the EZ, until the restructuring of their monetary system.
One manner of doing this would be to infuse new assets into the system—something the Turkish central banker won Banker of the Year for—he brought gold into commercial banking as an asset that can be lent against as collateral, and as an asset that can itself can be lent out for a return (and the associated risk).
While the timing remains speculative, the end of the road is near, while we know the public would not be pleased with the typical 3.5x reuse (repledge, rehypothecate) of an asset the original owner thought was safe (read the fine print). As for bankers, they too understand the risks of counterparty insolvency, and are quick to withdraw any offer to (make a loan to a risky bank), extending the “collateral chain.”
This is what happened in 2008, this is ongoing, and while the implied subjugation of private property rights should be a consideration, all-out monetary deflation is the imminent crisis, as 2007 repeats in the present.