Europe on the brink

"To monstrousness grows the concentration of economic power in the hands of those who dominate and direct the financial capital in such a way that they have unlimited disposition over credit and its distribution."

-- Pope Pius XI, Quadragesimo Anno (1931)

The story of the world's economy over the past decade begins with the fact that, in 2002, total global debt was $84 trillion. Today, even after the financial crisis of 2008-09, it has risen to $195 trillion. Seeing that worldwide GDP is $65 trillion, we have an exact 3 to 1 debt-to-GDP ratio-higher today than at the height of that crisis.

The debt has been run up by people, corporations, and especially governments-sovereign nations (though perhaps not sovereign for long). Greece, as everyone by now knows, has gotten so far in the red its angry citizens may soon petition a move to Mars. Its railway system alone costs seven times to operate what its annual revenues generate. Severe cuts affecting the living standards of that tiny member of the Eurozone have been imposed by Euro financial authorities. In truth, as Ted Striker from "Airplane!" would say, "It's worse than Detroit."

But the much larger economies of Spain and Italy are now teetering toward Greek-style chaos. Spain's unemployment has hit nearly 24 percent; the Wall Street Journal reported April 19 that the two nations' banks had little of the cash left from a generous lending program given by the European Central Bank's (ECB) Long-Term Refinancing Operation.

The program worked like this: unlimited amounts of liquidity were provided for member banks for up to three years, at a rate of 1 percent (that's right -- ONE percent). Italian and Spanish banks then invested the amounts borrowed in their own country's bonds, frequently getting above 4 percent. This enabled them to generate handsome short-term profits (dubbed "the Sarkozy carry trade," in honor of the French President likely to lose reelection May 6 to a Socialist, further unnerving markets).

But that money is now nearly gone. Experts say the banks will have to stop buying the sovereign bonds, or sell bonds to raise needed cash. Either way, the international community will have to step in, and on April 20 the International Monetary Fund (the world's lender of last resort) announced, without U.S. help, a near doubling of its war chest for "the impending crisis."

Of course, had the plan pushed by financial guru George Soros been adopted, the present threat may have been averted. Soros (and various others) proposed insuring the ECB against solvency risk on newly issued Italian and Spanish treasury bills bought from commercial banks. Banks could have then held on to the T-bills as cash equivalents, allowing Spain and Italy to refinance their debt at close to 1 percent. This would have protected both from the coming likely Greek default, as well as their own internal hemorrhaging. But the banking-bought ruling elite opted otherwise.

The most frightening aspect of all this, practically unacknowledged until now, is what will happen to what's left of European sovereignty once the European Stability Mechanism takes effect (expected in July). The articles of the ESM read like a complete surrender of individual nations' financial independence. Article 9 states, "ESM members hereby irrevocably and unconditionally undertake to pay on demand any capital call made on them within seven days." Article 27 says ESM property, funding, and assets are "immune from search (and) executive, judicial, administrative, or judicial action." Article 30 enables anyone associated with the ESM to be "immune from the legal process with respect to acts performed by them." The fund will start with 500 billion euros ($655 billion), but more will undoubtedly be needed. And the banks will stay in control.

The ECB president responsible for the latest bailout? Why, former Goldman Sachs Europe VP Mario Draghi. Like Hank Paulsen, the ex-Goldman CEO who as U.S. Treasury Secretary rescued his industry pals in 2008, Mario remembers well from whence he came. We would do well to remember that the monumentally incorrect mathematical models which told us that tons of no income/no job mortgagors being unable to make their house payments at the same time was a "25 sigma event" -- meaning as unlikely as winning a national lottery 21 times in a row -- was brought to us none other than the good folks at Goldman Sachs. More asinine calculations have seldom been made. Less fallout for such stupidity has never been equaled.


Mark J. Plawecki is a District Judge in Dearborn Heights, Confessions of a Condor pledges to continue a fondness for the quaint old U.S. Constitution.

Published: Wed, Apr 25, 2012