Thursday, January 30, 2014


The Slog.....



Joint Bank of England/Canada paper outlines plans to abolish default and bailin the customer

Inside the mind of the Central Banker, there lurks an obscenely inverted demon
I am indebted to a source for alerting me to the content of the Bank of England Financial Stability Paper No 27. This little read won’t be found anywhere on the bestsellers’ lists, but it isn’t in any way a secret. What it demonstrates in tone and conclusions, however, should be appreciated by everyone who thinks this interregnum is just another blip, and we are turning corners once more on our way to the sunny uplands of growth.
The paper offers a particular view about how to ‘reduce the cost’ of Sovereign and banking defaults. In it there are three starting assumptions:
1. It isn’t if but when
2. When the next event occurs, bailins will be used
3. Debtors should be allowed to move their defaults back…that is, move the goalposts, kick cans down the road etc etc.
The disturbing thing about this document is that bits of it made me laugh out loud – not in the textspeak LOL sense, but the real one: I laughed out loud. Here’s a classic at the beginning:
‘In recent decades, the common perception had been that sovereign debt crises were unlikely to occur in advanced economies. Events in the euro area over the past few years, however, have undermined this view’ 
If the author means ‘undermined’ in the sense of fracked to destruction until the house fell into a hole, then yes, this is fair comment. So why is this kind of understated euphemism disturbing? Because it contains within it another assumption: there’s nothing wrong with the system, we just need another bright idea to deal with this problem.
Other observations startle the reader from the real world:
‘More recently, the banking crisis of 2008–09 has led to the implementation of an ambitious financial sector reform agenda to reduce the risk of such a crisis occurring again’
The key word in this one is ‘agenda’: there’s an agenda, but the Board Meeting’s been going on for six years, and we’re still stuck on Point 1, ‘The need for reform’. Nothing substantive at all has changed since 2008. The paper accepts this, without consciously realising it, for it observes over and over ‘when such crises do appear’, ‘next time’ and so forth. In fact, when we get to the detail – and it is all predictable – there is precious little word-mincing involved:
‘this paper argues that, for reasons of equity and efficiency, private creditors should play a greater role in risk-sharing and helping to resolve sovereign debt crises’
There it is again, the concept of the private creditor. The last time I asked what the Hell difference there might be between the taxpayer, the private creditor, and the customer, I got one of those deliciously patronising emails from a City type who went into a great deal of woffle about subordination, concluding that the average customer’s money would “hardly ever” be needed. His entire argument was based on the crazy assumption that just a few large shareholders would easily see off a Tsunami of non-netted derivatives, junk bonds and toxic bad debt.
This is of course no longer a theoretical idea in the UK: CoOp Bank customers were openly redesignated as bondholders in 2012. And the City’s PR machine (you can’t have failed to notice) has been pouring out guff about “look here, you always were ultimately creditors, people” for nearly six months now. This is as big a myth in real life as the fiction put out by anti-Semites that the word Holocaust was applied by Jews to Hitler’s Final Solution as Mossad spin during the 1980s. (The word first appears in relation to the Nazis in a Foreign Office memo of 1943).
Anyway, for reasons of ‘equity and efficiency’ next time it won’t be down to us via our future pensions and taxes: it’ll be down to our bank accounts, via the insertion of a large electronic shovel the second serious solids start spraying from fans. It’ll be your equity…but for whose efficiency?
The linear thinking contained in Financial Stability Paper No 27 tries to ignore the now almost ubiquitous room-dwelling suburban elephant, but the very nature of how debt issuance should be ‘reformed’ proves beyond any reasonable doubt that Nellie of the large trunk has been spotted alright. The word ‘reform’ so often applied to bank practices (and then blown away by their lobbyists throughout the West) is, when used in this context, yet another example of Winston Smith at his best in the Ministry of Truth.
The reform suggested consists of two changes to debt issuance – new types of Bond. Here’s the first:
‘Contractual reforms offer a means to improve the crisis resolution toolkit in a way that is transparent and more predictable to the market. Our proposed formulation of sovereign cocos* is primarily designed to help tackle sovereign liquidity crises. They would automatically extend the maturity of bonds when a sovereign borrows from the official sector’
* A coco is a convertible bond in which the price of the underlying stock must reach a certain level before conversion is allowed.
This is supply-side thinking taken to the final madness: an attempt, pure and simple, to abolish default.The ‘idea’ being floated here is that the coco safety-stop against having to pay up when the issuer can’t afford to has bolted onto it the issuer potentially never having to pay up. ‘Extend maturity’ is another way of saying ‘kick can down the road’.
Had this been applied to Greek debt ten years ago, there would have been no crisis, and no need for bailouts,  because there’d have been no payouts to the bondholder. The question we have to ask ourselves is, “So who would’ve bought such a product?”
The second suggestion is what the joint Brit/Canuck paper dubs ‘GDP-linked bonds’, but it takes the reader about three seconds to realise that they’re merely current sovereign debt bonds with the original coco element put into the formulation: if we can’t afford to pay, no payout.
Effectively, what’s under consideration here is future Sovereign issuance at two levels of risk, depending on the appetite of the markets: one you can buy with a maturity date they can ignore; and one you can’t convert until they tell you to. The rationale for these hugely attractive products is bullet-pointed as follows:
‘This has the effect of: (i) significantly reducing the size of official sector support packages (better safe-guarding taxpayer resources and making voluntary debt restructurings easier to agree); (ii) better incentivising market discipline by reducing the risk of moral hazard; and, (iii) making private sector bail-in more predictable and credible.’
It’s a cliché I know, but you really couldn’t make this up. The way out of future debt crises proposed here (and we’re not out of the one we already own, let’s remember) is to transmute default into debt restructuring ad infinitum, and along the way towards the cliff, not pay out until we can afford to. That’ll reduce the burden on taxpayers, but if all else fails, then we’ll transmute them into creditors, and empty their bank accounts.
These people are ill. They need help. Who, pray tell, in their right mind is going to buy a Bond from an issuer who so lacks any confidence in his ability to repay, he formulates (sorry, reforms) the contract to ensure that he can run away from the responsibility for any of it forever?
The obvious parallel here is me taking out a mortgage secured on my house that you the bank can never realise because you can’t have my house, so there. By the magic of Alchemy, a secured loan becomes an unsecured one. Surely, Mr Bank Manager, you’re more than willing to offer me that, hmm?
Setting aside the inbuilt lunacy of all this for a paragraph or so, the paper doesn’t take that long to read, and to do so is to banish forever the idea that central bankers aren’t going to go ahead with what The Slog eight months ago first called Global Looting.
So it remains only for me to point out the bleeding obvious yet again: when the citizenry’s bank accounts have been emptied, who will then the taxes pay and the products buy, the more to produce an efficacious economic recovery?
I give up.

Yanis Varoufakis

The Bundesbank’s proposals possess both rhyme and reason!

I refuse to believe that the Bundesbank is staffed by idiot-savants. So, how should we interpret its quaint proposal that Eurozone member-states facing default some time in the future should resort to a one-off (wealth and income) tax?
One interpretation is of the idiot-savants variety. For example, Karl Whelan tweeted: “Bundesbank one-off wealth tax proposal an excellent idea for those who feel no fiscal crisis is really complete without a good bank run.”
My interpretation, based on a radical reluctance to believe that Germany’s Central Bank is populated by fools, is quite different. Their proposals possess both rhyme and reason. Alas, one has to dig deep to discover them.
Last April I was stunned to read Mr Jens Weidemann’s deposition at the German Constitutional Court (December 2013). In that document the head of the Bundesbank aimed his slings and arrows at the ECB’s ‘presumptuous’ attempts to save the euro (Draghi’s “we will do whatever it takes” June 2012 pronouncement, as well as the OMT announcement that followed a couple of months later). Given that Mr Draghi was facing, in the summer of 2012, the starkest of choices (intervene to save the euro, in the fairly minimalist manner that he did, or let the currency of which his organisation is the sole custodian collapse), what was Mr Weidemann up to when disputing, at the lofty setting of his nation’s Constitutional Court, Mr Draghi’s, and the ECB’s, basic right (and obligation) to try to save the Eurozone?
My answer (in this post) was:
“A close reading of the Bundesbank’s constitutional court deposition leaves us with only two possible interpretations. One is that Mr Weidmann does not ‘get it’; that he cannot see that a Greek exit in 2012, or an Italian exit in 2014, would spell the end of the Eurozone; that he cannot see that Mr Draghi’s OMT announcement played a crucial role in stopping the disintegration of the common currency last year; that he has no appreciation of the catastrophe facing good, solid Spanish and Italian enterprises due to the broken down interest rate transmission mechanism. The other is my interpretation: Mr Weidman can see only too well that the above hold unequivocally but is tabling this deposition at the constitutional course knowingly and as part of a strategy that leads the euro to a death by a thousand, almost silent, cuts.”
The most recent Bundesbank proposal would, if adopted, (and as Karl Whelan succinctly implied in his tweet) create conditions of a slow-burning capital flight from the Periphery that, at moments of heightened fiscal stress, would quickly turn into an exodus. I have no doubt that the Bundesbank’s higher echelons understand this. But this is precisely why they are proposing the one-off tax: because the Bundesbank’s long term aim has always been a smaller Eurozone, preferably unshackled by any member-state west of the Rhine and south of the Alps.